Sunday, July 15, 2018

An Investment View of Trading

Imagine living your life jumping from one activity to another based upon what looked good at the time.  There would be no constraints; you could pursue anything at any time.  

At first blush that might seem like heaven, until you realize that, cumulatively, you would accomplish nothing.  You might have fun, but would your life be meaningful?  After a while, all the activities begin to feel the same.  Life wouldn't feel complete without some sense of purpose.  In pursuing what is meaningful, we postpone things that might be fun at the moment.  We invest ourselves in some greater set of goals.

A full life is one in which we derive both happiness and fulfillment.  We do some things for here and now fun and some longer-term things to achieve meaningful goals.  We know we have hit a sweet spot in life when we find enjoyable ways of pursuing our life purposes.

That means, in life, we are both shorter-term traders and longer-term investors.  Activities we get into and out of day by day are trades.  Goals that we seek over time are our investments.  The sum is our life portfolio, and we hope that all its components produce unique, positive returns.  When we find happiness in our fulfilling activities, the result is an unusually high level of well-being.

So it is with our financial lives.  There is trading for immediate gains, and there is investing for longer-term returns.  One pursues short-term opportunities; the other seeks longer-term growth.  Increasingly, I see a sweet spot of performance among those who find trades that align with a longer-term view.  When a portion of a portfolio can earn investment returns over time and another portion can benefit from the price path over this period, the total, risk-adjusted return can be handsome.  For that to happen, the shorter-term trading must be aligned with the bigger picture view.  

In life and in trading, there is much to be said for diversification across time frames--and the alignment of shorter and longer term pursuits.

I recently enjoyed the commentary on the week ahead from A Dash of Insight.  I won't steal Jeff's punch lines, but suffice it to say that he summarizes a wealth of economic data with conclusions that I just don't hear from the majority of traders.  The big picture he perceives in multiple data sets and multiple analysts has meaningful conclusions for those trying to trade stocks, stock sectors, and the overall market.

See also the recent perspectives from The Fat Pitch site, which looks at one data source after another to get a sense for the probabilities of impending recession.  There are important big picture market implications from this information that can inform trading *and* investment.

As a back of envelope calculation, I looked at the percentage returns from SPY each day since 2016, broken down by overnight change (yesterday's close to today's open) and day change (today's open to today's close).  The returns over the two time segments were pretty equivalent.  In other words, roughly half of all the recent bull market has not been available to the pure day trader.

There is an important message in that.

Further Reading:  


Friday, July 13, 2018

Making Sense of Choppy Markets

A psychologist learns to listen to people.  Sometimes what they say is straightforward.  Other times, a person will jump from topic to topic in seemingly unrelated ways.  The psychologist knows that, at those times, what doesn't make seeming logical sense makes a psycho-logical sense.  Maybe the person first talks about an overbearing boss at work, then talks about not feeling well, then talks about a friend who has been distant lately.  Underlying all of these is a feeling state, a sense of discouragement and frustration.  It's that state that is the theme, not the particulars.  One has to see beyond the concrete details to appreciate the underlying theme.

Sometimes markets trade in uniform, coherent ways that we call trends.  Other times, markets move up and down in seemingly random ways.  We call those markets choppy and see them as difficult or even impossible to trade.  But what if markets, like people, make their own sense during the times when they seemingly flit from up to down and back again?

The "choppy", range-bound market may be one that is trading with a dominant cycle.  It may be trading non-directionally, but continuing relative strength versus overseas shares.  It may be in a range itself, hiding relative movements of individual market sectors.  Perhaps growth stocks are strong and value shares are weak.  Natural resource stocks are strong, rate-sensitive issues are weak.  Large caps are weak, small caps are strong.  Very often, beneath the "choppy" chart are real themes that can be traded.

But we have to listen and look beneath the surface.  Like the psychologist, we have to be sensitive to themes behind what seemingly doesn't make sense.  

Many, many times we develop a narrative--a view--and then become frustrated when the markets don't follow our story.  Can you imagine a psychologist operating that way?

If we can take our egos out of the picture--our desires to make the big market calls--we can open ourselves to what markets are really doing and trade accordingly.  It all begins with a simple question, "What is the theme here?"

Further Readings:


Sunday, July 08, 2018

The Power of Why

I'll be speaking on Tuesday, July 24th at the Traders Expo event in Chicago, and one of the things I'll be covering is how we really know we have an edge in markets.  I'll also share with the group some of the edges I am currently pursuing in my own trading.

