Monday, January 16, 2017

Turning Information Into Knowledge: 100 Sources of Potential Insight

Traders are typically inundated with information--from charts and data feeds, chat, financial media, social media--but obtaining knowledge (not to mention wisdom!) requires some active filtering.  The challenge is to be open to new sources of perspective, but not so open that everything becomes a blur.  I would much prefer to deeply ponder five excellent sources of knowledge than skim fifty.  Indeed, it's the proliferation of information--and our desire to assimilate it all--that often prevents us from obtaining true knowledge and wisdom.

A recent feature from Feedspot highlights 100 top blogs and websites associated with the stock market.  These have been ranked as a function of site traffic and social media followings.  TraderFeed is on the list, as are a number of news and trading-related sites.  A great exercise would be to scan the list and find one source of information that can truly provide knowledge for your trading.  While not all 100 will be relevant to every trader and investor, the odds are good that at least one can provide new ideas and perspectives.

Creativity begins with new inputs:  we're most likely to achieve new insights when we look at new things and contemplate old things in new ways.  The challenge is finding the information most likely to provide us with actionable knowledge.  The list of 100 sites is a good place to start.  

Further Reading:  Some of My Favorite Financial Websites for Developing Traders

Sunday, January 15, 2017

Positive Psychology and Trading Psychology: Bloomberg Radio Interview With Brett Steenbarger

I have to say, in the many years in which I've participated in interviews, I've never encountered one as detailed and well-prepared as Barry Ritholtz's recent interview of me on Bloomberg Radio.  He sent me questions in advance, updated those questions before the interview, and then came up with additional questions during the interview that revealed his prior thinking on the topics.  Barry's podcast series, Masters in Business, has become an impressive body of work, including interviews with such authors as Michael Lewis, Daniel Kahneman, and Philip Tetlock.  

One of the major themes of the recent interview was the role and importance of positive psychology for the discipline of trading psychology.  Positive psychology grew out of the early work of Abraham Maslow and the subsequent research of Martin Seligman and others.  It is the study of human strengths and competencies, as opposed to the study of psychological disorders.  An excellent curated list of positive psychology readings can be found here.

In a performance field such as trading and investing in financial markets, it is the leveraging of these positive attributes that distinguishes success.  Solution-focused work turns traditional counseling, therapy, and coaching on its head by intensively studying our successes--and then building upon those.  The Trading Psychology 2.0 that I describe in my recent book is a view of trading performance that highlights such strengths as adaptability, creativity, and the continual evolution of best practices into best processes.  Those topics were barely mentioned in trading books when I first began working with participants in financial markets almost two decades ago. 

If you have goals and a vision for yourself, the best way to reach those is to find the ways in which you are already moving toward those ideals in some ways, at some times.  There are patterns connecting your smaller successes that can become the framework for larger successes.  We are already the people we wish to become, but often only occasionally and inconsistently.  It is our moments of best performance that hold the key to the achievement of our greatest dreams.

Thanks again to Barry and the Bloomberg team for the opportunity to exchange ideas.  The podcast series is an invaluable resource for traders and investors.


Saturday, January 14, 2017

The Power of the Pause

Here's a very simple rule that distinguishes good traders from poor ones:

Good traders trade poorly at times.  When they do, they pause from trading, reassess the market and themselves, and don't return to trading until they're in a different mode.  That different mode could be a different state of understanding; it could be a different emotional, cognitive, and physical mode--often it's all the above.  When good traders trade poorly, they make changes before placing additional capital at risk.  Pausing from trading is an essential part of their success.  It returns them to their best practices.

Poor traders also trade poorly at times.  When they do, they continue trading, and they compound their mistakes.  They never achieve a different mode, because they're so focused on markets that they never observe themselves.  When poor traders trade poorly, they place additional capital at risk before they can make changes.  That further trading is essential to their failure.  It keeps them from implementing best practices.

To determine a trader's skill, watch what they do when they are not trading.  How well do they research and reassess markets?  How deeply do they reflect and observe themselves?  It is in life's pauses that we have an opportunity to change direction.  Without powerful pauses, nothing can change.

Further Reading:  Three Best Practices of Trading

Friday, January 13, 2017

Be the Person You Want to Become

Here's a very important psychological principle:  When you want to make a change, clearly identify your ideal self--the person you would like to become--and make a conscious effort to be that person in some way, in some measure every single day.

