Saturday, April 29, 2017

Three Ways to Move Forward as a Trader

I found an excellent way to assess experienced traders.  Simply ask them to show you what, specifically, they are now working on in their trading.  The best traders--including the ones experiencing current success--can show you concrete improvements that they are making to their research, their trading, their risk management, and/or their trading business.  Not intentions to make changes, not journal entries about changing, but actual, concrete, documented change efforts.

Here are a few things traders I've been working with have been doing to get to that next level of performance:

1)  Teaming up with other traders to create unique opportunities - The successful traders seek out others different from themselves and skilled/knowledgeable/experienced in different areas to create mutual learning and synergies.  A talented discretionary trader might team up with a talented quantitative researcher; someone expert in trading one region of the world will team up with someone with extensive background in a different region; etc.  In romance as in business, when the right people pair up one plus one becomes three:  everyone makes everyone else better.

2)  Becoming granular and working to improve specific trading processes - One trader I know is looking to high frequency market information to improve his entry execution, measuring results by tracking the adverse and favorable excursions of each trade.  Another trader is building specific time into his schedule to implement creativity exercises and generate more unique and promising trading ideas.  Yet another trader is implementing a system for sizing trades up and taking greater advantage of the trades found, through his research, to have the best hit rate and profitability.  The more detailed and sustained the improvement process, the more likely it is to result in meaningful change.

3)  Learning new tricks - I recently spoke with a trader who has created a unique correlation measure to assess when money is flowing into multiple macro assets at the same time as a way of tracking the activity of large money managers.  A creative trader is experimenting with generating sound patterns from the activity on charts, so that he can track more markets by simultaneously watching and hearing different markets.  When one market demonstrates the right patterns, he moves to trading it, so that he is always trading where there is opportunity for what he does.  Still another trader has added mean-reversion setups to his momentum ones so that he has different ways of trading slow versus busy markets.  These traders make money in different market conditions and in different markets, while others remain one-trick ponies.

Every successful company has an active research and development pipeline.  They are creating tomorrow's products and services and testing them out, because they know that is where tomorrow's profits will come from.  The auto manufacturer is working on driverless vehicles; the software company is building new virtual reality applications; the publishing company is electronically archiving chapters from all their books so that readers can, on the fly, select chapters from different books and create their own electronic texts.  

What is your R&D pipeline?  How full is it?  How much time do you spend in developing tomorrow's trading?  How, specifically, are you going to be better by the end of this year?  Those are some of the strategic questions that help guide the career success of traders.

Further Reading:  Three Varieties of Market Idiot

Thursday, April 27, 2017

How To Develop Yourself As A Trader

Many thanks to the great site of Despair for this perspective on limitations.  We see lots of motivational posters on how failure is a step toward success and we should always keep persevering, etc.


Sometimes perseverance is denial of limitations.  And sometimes failure--like losing your entire trading stake--really is failure.

So much of the reason many traders fail is that they never pursue trading the right way, as a performance discipline.  They don't have a structured process of learning.  They don't have the tools to properly replay, review, and correct their trading.  They don't have mentors to role model good trading practices.  They don't learn strategies with true edges and instead trade random patterns on charts or headlines of the moment.  They don't have enough capital to survive their learning curves.  They don't find the trading markets and styles that best fit their particular strengths.

Could someone on their own train for and reach the Olympics in an athletic event?  Could someone on their own practice acting and make it on Broadway?  

Of course not.

Performance fields require ongoing programs of development.  Without such programs, success is unlikely.

It's not what individual traders want to hear, but it's what I've learned in over a decade of working with everyone from beginners to portfolio managers managing billions of dollars.

So what goes into a proper developmental program?  I recently teamed up with Mike Bellafiore and Steve Spencer to summarize what has been working in our development of successful traders.  My intention is *not* to promote myself or SMB.  Rather, I'm hoping that seeing what is actually working with traders will inspire each reader to construct or find their own effective program of development.

You and your capital deserve nothing less.


Sunday, April 23, 2017

Aligning Your Ideas and Your Trades

There are two components to good decision making in markets:  our ideas and our trades.  Good things happen when these line up.

When I refer to our ideas, I mean the bigger picture of the trade:  the factors that lead us to believe that the market will make a particular directional move.  For shorter time frame traders, those ideas may be based upon data releases or earnings events or other such events.  For longer time frame traders, ideas may be grounded in fundamental factors, such as an acceleration of growth in the U.S. economy.  Our ideas express what we believe will be moving the market.  Sound ideas have some basis in reason--they make sense--and typically have some basis in backtesting.

The second component of our decision making is our trading of the idea.  This is how we implement the idea to achieve a favorable reward relative to risk.  Our criteria for trading an idea are separate from the idea itself.  For example, I may want to buy stocks on a surprise economic number that is bullish, but I might wait for the first pullback after the release to enter the trade.  I want to see how sellers behave after the first pop higher in price to tell me if the catalyst truly is altering capital flows.  If I see selling drying up at a price higher than when the news was reported, I'll enter the trade for at least another leg to the upside.  The news catalyst framed my idea, but the dynamics of the price and volume action framed my execution of the trade.

We see the same thing in sports.  A coach will call a play on the basketball court.  The focus then turns to executing that play well.  A good play exploits the weaknesses of an opponent.  But the good play doesn't lead to a score unless it is executed well, with good ball and player movement and players getting to the right spots on the court.  You can't score if you don't run good plays, but good plays cannot lead to scores unless they are executed well.

