Wednesday, May 15, 2019

Trading Summit: Thursday, June 20th in New York City

Please note:  Unfortunately I had hoped to speak at this event, but I needed to pull out because of an issue with my speaking time.  I apologize for any inconvenience.  I will address the topic of quant edges that come from understanding the psychology of the marketplace soon.  Thanks for your understanding!


Benzinga, in partnership with Traders4ACause, is holding a trading summit in New York on June 20th.  I'll be there and will be presenting from 12:10 - 12:40 PM.  Here is a tentative agenda for the conference.  If you use the Promo Code DRBRETTVIP when you register, the ticket price will be half off.  A portion of conference proceeds will go to charitable causes.

In my presentation, I will be addressing the topic of finding quant edges in the market by understanding the psychology of other market participants.  This enables you to see which way traders and institutional participants are leaning and then use that information to your advantage in a rigorously backtested way.  Some of what I present will share edges that I have found in the market; some will draw upon the excellent work of Rob Hanna from Quantifiable Edges.

The topic of trading psychology usually addresses our emotions and thought patterns and how those impact our trading decisions.  That can be helpful, but it is also possible to take the topic to the next level and identify the edges in markets that come from understanding the psychology of those active in the marketplace.  As Rob's work makes clear, such edges *do* exist.  It's only a question of whether we trade with awareness of them or in ignorance of them.

Thanks for your interest; I hope to see you in the Big Apple!


Tuesday, May 14, 2019

Trading Psychology Techniques - 4: Developing Your Morning Routine

In the previous three posts in this series, we have taken a look at managing our energy for peak performance; testing our trading ideas to provide us with knowledge and confidence in our trading edge; and the do's and don'ts of constructing a trading journal.  To an important degree, these three elements of success can come together in well-crafted morning routines.

I have consistently found, personally as well as in my work with others, that how we live our mornings sets the tone for the entire day.  I've equally observed that how we start our mornings sets the tone for the entire morning.  In life, as on the racetrack, getting off to a good start does not guarantee a win, but getting off to a bad start puts the winning odds against you.

Here's a general rule for successful morning routines:  whatever you are trying to develop in your life overall, make sure it's an active part of your morning.  Whatever goals you have--personally and in your trading:  make those integral parts of your morning routine.  You want the morning to provide an emotionally impactful set of experiences that enables you to sustain the sense of moving forward.

Unfortunately, that's not what many of us do.

Too often, we roll out of bed, shake off the cobwebs, grab some food and coffee, and start our day, whether it's with a commute to work or time in front of screens.  In such a situation, we've gained nothing from our mornings, but we *have* internalized the habit of living life on auto-pilot.  If we live life in routine ways, can we really expect to excel?  If we start our mornings without direction and purpose, can we truly live the rest of our days productively and meaningfully?

Whatever functions you want to develop in your life, exercise them in the morning.  That internalizes the sense of living life intentionally, meaningfully, with purpose.

My mornings typically begin early (between 4 and 5 AM EST), as I follow markets and communicate with traders overseas and prepare either for a day of work at a trading firm or a day of trading and writing.  Here are the usual elements of my morning routine:

 1)  Prayer - In my tradition, there is a wake up prayer that begins Modeh Ani (I give thanks).  The idea is to begin the day on a note of gratitude and spiritual connection.  What I *don't* want to do is begin my day cluttering my head with ego concerns:  things to do, worries about markets, etc.

2)  Cats - If I don't get up early on my own, our four rescue cats pretty well ensure that I'm up to take care of them.  All our cats were either neglected, abandoned, abused, sickly, or some combination of those.  We have socialized them and they have become quite loving, toward us and toward each other.  Each morning I greet them, pet them, change their water, give them food, and clean out their litter.  I take care of them before I tackle any of my personal priorities.  In acting on our values, we cement those as active parts of ourselves.