We expand our identity by taking on roles and, over time, having those roles become part of us.  When I met my wife, she had three children by a prior marriage.  I had never been in a father-like role in the past.  By taking on some (but far from all) of those responsibilities day after day, I gradually internalized the sense of being a father.  When we had two more children, I stepped into my responsibilities naturally and gladly.

Identity is something we internalize over time, and the feedback we receive from others when we're in a new role is an important part of that internalization.  Our life experience is constantly mirrored to us in our social interactions and that becomes part of who we are.

One change that many traders want to make is expanding their trading size and risk taking.  They have been trading small and prudently as they develop, but now is the time to take greater risk and pursue meaningful rewards.  How can traders make that transition?

We become bigger traders by gradually trading bigger:  by assuming that role each day.  In gradually bumping up the size of our positions, we gradually internalize the sense of being a bigger trader.  The gradual increases ensure that the resulting volatility of our P/L doesn't throw us for a loop, but are meaningful enough that we experience ourselves as growing.

We never talk ourselves into change.  Change is the internalization of consistent action.  When we assume a role, we potentially expand our identity.  Be the person you want to become in small measure every day, and before long, you'll experience the world as that ideal person.

Further Reading:  Five Keys to Making Life Changes

Thursday, January 12, 2017

Supercharging Learning and Your Development as a Trader

In a recent post, Adam Grimes offers a number of helpful thoughts and advice for developing traders.  He makes the very valuable point that many of the psychological challenges of trading resolve themselves once basic, fundamental components of trading are properly addressed.

I'd like to add an observation to Adam's excellent list of must-do's for evolving traders.  The observation was inspired by a group coaching exercise I performed yesterday with the developing traders at SMB.  They came to my session probably expecting me to deliver a talk on a psychology-related topic.  Instead, I began by going around the room asking each attendee to name the one goal they were working on in that day's trading.  To their credit, the traders were able to quickly articulate what they were attempting to accomplish.

My observation is that the rate of development in a trader critically hinges upon:  1) keeping score with one's trading; 2) using score-keeping to identify clear aspects of trading to work on; and 3) the manner in which one actually works on those goals.  This third component turns out to be particularly important.

A good, diligent trader will keep track of P/L of trades, identify good and bad trades, and perhaps write in a journal what they did right and wrong and how they want to improve.  That is great.  Consider, however, the trader that takes the following additional steps:

a)  Discusses good and bad trades with a coach, mentor, or colleague and gathers additional perspectives re: things to work on;

b)  Films the trading session and actively reviews each trading day, focusing on specific areas where decisions were made and could have been made and noting what to look for in the future to take the right actions;

c)  Uses results to improve screening for trade selection, including writing scripts that automate screens and identify stocks trading with similar patterns.

Those additional steps accomplish two things.  First, they allow the trader to process learning lessons more deeply, because those lessons are processed via multiple modalities:  through discussion, active observation, and automated analysis.  When we learn something in multiple ways--think of learning to drive a car by reading and memorizing road signs and rules; practicing on a driving simulator; and going out on the road with a driving instructor--our learning is most likely to stick.

The second benefit of these added steps is that they place the trader in a very active learning mode.  The trader who films the session is then reviewing the film, pausing it at key points, writing down observations, and cementing patterns to be acted upon--no different from athletes who watch game film as preparation for practice and upcoming games.  The active and interactive learning keeps the trader highly engaged and focused and thus more likely to take in the lessons learned.

Learning more deeply in multiple modalities; learning more actively by doing and not just observing--these enrich the development process and accelerate the learning curve.  One or more traders in my meeting engaged in one or more of these best learning practices.  Imagine being in a community of traders, each of whom is learning deeply and actively.  

The process of learning is every bit as important to development as the lessons being learned.

Further Reading:  Learning How We Learn

Wednesday, January 11, 2017

Trading Market Cycles

In the previous post, I proposed a scheme for reading market cycles, by breaking those cycles into phases based upon market activity.  Trading market cycles requires a kind of creative opportunism described by Gehry.  The materials on the table are characteristics of market behavior.  When trading well, we are arranging those in a fashion that enables us to capture solid reward-to-risk relationships.