In a broad sense, there are two forms of knowing:

*  Predicting - Being able to anticipate future events;

*  Understanding - Being able to explain events.

We can predict without understanding.  We know to anticipate changes in weather without being able to explain the chain of events by which these occur.

We can understand without being able to make specific predictions.  We might understand reasons for a market's behavior without being able to predict when and how the market will move.

This is a bit of a simplification, but a good deal of what we call technical analysis seeks prediction.  A good amount of fundamental analysis seeks understanding.

The vulnerability of much technical analysis is that it finds patterns that appear to be correlated with price changes, but cannot explain the nature of that relationshipAs the video explains, if we look at enough patterns, we can find something that appears to be predictive.  Indeed, with a large enough search space (thanks to powerful computing), we can find things that work in sample and out of sample that still are random!

The principle that makes sense here is that we don't *truly* have an edge unless we can clearly explain why this edge is present.  Prediction without understanding is a frail basis for risking our hard-earned money.  

If we can explain the basis for a predictive relationship, we possess true understanding.  Real conviction and confidence in trading comes from understanding the basis for what you're doing.  

A person with a purpose in life has a "why"--a considered set of reasons for doing what they're doing.  That person is most likely to travel in a coherent direction.  Without a "why", we wander through life.  That's the difference between having a year of experience versus one day of experience repeated 365 times.

So, too, with trading.

Trading psychology is much easier when we have a genuine "why" underlying our actions.  Too many people are pursuing trading because they can't figure out another way to work independently and make enough money to support themselves.  This is understandable, but invariably ends badly.  People setting themselves up as gurus are all too willing to exploit the desire to make a living from trading.  A great question to ask about any idea advanced by a guru is, "Why?"  If you--and they--can't truly explain why an idea works, how do you know you actually have an edge and not just another pattern fit to market data?

Further Reading:


Thursday, July 05, 2018

Why Do So Many People Pursue Trading?

I recently received an email from someone interested in trading for a living.  The person knew little about markets other than reading a few books and following some traders online.  He only had a small amount of money to open an account, but indicated a passionate desire to turn this into a living.

Seriously, WTF?

Why is this going on?  Why do so many pursue a living from markets when there is clear evidence that the great majority never succeed?

Consider these results from Gallup organization polls:

Polling finds that in the UK, 14% of people indicate that they strongly agree with the statement that they have enough growth opportunities in their work.  That number is 21% in France; 19% in Spain; 33% in Germany.

Another poll finds that GDP has been rising in India, but only 3% of the population describe themselves as "thriving".

A poll of healthcare workers finds that 6% report themselves as "thriving" in measures of well-being.

Surveys consistently find that 30-35% of American workers feel "engaged" in their work.

Most people don't have the capital, connections, or experience to start their own businesses.  They look at the jobs out there and talk with people working and don't exactly feel inspired by what they see and hear.

Perhaps, just perhaps, people seek trading--against all odds, against all common sense--because the pursuit of a remotely possible winning life feels preferable to assured misery.  It's the same reason refugees defy all odds on the high seas in hopes of a better home, a better life.  What many aspiring traders need is not false hopes, but genuine, viable alternatives to the traditional "opportunities" out there.

Further Reading:  


Wednesday, July 04, 2018

Why Empathy Matters In Markets And In Life

Shoutout to vlogger Meir Kay, who produced an outstanding video that captures the relationship between anger and empathy.  

There's an important psychological lesson here.  

Frustration is a form of anger.  It occurs when we have a goal and something prevents us from reaching that goal.  We develop an idea, place a trade based on that idea, and then a burst of volume comes into the market and moves our position against us.  Our hopes for profit are dashed with the reality of a loss.

We can voice frustration at the market or at the traders who are "obviously manipulating" the market.  We can become frustrated with ourselves and beat ourselves up over how stupid we were to place the trade.  Regardless of the object of our frustration, once we become angry, we enter fight/flight mode and stop processing the world objectively.

The good trader will catch themselves at that moment and take a step back, slow down, calm themselves, and return to their trading.

The great trader, however, will do something quite different.

Remember that markets are always speaking to us.  They tell us where participants are finding value, where participation is waxing and waning, and when participation is dominated by buyers or sellers.  The great trader is like a great listener in a conversation.  That requires empathy: the ability to not just see, but feel what other market participants are doing.