Above we can see a snippet from Friday's trading session in the ES futures.  The screen grab captures four things I look at in executing a trade idea.  The basic idea for my trading comes from an assessment of market cycle:  specifically the relationships of event time spent in rising/falling in past cycles as those relate to the dynamics of a current, evolving cycle.  (See the post on Cyclically Adaptive Trading for more background.)  My basic idea was that a short-term cycle had peaked on Thursday and that we should see lower lows and lower highs over time on Friday.  

In executing the idea, the four elements I keep track of are time (and event time denominated in volume bars); price (red and green bars); volume (bottom of chart); and upticks/downticks among all NYSE stocks moment to moment (blue line).  Note that we sold down around 12:15 PM with downticks greatly exceeding upticks and volume expanding on the decline.  Sellers had taken control.  

When the buyers take their turn, we can see upticks handily outnumber downticks at several peaks between 12:30 and 13:00.  Note, however, that volume dries up during those bounces and price can only retrace a fraction of the prior decline.  The buyers just can't get it done.  When I look at time, I'm looking for a rough correspondence between the amount of time spent declining and the amount of time spent in the subsequent bounce.  (If we draw volume bars, the time equivalence is about equal in this example).  Waiting for that time relationship to play out and selling on the final bounce in the NYSE TICK nicely executes the trade idea for a move down to 2341 a little after 13:00--a fresh low for the day on expanded volume.

You may very well trade different ideas on different time frames and implement those trades in very different ways.  The important point is that you trade well-researched, sound ideas and implement those in a way that aligns market flows with your bigger picture.  It is not enough to have good ideas in markets; we have to be able to translate those ideas into good trades.  Similarly, it is not enough to focus on chart patterns and short-term price relationships when larger market forces can run you over.  The greatness of a painter is that he or she sees a big picture--an inspiring vision--and then executes that brushstroke by brushstroke.  It takes a similar combination of vision and execution to make for great trading.

Further Reading:  Time and Trading Psychology

Saturday, April 22, 2017

Three Best Practices of Currently Successful Traders

Bella recently wrote a blog post in which he described five things that top traders at SMB were doing to facilitate their success.  It was interesting for me to read his post because, as he notes, I've been working as a coach with many of these same top performers.  I see the traders from a different angle so, with that in mind, I offer three additional "best practices" that I am seeing among traders experiencing consistent profitability:

Accountability - The most successful traders are the ones that most consistently bring their numbers to meetings with me.  They show each day's performance and review with me what happened:  good and bad.  They let the numbers tell the story:  whether or not they let losing trades get away from them; whether or not they were consistent in trading their edge; etc.  In one case, P/L was down for the month, but the distribution of winning and losing trades showed real consistency and superior risk management.  It was simply a time period where opportunity was more scarce in that trader's strategy.  But the conversation focused on what the trader was doing right, not simply on the lower P/L.  The best traders hold themselves accountable; they hold themselves to the goals they set and they set their goals in measurable ways.

Working on Psychology in Real Time - The most successful traders develop strategies for staying in their trading zone during the course of the trading session.  Psychology is not merely an add-on, something to be reviewed at the end of the trading day.  It is an integral part of their trading process.  For example, one trader has found that he is much more successful when he is in a mind state of calm, patient, self-awareness.  Accordingly, he takes breaks during the day to ensure he sustains his optimal state and practices meditation outside of trading hours to build his capacity to enter that zone.  On the trading floor, the traders frequently refer to trading "setups":  criteria that have to line up in order to provide an edge in a trade.  We've recently begun talking about each person's psychological setups:  the cognitive, emotional, and physical factors that need to align for best trading.  Edge occurs when our psychological setups overlap the setups offered by the market.

Adopting a Process Focus Trade by Trade - A promising new trader who will be joining the trading floor recently emailed me and asked about "trading process".  Because he had experienced success as an athlete, I responded by drawing an analogy to football.  When you're in the game, you focus on blocking, tackling, and executing the next play well.  You don't get caught up in the scoreboard or what others are doing.  *That* is a process focus:  being immersed in the doing rather than the results of the doing.  Imagine that each month is a season for your basketball team and each trading day is a game that you're playing during the season.  Your goal is to win the game, but to accomplish that you need to be focused on making the crisp passes, boxing out to get the rebounds, keeping yourself between the ball and the player you're defending, moving without the ball on offense, and screening to free up the good shooter.  To win a season, you have to win many games; to win a game, you have to run many good plays; to run a good play, you have to execute on offense and defense.  I've written in the past about my favorite bumper sticker, "Forget world peace.  Visualize using your turn signal."  That is process focus!

The worst traders have a passion for trading.  They need to trade.  The best traders have a passion for trading well.  They need to get better.  Show me what traders are doing outside of market hours, and I'll show you the odds on those traders' success.

Further Reading:  Mental and Emotional Preparation for Trading

Sunday, April 16, 2017

Cyclically Adaptive Trading (CAT)

The recent post highlighted the challenge of short-term trading returns over the past year and, indeed, since 2009.  In this post, I will sketch how I am addressing those challenges in my own trading.

When traders refer to the difficult trading environment, they often make reference to "choppy" or "noisy" markets.  Usually their next sentences lament the "algos" and their impact upon markets.  I find these to be expressions of frustration, not constructive formulations of trading challenges.  Invariably, those lamenting choppy markets dominated by algos that "manipulate" markets engage in their venting--and then go back to trading as they've always traded...and continue to lose money.  