A cycle-based site for stock and ETF trading that quantifies market cycles and makes buy and sell recommendations is StockSpotter.  The site makes many recommendations--more than the average trader would take in a day.  So they simulate performance by taking very many random groups of four recommendations (Monte Carlo simulation) to show the range of likely trading outcomes from following those picks.  It's one of the more elegant demonstrations of edge that I've seen from a market service.  The opportunism comes when we take other criteria for buying or selling, such as our fundamental analysis of a company or our view of the entire market, and marry those to the site's recommendations.  What we're trying to do with this kind of opportunism is join two or more independent sources of edge, so as to maximize the probability of success.

A different kind of opportunism might look at separate overbought/oversold measures on two or more different time frames.  For example, I'll look at the upticks/downticks in the market as a very short-term measure of overbought/oversold and an oscillator of price change to capture a medium time frame.  When we are topping and dropping, we'll see the measures peak at equal or successively lower price levels: the buyers still move the market, but cannot move it higher over time.  When we are bottoming and rising, we'll see the measures trough at equal or successively higher price levels.  In opportunistically aligning the time frames and market behavior, we can find solid risk/reward ways to exploit market cycles.

Still another form of opportunism for daytraders involves tracking order flow--seeing when bids or offers are holding particular levels--and joining that information to a broader view on trend/direction.  For instance, if we see recurring bids being hit at a given price level where that level holds, we might join the offer if we see that the bigger picture for the stock is higher.  

It is this lining up of market behavior that creates some of the best trades.  Waiting for the lining up requires patience and perspective.  A great deal of productive trading time is spent not trading, but actively watching for those occasions when one source of edge falls into place with another--and then pouncing on those opportunities with meaningful risk-taking.

Further Reading:  Some Great Rules for Life and Trading

Tuesday, January 10, 2017

How to Read Market Cycles

I find it helpful to think in terms of market cycles, rather than trends.  A cycle consists of both trending and non-trending components.  Understanding where we're at in cycles helps us identify whether we want to be going with strength or weakness or whether we want to fade these.  Once we think in cycles, it's silly to identify ourselves as trend traders or counter-trend traders.  Our job is to profit from the various phases of market cycles, not try to make market activity fit our predetermined trading preference.

Cycles are like snowflakes:  no two are identical and yet all have a similar structure.  Let's review the phases of a market cycle:

1)  Market Momentum Bottom - Here is where we wash out on elevated volume, with a maximum number of stocks registering fresh new lows.  Volatility is high and correlation is high, as the great majority of stocks and sectors are participating in the decline.  An example of a market momentum low was January 20, 2016, when we dropped on high volume with over 2600 stocks across all exchanges registering fresh three-month lows.

2)  Market Bottoming - The extreme selling brings in value buyers and we get a sharp bounce from the market lows, followed by further attempts at selling.  At major market lows, this bottoming process can occur over a period of weeks or more; at intermediate lows, it may occur over subsequent days.  An example of a bottoming process was the bounce into the beginning of February, 2016 followed by a decline to new closing price lows on February 11th.  Only 1353 stocks made fresh three-month lows at that time, showing that selling pressure was having difficulty moving the great majority of shares lower.

3)  Bull Momentum Phase - With the inability of sellers to move the majority of stocks lower, value buyers return with a vengeance aided by short-covering and that moves the market steadily higher.  Volume and volatility are still high, with the vast majority of stocks lifted off their lows.  In this phase, we often look for pullbacks but get none of great magnitude, as momentum enables strength to follow from strength.  A good example of a momentum phase was the sharp move of stocks higher from mid-February, 2016 through much of March and early April.

4)  Bull Topping Phase - Here is where higher prices get to the point where the market is no longer attractive to value participants and bulls are relatively loaded up.  This results in a drop of volume and relatively low levels of volatility.  Correlations move lower as some sectors and stocks continue strong, while others begin to lag.  Late in a topping phase, we can see the number of stocks making fresh short-term lows expand, even as the overall market averages are near their highs.  A short topping phase occurred from mid-April, 2016 through early June.  Over that time, price moved higher, but new three-month highs dropped from 1113 to 818.

5)  Bear Momentum Phase - The inability of buyers to push the market to new highs attracts the participation of sellers and volume and volatility once again pick up.  The market can remain oversold for a while, as bulls exit their positions and shorts are emboldened.  Correlations rise, and we move toward a market momentum bottom.  The market demonstrated an intermediate bear momentum phase from early June, 2016 to late June.  At that bottom, we did not see an elaborated bottoming process.  When a pullback occurred, it was from a higher price point and resulted in a higher price low.  This led to a quick rally higher into August.

