Saturday, October 20, 2018

How Our Physical Health Impacts Our Trading Psychology

Let's take a look at how the state of our bodies impacts our health and well-being and ultimately the mindsets we bring to trading.

Recent research suggests that a sedentary lifestyle--one without exercise--is more harmful to our health than smoking, diabetes, or high blood pressure.  The lack of aerobic fitness is a larger risk factor for mortality than having many medical conditions that we regard as necessary to treat.

*  Poor posture, such as sitting hunched over a screen for many hours per day, has been implicated in low blood oxygen levels.  Low blood oxygen levels are associated with higher stress levels and greater fatigue, both of which can negatively impact our executive brain functions and ultimately our performance.

Fascinating studies placing people in high altitudes (and thereby reducing their blood oxygen levels) find that low blood oxygen is responsible for declines in mood and worse cognitive performance.  Poor aerobic fitness interferes with our optimal processing of information.

Research finds that increased exercise is associated with lower rates of depression and greater levels of happiness.  Exercise also improves our sleep quality, which in turn is associated with higher levels of well-being and focus/concentration.

There is yet another way in which physical exercise can help our trading.  By training ourselves to tackle challenges, day after day, we build a mindset that encourages the tackling of challenges in other areas of life.  Quite simply, developing ourselves physically can be a powerful pathway toward developing our performance--in markets and in our personal lives.

Further Reading:


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Wednesday, October 17, 2018

The Power Measure: How Is Volume Moving Price?

In the most recent Forbes article, I highlighted the importance of monitoring the amount of movement we get per unit of market volume.  When we look at normal bar charts, we see price as a function of time, with volume on the X-axis.  A large bar tends to be one in which we see increased volume (increased participation at that point in time), moving the market more than usual.

A different way of viewing market behavior is to look at volume bars (price where each bar represents an amount of volume traded) and see if bar size (volatility) is expanding on the upside or downside.  What this is telling us is not just how much volume is coming into the market, but how much each unit of volume is actually moving price.  When we see bigger bars coming in on market upmoves than downmoves, we can actually visualize where the market is finding its greatest ease of movement.

(This is a great example of the importance of creativity in trading.  Looking at price-volume-time through different lenses enables us to see fresh relationships that can illuminate what is actually going on in the market.  Looking at the same charts as everyone else is a great way of seeing the same things as everyone and becoming part of the proverbial herd.)

Above we see the full day's trade in the ES futures for 10/16/2018.  It's a great day to study, given the major turnaround in the overnight session and trend day during NY hours.  The blue line is the ES futures, with each bar representing a small unit of trading volume.  The red line is a running correlation of the size of the bars and the directional movement (open to close) of the bars.  Hence, when we get more upside movement per unit of trading volume, the correlation goes positive and vice versa.  

Shifts in this "power measure" tell us that volume is moving price more easily in one direction than another--a worthwhile heads up, though not a precise timing measure.  Notice, for example, how the correlation shifted positive and stayed positive during the period of the market's big turnaround.  Notice how subsequent moves lower in the correlation occurred at successively higher price lows--a great indication of the underlying strength of the market.

This is a relationship relevant to multiple time frames.  The illustration above, with over 500 bars per day, is clearly relevant to active day traders.  I maintain the measure for bars with much larger volume to examine multiday patterns.  The value of such measures is not as crystal balls, but as multiple lenses through which we can understand the dynamics between buyers and sellers.  There are many other such lenses, such as the shifts in distribution of upticks and downticks across all listed stocks.  Many trading problems occur, not because of emotional disruption, but because of cognitive poverty:  an absence of perspectives that yield fresh, valid insights.

Further Reading:


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Monday, October 15, 2018

How To Prepare For Challenging Trading

If Noah had waited for the storms and floods, it would have been too late to gather the animals and build the ark.  Our role as traders is to prepare for possible adverse outcomes so that we can ensure our survival should one of those materialize.

How can we prepare properly?

In the recent Forbes article on how to navigate these volatile markets, I make the point that a close examination of similar historical periods can help us anticipate a variety of scenarios: both ones of risk and ones of opportunity.  It's not that the immediate future will replicate any of the past price paths in similar circumstances.  It's that the past price paths can tell us what is possible--and maybe even what is likely--going forward.

So let's take a specific example.  I recently noted that we had made a multi-standard deviation move to the downside--over five standard deviations, to be precise.  In similar situations going back to 1993, we were up 11 times, down 4 over the next five trading sessions.  Of the four down instances, all were lower by more than 2%.  Of the eleven up instances, six were higher by more than 3%.  Volatility was the norm and bounces were common.