A key to understanding the recent poor returns of short term traders is to appreciate that these traders don't merely lack an edge; they have a negative edge.  What they are doing, which largely falls into the category of trend/momentum trading, is systematically not working over time.  Waiting for high Sharpe trends to return to markets has not been a sound business model.  But perhaps we can trade in a way that benefits from anti-trending/mean reversion as well as momentum.

In coming months, I will be rolling out an approach that I refer to as Cyclically Adaptive Trading (CAT).  The core idea behind the strategy is that all markets contain linear, directional elements (trends) and cyclical elements.  On a given time frame, a "noisy" or "choppy" environment is simply one in which the cyclical aspects of market behavior dominate the linear ones.  Note that any market cycle itself has linear (rising and falling) components and range bound ones (topping and bottoming).  Very often, what is a trend on one time scale is a portion of a longer-term cycle.  The interaction of cycles over multiple time frames creates challenging irregularities, as markets switch between mean-reverting and trending phases.

The idea of CAT is that you trade the market's personality, not your own.  Instead of trading the time frame and style you happen to prefer, you trade the cycles setting up in markets.  Because there are multiple cycles at work at any one time and because the dynamics of the current cycles are influenced by the activity of prior cycles, we can identify dominant cycles in real time and adjust trading parameters to those.  This is the adaptive element in cyclically adaptive trading.  The reason so many traders are failing is that they lock themselves into preferred time frames and trading styles.  An adaptive approach is one that trades momentum/trend when we are in the rising and falling phases of cycles and one that trades in a value/mean-reverting manner when we are in the topping and bottoming phases.  We trade longer-term when longer-term cycles dominate and shorter-term when we see those "choppier" conditions.  Trading one time frame in one style systematically fails over time in markets possessing strong cyclical elements.

(A corollary is that, to the degree you identify yourself, say, as a directional trader or a short-term trader, you are probably losing money.  Someone who limits themselves to trading one facet of market cycles is like a baseball hitter who specializes in hitting fast balls.  If you get enough of those guys on a team, it doesn't take the opposition long to put breaking ball and off-speed pitchers on the mound.)

A second major idea behind CAT is that cycles are self organizing:  recent cycles impact the creation of new cycles which interact to generate other, different cycles.  There is no single periodicity to cycles that can be traded mechanically and, indeed, I have doubts that cycles even exist in chronological time.  Markets move in event units of price movement and volume: as participants enter and exit markets, they impact cycles in ways that impact future price behavior.  In other words, cycles are a function of the behavior of market participants, not a function of the passage of time on a clock. Our job as traders is to adapt to the market's clock and trade in market time, not our time.

The trading I am rolling out is based upon an advance I've made in tracking the self-organization of cycles over multiple event time horizons.

Some sources of insight into market cycles can be found in the early technical works of George Lindsay and Terry Laundry.  Important quantitative perspectives and tools have been offered by John Ehlers, who introduced the notion of adapting technical trading systems to dominant cycle periods.  Relevant TraderFeed posts appear below, and I will be posting more as I formally roll this out in my trading.

Further Reading:


Saturday, April 15, 2017

How Tough Has Trading Been?

Thanks to a savvy trader for this graphic of the Soc Gen Short Term Trading Index, which is the composite results of the largest diversified futures funds holding positions for less than 10 days.  Even the longer track record is net negative.  Interestingly, hedge fund performance was positive for the first quarter of 2017, but the performance of CTAs was negative over that same period.  These results mirror my own experience working with trading firms:  those trading short-term and those trading in a momentum/trend style have been performing worst.  Those performing best in Q1 were ones focused on Asia, as well as activist funds and funds trading volatility strategies.

In other words, those market participants with specialized strategies have been outperforming the generalists.  Working at a number of funds as a performance coach, I can tell you that--on average--those placing directional bets on interest rates in Q1 greatly underperformed those trading relative value strategies.  Even among day trading firms, uniqueness of strategy has been an important predictor of success thus far in 2017.  Those traders day trading big liquid instruments have underperformed those finding unique opportunities in carefully selected individual stocks.

I'm not so sure this is all that different from the dynamics in the broader business world.  If new participants enter a crowded space, they are less likely to be successful than if they find unique niches.  This is an important challenge for those aspiring to trading success.  The risk tolerance of most trading firms does not permit long holding periods for directional positions.  This tends to throw everyone in the short-term camp depicted above.  You're not going to win by playing the same game as everyone else, just as you're not likely to find gold if you prospect the hills that have been well picked over by previous miners.

It's not enough to learn how to trade; it's critical to trade uniquely.  It's not enough to trade with rules and discipline; one must also find opportunity creatively.  The firms achieving the results depicted above are trading trends in liquid markets in a disciplined fashion.  A great approach to success would be to research strategies that made money during months when those other participants were performing worst.  There is no guarantee that future returns will mirror backtested ones, but digging for gold in well-mined fields is a poor risk/reward proposition.

Further Reading:  Creativity and Innovation in Trading

Sunday, April 09, 2017

Overcoming Overtrading: A Powerful Exercise

The most recent post took a look at the real reason traders lose money.  Though we often justify our style of trading by asserting that the style fits our personalities, the reality is that traders lose money precisely because their personality traits interfere with the identification and trading of opportunities that legitimately exist in markets.  

Nowhere is this dynamic more prevalent than in the frequency of people's trading.  For the most part, traders trade with a frequency that suits their needs for involvement, not their objective assessments of opportunity.  The result is overtrading--taking many more trades than opportunity rewards.  