Suppose you bring up a topic in a conversation with someone you care about and they quickly change the subject and start talking about something else.  You can become frustrated, filled with a sense of injustice over being "cut off", or you can step back and say to yourself, "That's friend doesn't normally change topics like that.  This must be very important."  That empathy makes you a better listener.  Going with the conversational flow will bring you closer to your friend.

If you have formulated a great idea for a trade and the market changes the topic on you, perhaps there is an important message there.  Doubling down on your listening skills and drawing upon your empathy opens the possibility of profiting from this new information.  It's yet another way that developing ourselves as traders is not so different from developing ourselves as human beings.  When we replace anger with empathy, frustration with listening, we make new connections and profit from those--in markets and in life.

Further Reading:


Sunday, July 01, 2018

How To Achieve Your Life Goals

In pursuing your life goals, imagine that you are the leader of your own team.  In other words, consider that what you achieve in life will be a function of teamwork, not just your individual talent and effort.  

That perspective raises interesting questions.  Who is currently on your team?  How well are you working with them to achieve your goals and theirs?  What is missing from your team?  How would you add to your team to enrich everyone?

My latest article introduces the notion of life as a team sport and identifies three specific factors that make teams work.  This is true for sports teams and teams in workplaces.  It also applies, however, to our personal lives and, yes, our efforts as traders.  Who is on a team, what they bring to each other, and how they interact with one another very much determines the odds of success.

I've thought long and hard about the very successful traders I've known.  To a person, they go out of their way to maintain contact with insightful and talented market participants--and very often they build formal teams to assist with the tasks of generating ideas, managing positions and risk, and staying on top of developments that impact markets.  Whether through informal networks or formal teams, successful traders get that way by expanding their bandwidth.  To paraphrase the Michael Jordan quote above, talent wins trades, but teamwork and intelligence make for winning trading careers.

As the previously mentioned article emphasizes, there is much, much more to effective teamwork than simply touching base with people who you think can help you.  I would go so far to say that people often fail at their work for the same reasons they often fail at their marriages: they select the wrong teammates; they don't fully embrace the give and take of being part of a team; and they don't sustain a vision of how everyone can make each other better.

Your life is an enterprise, and you are its leader.  The lives of those who matter to you also represent enterprises and you are part of their teams.  You're not just an individual; you're also part of an interconnected network.  When you improve the network, everyone improves.

Further Reading:


Friday, June 29, 2018

What Are The Patterns In Your Trading?

Trading is based upon the notion of recurring patterns in markets.  These could be patterns of price behavior, patterns of response to world or economic events, or patterns that occur in the relationships among markets.  A common trading pitfall is perceiving patterns where none truly exist.  We can become anchored to recent occurrences and assume that these will recur.  We can overemphasize dramatic market occasions, such as large drops in prices, and look for similar "setups" going forward.  If we look at enough patterns, something by chance will appear to be significant.  Not all "overfitting" is performed by quants.

Just as there can be patterns--and false patterns--in markets, these can also exist in our trading.  One daytrader I worked with had flat results over several months.  When we dissected the P/L, it turned out that certain hours of the trading day (early morning) were consistently profitable.  Other hours were losers.  The patterns being traded, which involved momentum, were more likely to occur during periods of higher liquidity.

I also met with a portfolio manager who was having trouble making money.  When we examined his returns, it turned out that newly initiated positions were getting stopped out for losses unusually often.  This was because, in a lower volatility market, he was waiting for strength before going long and waiting for weakness before selling.  He kept stops tight and thus was whipsawed when the short-term price movement failed to extend.

There is tremendous benefit in dissecting your returns as a trader.  Yes, we can overinterpret and perceive patterns that do not exist.  Many times, however, there are rational explanations for why the returns are patterned.  Perhaps we're trading differently after having made versus lost money.  Perhaps we're trading differently as a function of market conditions.  Perhaps we're trading differently as a function of how we have prepared for the day or week.

I find it again and again:  Successful traders spend significant time not trading, studying their markets, and studying their performance.  Successful sports teams review game films to prepare for the next contest.  What is your review process, and how rigorous is it?

Further Reading:


Tuesday, June 26, 2018

What We Should Focus On In Our Trading

Here's an important principle:  Your attention operates like a magnifying glass.  We program ourselves with our attention.  What we focus upon, grows within us.  

This is why our self-talk is so important.  If we focus upon our shortcomings and berate ourselves for our mistakes, that is what we internalize.  We recognize this with parenting.  We realize that if we were to focus on every flaw in a child, we would damage their self-esteem.  As I mentioned in a post a while back, we are what we eat--and we're always eating life experience.  Our experiences are what we internalize.  Ultimately they define who were are.