Psychologically that alerted me that, even though I thought we could see further downside, I had to be prepared for short squeezes.  In fact, those have been more common in the past than not.  The past instances also alerted me to the likelihood of further volatility, which led me to temper my position size.  When we traded weak in morning hours, I took an initial short position, saw it go my way modestly, and then bounce higher.  The quality of the bounce made me take notice, as it demonstrated a shift in the amount of movement per unit of volume--something I describe in the Forbes post.  I quickly covered my short position for a small loss and avoided a larger drawdown.

Knowledge of the past prepared me for possible future outcomes.  It helped me stay open minded--and that helped me manage risk.  In trading as in sports, preparation primes us for action and that builds our mindset.

Further Reading:


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Friday, October 12, 2018

Lessons We Can Take Away From Broadly Oversold Markets

And the trick, of course, is getting cut the right way.  An uncut diamond isn't worth much, and a diamond cut the wrong way is too flawed to be worth anything.  When we take losses the right way and learn from those, that's when we develop the facets that give us value as traders.

One of the bad cuts I see people taking in the recent equity markets is failing to adapt to new, volatile market conditions.  Buy the dip at VIX of 12 is quite different from the same strategy at VIX of 24.  When a market becomes more volatile, we trade more volume per unit of time.  Moves that might have unfolded in hours now occur in a few minutes.  That has relevance for how you size positions and how much heat you can take on ideas that ultimately work out.

I looked at the overbought/oversold statistics from Index Indicators and found something outstanding.  Fewer than 5% of stocks in the SPX are trading above their 3, 5, 10, and 20-day moving averages.  In other words, not only are we quite oversold; we are very broadly oversold.  Essentially everything has gone down.

So what has happened historically after such broadly oversold occasions?

Since 2006, when I began my database, we have only had 15 other such days.  That means that broadly oversold markets only occur less than half a percent of the time.  As we saw in the last post, this means that the current market conditions are historically rare.  Below we can see the dates of occurrence in chronological order:


9/29/2008
10/7/2008
10/9/2008
11/20/2008
5/6/2010
5/7/2010
5/20/2010
8/2/2011
8/4/2011
8/8/2011
10/3/2011
11/23/2011
8/24/2015
8/25/2015
2/8/2018

We can see right away two things:


1)  These rare occasions can "clump".  When we see one, it's not unusual for others to follow.  This is also something we saw in the last post.  A very oversold market can stay oversold for a period and indeed become more weak.

2)  These occasions have occurred during markets we have recognized as meaningful corrective periods or as bear markets.  These occasions have also been accompanied by significant volatility.  The median VIX for the 15 occurrences has been almost 41.  The median VIX for the rest of the sample is a little over 16.

And what have been the forward paths for these broadly oversold markets?

Bounces have been the norm, but it's not always a one-way path.  The next day has been 9 up, 6 down.  Two days later has been 12 up, 3 down.  Five days later has been 12 up, 3 down.  That being said, ten trading days later we see 8 up, 7 down.  Ten of the 15 occasions have posted a lower daily close within a ten trading day period.  Two-sided markets over the next two weeks are not unusual.

Forward volatility is expectable.  Thirteen of the 15 occasions moved more than 2% from close to close over the next two trading sessions.  Nine of the occasions moved more than 4% up or down over a next five-day period.  Very large moves are not uncommon.  During 2008, we saw near-term closes up 9% or more and down 9% or more.  After the 2011 occurrences, we saw moves up and down exceeding 5%.

There has been opportunity longer-term.  The longer-term investor recognizes that broadly oversold markets are taking down high quality, growth companies along with less stellar firms.  This can create unusual value for individual stocks and also for the market. With the exception of the 2008 occurrences--a protracted bear market--we were meaningfully higher in SPX one year after the broad selling periods.  If we believe this to not be a recessionary period with major economic dislocations, the drop can be a great opportunity to buy stocks for longer-term holding periods.  

So it's back to the theme of getting cut the right ways.  When market participants puke, it's common to see favorable forward returns, but not without volatility and retracements.  Shorter-term traders can take each day as it comes, knowing there will be meaningful movement to capture.  Longer-term investors can identify stocks worth snapping up at bargains, but also create market hedges (and size appropriately) to weather the forward volatility.