3)  Quick Market Update and Look at Emails - The evening before, I've updated my market research and formulated tentative ideas and plans for the trading day.  I quickly review market activity during the overnight hours (in Asia and Europe) and, if necessary, do a quick update of my ideas and plans.  I scan emails to see if there is anything pressing and respond as needed.  This is also when I set goals for the day and enter them into my daily calendar.  The calendar ensures that I attend to the things most important, whether it is book writing, attending a class, or getting work done at home.  I often do this update while listening to inspiring music; this is the music I'm listening to at the moment.  

4)  Exercise - This includes time in a massage chair, stretching, weight lifting, and jogging on a treadmill.  The idea is to first warm up and then push my limits, both with strength and  aerobic conditioning.  I keep track of my reps at each station in the indoor gym and my treadmill measures my distance run, pace, heartrate, degree of incline, etc.  I also wear a Fitbit that records my exercise minutes as well as the quality of my sleep, my heartrate, etc.  This helps me be accountable for getting in shape.  I want to begin the day pushing myself, breaking a sweat.  We don't grow unless we push our limits, and we don't push our limits if we stay in our comfort zones and never break a sweat.

5)  Morning Prayer, Meditation, and Reading - Once I've worked out the body, it's time to engage mind and spirit.  It is during this time that I want to be connected to the meaning and significance of what life is all about.  In a very important sense, the prayer and study are to the mind and spirit what the exercise is to the body:  a way of building our capacities.  In the case of prayer and reading, I'm building the capacity for quiet focus and inspiration.  During this time, I engage in meditation exercises for the same purpose.  The goal is to be energy-filled from the exercise, but also centered and focused in tackling the rest of the day.  

6)  Family Time - A longstanding tradition is that I make coffee and bring a small breakfast in bed for Margie.  That is a nice time to connect and start our day.  Usually one or two of the cats will be clamoring for attention at this time, so we spend a little petting and purring time together.  

7)  Following Markets - Here is where I will dig in, update my research, and revise my ideas for the day's trading.  If I've been successful with the prior elements of the morning, I'm usually pretty good at staying open minded for the start of trading, framing my ideas as "if-then" scenarios that tell me what I'll do under various market conditions.  That scenario planning will also incorporate goals that I've formulated from the trading journal the evening before.

8)  Reassessing - Although most of my trades are intraday, I don't want to trade reactively, jumping from one trade to another.  I reassess my plans and scenarios based upon the outcomes of the initial trades I placed.  This enables me to adapt to market conditions (if they are slower or busier than usual; if there has been a breakout or important news), but it also tells me if I need to re-evaluate my views or perhaps double down on them.  Very often, the first trade is smaller, as a kind of feeler in the market, leading me to reassess and place more significant trades based on that learning.  I always want the current trade to benefit from the trades placed most recently.

How you construct your morning routines will of course differ from what I do.  The important thing is to be the person in the morning that you want to be during your trading--and during the rest of the day.  Notice how much of my morning routine has little to do directly with trading, but everything to do with being in the right state of mind, body, and spirit for good trading.  We want to live our mornings with purpose and meaning, and that helps us carry significance to the rest of our day and from day to day.  Inspiration doesn't just come to us.  We create it and recreate it until it becomes a regular and energizing part of what we do and who we are.

The right morning routine connects us with--and strengthens--everything in life that is more important to us than P/L.  It is difficult to get caught up in frustration over missed trades and losses if we are truly grounded in the things that matter most to us.  And it is difficult to get rich in markets if we're living impoverished lives.

Further Reading:


Thursday, May 09, 2019

Trading Psychology Techniques - 3: Managing Your Energy

In the first post in this series, we took a look at the do's and don'ts of creating an effective trading journal.  The second post examined the importance of testing our trading ideas and truly understanding our edge in markets.  When you are on a productive learning curve and when you trade with an edge you understand, you are able to trade with energy and enthusiasm.  Yes, it's important to manage our risk and it's important to manage positions.  In our personal lives, it's important to manage our time and manage our homes and our savings.  Few of these things, however, provide us with energy and inspiration.  It's surprising how few people have reliable processes for managing and growing their energy.

Why is this important?