In trading, if we focus on rules and best practices, we make those our own.  As young children, we had to be taught rules of proper behavior, such as thanking people who do good things for us.  Now, as adults, we don't need to consult the rule or motivate ourselves to follow it.  We naturally feel gratitude for good deeds and offer thanks.  The trader who makes rules about risk management or about what constitutes opportunity consistently focuses on those rules and eventually they become internalized principles.  They are no longer simply things to do; they are part of us.

Merritt Black recently reviewed the Principles from Farnam Street and applied those to trading.  One of those principles is that "principles outlive tactics".  A tactic is something we do in response to a particular situation.  A principle is something that guides us across all situations.

Here's a great experiment:  Quickly, write down the principles that guide your trading.  Only give yourself a couple of minutes for the exercise.

If you can't enunciate your principles quickly, they are not an automatic part of you.  It's when principles are front and center that they form the backbone of trading process.  That can only happen when we focus on principles and keep them conscious.

What a great practice for developing traders:  Writing principles on a card and consulting them before trading for preparation, during trading for execution, and after trading for review.  After a month of such repetition, we become more consistent because we become more principled.

Further Reading:  

Sunday, June 24, 2018

Renewing Ourselves, Renewing Our Selves

A while ago, I wrote in an article that, "Perhaps the greatest mistake in managing our lives is to treat energy and willpower as finite resources."  It is partly for that reason that a major theme in the book I'm currently writing is renewal.  All of us lived new and fresh lives as children growing up.  The challenge of adulthood is to re-new and rediscover that early sense of adventure and excitement.

One of life's great paradoxes is that we need routine to efficiently navigate through life--think how exhausted we would be if we had to approach each task as if it were our first time--but it is precisely that immersion in routine that makes life feel, well, routine.  Renewal requires new-ness, the exiting of routine to partake in what we find enjoyable, meaningful, and energy-giving.

In the new book I describe a "principle of alternation" that helps us recharge:  By arranging daily activities so that we draw upon different strengths, we rest one set of functions while exercising others.  For example, I might alternate trading time with time spent helping people as a psychologist and then turn to immersing myself in family activity and finish the day reading a new book and listening to favorite music.  The energy from each of these activities stimulates the next ones.  We become like batteries continually connected to a power source: we don't run down.  

That is an important part of living a truly diversified life.  When we alternate activities that draw upon the best of us, energy and willpower are no longer finite resources.  We spend much of our days facing the sunshine.  That not only brightens our perspective, but lights our path. 

Further Reading:


Friday, June 22, 2018

Why Goal Setting Often Doesn't Work

I work with many diligent traders who review their performance regularly, see what they need to improve, set goals for the next time period, and then move forward.  It's a great process, but it misses one thing: vision.  Rarely do goals in and of themselves truly motivate us to go beyond what we believe to be possible.  That takes a vision that captures our imagination, challenges us, and becomes an overarching priority.  Goals can help us implement our vision, but goals without a clear animating vision are little more than to-do lists.

In my latest Forbes article, I outline three strategies for getting to that all-important next level of performance.  It turns out that the environment we create for our performance, the ways in which we pursue performance, and who we work with on our performance make all the difference in the world. But notice in the article that two of the performers I cite choose truly audacious goals driven by a vision.  They seek something big.  They seek something meaningful.

Without vision, we are blind.  Without a vision of extraordinary achievement, we will always function within ordinary expectations.  The three strategies I outline are effective precisely because they align our goal-seeking with our vision.

Further Reading:


Tuesday, June 19, 2018

Overcoming Pessimism And Negativity

Colin Wilson's insight is that we approach life as a spectator, not realizing that we are the ones in the control room.  We experience pessimism when we believe we have little control over the important outcomes in our lives.  If you examine successful people, you find they structure their time in ways that give them that sense of control.  This is one reason living by goals and plans is so important.  Only dead things go with the flow.  Our job is to guide our lives.  That means being in the control room.

Wilson also recognized that we tap a small portion of our potentials.  This is partly because we tend to lead constricted lives.  Think of our emotional states and how rarely we experience true unbridled joy, profound fulfillment, or even deep and heartfelt regret.  Consider our physical states and how rarely we operate in modes that could bring us to our second wind.  Reflect upon our intellectual states and how rarely we truly challenge ourselves with new ideas and challenges.