There are all sorts of excuses for overtrading, including the common assertion that frequent trading contributes to one's "feel" for the market.  In reality, however, the chop, chop losses that often accrue with overtrading contribute to the very psychological problems--frustration, loss of discipline--that traders recognize lead to a loss of market feel.  The real question is whether frequency of trading is positively correlated with P/L.  Very often that correlation is zero or negative.  Periods of more active trading correlate with worse trading performance--not better market feel.

It's no coincidence that one of the most read TraderFeed posts deals with why we trade emotionally.  We typically encounter psychological issues in trading because we're overinvolved in markets, not because we lack commitment or passion.  Indeed, too often passion is used as the excuse for addictive trading.

So here's an experiment that I've been working on.

The inspiration for the experiment comes from the idea that artificial constraints can act as prods that stimulate creativity.  For instance, suppose I tell myself that I have to prepare a tasty dessert that only utilizes three foods.  Moreover the first two components of the dish have to be cake and cherries.  So now I have to think out of the box.  How do I put cherries and cake together into a unique and tasty dessert?  I decide that the dessert needs liquid to bring the cake and cherries together, so I squeeze juice from some of the cherries.  I then recall that I had a delicious fruit beer during a recent brewery tour.  I blend the beer with the cherry juice to create a tasty sauce and pour that over the cherries and on top of the cake.  Voila!  A unique dessert that I never would have thought of had my options been unlimited.

With that in mind, how would I trade if I could only trade once per week?

Hmmmm...that changes everything.  If I can only fire one bullet, I have to make sure it counts.  That means I won't take little scalp trade ideas; I'll want to benefit from more significant market moves. So now I have to go back to my market research and identify the characteristics of the few great trades that set up during a week.  I look back at many weeks, across many market conditions.  Lo and behold, there *are* criteria that clearly indicate good weekly opportunity, but they are different from the criteria I've been looking at.  They are longer term, and they rely on setups that simultaneously occur on multiple time frames.  They're like the fruit beer:  criteria I wouldn't have thought of had I been free to trade any and every time frame.

As a consequence, if the trade doesn't set up across defined time frames, I don't take it.  Looking for a good idea isn't good enough when you can only trade once in a week; you need those great ideas that come to you.  If it doesn't strike me as a slam dunk, I don't trade it.  I don't want to waste that bullet.

What I can report from this experiment is that the trading thus far has been profitable and consistent.  If that continues, I'll size up the selective trades; I won't trade more often.  I am fully engaged in markets and update my research daily, but I only trade when everything comes together.  I'm perfectly content to miss moves, as long as I profit from the movement I do identify.

But just as the fruit beer cherry cake is a new creation, my new trading style provides an entirely fresh experience.  I check the market in the morning, midday, and evening, but I don't spend time staring at screens.  That frees me up to do many other things with my time:  I now have the bandwidth to take on new and interesting projects.  Trading has fit into my life; my life does not revolve around markets.  It's easy to tell when we're on a good path:  the travel gives us energy; it doesn't deplete us.  Trading less has meant making more, but also being more productive.  It has also led me to identify patterns to trade in the market that I would have never otherwise perceived.

Take it to the bank:  Trading success comes from trading the market's personality, not our own.

Further Reading:  When Trading Gets Out of Control

Saturday, April 08, 2017

The Real Reason Traders Lose Money

So I've figured out the real reason traders lose money.  It's only taken me how many years as a psychologist to figure this out, but, hey, no one ever said psychologists have a monopoly on the insight market.

Before launching into the actual reason traders lose money, let's step back and review an important principle:  Most accepted wisdom in the trading world consists of kernels of wisdom that have been blown up into Grand Ideas that are utterly invalid.

The poster child for this phenomenon is the idea of discipline.  Successful trading requires having rules that guide decisions and actions.  Success requires the consist following of those rules.  Given a set of valid rules, the better performer will be the disciplined person who trades with fidelity to those rules.  Makes sense.

But once we blow discipline into a Grand Idea and insist that Discipline is the source of all trading success, we then have mentors and coaches who harangue traders with journals and checklists to monitor every minute activity.  This ultimately serves two purposes:  it makes traders so self conscious that they are no longer attuned to market patterns, and it so routinizes trading that traders become unable to adapt to changing market conditions.  As a general principle, discipline makes sense.  As a supposed formula for trading success, Discipline ensures consistency in losing.

The same is true for ideas of emotional awareness and mindfulness in trading.  Great ideas in context that, once blown into Great Principles, divert traders from the real work for identifying objective patterns playing out in the marketplace.  If a trader trades randomness with self awareness, they will be a keen observer of their own demise.

Which brings us to the topic at hand: the real reason traders lose money.

One of those nuggets of wisdom that gets blown out of proportion is the idea that success comes from trading in a way that fits your personality.  There is certainly truth to that.  If you're an extroverted person, your idea generation is likely to benefit from talking with knowledgeable market participants.  If you're introverted, you are more likely to benefit from reflection and analysis.  Taken to the level of Grand Principle, however, the idea that success will follow from expressing your personality in markets becomes a kind of anything goes, do whatever you feel like justification for poor decision making.

Because *that* is the real reason traders lose money:  They ARE trading their personalities.  Show me a losing trader and I'll show you someone acting out their personality in risk-taking.  Consider examples drawn from the "big five" personality traits:

*  The trader who lacks conscientiousness in his/her personal life fails to achieve consistency in trading.  The trader who is overly conscientious fails to innovate when market conditions change.