Energy is one of four key components of positive emotional experience.  The other three are happiness (doing what we enjoy); fulfillment (doing what we find meaningful); and relationships (doing things that bond us to those we care about).  It is difficult to imagine experiencing well-being without a good measure of energy and enthusiasm.  Indeed, research suggests that we are most likely to succeed at work and experience good health if we enjoy a high degree of well-being.

Energy comes from multiple sources:  intellectual stimulation; physical exercise; optimism and inspiration; novel experience; and more.  In a very important sense, energy comes from those other dimensions of joy, fulfillment, and connectedness.  When we are energized, we are most alert, most mentally switched-on, and most able to process information broadly, quickly, and deeply.  It is very difficult to be at our cognitive peak if we are run-down, bored, or otherwise in low energy states.

Perhaps most important of all, it is when we are energized that we have greatest access to our strengths in all areas of life.  Can we truly expect to succeed at trading if we are operating in less than fully energized states?

And yet that is often what I observe:  Traders become so concerned about not losing money, about poor performance, and about trading mistakes that their self-talk becomes profoundly de-energizing.  Think about it:  how often does your trading journal inspire and energize you?  How often is your self-talk during trading breaks optimistic and enthusiastic?  How often are you trading in states of high mental energy (concentration, focus) and high physical energy (aerobic fitness)?  Many times we have processes that guide us in risk management and trade entries/exits, but not in processes that keep us in the right state for peak performance.

A process that manages and maximizes our energy would include at least five components:

*  Ways of taking breaks from trading that keep us alert and renewed;
*  Ways of preparing for trading that keep us positively and constructively focused;
*  Ways of interacting with other traders that keep us informed and inspired;
*  Ways of using our time outside trading to do things that excite and interest us;
*  Ways of using our time outside trading to stay physically fit and energized.

How many of these five cylinders are you firing on from day-to-day, week-to-week?

If re-reading your trading journals and re-viewing your trading day doesn't energize you, you know you're operating outside your peak performance zone.

Further Reading:


Sunday, May 05, 2019

Trading Psychology Techniques 2: Testing Your Trading Ideas

In the first post in this series, we took a look at the do's and don'ts of keeping a trading journal.  This post tackles a very different skill essential to trading success:  testing your trading ideas.

You might be asking WTF?!.  How is testing trading ideas a trading psychology technique?

The sad truth is that a substantial portion of trading (and trading psychology) problems stems from trading sheer randomness.  Traders convince themselves they see a pattern in price action, earnings, macroeconomic data releases, indicators, etc. and they act upon that pattern without testing its validity in any fashion whatsoever.

I recently met with a trader who was frustrated over losing money.  The trader described a trade where one price bar made a lower high and lower low than the bar previous on increased volume.  He inferred that a decline was underway, waited for an uptick to enter, and then stopped out when his entry bar took out the highs of the previous two bars.  He complimented himself on his risk management (i.e., honoring his stop out level), but said he was frustrated because his "setup" didn't work.  He concluded that he needed to be more "patient" with his entry and wait for weakness within the current bar before entering his position.

My approach to helping the trader was a bit unorthodox.  I downloaded data for his symbol and created a database in Excel.  I coded with 1's versus 0's all instances in which the current bar made a lower high and lower low than the bar previous on increased volume.  I then assessed the forward returns (over the next 1-10 bars) for the "setup" group versus all other occasions.

There was no difference whatsoever.

The pattern being traded was not predictive.

So here we have a situation where the trader is diligently working on his trading psychology (keeping a journal, observing his losing trades, making plans for improvement), but his psychology is not the primary problem.  His  frustration and discouragement stem from the fact that the ideas he is trading lack a foundation in objective reality.  Imagine if a person played roulette at a casino and placed bets on numbers corresponding to the birth dates of family members.  That person then becomes frustrated and stressed because his system is not working!

(To take the analogy further, imagine a "gambling coach" who emphasizes to the roulette player that he needs to maintain a calm focus and stick with his system in a disciplined manner.)

How many traders trade sheer randomness, only to have mentors and coaches insist that there is an "edge" and that the key to success is faithfully following the system?