As a rule, the longer the bear market phase and bottoming processes, the longer the subsequent rally.  The longer the bull topping phase, the more extreme the subsequent bear phase.  When more market participants are trapped short or long, the unwinds tend to be greater.

Cycle structure can provide us with a road map for gauging where we stand with respect to "overbought" and "oversold" markets and the likelihood that strength or weakness will continue or reverse.  I use cycles less for predicting markets than understanding them.  Knowing where we're at in a market cycle helps us avoid chasing markets at the wrong time and also helps us avoid standing aside during the market's periods of momentum.  Most of the indicators I track are ways of gauging day to day strength and weakness and updating where we stand in terms of cycle structure.

At present, we see volume and volatility at relatively low levels and small cap shares underperforming large caps.  That has contributed to a rise in the number of stocks registering fresh short-term lows.  For example, on Monday we had 520 stocks across all exchanges make new monthly highs, but 694 register fresh monthly lows.  Technology shares have made new highs, but many sectors remain below their peaks.  All of that raises the odds that we're at a relatively late, topping period in the recent bull cycle.

Further Reading:  Relative Volume and Links to the Indicators I Follow

Monday, January 09, 2017

Taking One Step Beyond Failure

When we pursue our greatest strengths and passions, success may not come easily, but it is not a fight.  When we're on the right path, we naturally pour ourselves into what we're doing and that supercharges our learning and development.  If you're in the right relationship, you don't spend endless hours "working" on your relationship.  If you're in the right career, you don't struggle to get work done.  No one has to force an artist to paint or a scientist to study.  No one has to prod an entrepreneur to get up in the morning and get to work.  When we pursue our greatest strengths and passions, we don't need a push: we are pulled toward our ideals.

So often, for this very reason, failure results from failing to pursue those strengths and passions.  We fail because we're traveling the wrong path.  We try to push ourselves to make things work out and that never achieves the motive force of passion's pull.  For years, I stayed in a romantic relationship that I thought I could make work out.  That made it difficult to eventually face the relationship's failure.  But it was that failure--and especially the pain of that failure--that taught me what I truly needed in a relationship.  Little did I know that just two years after that debacle I would find the person who would become my life partner and soul mate for now over 30 years.

Early in my career as a psychologist, I found myself in a dead end.  The work I most enjoyed was not the work that consumed most of my hours.  I finally confronted the failure of that dead end and pursued work I loved--at a 33% pay cut.  It was one of the best moves of my life.  I taught myself new approaches to counseling, which formed the foundation for my eventual work at a medical school and then with traders.  One step beyond failure laid my success.

And so it is with trading.  For years, I tried to make myself into a longer-term trader, hopeful of integrating my trading with my work as a psychologist.  I never blew up, but I came to the point when I realized, with cold clarity, that my trading was adding no value to my account or my life.  Only then did I gather myself, study my winning trades, ground myself in what I was good at, and craft the short-term methodology that remains my current bread and butter.

If you're failing at some part of your life, trying harder and doubling down on your present course is not necessarily the solution.  Often, there is purpose and meaning in failure.  It teaches us that we're traveling the wrong path, pursuing the wrong ends.  Once we embrace the failure of the old path, we're free to find success on a new one.  Failure can be the best of teachers, but only if we're willing to accept and learn from painful mistakes.

Further Reading:  Quotations on Success and Failure

Sunday, January 08, 2017

Living Our Online Lives Authentically and Inauthentically

It's difficult for people who have grown up with the online medium to fully appreciate how truly powerful and revolutionary social media is and can be.  In the past, the way to get your voice out was through print publication or perhaps through radio or television.  Both required access to publishers and broadcasters that was quite difficult and limited.  Now, almost anyone can generate a podcast, publish a blog, tweet an opinion, or stream video.  This democratization of communication challenges authoritarian governments and institutions.  It provides access to specialized information to those around the globe who might not have access to university libraries or research journals.  Sadly, the democratization of communication has also provided a kind of shield for those who would engage in less constructive discourse, from hateful trolling to cynically fake news and breathtakingly insincere virtue signaling.  

In the interest of separating wheat and chaff, I would like to introduce the concept of "online personality".  This is the personality revealed by the online participation of an individual or group.  I would argue that it is precisely the relative anonymity of the online medium that makes social media an unusually clear window on the souls of participants.