*  The trader who lacks emotional stability in his/her life trades impulsively and emotionally.  The trader who is highly emotionally stable has difficulty taking proper risk out of fear of upsetting the emotional apple cart.

*  The trader who is highly introverted or extroverted allows internal or external stimuli to interfere with decision making.

*  The trader who is highly open to experience becomes so enamored of new ideas that his/her trading becomes skewed by the latest shiny toy.  The trader lacking openness to experience finds one way to make money and can't do anything else even after that one way loses its edge.

*  The trader who is very likeable has difficulty tuning out people and becomes easily distracted by noise.  The trader who lacks likeability alienates the very colleagues that could help inform his or her trading.

In other words, traders lose money BECAUSE they are trading their personalities.  Every personality trait brings potential assets and liabilities to trading.  Sometimes, our personalities pose severe challenges to trading success.  Every personality asset, when overutilized, brings its own set of problems.  

There is only one source of making money in markets, and that is identifying recurring patterns in market behavior and exploiting those in a manner that provides solid reward relative to risk.  We marshal and attenuate various personality traits to identify and exploit those patterns.  Success comes, not from indulging our personalities, but from knowing which traits to draw upon and which to work around.  That is called wisdom.

In my next post, I'll provide a personal example of trading success that came, not from following my personality, but from properly channeling it.

Further Reading:  Trading Psychology for the Experienced Trader

Saturday, April 01, 2017

Building Your Trading Resilience

Resilience is the ability to encounter a setback and quickly resume forward movement.  The resilient trader doesn't allow losses in the morning to prevent good trading in the afternoon; losses in one day to turn into poor trading the next day.  Resilience requires belief in oneself and one's processes, and it requires the ability to look at the setback and ask, "What is this trying to teach me?"

Much of resilience is having other, positive things to fall back upon when one part of our life is not going well.  It's much easier to absorb trading losses when we are fulfilled by family life and enjoy physical health, friendships, and meaningful personal pursuits.  A great test of a trader is to see how they perform after a poor trading day or week.  Do they become impulsive and lose discipline, trying to make the money back?  Do they become fearful and miss good opportunities?  Do they double down on preparation and learn from what they could do better?

Here are several articles pertinent to resilience and maximizing positive experience when trading.  These will be helpful in that part of trading preparation in which you prepare yourself for the trading day:


Saturday, March 25, 2017

Coaching Yourself for a Better Trading Psychology

Thanks once again to the good folks at, who hosted the recent webinar on techniques for changing your trading psychology.  The recording of that session is now up on YouTube.  I appreciate Mike, Terry, and crew making that available for those who could not attend live.  We had over 250 attendees and many more questions than I had time to answer.  In August, therefore, I'll do another session with, but this time with the sole focus of Q&A.  Traders can ask me any question about any trading (or life) problem, and I'll respond with ways I deal with those challenges as a psychologist and coach.  As the time gets closer, I'll post instructions for registering for that session.

In this post, I'd like to elaborate on a point made in the recent webinar:

What traders typically identify as psychological problems in trading are usually the result of an underlying problem and not the problem itself.  Successfully dealing with the issue means identifying and addressing its cause.

This is a very important concept, and it's what distinguishes would-be trading coaches from actual psychologists.  Very often the wannabe coach has a favorite tool or set of techniques for dealing with trader issues.  It's one size fits all.  A psychologist recognizes that the problems people experience can have many causes and first tries to determine where the problem is coming from.  

Let's take a typical example of a trader complaining of lapses in discipline.  The trader trades well for a while, then overtrades and loses more money than is prudent.  The trader asks the coach, "How can I solve this problem?"

It's the wrong question.  The right question is, "Where is this problem coming from?"  It's only after asking that question that we can figure out a possible solution.

Consider the following possible causes of lapses in trading discipline:

*  The trader is trying to focus on screens continually for an extended time and is becoming fatigued, with a resulting loss of willpower;

*  The trader is distracted by problems in his/her personal life, perhaps upset about arguments at home or financial issues;

*  The trader suffers from attention deficit disorder and resulting impulsivity;

*  The trader has become frustrated by recent trading losses, as these trigger past feelings of being a loser;

*  The trader has failed to adapt to a lower volume/lower volatility market and is now trading breakouts/momentum that fail to materialize.

You get the idea.  Loss of discipline is not the problem.  Loss of discipline is the result of a problem, and we have to diagnose that problem to figure out how to address it.  Filling out trading journals and checklists will not help the trader deal with personal issues at home or medical issues regarding ADD.  Working on mindfulness and awareness/control of emotions will not help a trader adapt to a changing market regime or address past psychological conflicts.  All of those techniques are useful in certain situations; none are universal solutions for our trading psychology.

The starting point for identifying causes of our trading psychology challenges is creating a catalogue of instances when those challenges are and aren't occurring.  So, for example, we would note when we are having more trouble with discipline in trading and we would jot down what is occurring at those times:  what's happening in markets, what's going on in our minds, what's happening in our personal lives, etc.  We would also write down occasions when we're faring much better in our discipline and what is going on at those occasions.  As we catalogue instances, we begin to notice patterns and those provide excellent clues as to potential sources of our trading woes.

The most important distinction is between issues that occur solely within the trading context and issues that also occur outside of trading and/or that have occurred in our past.  If we're lacking discipline in our personal lives (perhaps by not paying bills on time, by being easily distracted, by being emotionally upset), that is different from situations where discipline lapses are specific to the trading context.  Very often the connection is an emotional one:  the frustration that triggers the lapse of discipline is a frustration that is being felt in other parts of the trader's life and/or that has been felt during the trader's past.  