Constriction of life lays the groundwork for pessimism.  It is difficult to remain negative if we experience varied emotional, physical, and intellectual lives.

Will you ever reach your true potential if you are planning, reviewing, and working on your trading while leading an unexamined, constricted life? If each day is an opportunity to stretch ourselves emotionally, physically, and intellectually, each day becomes an adventure--a journey into unexplored territory.  Pessimism most often results when life is routine and we no longer experience fresh, shining vistas.

Further Reading:


Sunday, June 17, 2018

Winning By Minimizing Your Trading

The previous post highlighted distraction as a major source of trading problems.  We have limited capacity for high-quality, focused concentration, and that shows up as limitations of willpower.  Too often, we lose discipline in trading, not because we lack emotional control, but because we encounter limits to our capacity to sustain intentional action.

This helps explain why overtrading is so deadly.  Trading requires mental capital, and after a while our cognitive bank account runs dry.  When we overtrade, we almost guarantee that we will trade with suboptimal focus.  Indeed, that's not a bad definition of overtrading:  when our trading activity exceeds the capacity of our willpower.

An interesting corollary of the last post, however, is that perhaps we should *minimize* trading decisions and maximize the efficiency and depth of our information processing.  What if we only traded when we had complete focus?  How would that impact our results?  Our trading psychology?

But, wait, here's an additional dimension to our challenge:

We can trade within the capacity of our willpower, but what if we need further willpower for the rest of our life outside of trading?  I can tell you from personal experience that trading a full day in active decision-making mode leaves me pretty much like mush for the remainder of the day.  Yes, I can perform routines and carry out normal social activity, but my capacity to sustain meaningful effort after a day of hard trading is severely limited.  

That's not a great outcome for someone who has responsibilities outside of trading.  If you hope to raise a family, deal with personal and relationship challenges, sustain physical fitness and optimal nutrition, expand yourself intellectually, and maintain a research program to adapt to markets and develop new sources of edge, you'll need to summon focus and willpower when you shut down the screens.

It's no coincidence that the majority of active daytraders I've worked with are single males.  They are "passionate" about trading and expend their mental energy on placing trades and managing positions, but surprisingly often achieve relatively little off the trading floor.  That is not a sustainable way to live life.

The bottom line is that most of us should be trading less.  Much less.  Activity born of true passion *gives* us energy.  If you're finding yourself drained by the work of trading, you are probably shortchanging the rest of your life and jeopardizing your returns with the overtrading that results from lack of focus.

Not many gurus in the industry have a vested interest in telling you to trade less.  Not brokerage houses, not trading coaches looking for your business, not prop firms that charge commissions from your activity or make hidden returns from selling your order flow, not hedge funds that seek nice returns but tolerate little downside, not firms that want to sell you trading software or advisory services, not "education" providers that promise the latest, greatest trading strategies, not vendors who will sell you whiz-bang overfit trading systems.  They all benefit from you trading.  Sadly, their livelihood depends on your overtrading.

With the idea that less can be more, I've constructed a trading approach that specifically minimizes trading decisions.  It's really a framework for active asset management.  Using ETFs with minimal management fees, I created a volatility-weighted portfolio consisting of fixed income, equity, and commodity returns.  The specific ETFs were selected to minimize correlations among positions, maximize yield/dividend (carry), and maximize liquidity.  I then studied the historical performance of the portfolio and identified the few times in a year when it would have been highly beneficial to institute a tactical hedge.  The resulting quant model provides an on-off signal for an SPX hedge using three variables (time, breadth, volatility).

So that's it.  Most the time, the portfolio does what it does, benefiting from asset strength and making a nice carry return during flat periods.  Once in a while, when markets become turbulent and fragmented, the tac hedge kicks in and buffers the overall equity beta.  The result is a framework for minimizing trading, but using trading insight for improving active investing.  Less commissions, less wear and tear; more time for family, travel, community involvement, and other productive endeavors like book writing.

When I mentioned this framework to a few active traders, they responded with horror.  It makes trading totally boring!!


No excitement.  No drama.  No gurus to follow or workshops to attend.  No FOMO.  Just diversification, portfolio construction, and informed hedging.

That's an important edge in itself.

Further Reading:


Friday, June 15, 2018

Distraction: The Hidden Enemy of Good Trading

What if traders miss good trades and impulsively take bad ones, not because they are emotional, stressed, frustrated, or lacking in discipline, but because they are too distracted to maintain the focus needed for effective pattern recognition?