That is not just bad trading.  It is a clear waste of time, energy, and resources.  When someone trades randomness and can't obtain results, they *should* get upset!  What is delusional is continually getting one's hopes and confidence up and "working on trading" by tweaking utter randomness.

There is, however, a more subtle problem associated with the lack of testing for ideas.  The great majority of traders aren't really crazy, though I may occasionally question their sanity.  They realize that their ideas are untested, and they can't truly explain *why* the patterns they trade should produce an objective edge in the marketplace.  As a result, they never develop confidence in what they do, even when the ideas are seemingly working out.  It is the cognitive grasp of why trading signals are valid that leads to the development of true conviction.

There are two ways of testing trading ideas:  1)  backtesting over multiple independent data samples (to make sure any single backtest isn't spurious) and 2)  establishing an objective track record in simulated and real-time trading that demonstrates, over multiple time periods and market conditions, results significantly better than random.  Ideally, the first way of establishing the value of an edge leads to the second, so that backtests are validated in real time.  

The bottom line is trading ideas that you've worked with and tested provides an unparalleled--and reality-based--foundation for your trading psychology.  Testing also tells you what doesn't work--and that can lead to a deeper understanding of hidden edges.  Sadly, there are many traders who insist that they will succeed in their trading through sheer passion and willpower, when in fact they display all the signs of a trading addiction.  You would never purchase a car without giving it a test drive; your trading deserves nothing less.  It is not enough to rely on the promises and claims of peddlers offering the next best trading scheme.  Test before you invest your precious time and money.

Further Reading:


Thursday, May 02, 2019

Trading Psychology Techniques - 1: Keeping a Trading Journal

As mentioned in the previous post and the recent Forbes article, I will be posting a series dealing with research-backed methods for improving both our psychology and our trading performance.  I am doing this because so much of the writing I see in the area of trading psychology is long on what to do and short on how to do it.  This series will focus on the how-to's, to help traders better coach themselves.

The focus of this post is on the proper construction and use of trading journals.  Several evidence-based approaches to psychological change make substantial use of journaling, including cognitive therapy.  Like many cognitive-behavioral methods, journaling can improve our self-awareness, making us more mindful both of what we are doing well and what needs improvement.

Traders often keep journals, but in ways that are not especially helpful.  A few common journaling mistakes are:

1)  Inconsistency - Journal entries are sometimes detailed, sometimes sketchy.  They are sometimes more frequent, sometimes less frequent.  The trader lacks a consistent journaling process.  The frequency of the journal is often out of line with the frequency of trading.  If traders are making multiple decisions per week, for example, it makes sense to keep a weekly journal.  If the trader is making multiple decisions daily, a daily journal will be useful.

2)  Isolation of Entries - A trader writes a journal entry one day, then the next day, then the next.  Very often, the entries do not reference one another:  they are written in isolation.  As a result, the trader gets little cumulative benefit from the journal process.  It is very common that traders never look over journal entries from a week or a month ago, and thus don't fully learn from experience.

3)  Focus on Reporting - The trader's journal entries report what happened during the day--sometimes in detail--but spend relatively little time analyzing why these things happened and what they can learn from them.  The journal ends up being more descriptive than prescriptive.  The journal as a reporting tool is not necessarily a performance-building tool.

4)  Focus on Venting - The trader's journal expresses frustrations and focuses on things that went wrong, mistakes made, etc.  There is little time spent on what the trader did well, and there is little constructive writing about how the trader could correct the mistakes.  A useful journal is a constructive journal; it isn't mired in negativity.

5)  Narrowness of Focus - The journal focuses mainly in one or two areas, not with trading overall.  For example, the journal may focus on psychology and not actual trading decisions.  The journal might focus on entries and exits, but not position and risk management.  It is uncanny that the areas left out of journals are often those most important to work on!

So, what are some best practices regarding the keeping of journals?

1)  Frequency - Note that, in cognitive therapy, people keep journals daily and make multiple entries per day.  They write in the journal as soon after significant events occur.  That allows them to observe what happened, how they processed the event, how that processing impacted them emotionally, and how they might process the occurrence differently and more constructively.  By journaling often, the person becomes very aware of their thinking and grows in the ability to address problem patterns before they occur.  The frequent journaling becomes a tool for building positive habit patterns.  