Very often, as you catalogue the waxing and waning of problem patterns, you'll see that working with a dedicated trading coach is not the answer.  If the problem is a conflict from your past repeating itself in your trading, a competent counselor or therapist can help with this.  If the problem is an attention deficit that has been present since our youth, this can be addressed medically and perhaps via biofeedback training.  If the problem is adapting to changing market conditions, perhaps what is needed is some mentoring from an experienced trader.

We can coach ourselves for a better trading psychology by paying close attention to the triggers of our trading challenges.  Asking the right questions greatly increases the odds of finding solutions for our trading.

Further Reading:  

Brief Therapy for the Mentally Well

More Therapy for the Mentally Well

Four Triggers for Trading Psychology Problems

A Powerful Change Technique for Our Trading Psychology

The Daily Trading Coach:  101 Techniques for Changing Trading Psychology

Sunday, March 19, 2017

Seven Training Resources For Developing Traders

If you look at successful programs of training, you'll see three elements:

1)  Hearing - Having information taught to you;
2)  Seeing - Seeing skills being performed based on the information being applied;
3)  Doing - Trying out the skills yourself, with ongoing feedback and guidance from a mentor

Think about apprenticeship programs in the trades; the training of military recruits; the medical education of physicians; and the training of elite athletes.  All involve acquisition of knowledge/information; observation of advanced practitioners applying the knowledge; and supervised efforts to apply the knowledge oneself.  In this three-fold process, we make the transition from theory to skill development.

What we're seeing is an increasing number of offerings to developing traders that integrate the hearing, seeing, and doing through a combination of videos, live trading sessions, and active mentoring/teaching.  Back in the day, trader education generally meant someone giving a class on a topic--and that was it!  Obviously that didn't help traders translate theory into practice.

Here are some outlets for more complete training and support of developing traders that I'll list in alphabetical order.  My goal is not to formally review or endorse these, and none knows that I'm writing this article.  Rather, the idea is to point developing traders in a few directions that could prove promising.  If I have missed some excellent comprehensive resources, please feel free to let me know at steenbab at aol dot com.

Crosshairs Trader - David Blair has assembled a comprehensive suite of educational videos and daily watchlists, reviews, and mentoring to help traders apply chart-based setups in real time.  Great way to see how an experienced trader approaches market opportunity.

Exceptional Trader - Terry Liberman has assembled a unique coaching resource for traders.  The focus is not on finding trade setups, but rather on building your trading business and figuring out what *your* edge is in markets.  Regular webinars and group as well as individual coaching.  Great way to think through the big picture of your trading. - Mike has built a large and active trader community with chat and frequent webinars and downloadable trading tools and resources.  Topics on the discussion threads range from trading journals to the creation of quant tools for trading.  Great way to learn from others.

Investors Underground - Nate and team have assembled an active trading community that offers beginning and advanced courses, chat rooms for different strategies, daily watchlists, webinars, and mentoring.  The courses cover a range of topics from chart patterns and setups to scanning for opportunity and reading Level 2 information.  Great way to connect with a variety of mentors and traders in a community.  

NewTraderU - Steve Burns explicitly addresses the learning process of new traders with courses on such topics as using moving averages in trading and trading with options.  He also maintains an active blog and has written several ebooks.  Great introduction to trading.

OpenTrader - Ziad and Awais offer a comprehensive training program that includes a large number of videos, exercises to drill skills, and live mentoring/coaching.  A unique aspect is the grounding in auction theory and Market Profile.  Great way to approach trading with a well constructed curriculum that moves from theory to practice.

SMB-U - Mike and Steve have built SMB's training programs into a successful proprietary trading firm.  Detailed courses integrate video, skill drills, and a real time audio feed to their trading desk.  Topics range from foundation skills to tape reading and options trading.  Their in-house training includes practice trading on a simulator, access to quant tools to improve trading, and daily mentoring.  Great way to learn hands-on.

Interested traders will want to investigate offerings and the cost of those offerings thoroughly before seeking training.  Note that most of these services are offered for active/day traders and especially those in the stock market.  If you do investigate, I think you'll be surprised by the depth of offerings and the degree to which information is supplemented with active opportunities to watch experienced traders in action and try out their methods for yourself.

For those looking for a low overhead start with trading education, check out Adam Grimes' site, which contains a podcast covering relevant trading topics and a free trading course that tackles topics ranging from technical analysis and psychology to quant trading and options. 

Further Reading:  Fake and Real Education in Trading 


Note:  TraderFeed will move to a weekend basis of publication starting this coming week, but I will repost popular pieces during the week re: topics that seem currently relevant.

Saturday, March 18, 2017

Building Your Trading By Building Your Consistency

Bella makes an excellent point in his recent post:  We improve our trading not only by making improvements during trading hours, but also by building consistency in our lives outside of trading.  It is through such consistency that we build habit patterns.  Those habits reinforce qualities in us that show up in our work.

Just a moment ago, I was starting to write this post when Sofie jumped onto my lap after bringing me her favorite toy, a rubber mouse.  She was purring and clearly wanted to cuddle and play fetch.  So now I have a dilemma:  do I continue with the post or do I pet this formerly homeless cat and toss her mouse for a few rounds of fetch?  Of course it's a no-brainer.  I play with Sofie.  And I would have done the same thing if it had been my little son or daughter coming up to me while I was reading, writing, or working.  People and their needs come first.  That's what makes me a psychologist.  The consistency of acting upon that is a big part of what has helped me be effective when the people I work with have needed attention.