A simple methodology for assessing online personality is to categorize posts by their emotional content and tone.  To accomplish this, consider four major positive factors of emotional experience and four negative ones:


1)  Happiness - Spreading joy, fun, and enjoyment
2)  Significance - Promoting valued causes and ideas that are deeply meaningful
3)  Stimulation - Offering new ideas, developments, and perspectives that widen our appreciation of the world
4)  Bonding - Promoting shared experience and appreciation of others


1)  Discouragement - Expressing pessimism, fatalism, and depressed sentiment
2)  Anger - Attacking others, venting frustration, and expressing hostile sentiment
3)  Fear - Expressing worry and anxiety and catastrophizing events
4)  Meaninglessness - Voicing boredom, alienation, and absence of purpose 

Any tweet, blog post, podcast, video, or photo posted online can be coded with at least one of these factors and often more than one.  Any particular post may fall into one category or another, but over time patterns emerge for most social media participants.  You'll see many posts devoted to happiness and bonding, as people share life experiences.  You'll also see many posts spewing anger and discouragement over the state of the world or the state of their lives.  Think of people who post on market-related topics.  We have those who promote fear ("Market is going to plunge") and discouragement about the state of the world and promote themselves as safe havens.  We also have those that seek to stimulate with fresh perspectives and education, offering ideas of significance.

To a surprising degree, our personalities are revealed by our online personalities:  by the emotional tone of our communications.  We can either serve as positive influences in people's lives or negative ones.  Our communications can either give energy or drain it.  Happy, productive people doing good things in their lives are not filled with discouragement, anger, fear, and meaninglessness.  They do not spew hate, discouragement, and fear to signal virtues, because they are too busy living authentic, virtuous lives.  The right people are living their values, enhancing the world around them.  The wrong people attack others, vainly hoping to elevate themselves.

There's a saying that we are a composite of those we spend the most time with.  We cannot help but absorb what is mirrored to us in our interactions with others.  Similarly, we are most influenced by the influences we access online.  Our personalities are shaped, in part, by the online personalities that we frequent.  Nothing is quite so nourishing as a healthy diet of social influences.  Nothing is quite so richly rewarding as an authentic life that creates positive influences for self and others.

Further Reading:  Going on a Healthy Psychological Diet

Saturday, January 07, 2017

Rising Markets and Healthy Markets

Friday was an interesting day in the US stock market.  The major averages encountered some early weakness in the New York session, but moved higher in the afternoon and closed at multi-week highs.  Upticks among all NYSE stocks only modestly outnumbered downticks, however, and advancing stocks were actually outnumbered by declining ones.  As we can see from the excellent Finviz graphic, market capitalization was a major driver of the day's action.  Mega cap stocks--the very largest companies--were quite strong on the day, whereas the smallest micro, nano, and small cap shares were down on the day.

A psychologist views the health of a person across the totality of that person's life.  Someone might be successful in the work arena, but suffer a highly conflicted marriage, social isolation, and declining physical health.  That is not what a psychologist would regard as a strong and healthy life.  Conversely, a person firing on all of life's cylinders--work, relationships, personal interests, physical health--is likely to sustain the overall well-being needed for a continued successful life.

So it is in the market.  A rising market that is lifting all boats is a healthy market, and frequently we see further upside momentum from such markets.  That was true at the start of this week, when a broad range of shares participated in the market strength.  Friday was a market firing on one cylinder.  That is not how healthy engines behave.

To be sure, one day does not make a market.  Rather, we look at patterns of sector and capitalization performance to gauge the underlying strength and weakness of markets.  Mid-cap and small cap shares are thus far not confirming recent market strength, as we can see from their charts (MDY; IJR).  Nor are we seeing commensurate strength among such sectors as raw materials (XLB), retail (XRT), consumer staples (XLP), and energy (XLE).  Headlines may focus on Dow 20,000, but my eye is also on the breadth of market strength.  

Further Reading:  Trading Psychology and My Upcoming February Seminar

Friday, January 06, 2017

Developing Your Trading Psychology Process

Many traders work on developing a trading process that captures what they define as opportunity and how they want to implement that opportunity. 

How many traders have a process for trading psychology?  As I note below, this will be the topic of an upcoming four hour seminar for traders at Trading Expo.

A trading psychology process is one in which we systematically engage in the activities that place us in a peak performance mindset.