Knowing historical patterns is a great way to prepare oneself for forward price paths.

Further Reading:


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Thursday, October 11, 2018

What Happens After A Huge Down Day?

Well, I had a record number of phone calls and emails yesterday and you can guess why.  The yellow caution signal that we discussed on September 24th proved to be a worthy alert.  Yesterday the stock market dropped around 4% on very elevated volume, closing at its lows for the day.  I went back to 1993 in SPY and learned a few interesting things:

1)  This daily move down was more than 5 standard deviations from the average move, using the last 100 trading days as a reference point.

2)  Downward moves of over 4 standard deviations have occurred only 15 times since 1993.  So, in over 6000 days of data, this has occurred less than .25% of the time.  It's a truly rare occurrence.

3)  Occasions when the 4+ standard deviation moves have occurred include the following dates.  Note the prominence of bear market periods and significant market corrections.  Note also that one such occurrence does not prevent the possibility of another occurrence shortly after, as in 2015 and 2018.  We also saw multiple large down days in 1994, 1998, and 2008, though not at 4+ SD.  In other words, we cannot count on "one and done"; such outlier events tend to cluster:


2/5/2018
2/27/2007
8/8/2011
10/27/1997
2/2/2018
8/31/1998
2/8/2018
8/24/2015
8/4/2011
9/29/2008
2/4/1994
6/24/2016
9/17/2001
3/8/1996
8/21/2015

4)  One day, five days, and 20 days later, the market was up 11 times and down 4.  Over the course of the next 20 days, the market made a lower close on 9 of the 15 occasions.  On the occasions where the market made lower closes five days later, all four declines were in excess of 2%.  On 10 of the 15 occasions, the market moved more than 2% over the next 10 trading days.  Volatility continued to be the norm.

So what can we take away?

A)  We are in a historically rare event.  Casually applying normal rules and "setups" to the current situation can be hazardous to your wealth.

B)  A bounce from the big down day is the most common scenario.  Twelve of the 15 occurrences posted a higher close within the next five trading days.  That being said, the majority of instances also posted lower closes over a 20 day horizon.  V bottoms have been the exception.

C)  Volatility continues over the next 20-day period, with moves greater than 2%--up or down--occurring in all but two of the instances over the next ten trading days.  

D)  The presence of one rare drop does not preclude others from occurring and indeed there is evidence of clustering during bear periods.  Failure to sustain rallies after the big drop should be viewed with caution.  Significant additional large drops occurred in 2008, 2015, and 2018, for example.

Psychologically my takeaway is that investors should have a long-term view of opportunity--on a long time frame these were good buying opportunities--but on a short time frame a degree of hedging is prudent.  Shorter-term traders should view a failure to sustain bounces as possible occasions for further large declines.  Open-mindedness is key.

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Sunday, October 07, 2018

Viewing and Reviewing Your Trading

An excellent, successful SMB/Kershner trader I've known for years recently made a Q&A video where he shares valuable lessons from his development.  One of the important points he makes is the crucial role that review plays in honing trading skills.  I can vouch for the fact that he reviews his trading religiously every day and shares those reviews with a variety of colleagues.  He learns from the reviews and role models trader development for others: a great example of each one teach one.

As Les Brown notes above, a double review serves an important focusing purpose.  The first review occurs at the start of trading where you examine how your markets or stocks are setting up and you figure out--specifically--how you will apply your trading goals to the current market conditions.  For example, one of the things I'm working on in my trading is developing better estimates of how far moves can extend and adapting my scaling out of profitable positions to take better advantage of markets that expand their volume and volatility during the day.  My premarket review examines relative volume in real time and lays out a tentative plan for sizing and scaling.

Note that the idea here is not to simply review an abstract goal, but instead to actively apply that goal to upcoming performance.  A goal not actively applied is merely a good intention.  It is planning that gives goals their life.

At the end of the trading day comes the second review.  We examine how well we actually acted upon our plans and goals.  If I made progress on the goal, I will note how I did that in real time and will bring that positive learning lesson forward to the next day.  If I failed to move forward on the goal, I will dissect what went wrong.  Did I read the market incorrectly or fail to properly update my views on volume and volatility?  Did I become distracted and lose sight of my goal altogether?  Did I become too focused on sizing up that I missed the fact that the opportunity set was waning?  What I could have done better frames the goals for the next trading session, which will become plans in the morning review.

Every day.  

That is how learning compounds and develops into expertise.  That is what improves our odds of long-term success.  