Whatever we do during the non-trading day is training for what we will be like when we're trading.  Everything we do trains us for something.  If we are scattered and disorganized in our personal lives, we are building those qualities and will enact them in our trading.  If we fail to make efforts outside of trading, it won't be surprising if we don't follow through on goals written in our journals.  Bella's point is that we become better traders by enacting the qualities in our personal lives that will make us better in financial markets.  

In small ways, every day, we can be the person we want to become until, one day, it all comes naturally.

Further Reading:  Be The Person You Want To Become

Friday, March 17, 2017

Trading With a Higher Consciousness

A higher dimension of consciousness occurs when we are self-aware:  when we not only act, but observe ourselves in the process of action.  Some activities are best performed on a routine, automated basis, such as driving a car through familiar territory.  To be continually thinking about how you are driving would interfere with the driving itself.  That is the basis for most performance anxiety.

Other activities are not routine and involve deliberate choice among difficult alternatives.  Driving on very icy roads with very limited visibility is not a routine activity and proceeding on an automated basis could be fatal.  In difficult terrain, you have to think carefully about how you're negotiating each turn, how fast you can afford to go, etc.  That self-awareness helps you govern your actions, and it ultimately helps you address the larger question of whether you *should* continue driving under those conditions.

Active trading is challenging from a consciousness perspective.  On one hand, there are times when the trader needs to be absorbed in market activity, reading patterns as they unfold.  This requires the ability to operate on a routine, automated basis.  Active self-awareness can impair such real time pattern recognition.  On the other hand, self-awareness is required for proper risk management and for those occasions when the trading path becomes icy, with limited visibility.  It is self-awareness that tells us we need to pull back from trading and reassess markets.  We cannot pull back when we're on auto-pilot.

Balancing market awareness and absorption with self-awareness and self-observation is one of the trickiest skills traders need to master.  It requires a flexibility of focus, an ability to shift cognitive gears when self-control becomes vital.  One way I've developed this gear shifting is to use losing trades and days as an automatic signal for stepping back and becoming more self-aware.  The losing trades and days may be a sign that markets are changing; they also may signal that we're reading the market improperly.  Losing trades are like seeing some ice on the road and fog in the air...we use the change in conditions to become more aware of how we're driving.

Practicing that gear-shifting--from market focus to self-focus and back again--is a great way to develop a higher consciousness in our trading.  Every step back from the screens can become an opportunity to rehearse gear shifting and build our capacity for flexible performance.

Further Reading:  Sustaining the Flow State

Thursday, March 16, 2017

Techniques for Changing Your Trading Psychology

I look forward to the webinar a week from today, when I'll describe three research-backed methods for working on the most common trading psychology challenges.  What will make this session unique is the focus on specific techniques that you can take away and use to coach yourself for challenging trading situations.  I'll also be taking questions from participants and illustrating how the techniques can be adapted for different traders and challenges. 

Hope to see you there!


Wednesday, March 15, 2017

Using Cycles to Trade Market Trends

Even in trending markets, we see cyclical behavior.  In a distinct uptrend, we will make cycle lows at successively higher price levels.  In a downtrend, we make cycle highs at successively lower price levels.  Those cyclical movements can provide worthwhile entry areas for those looking to ride longer-term trends.  In other words, we can participate in a trending market by going with the trend for our trade but entering countertrend with the market cycles.  This is different from momentum trading, where we're looking to buy strength and sell weakness on price breakouts.  In a low volatility environment, using momentum to time entries can lead to getting chopped up.  

The chart above depicts cyclical behavior in SPY (blue line) as a function of a moving average of the percentages of stocks in the index trading above various moving averages (data from Index Indicators).  You can see we're in oversold territory on the measure at a higher price low.  This leads me to expect at least a retest of recent highs in the market's bigger picture.  Very good short-term trades can be found when intraday flows line up with this larger market picture.

This is yet another way that we can integrate quantitative and discretionary information in our trading.

Further Reading:   Trading Market Cycles

Tuesday, March 14, 2017

Lessons From A Successful Independent Trader

Here's a great post from Bella regarding a small independent trader, J. Park, who has grown his account to $100,000--and what that trader did to achieve his success.  Several lessons jump out from his experience:

1)  He failed many times small before finding success - We see this pattern among a surprising number of the Market Wizards that Jack Schwager interviewed.  It took experiences with failure to finally figure out what produced success.  The success came from perseverance and the ability to learn from failures.

2)  He found multiple mentors - I believe this is key.  Whether its chess, athletics, performing arts, or elite military, we find that successful performers are mentored and trained.  The presence of multiple mentors permits an integration of perspectives that eventually leads one to their own distinct approach.  Interestingly, I have known the mentors mentioned by J. Park, such as @InvestorsLive, @Modern_Rock, @kroyrunner, and @MikeBellafiore, to have mentored other successful traders.  Think of all the stars that have come from basketball coaches John Wooden and Coach K:  good mentors produce good performers.

3)  He focused on process - As he points out, we can't control P/L; we can control our trading process:  what we trade and how we trade it.  The successful trader may be discretionary in their decision making, but will not be random.  Successful trading is rule-governed, where the rules are derived from a clear understanding of who is in the market and what they're doing.