That means we need to study our mindsets and identify the factors that aid our performance and factors that hinder.  Once we identify what helps us be in the right mindset for trading, we can begin to assemble those elements into repeatable processes.

One of the keys to success is creating processes that are so intrinsically rewarding that you will *love* engaging in them.  That is what helps you engage in the right activities daily, and that is what creates positive habit patterns.

Some of the elements of peak performance that I've observed among successful traders include:

*  Pre-trading rituals to prepare for various market scenarios;
*  Meditation, biofeedback, self-hypnosis and similar activities to increase our focus;
*  Mental rehearsal of plans for the day;
*  Physical exercise to be energized for the day;
*  Taking breaks to renew concentration and stay in the right mindset;
*  Constructive self-talk through the trading day;
*  Looking at markets through multiple lenses to see fresh sources of opportunity and threat.

It's when we assemble these kinds of practices into daily routines that we take control of our trading psychology.

So, about that trading psychology seminar:

On February 26th, I'll be at the New York City Traders Expo and will offer a four-hour workshop on the best practices of best traders--and how we can implement them in our own trading.  The beauty of a four-hour workshop is that we will have ample time for coaching:  applying the ideas to our specific situations and finding ways to create processes we will so love that we will naturally make them daily routines.

The bottom line is that trading psychology has to be something we do, not just something we think about.  I look forward to working with you on the doing!

Further Reading:  Four Pillars of Trading Process

Thursday, January 05, 2017

The Importance of Trading With Focus

I inadvertently conducted an interesting experiment yesterday while trading.  I traded from an enclosed office that was totally quiet and free of distraction.  Interestingly, that's similar to the setting in which I typically conduct my meditation and biofeedback work.  Indeed, when I work on maintaining relaxed, concentration using biofeedback equipment, I select an isolated setting that allows me to maintain an unbroken focus.  The resulting "zone" state is one that I have found to be helpful for clarity of thought and decision-making.

So in trading from the removed office, I unwittingly recreated my cognitive gym environment.  Within a few minutes of following the market, I found myself doing *exactly* what I do in biofeedback:  slowing my breathing, making it more rhythmical, keeping still, sustaining a high degree of focus, and shutting off most internal dialogue.  

What I found was that, in this state, market movement seemed slower and clearer than usual.  When I am distracted--and especially if I'm frustrated--it seems as though I'm several steps behind the market.  Things happen before I make sense of market behavior, so I'm in a reactive mode.  When I was in the zone during yesterday's trading, I felt on top of what the market was doing, where I was feeling the flow of buyers and sellers.  I was not thinking about buying, selling, making money, losing money, or P/L.  I was wholly immersed in the ebb and flow of what the market was doing.  At times, it felt as though I was one with the market.  In fact, the feeling was very similar to the feeling I've had when doing self-hypnosis exercises.

Relatively early in the session, the market pulled back and I could feel the attempts at selling fail to push prices lower.  I said out loud to myself, "We can't break the opening lows.  The buyers are in control."  That turned out to be a key insight for the day's trading.

Trading psychology gurus emphasize the need to control emotion and negative thinking during trading, and I think that's important.  Emotional self-control is necessary for good trading, but perhaps not sufficient.  What I was additionally observing was that a state of hyper-focus and enhanced concentration completely changed my experience of the market as well as my processing of market-related information.  In essence, I had turned the trading session into a biofeedback session and the calm focus changed how I viewed and responded to market activity.  I did not plan trades; I simply joined the flow of activity and exited when that flow shifted.

What if short-term trading is a function of pattern recognition and pattern recognition hinges upon our state of awareness?  How much effectiveness do we lose in trading by dividing our attention and so watering down our focus that we never truly enter the "zone" of information processing?  When we are super-focused, perhaps we create a cognitive environment in which trading psychology problems *cannot* dominate.

Further Reading:  What It Takes to Trade in the Zone

Wednesday, January 04, 2017

A Deadly Bias That Affects Active Traders

One of the most common biases I observe among short-term traders is one that looks for market movement.  Because most short-term traders trade directional moves, they naturally hope for moves that extend, that give the most potential profits.  A market that moves is a "good" market; one that offers little movement is "choppy" and poor for trading.  If we think of the dynamics of realized and implied volatility in the stock market, we can see that this long volatility bias is actually a bearish bias.  When it comes to market movement, the elevator moves more quickly in the downward direction than upward.  Not surprisingly, many traders root for reversals of market gains, hoping to profit from quick directional movement and the volatility of the downside.

This bearish bias can be deadly, as it leads traders to ignore the actual flow of supply and demand and color their market perceptions with their preferences.  More than once, I've heard traders complain that a move higher was "fake" or "manipulated" or caused by "machines", thus discounting what the market was doing and instead sticking with a bias.

A good general rule is that the very largest market participants--think sovereign wealth funds, pension funds, asset managers, etc.--take the longest time horizons.  Their sheer size leads them to be investors, not just traders.  With that increased holding period comes an increased focus on fundamentals.  Global growth rates matter little for a 10-minute trade, but matter quite a bit for a 10-year investment.  The day trader doesn't have to worry if we're entering a deflationary or inflationary environment.  That same issue may shape much of an investor's holdings.

This is why it's helpful for even short-term traders to be aware of fundamentals and the big pictures that shape the behavior of investors.  If the big picture is favorable, oversold situations are likely to be viewed as value.  That will impact market trend and volatility, which percolate down to the shortest time frames.  

I hear considerable frustration from traders lately.  Some did not profit from the recent bull move to new highs and insist it must be reversed.  Some are not happy with the U.S. Presidential election results and look for things to collapse.  Some are just tired of sub-20 VIX markets.  A great check on frustration is to actually look at the economic data and trends that the largest market participants look at.  A site that curates this information effectively is A Dash of Insight.  If you check out the most recent posting, you'll see a summary of the latest economic data releases, including which ones are showing increased strength and which ones are signaling weakness.  You'll also see a host of macroeconomic indicators that track the likelihood of recession.  Over time, you can gain perspective on whether the economic picture is becoming more or less favorable--and that provides a window on how institutional participants are likely to respond when they see stock market strength and weakness.

I think you'll be surprised when you look at the data.  A fresh look at information is a great antidote for confirmation bias and a great prod for open mindedness.  The best traders look for data that disconfirm their leanings; that is what helps them update views and not get locked in stale ones.

Further Reading:  Creativity and Innovation in Trading

Tuesday, January 03, 2017

How to Break Our Worst Trading Habits

Surveying the traders at SMB, Bella recently reported that the number one problem they had during the past year was forcing trades.  That is, they failed to wait for trades to properly set up and instead tried to front-run the patterns they were trading.  Bella then offered three ideas for traders looking to improve their patience and reduce their forcing of trades.  Those ideas include journaling, studying your "Playbook" of best trades, and taking breaks to speak with other traders.  Note how all of these strategies involve getting one's nose out of the screen, stepping back, and gaining perspective.

What the traders are working on is self-control.  Generally, here's what happens when traders force trades:

1)  A situation occurs that the trader personalizes in some manner.  The market moves and the trader blames himself/herself for missing the move.  Or the trader is stopped out and is concerned about taking a loss.  The situation gets the trader P/L focused and self-focused and no longer market focused.  This is very important.  Psychological problems in trading typically begin with a shift of focus and a loss of market focus.

2)  The personalizing of the situation leads to an emotional reaction.  Generally that reaction is one of frustration, fear, or overeagerness/overconfidence.  That emotional reaction represents the body's fight or flight response to a perceived emergency and leads us to act rather than stay patient.  Once we personalize a situation, it's no longer about the trade.

3)  The emotional reaction leads to reactive decision-making.  Out of frustration or fear, we take trades we shouldn't, abandon good trades, etc.  Many times, when we review the situation after the market close, we wonder how we could have been so foolish.  The trading decision was not made for trading reasons; it was made to manage the crisis that we had talked ourselves into.     

Once we understand this three-step sequence, we can become more aware of our own patterns and disrupt them before they lead to poor decisions and actions.  For example, I know in my own trading that once I'm thinking about myself, my track record, my P/L on the day, I'm not in the zone.  At that point, the focus needs to shift from the market to my own processing of events.  By taking deep breaths, slowing myself down, placing the situation in perspective, and returning to the market with fresh eyes on opportunity, I prevent the initial problem from cascading.

Very often, we recognize our problem patterns by identifying signature negative thoughts and/or feelings:  ones that recur in market situations.  It's almost as if a script is playing itself in our heads.  When we view the script as the problem, not the market, we not only open ourselves to patience; we also create a situation where we can use our patient time to reinforce new and constructive ways of processing market outcomes.