Yet a further refinement is to conduct separate reviews of the various facets of trading:

*  How well did you develop sound ideas to trade?
*  How well did you enter positions and achieve favorable reward relative to risk?
*  How well did you scale into and/or out of positions to optimize profitability and manage risk?
*  How well did you manage yourself during the trade--and throughout the day--to sustain optimal focus and keep yourself in a peak performing state?

Just as a tennis player will work on different aspects of her or his game (the serve; backhand; net game; etc.), we view and review different facets of trading to ensure that our development extends to everything we do.  In a gym, you'll work different parts of your body--upper, midsection, lower--and you'll work on aerobic conditioning as well as strength.  So, too, do we work on different facets of what we do as a trader.

That is how developing ourselves as traders inevitably intersects with our personal development.  In refining our skills, we refine ourselves.  

TraderFeed Home Page and Index
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Thursday, October 04, 2018

Where Does Market Edge Come From?

Above is a screenshot from my trading station, capturing roughly the last eight days of trading in the ES futures, using hourly data.  Volume is on the X axis.  Below volume is a two-period RSI that is a very short term measure of overbought/oversold.  Above volume is a linear regression line (red) with bands of one standard deviation (blue) above and below.

The chart nice illustrates how markets are a joint function of linear trend (the regression line), with one or more cyclical functions overlaid (the movements from upper to lower bands; the movements between short-term overbought and oversold).  Notice how often the market will take out a prior low or a previous high, only to cycle back the other way.  It's a good illustration of how traders who think primarily in terms of breakouts, momentum, and directional trends get "chopped up" by the market's cyclicality.

Much of the frustration from trading comes from the imposition of linear thinking on markets that have significant cyclical drivers.  During stable market periods, we can "solve" for dominant cycles and then use movement above and below the bands to identify when stability is breaking down and we're entering a different cyclical or directional regime.  The idea is *not* to trade according to your personality.  The idea is to capture the linear and cyclical components of markets and trade the market's personality.

If you get the basic idea of interacting trends and cycles, you can see why the following has very limited edge:

*  Chart patterns taken out of context;
*  Oscillator readings taken out of context;
*  News "catalysts" taken out of context;
*  Breakouts taken out of context;
*  Wave counts or Fibonacci patterns imposed on markets;
*  Releases of fundamental data

So what does have edge?  In my experience, it comes from identifying when 1) the herd (which thinks one-dimensionally in terms of linear/directional movement) gets trapped at cycle extremes and 2) when shorter-term "mean reversion" traders get trapped by the momentum components of longer-term cycles and trends.

What has edge in the quant world is the dynamic modeling and re-modeling of shifting cyclical and directional components of markets, rather than static, curve-fit models based on lookback periods.  This is a big reason why funds that make use of true machine learning are the top performers in recent years and why many funds underperform their benchmarks.

Further Reading:




Monday, October 01, 2018

The Real Way To Learn Trading

In a recent article, I ask the question of whether individual traders can succeed in financial markets and take a look at actual research on the percentage of traders who sustain profitability.  I also examine a number of successful training efforts and what they are doing to increase the odds of trading success.

What emerges from this exploration is an insight:

The real way to learn trading is not so different from the real way to learn to be a doctor:  see one, do one, teach one.  

Medical students begin their clinical education by shadowing experienced doctors and seeing first hand what they do, hearing why they're doing it, and observing how they do it.  Learning first occurs at the bedside or in the examination room.

The next phase of learning for the medical student is doing some of the work with patients themselves, while under close observation and supervision.  This might begin with taking histories and conducting physical exams and progress to assisting in simple procedures, such as removing a skin growth.  All of this learning occurs within a team, with frequent evaluation and feedback to build skills.

The more advanced phase of learning occurs when the medical student becomes a resident physician and participates in the teaching of new students.  We learn by observing and doing, but it is teaching others that cements our knowledge and extends our experience.

As this analogy points out, the real way to learn trading is to not learn solo.  Basketball and football players always learn from coaches and teammates; artists, musicians, and chess masters always train with mentors.  So few succeed in financial markets because:  a) they begin with limited capital and cannot sustain a living from normal, expectable returns; and b) they lack structured learning processes and resources.

The old model of trader education emphasized didactic seminars/webinars; the newer model embraces mentoring and interactive learning in teams at hedge funds and proprietary trading firms and via online communities.  It is in these venues that traders have a real opportunity to see one, do one, teach one.  And it is in these venues that we can see enhanced odds of trading success.