What if your trading environment not only does not bring out the best in you, but actively distracts you from what you need to be focused upon?

What if *how* you are working is precisely what prevents you from achieving your potential?

Some savvy traders have recently pointed me to a book called Deep Work by Cal Newport.  The author refers to deep work as professional activities performed in a state of distraction-free concentration that pushes our information processing capabilities to their limit.  The important idea here is that we need to be in a heightened state of focus to reliably formulate and execute plans and also to exercise our creative capacities to see opportunities others are likely to miss.

It is when we are in the heightened state of concentration that we find our cognitive second wind and enter into the flow state we sometimes call "the zone".  Initially, concentration is taxing.  It's easy to become fatigued and move to other activities.  If we can sustain the focus, however, we hit that point of second wind where we're capable of doing deep work.

Multiple screens.  Ongoing chats.  Talk on the trading floor.  Tracking indicators, markets, news...all of these contribute to distraction and keep us out of our zone.  As Newport points out, the difficult truth is that we have to make friends with boredom if we are to enter and stay in our zones.  This is why so much quality writing and artwork is performed in solitude. 

How much solitude do you experience in your trading?  In your life?

How deep is your work?

Perhaps the reason you're not finding opportunity in your trading is because you are not in the right cognitive mode.  If you were to skim the surface in all your conversations, you would never build a meaningful relationship.  Is our relationship with markets all that different?

Further Reading:


Monday, June 11, 2018

How Experienced Traders Make Use of Trading Psychology

I recently went through the tweets under the #tradingpsychology hashtag on Twitter.  It was interesting.  The great majority of postings were relevant to beginning traders and pertained to emotions interfering with decision-making.

What are key trading psychology issues that experienced traders deal with?  Here are three that I've recently worked on with portfolio managers and traders:

1)  Teamwork - How to build a team by hiring the right kind of junior professional; how to team up with other experienced traders in a way that offers quality for all; how to get more out of conversations with traders.

2)  Creativity - How to process market information in new and deeper ways to see patterns and relationships that otherwise would go unnoticed.  How to better integrate information at different time frames and/or across different markets.  How to better blend intuition and rigorous analysis.

3)  Self-Development - How to renew energy at the end of difficult days in the market; how to better review one's trading to identify what is and isn't working; how to more rapidly update views and adjust to market changes.

If I had to generalize, I'd say that beginning traders turn to psychology to deal with frustrations.  Experienced traders turn to psychology to hone performance.  At its best, psychology is a tool for learning from experience, not just a salve for emotional wounds.

Further Reading:


Friday, June 08, 2018

The Importance of Having One Big Thing to Work On

I've read hundreds if not thousands of journal entries during my years of working with traders.  One pattern shows up among the traders who make greater success:

Their performance journals are highly focused.

The trader surveys his or her trading and identifies one big thing to work on that will make the greatest difference to the bottom line.  They sustain that single focus until they have demonstrated significant progress.  Then they move to another "big thing" goal to work on.

The lesser successful traders recount everything that has happened in their trading and what they need to do better next time.  Lots of good intentions, not many concrete goals.

It is difficult to sustain a sense of urgency when working on many things at one time.  When there are many goals, it's easy for a priority at one time to distract from efforts at other priorities.  

When I see the progress of traders with many goals, it is difficult to pinpoint where they have made dramatic improvements.  The more successful traders seem to be working on fewer things but they actually get more accomplished.

Here's the framework I'm using for my own trading:  one prioritized goal per month.  Each day I have a specific plan for working on that goal and each day I review my recent work on the goal and modify my plan.  If there are roughly 20 trading days in the month, that means that I have at least 20 reps in my workout, 20 trials in my deliberate practice.  The reality is that I have more than that, because I take midday breaks in my trading and treat morning and afternoon as separate trading "days".  So that means 40 reps, working on just that one goal.

Then a new goal the next month.

And the next month.

By the end of the year, the idea is to have 12 big things that you've accomplished, each making you better.  That's a big outcome, and it springs from a small beginning:  a single important thing to work on that will make a positive difference in your trading.  Keeping a report card on your trading is huge.  Focusing that report card takes it to the next level.

What's your One Big Thing?

Further Reading:


Monday, June 04, 2018

A Trading Psychology Lesson in Real Time

Here's a trading psychology lesson from my own trading today.  Twice today I had positions that went my way, only to reverse:  one for a loss, one for a scratch.  Since those were trades that normally work well for me, I began digging into the reasons they didn't work out.