There is a fourth ingredient in success, and it helps explain why many successful money managers started out as active, short-term traders.  Short-term trading creates multiple learning trials.  If you are investing and holding positions for six months to a year or more, how many learning trials do you obtain over the course of a career?  The daytrader has 200+ learning trials every year--more if they are using simulation tools, engaging in review of recordings of their trades, etc.  That intensity of learning trials acts as a kind of cognitive gym, building the decision making and pattern recognition skills of the trader.   

All the learning trials in the world, however, will not lead to a cumulative result if they are pursued haphazardly.  The reason we see mentoring as a key ingredient in success across disciplines is that the right teaching guides learning trials toward optimal development.  Great athletes don't just exercise daily; they perform the right exercises.  That is equally true for developing traders.

Further Reading:  Trading With Focus

Monday, March 13, 2017

Growing Your Trading By Integrating Quantitative and Discretionary Processes

A developing trader makes progress by mimicking a mentor, an experienced and successful trader.  That developing trader becomes an experienced and successful trader by finding multiple mentors and integrating the wisdom and best practices of each.  If you look at training programs from medicine to the military, you'll find strong mentors and multiple mentors.  We acquire skills and we integrate them: that generates expertise. 

A distinct trend in recent years is using multiple mentors to integrate quantitative approaches to trading with discretionary ones.  A simple example occurred at a firm where I worked, where several of us developed a predictive model for trend days in the stock market.  We examined days that qualified as trend days and days that did not and built a simple model based upon such variables as volume and breadth.  The output from that model was then shared with traders, who integrated the results into their own trading.  So, for example, a trader might focus on stocks most likely to benefit from the trend by looking at volatility, relative strength, etc.  A different trader might use the model output to extend the holding time on a trade that had already hit its first target.

Yet another example of integration would be using historical studies of market tendencies to frame trade ideas.  Some of those studies can be found via Quantifiable Edges and from Paststat and from InvesiQuant.  Still more quant resources can be found via the excellent Quantocracy resource.  Market regimes can change and what happened in history may not be mirrored in the near future, but knowing tendencies from well-constructed studies can tell you what markets *usually* do in a given set of circumstances.  Some of the best discretionary trading comes from occasions when markets fail to do what they "should" be doing, as that tells us that idiosyncratic factors and flows are dominating trade.  

The ability to integrate new information and styles into our trading is what keeps us learning, developing, and adapting to changing markets.  It's when we don't integrate that we stagnate.  The most consistent finding I've made as a trading coach is that the best traders find multiple ways to win.  Those traders can be successful in multiple market regimes.

Further Reading:  Identifying Trend Days in the Market

Sunday, March 12, 2017

Three Tools to Improve Our Trading Performance

If we internalize everything that we do such that all that we do acts as training, then it makes sense for us to train as intelligently and purposefully as possible.  Here are three tools for training traders that have the potential to shape our future performance.  (Please note that I have not received any incentives or compensation for mentioning these.  The companies have no clue I'm writing this, which is how I like to keep it).

1)  TradingSim - I've long advocated the use of simulated trading as a way of practicing pattern recognition for active traders.  What makes TradingSim unusual is that it is entirely web-based (no software to download) and the data are included in the subscription.  You can simulate trading any day over the past two years and the simulator will replay that day with any symbols and technical indicators you choose.  You can view multiple charts simultaneously, and you can speed up the replay or advance bar by bar.  You place your trades on screen and the program tracks your P/L and historical performance.  Great way to review the day; great way to practice trading for developing traders--or for experienced traders testing new strategies.  One unusual feature for daytraders is that the biggest moving stocks are displayed, so that you can trade what is moving.  Longer time frame traders can use the simulation to aid their entry and exit execution.

2)  Headspace - Some smart traders I'm working with are using this program and app, which teach meditation and mindfulness.  There is research supporting its use, and a blog addressing various topics related to work on mindfulness.  The platform is web-based and easy to use, with a guide that walks you through meditation exercises, some of which are tailored to particular needs including relationships, performance, and health.  There is a basic foundation sequence for new meditators and also longer, more detailed exercises to build mindfulness for more experienced users.  The app keeps track of your progress and structures your learning, so that Headspace truly becomes a workout routine.  The program will even send calendar reminders to ensure that working on your head is built into your day.  It's a great way to stay actively engaged in meditation work without having to join a class.

3)  BrainHQ - This is quite an unusual program and app that trains specific brain functions, such as memory, attention, and visual tracking.  It's backed by considerable science, and all the exercises are web based so that they can be accessed from any place, any time.  The exercises can be tailored to various levels of difficulty.  The program keeps score and enables you to track your progress.  It calculates your skill level and sets parameters that ensure that you're always challenging yourself at your threshold.  I am not at all proficient at hand-eye coordination tasks, so these are unusually challenging--and frustrating!--for me.  One of the side benefits is that the work on the tasks builds not only attention/focus but frustration tolerance.  If you're interested in cognitive exercise, it puts you through your paces!

What we're seeing is the next generation of tools to build successful traders.  It's one thing to write in a journal and talk with a mentor/coach about trading mindfully or sticking to your best trading rules.  It's another thing to actually work each day on mindfulness and actively practice trading with those rules.  Taken together, these kinds of tools form a kind of performance gym.  Talking to your basketball or football coach doesn't substitute for getting in the gym and engaging in the drills that lead to better conditioning and sharper skills.  Similarly, speaking with a mentor or trading coach can't substitute for hands-on skills building.  These are great ways to build trading-relevant skills without putting your capital at risk.

Further Reading:  Using Metrics to Boost Trading Performance