Thursday, September 27, 2018

Webinar To Improve Your Trading Performance

I'm pleased to announce a free webinar hosted by Journalytix on the topic of "Taking Your Journals--And Your Performance--To The Next Level".  The session will be held at 4:30 PM EST on Monday, October 1st.  I like what the Journalytix folks have done in creating a next-generation journaling tool.  One app connects your daily journal with your key trading statistics, news feed, and event calendar--and it all updates in real time via your data feed.

The Monday presentation will focus on how you can use journals and trading stats to more clearly define where you do and don't have edges in your trading.  One observation I've made with developing traders is that they will trade multiple patterns/setups and will assume that these have an edge.  When they break down their profitability as a function of the strategy traded, however, it often is the case that most of their profits are coming from one or two key types of trading.

By using trading stats as an objective performance measure and, from the numbers, defining goals to work on each day/week/month, traders can greatly accelerate their progress.  With traders I observe first-hand, for instance, at SMB, I notice distinct improvement among those who religiously keep their stats and generate monthly goals.  We really can take control of the pace of our trading progress.

I look forward to sharing best journaling practices with you and responding to your questions on Monday.  Thanks!

Brett  
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Monday, September 24, 2018

Yellow Caution Lights for the Current Market

As we all know, the stock market has been on a tear, recently rising to all time highs.  This reflects overall strength in the economy as well as a favorable yield status for the U.S. dollar.  

As we have made these recent highs several of the measures of strength that I track have lagged.  I refer to this as a yellow light, rather than an outright red one, if for no other reason that these divergences can persist for quite a while before they turn into significant price weakness.  My general experience has been that, the longer the divergences, the more pronounced the subsequent market decline.  This was certainly the case in 2000 and 2008, where market rises became increasingly selective until the overall market dropped.

Above is a chart that tracks five minute closing values of SPY (blue) versus a cumulative line of upticks versus downticks among NYSE stocks.  (See this post for background).  When we have more stocks trading on upticks, that reflects underlying broad buying strength and vice versa.  Note how the cumulative TICK has been declining now for a while.  This reflects relative weakness among the smallest of the NYSE universe.

We see this relative weakness in the recent underperformance of the NASDAQ and Russell indexes as we made the recent highs in SPX.  Many sectors within the SPX also failed to make new highs for the year, including XLF, XLE, and XLB.  Even more pronounced has been the relative weakness of overseas equity markets, many of which have been in downtrends since January.  See, for example, EEM and EFA.

Quite simply, stock market strength around the world has waned since January and has begun to wane in the U.S.  As a result, the market rally has become increasingly narrow.  Indeed, in the last 13 trading sessions, only 4 have seen more stocks across all indexes making new one-month highs versus fresh one-month lows.  

As I've mentioned in the past, a rising tide lifts all boats.  When boats aren't rising, it's worth questioning the tide.  Updating market strength and weakness is a way of staying flexible in our expectations and being prepared for multiple market scenarios.

Further Reading:


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Friday, September 21, 2018

Can Artificial Intelligence Make Us Smarter Traders?

There are some who would have you believe that trading is 80+% a function of your psychology.  All you need to do is sustain your mindset and discipline and remove your emotional blocks and you, too, can find the success of Market Wizards.

As a psychologist, a psychologist who has worked full-time with traders on trading floors, a psychologist who has consulted to trading firms across different markets and strategies, and as one who has traded himself for decades, I can assure you that there is a helluva lot more to success in markets than maintaining the right psychology.

A good way to put it is that the wrong psychology can derail anyone, but the right psychology does not substitute for insight, skill, and experience.  Psychology is necessary for success in any performance field--from athletics to trading--but it is not sufficient.

One of the most powerful observations I've encountered in my work with traders and portfolio managers is that cognitive skills and development account for as much success in markets as personality variables.  Superior traders have superior information processing skills.  Show me a good trader, and I will show you someone who--in some way--processes information more effectively and uniquely than his or her less successful counterparts.

I was part of a meeting recently in which a money management firm discussed the idea of requiring programming knowledge from all new hires.  Years ago, that could never have been a topic for discussion.  Now it is a serious proposal.

It makes sense.  When I look at the traders who have been particularly successful over the past couple of years, the majority are either entirely algorithmic or manage capital with a hybrid, "man-machine" interface.  Many make discretionary decisions--aided by signals generated by the machines.