My first hypothesis, always, is that I have missed something in the market.  I don't automatically attribute my losses to psychological factors.  These were trades that have worked very well for me in the last two weeks and something felt different today.  I trust that sense of "something different".

To provide some background, I tend to enter trades actively (I'll pay the market price) and exit passively (I'll work an order to exit).  The exit is a function of the expectable move in a particular holding period.  In my case, the holding period is 60,000 ES contracts traded.  I know from my research that, over a 60,000 contract horizon, we can expect moves of a given size.

Today, the two trades I had that didn't work out came close to my targets, but failed.  Yes, that could be due to chance, but maybe something else was at work...

Notice the ES and SPY volume for today's session.  According to my stats, the SPY volume in the afternoon was running at about half the expectable level for that time of day.  On normal days, we might get 60,000 contracts traded in 25 minutes' time.  Today it took more than an hour.  Everything slowed down.  

Except for my expectations.

In other words, per the above quote, my internal relations (my expectations) did not adjust to the the external relations (the volume and volatility of the market).  I placed my take-profit exits at one level and that level didn't get hit in the time frame expected.  That is because I was calibrating by chronological time when I know to calibrate in volume time.  Had I let the trades run for the hour rather than a 20-ish minute time horizon, I would have made money on both.

To use an analogy, the music on the dance floor slowed way down and I was still in my faster dancing mode.  I needed to adjust to the pace of the music, not my accustomed pace.  Institutional participants really moved away from the market today, and it traded a helluva lot more like a 10 VIX market than the 15 VIX we've seen recently.  I didn't adjust, and that becomes my job tomorrow:  to be prepared if relative volume comes in low once again.  

Folks, this is real trading psychology from real time trading.  Not the pronouncements of some self-appointed guru who tells you to control your emotions, listen to your emotions, keep yourself mindful, trade your plan, etc, etc.  Market participation changes daily, and the balance of buyers and sellers changes daily.  Our job is to recognize and adjust.  Sure I can calm myself and trade with confidence.  If I don't recognize how the market is behaving differently right here, right now, however, I'll simply lose money calmly and confidently.

When markets change faster than we adapt, bad things happen to P/L.  Our job is to adjust our internal expectations to the external realities of the market.

Further Reading:


Sunday, June 03, 2018

How Not Working At Trading Can Help Your Trading

Think of working out in the gym.  There is time when you work the muscles, and there is time when you rest them.  The cycle of workout and rest increases blood flow to those muscles and enables them to grow in a sustainable fashion.  If you only rested, you would never build your muscles.  If you only worked, you would overtax yourself and break yourself down.  Growth occurs over multiple cycles of work and rest.

This is an important lesson of the Sabbath in the world's religious traditions.  After a period of creation, we rest and renew.

Some traders fail because they work too hard.  Others fail because they hardly work.  Performance is achieved when we effectively alternate effort and renewal.  Growth occurs in the cycles of doing and reflecting that comprise deliberate practice.

Thanks to a savvy portfolio manager who passed along this article on how the Golden State Warriors make use of their halftime to dominate the third quarter of their games.  It is fascinating to see how the coaches plan for the halftime during the game, collecting videos that will help the team build their confidence and focus on the right things in the second half.  The period of rest during halftime becomes an integral part of improved performance for the remainder of the game.

Mike Bellafiore, in a recent blog post, notes that this same dynamic occurs on the trading floor.  Traders keep running "playbooks" of their best trades and use breaks during the trading day to review their plays and share insights with other traders.  When I worked at Kingstree in Chicago, traders would formally divide their trading day into morning and afternoon sessions, with a break in between.  They allocated separate risk (loss limits) to the two sessions, effectively creating two trading "days" in one.   Midday served as a halftime, a period of rest when they could learn from what they did right and wrong, update market views, share insights with colleagues, and rejuvenate.

What are your halftime drills?  How are you utilizing periods of rest in your trading?  In your life?

When we increase the frequency of cycles between "performance" and "halftime", we speed our deliberate practice and development.  

How we rest is as important as how we work.

Further Reading:


Friday, June 01, 2018

The Unappreciated Key to Success

The most unappreciated element in success in any area of life--trading or otherwise--is the capacity to sustain effort.  We can think of this capacity as intentionality:  the ability, over time, to exercise free will.