Further Reading:  Perfecting the Pause in Our Trading

Monday, January 02, 2017

Why Context Matters in Trading

Saarinen realized that the effectiveness of a design hinges not just on its individual attributes, but also on the context in which it appears.  We are drawn to many of Frank Lloyd Wright's structures, such as Fallingwater, because they harmonize with their natural environments.  Similarly, we furnish quite differently a home in a modernist design and one that is an American colonial.  

Context matters in terms of behavior as well.  How we behave at a funeral will be different than at a party.  How we speak with a child differs from our speech with a group of adults.  The same words can be interpreted differently depending upon the situation: texts derive meaning within contexts.

This is an important market lesson as well.  Some traders look for "setups", patterns that give them a probabilistic edge in trading, across a variety of market conditions.  As Ivaylo Ivanov points out in his recent book, this is a major mistake.  The patterns that set up in a bull market will be different from those in range conditions.  What makes his text interesting is not just the 10 setup patterns that he illustrates, but the understanding of when each of those is relevant.

Suppose the market opens with a flurry of buying activity, followed by some selling.  We could look at that in isolation and use the pullback to join the upside.  If, however, we step back and see that the market is unable to surmount its previous day's high even with the early buying, we would likely interpret the situation quite differently and perhaps take the opposite trade for a return into yesterday's range.  

Similarly, a breakout from a range that occurs with elevated volume early in the trading day is often interpreted quite differently from a breakout during midday hours.  Early in the day, we have the most liquid market conditions and the greatest activity from large market participants.  Ideally, we want their activity at our back, not in our face.  For the day trader, time of day is an important element of context.

At a broader level, suppose we notice a wide array of risk assets moving higher, including U.S. stocks, overseas shares, oil, high yield bonds, and emerging market currencies.  The macro participant views such "risk-on" behavior as part of a single trade related to global growth and will view the situation quite differently from one in which one of those assets moves higher in isolation.  

Many poor trades result from becoming so narrowly focused on the price action of what we're looking to trade that we fail to step back and appreciate the context in which the action is occurring.  That's like jumping into a conversation wanting to speak what's on your mind without taking into account what's been going on in the conversation to that point.  When we place texts in context, we achieve understanding.  The best trades set up when a smaller picture lines up with a larger one.

Further Reading:  Training Yourself in Pattern Recognition

Sunday, January 01, 2017

How Relative Volume Helps Us Trade and Fade Market Movement

This is the sixth post in the series looking at indicators that I have found useful in tracking the market's short-term behavior.  Previous posts in the series are linked below.  In this post, we look at a measure I call relative volume.  In the chart above, relative volume (red line) is plotted against SPY for Friday, 12/30/16.

Relative volume is actually a ratio of current one-minute volume to the average volume for that minute.  Thus, for instance, if the current volume at 9:39 AM is 200,000 shares and 9:39 AM volume averages 100,000 shares, the relative volume is 2.0.  When we view volume in this manner, we can quickly see if market moves are supported by significant participation.

Notice how relative volume started the day well elevated and stayed elevated for most the session.  This is true for many trend days:  it is the additional participation of directional players that sustains the market move.  The trader watching relative volume early in the day had an excellent tell that this was abnormally high participation--and it was skewed to the downside.

Conversely, days in which relative volume persistently stays below 1.0 are ones in which moves cannot attract meaningful participation.  This leads to frequent reversals of those moves in a range environment.  Very often, we'll see relative volume tail off as market moves mature, as new high or low prices fail to attract added participation.  This frequently precedes reversals, as we saw during the 10 AM hour of trading above.

When price breaks out of a range on sustained elevated relative volume, we have a great indication that the new prices are attracting fresh participation, which makes the breakout less likely to be a fakeout.  

The key to understanding relative volume is that, when we see elevated participation in the market, that elevation typically comes from directional participants.  If we're going to get a momentum/trend move, we need the players to sustain the higher or lower prices.  The waxing and waning of relative volume tells us where the market's auction is attracting activity and where it is shutting it off--an essential distinction for short-term traders.

Previous Posts in the Series:

Tracking Instantaneous Demand and Supply

Tracking Multiday Market Strength and Weakness

*   Tracking Market Breadth and Strength/Weakness

A Unique Application of VWAP to Gauge Market Strength

Tracking Market Strength With Intraday New Highs and Lows