Quite simply, machines--used properly--can process more information, more quickly than we can.  They can find patterns in multidimensional space that evade our naked eyes--and they can ensure that these patterns are not merely curve-fit.

It's not that artificial intelligence (AI) necessarily succeeds by giving us better trades.  It is valuable in giving us more hypotheses to consider in framing trade ideas.  It identifies patterns that have set up in the most recent past so that we can make an informed judgment as to the potential for those patterns continuing into the immediate future.  It vastly expands our cognitive bandwidth.  For that reason, AI can help us more quickly adjust to shifting patterns in the instruments and markets that we trade.

On Saturday, October 20th, I'll be in San Diego with the folks at Trade Ideas and several experienced market participants to discuss the potential for partnering with machines for better trading.  We'll take a look at trading processes, as well as trading psychology, and how those can make the most of increased information bandwidth.  The automobile greatly expanded our travel capacity relative to the horse-and-buggy.  So, too, in the machine age, can we greatly enhance our decision making with a superior flow of supporting information.

Further Reading:  


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Tuesday, September 18, 2018

The Power of Quiet Trading

Think of your mind as a finely calibrated instrument that can detect subtle patterns in markets--and in ourselves.  In order for this wonderful instrument to function properly, it requires no interference whatsoever.  If you place electrodes on a person's head to detect brain waves, the slightest movement of the head can throw the readings off.  Similarly, when our minds encounter interference, they no longer can read the subtle cues of conversations--or the subtle patterns of price behavior.

Perhaps the greatest trading psychology flaw one can have is the tendency to experience quiet as emptiness.  Instead of experiencing quiet as peace, people can experience it as boredom or as a void.  So they rush to fill their voids with self-chatter and aimless action.  Just watch how quickly we turn to our cell phones when a quiet moment occurs.  All that activity trains us in a sense: it trains us to be unable to make full use of our finely calibrated instrument.

The most recent Forbes post examines research relevant to the quieting of our minds.  One line of research reaches an astounding conclusion:  that it is in the quieting of our egos that we gain access to our greatest strengths.  I encourage you to check out the post and the research links.  If this line of thought is correct, then all the trading patterns/setups and all the self-help techniques designed to instill discipline and remove our blocks are of limited value.  If we are not in the right (flow) state to detect subtle patterns, we quite literally will end up trading noise.

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Thursday, September 13, 2018

The Right Way to Trade With Confidence

Here's an idea I've been discussing with a few of the traders at SMB who are increasing their confidence--and their size--in many of their trades:

When you have *real* confidence in your trading, you're not threatened by the possibility of being wrong.  All of us are fallible, and if we are secure with who we are, we can accept that.  True confidence means we have the inner strength to deal with setbacks as well as successes.

When we have big confidence in a trade, that is when we want to double down on our planning for the possibility of being wrong.  Too often, traders become confident in an idea and stop looking and planning for alternate possibilities.  We want to use confidence to trigger our awareness of fallibility, so that we are aggressive in the trade AND aggressive in planning an exit if the trade doesn't work out.

The holy grail is to have conviction *and* open-mindedness.  We can size up a trade at the same time that we intensively review our exit strategy.  Aggressive and nimble...just like the sniper.

Further Reading:


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Saturday, September 08, 2018

Six Characteristics of Successful Traders

I've seen traders succeed in very different markets, over very different time frames, and with very different strategies.  Here are common elements I've noticed among the most successful traders:

1)  Capacity for Sustained Focus - Quite simply, the successful ones process more information--and sustain the search for unique information--better than their peers.  This enables them to see what others do not;

2)  Originality and Creativity - I have never met a successful trader who traded in the ways that trading texts describe.  There is always something unique to the successful trader, and very often it's looking at unique information or looking at common information in unique ways;

3)  Learning From Mentors - There may be completely self-taught genius traders, but the best that I have met have learned from other successful traders.  Indeed, it's common for the great trader to have multiple role models and synthesize lessons from each;

4)  Emotional Resilience - Some traders bounce back from losses and setbacks better than others.  The successful ones actively learn from the setbacks--and then move on.  The less successful ones fail to learn from their experience and often fail to move on;

5)  Attention to Detail - In football, it's often the blocking and tackling that ultimately wins the game.  In basketball, it's running the plays and the defense.  Less successful traders focus exclusively on "setups" to get into trades.  Successful traders develop rules and processes for sizing and managing positions to maximize reward relative to risk.

6)  Always Working on their Game - As Merritt Black at SMB Futures recently noted, the intensity and consistency of the review process is very positively correlated with success.  Just as in sports, the successful traders review markets, review their trading.  They are studying "game film" to prepare for the next contest.  They aren't focused on getting rich; they're focused on getting better.

Quite simply, the best traders start with distinctive strengths and then cultivate those through rigorous tracking of performance and learning.  There is a winning process long before there are winning outcomes.

Further Reading:


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Wednesday, September 05, 2018

The Psychology of Trading Without the Ego

A surprising amount of poor trading comes from trading our egos, not from actually trading markets.

When we focus on predicting market moves and trading our views with conviction, trading rapidly becomes a game of the ego.

When we declare that we have a certain trading "style" and we wait for market conditions to accommodate our style, trading becomes ego-based.

When we obsessively watch screens and focus on each move of P/L, trading turns into an ego game.

We can use every technique under the sun to instill discipline and overcome emotions, but if we pursue trading through the ego, we will be vulnerable.

An analogy I've used in my books is the good dancer on a dance floor.  The good dancer doesn't just dance his or her style regardless of the music playing.  The good dancer does not start dancing ahead of the music, anticipating the next tune.  The good dancer waits for the music to start, catches the beat and tone, and dances accordingly.

In my recent trading, I've been taking ego out of the picture.  I examine a stable lookback period in the recent market and identify two things:

1)  Has there been a dominant trend over that period?
2)  Have there been one or more dominant cycles over that period?

If I can detect no clear trend or cycles, I don't trade.

If there is no trend, but a dominant cycle, I trade the hypothesis that this cycle will continue into the immediate future unless I see clear changes in market volume, volatility, news events, etc.  That has me buying prospective cycle lows and selling highs.  In that regime, I look like a value trader.

If there is a distinct trend, but no clear cycle, I use the first pullbacks/bounces in the NYSE TICK to enter and ride the trend, again unless I see clear evidence of changes in the market's trading.  In that regime, I look like a momentum investor.

If there is a distinct trend *and* one or more dominant cycles, then I am using the cycles to guide entries and exits in the direction of the trend.  In that regime, my execution is counter-trend (value), but the overall idea is trend-based (momentum).

We suffer when we expect markets to trade the way *we* want them to trade.  There are valuable tools that help us identify cycles and trends.  That enables us to enjoy the market's dance music--and profit from it.

Further Reading:


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Monday, September 03, 2018

Becoming Truly Accountable For Our Trading Account

We have trading accounts, but how truly accountable are we for those?

What percentage of us routinely keeps informative data on our trading results?

What percentage of those traders keep regular journals to turn the trading data into actual goals and plans?

What percentage of those traders then tracks their goals and plans and holds themselves accountable them going forward?

Put it this way:  If you pursued greatness in any professional sport, how likely would it be to find success if you worked as hard at that sport as you currently do at your trading?

Could it be that the majority of traders fail to find success, not because they trade the wrong "setups" and styles, but because they pursue performance in ways that could not work in any performance field?  

In an excellent post, Bry Gomez from the Caylum Trading Institute points to a study from the American Society for Training and Development (ASTD) in which the probability of reaching a goal was studied as a function of the level of accountability for that goal.  Simply formulating a goal led to a probability of success of 10%.  Having a concrete plan for reaching the goal raised the odds of attaining the goal to 50%.  Having a specific person to whom you are accountable for the goal--and a specific time set to review performance with that person--led to an achievement rate of 95%.

In other words, it's not simply about having good intentions or even having good goals.  It's about leveraging the power of human relationships to become fully accountable for achieving those goals.  Creating daily report cards of performance and sharing those with peers becomes a best practice that can greatly improve performance, as Mike Bellafiore has observed in the development of traders.

We find our potential when we make life a team sport.

Further Reading:


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Wednesday, August 29, 2018

Tapping Our Inner Resources

In this post, allow me to pose a few questions that strike me as terribly important:


  • What if the depth and breadth of our learning can be magnified many times over by maintaining optimal mindstates?
  • What if our performance--in trading and in life more broadly--could be expanded many times over by sustaining optimal well-being?
  • What if the normal human mindstate is itself pathological and suboptimal, far from the potential of joy, fulfillment, and energy that we're capable of?
  • What if the ways in which we approach each day, designed to get tasks done, are some of the very ways in which we sustain our suboptimal mindstates?
  • What if the usual ways we think about trading psychology are simply shufflings of deck chairs on the Titanic and not ways that can bring about positive transformation of learning and performance?
My most recent Forbes post expands on these questions and offers one technique for maximizing our experience--and our performance.  The important implication is that, to maximize our trading, we need to optimally develop ourselves.  Expanding our experience is like providing our brains with faster, more powerful processors.  The problem is not that we fail to live up to our dreams, but that we dream too feebly and hence never truly awaken to turn dreams into visions and realities.