For much of daily life, we follow routines.  This is efficient, allowing us to get the most done with the least effort.  A great example is driving a car.  Being able to do that automatically enables us to carry on conversations, listen to music or podcasts, etc. The problem occurs when we become so immersed in routine--so wedded to getting the most done with the least effort--that we are unable to sustain the efforts that generate distinctive performance.

Important research from the psychologist Mihalyi Csikszentmihalyi identified a "flow state" in which people become capable of high levels of creativity.  The flow state results from being immersed in efforts over time--a kind of hyperfocus.  In that state of superfocus, we become capable of processing information in new ways, seeing patterns and solutions that escape us in our normal state of awareness.

In our ordinary state of mind, we can only achieve ordinary things.  All success comes from the ability to transcend routine.  But that requires effort and the capacity to sustain effort.  Successful people have developed routines that exercise intentionality:  that build the capacity to sustain flow states.  They sustain those efforts by pursuing their strengths: what they are good at and what speaks to them.  We achieve hyperfocus when we are hyper-interested in what we are doing.  If you need discipline to get things done, you know you are not operating in the sphere of your strengths and passions.

Further Reading:  


Wednesday, May 30, 2018

Losing the Right Way

If you are wrong on the next trade, will it impair your ability to take the next legitimate trade?  If so, you know you are too big.

If you lose money this week or this month, will it impair your ability to trade freely next week or next month?  If so, you know your risk management is too loose.

The best losses are planned.  A planned loss is part of playing a game of probabilities.  A planned loss won't prevent you from pursuing odds in your favor.

Every trading slump begins with losses larger than a trader has planned and is able to digest.

Are you losing the right way?  Are you limiting trades to where you have demonstrated edge and then sizing those trades so that you can continue full pursuit of that edge even if the odds don't play out here and now?

Losing the right way is a great means for setting yourself up to be a winner.

Further Reading:  


Monday, May 28, 2018

When Trading Psychology Problems Just Won't Go Away

As we saw in the last post, the starting point for addressing psychological problems in trading is making sure that the methods you are utilizing really do provide you with positive expected value.  I recently spoke with a frustrated trader who was making money, losing it, making it, and then losing.  He couldn't understand why he couldn't sustain his gains.  It turned out that he was making use of trendlines that were promoted by an online trading service.  The guru running the service pronounced that there was a "strong edge" in placing trades based upon these lines, but when I questioned, the trader acknowledged that he had not independently verified this edge.  When I conducted a quick backtest, the signals based upon the lines displayed random forward returns.

The trader's problems had nothing whatsoever to do with psychology.  The psychological discomfort was the result of the problem, not the cause.  All the attempts in the world to stick to his plan, improve his mindset, listen to his feelings, control his feelings, etc, etc, etc would not have helped him.

This should always be the null hypothesis--the base case--for a trader experiencing distress and behavioral problems, especially if those do not show up in his or her non-trading life and if an edge had not been soundly established previously.  The first hypothesis is that there is no edge--and you need affirmative evidence to reject that hypothesis.  It is your methods, not your psyche, that need working and reworking.

Only after establishing the soundness of what you're doing should work on psychology and performance take front stage.  An analogy would be a golfer who runs into a string of poor scores.  If the mechanics of the swing and the mechanics of putting have not been mastered, there's little sense in using visualization exercises to foster a winning mindset.

A related hypothesis is that the edge that once was present is now no longer operative or has changed.  If the golfer is playing in rainy conditions, that may dictate a change in swing and a change in each approach to the hole.  If traders find themselves in low volatility conditions, that may dictate a change in the trading of momentum-based patterns.  Edges are dynamic, requiring frequent adjustments by traders.

Once you have identified and verified patterns in markets that capture your understanding of what makes markets move, any problems you might have in implementing the trading of those patterns might be psychologically driven.  Here, the key is determining whether problem patterns in your implementation are caused by emotional or behavioral factors that show up as problems in other parts of your life, or whether the problems affecting your trading are indeed unique to the trading context.

Many problems that impact trading are not specifically trading-related.  For example, a person with fragile self-esteem or a person with poor emotional self-control will find these problems impacting their family lives and personal relationships, not just their trading.  In such cases, work on those problems needs to occur outside of trading and well as during trading hours.  There are research-backed psychological techniques for the great majority of these issues, as I lay out in the Daily Trading Coach book and in many blog posts.

Trading problems that won't seem to go away are usually trading problems not being properly addressed.  By looking deeply into the root causes of poor returns, we can figure out what is going wrong--and that's the first step in setting things right.

Further Reading: