Saturday, January 23, 2016

Going Back To School For Your Trading

Well, it's a snowy Saturday in the next station to heaven, so Mia and I are listening to love songs and going back to school.  There's no better formula for a full life than to live meaningfully and learn constantly.  That way, you're always growing: in your heart and in your head.

Going back to school is an exercise I return to periodically that keeps me fresh as a trader.  It's really a return to the process by which I learned trading.  For well over a year, at the end of the day I printed out charts of the market (price/volume) and charts of every indicator that I believed could have value in anticipating market moves.  I knew that, for any limited period of time, indicators could randomly appear to have value.  Over the course of weeks and months, however, patterns recurred that helped me focus on the measures that added true value.  It was through those initial explorations that I discovered trading patterns in NYSE TICK (upticks/downticks among all NYSE stocks) and breadth divergences.  Those remain staples of how I look at markets to this day.

When I returned to trading after a five year hiatus during which I worked full time at a hedge fund and was not allowed to trade for compliance reasons, one of my first steps was to get back to school.  I observed new patterns, including the relationships among macro markets and how movements in currencies, rates, and commodities were related to moves in stocks.  Carefully reviewing market behavior minute by minute, day by day, gave me a fresh appreciation of volume and volatility and the ways in which large institutional participants help to move the market.  This led to new ways of viewing the uptick/downtick and breadth data, as well as new ways to measure buying and selling pressure to be on the right side of the market movers.

Still later, I felt my trading results were not what they should be.  Specifically, I became disenchanted with my quantitative models and looked at why they occasionally broke down.  I began focusing on the question of whether cycles exist in the market and whether those could aid the identification of relative highs and lows.  Once again, I made a day to day study, minute by minute, and returned to school.  What I found was that measuring cycles in chronological time was not particularly effective.  More properly, I found that cycles are better identified in event time than chronological time.  That led to new ways of measuring overbought and oversold markets, as well as new ways of assessing volatility.    

So now it's back to school.  I'm reviewing recent markets and the most meaningful recurring patterns among  the measures I track.  What I'm finding is that I follow a lot of things that ultimately are not crucial to decision-making.  I could be much more efficient by tracking a more limited set of unique data.  I'm also finding real value in looking at how shorter-term cycles are nested within longer-term ones; i.e., viewing cycles in context.  This was particularly helpful in identifying the market turn this week.

There are three important lessons in all this:

1)  In getting back to school and looking at markets through fresh eyes, we can adapt to changing markets and we can continuously grow as traders. If you merely have a passion for trading, you'll overtrade.  It's a passion to understand and master markets that can keep you going through the ups and downs of your equity curve.

2)  None of the most important information that shows up in my reviews is a traditional technical market measure, such as a chart pattern or canned oscillator.  None.  The value is in new data and new ways of organizing the data.  If you're tracking the information other people are tracking and if you're assembling the information the way others are, you're just not going to achieve distinctive returns;

3)  The best way to improve your trading psychology is to improve your trading.  People hope they'll trade better if they improve their mindset, control their emotions, etc.  All that can be useful, but cannot substitute for genuine insight and information.  When you go back to school, you cement your own learning.  That is what gives us the confidence to take risk and stay with trades when the odds are with us.  

OK, Mia and I are finishing the last song and heading to the basement.  That's where the exercise room is located and where we work on body after working on mind.  That's a different school, but one that is equally important. 

Keep growing.

In all respects.

Further Reading:  Learning From Our Trading