In coming posts, I will address powerful strategies for expanding our selves as a gateway to making the most of what we pursue in relationships, in careers, and in markets.

Further Reading:

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Friday, August 24, 2018

A Powerful Strategy For Feeding Your Head--And Your Trading Results

Mike Bellafiore at SMB recently wrote about the value of expanding your trading network as a way to accelerate learning and performance.  When traders team up and share ideas and review performance, they turn learning into a social process, which can become enjoyable and motivating in itself.  Most importantly, teaming up increases our sources of learning.  If I take away one valuable lesson from my trading each week, that compounds impressively over the course of a year.  If I take away multiple lessons from colleagues each week, I'm now on an exponential path of growth.

I notice a promising mentoring group for day traders that has formed recently:  My Investing Club.  Another with a long history of success is Investors Underground.  Hedge fund managers have a long history of networking over dinners and drinks, sharing ideas and performance improvements.  What Mike is describing takes networking to another level, where traders become an active, ongoing part of each other's processes.  That occurs regularly on the NYC trading floor and has been an important source of learning and growth for developing traders.

I would like to suggest a deeper reason why this networking works, and it's related to the Sweller quote above.  When we team with others, we gain access to their modes of information processing.  Each of us processes information in different ways, with different strengths.  I may be excellent at processing market information analytically, but I can benefit from others who are well connected and sensitive to shifts in investor/trader sentiment.  Perhaps I'm good at pattern recognition and reading short-term market behavior.  I might benefit from another trader who is excellent at identifying bigger picture market themes.

When we network with others, we process information actively and we typically do so via multiple modalities.  That leads not only to broader learning, but a deeper processing of the material we learn.

This works because it takes advantage of an evolutionary dynamic.  We create many variations when we look at markets in multiple ways through multiple lenses.  We can look at many markets and their interconnection; we can analyze markets quantitatively; we can look for repeating patterns in markets; we can look at the same markets over varying time frames.  All of this expands the number of hypotheses we generate and sets us up to critically sift through these hypotheses, resulting in a greater likelihood of one good idea coming to mind.  By looking at more things in more ways, we activate a kind of intellectual natural selection that results in the few great ideas, the few great trades that can make our week, our month, our year.

One implication of this line of reasoning is that, as traders, we can do a much better job of networking with ourselves.  This means tapping into *our* variety of modes of processing and actively engaging market information in multiple ways:  seeing it, talking it aloud, writing it, studying it.  Networking works, because it literally feeds our brains, creating better cognitive networks.  An underappreciated source of trader failure is impoverished information processing.  In so many areas of life, feeding our heads can feed our bottom lines.

Further Reading:


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Monday, August 20, 2018

Failing With Enthusiasm

Thanks to a savvy performance/trading coach for forwarding an excellent NY Times article on "Talking About Failure".  

Talk about our failures?  For most of us, that's the *last* thing we feel like doing!

The idea makes sense, however.  Not only does talking about our failed ideas and failed trades help us put them in perspective; it also enables us to accept them, learn from them, and put them into perspective.

One exercise I strongly suggest to developing traders is the following:

On your flat or down days/weeks, reach out to other, similar traders who made money on the day/week and learn what they did and how they did it.  Let them talk about their success and see what you can take away as ideas, learning lessons, and goals going forward.  Having one or more trading "buddies" who can openly talk about mistakes and successes helps everyone cement what they did right and learn from what didn't go right.

And if you have no trading buddies?

It's worth reviewing your trading and looking for the plausible opportunities you may have missed.  In other words, if you had been trading your way, at your best, what might you have done differently?  In that situation, you are looking to the ideal trader within you to act as your "trading buddy".  By openly facing your "failure" and using it to prod your ideal trader, you turn setback into learning and opportunity.

The psychology of having flat or down periods is determined by whether you view them as setbacks and defeats versus inspirations, prods, and opportunities for growth.  Churchill had it right:  it's all about failing enthusiastically.

Further Reading:


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