2)  Backward and Forward Looking - The ideal journal entry notes something distinctive that was done right or something distinctive that needs improvement.  In both cases, the focus in on clearly identifying what was done right or wrong and why it was desirable or undesirable.  Then the journal entry looks forward to identify a concrete goal based on the observation and a specific plan for implementing that plan going forward.  For example, the journal entry might identify a way of scaling into a position that was very effective in several trades.  This becomes a concrete goal to implement going forward, perhaps with a position management checklist to be used in coming trading sessions.

3)  Reviewing as Well as Viewing - If the journal entry sets a goal and a plan for reaching that goal, the next entry should spend some time reviewing how well the goal was reached.  If the goal wasn't fully met, modifications in plans can be made going forward.  If the goal was reached, there might be some reflection on how to make the improved practice part of an ongoing process.  If a goal is worth setting, it's worth implementing and reviewing!

4)  Keeping it Doable - Focused goal-setting and review is more effective than scattershot approaches to change.  You might want to work on one main goal per week or month, depending upon the frequency of your trading.  You don't want journaling to become unduly burdensome, and you don't want to be setting different goals every day, never truly building changes into robust habit patterns.

I like keeping journals in apps that allow you to share the entries with teammates and colleagues and that allow you to tag entries and sort through them during your reviews.  As I mentioned in a previous post, an app like Evernote allows your journal to become truly multimedia and interactive.  Pulling up all your entries on a given topic, such as risk management, is a great way to track your progress and learning.  At SMB, for example, trading journals structured as daily report cards are routinely shared with mentors to facilitate feedback and learning.

The bottom line is that the focus should be on journaling as an ongoing learning and performance-enhancement process.  Keeping a journal has minimal value unless it is part of a cumulative process of assessment and deliberate practice.

Further Reading:


Monday, April 29, 2019

Trading Psychology: How to Improve Your Trading Results

Many traders focus on their results--their P/L--and never make the process changes that could lead to sustained results.  A great deal of writings in the area of trading psychology emphasize the changes that traders should make--not actual techniques traders could employ to make those changes.  When I wrote The Daily Trading Coach, the idea was to create a "cookbook" that would help traders coach themselves, using established, proven techniques from applied psychology.

It's time, however, to update those "how-to's".  In the most recent Forbes article, I explain how evidence-based approaches to short-term therapy can be adapted to help us achieve peak performance in our trading--and in our personal lives.  This is a major development in psychology.  Until recently, change techniques have been used to help troubled people reduce their problems.  They have equal value, however, in achieving positives as "therapies for the mentally well."

In future posts and presentations to trading groups, I will be elaborating the how-to's of trading psychology, drawing upon techniques proven in their effectiveness based upon outcome research.  (This book, which I wrote/edited with two colleagues at the medical school where I teach, reviews the research going into each of the methods.)  Three of the specific approaches are covered in the Forbes article and will be a starting point for future posts:  behavioral techniques; cognitive exercises; and solution-focused methods.  As always, thanks for your interest and support!

Further Reading:


Friday, April 26, 2019

Follow Your Joy...And Your Pain

The SMB Blog recently posted its 10 top trading tweets of the week.  There are excellent insights here, including reflections on "What I Wish I Knew Before I Started Trading".  One of the tweets pointed to the importance of feeling pain when we're trading poorly.

This past week, I've been teaching psychology and psychiatry trainees in techniques for helping people make changes.  A major theme I've touched upon is that, in our normal, routine states of mind, we tend to think routine things and engage in routine actions.  If we're looking to make changes, we need to get out of our habitual consciousness and access new ways of experiencing ourselves.  Interestingly, joy and pain are both helpful in that regard.

When we feel joy and gratitude, we focus on what we've done well; when we feel pain, we focus on how we've fallen short of our ideals.  Both states of mind cement our perceptions and help them stand out from routine.  We change via powerful emotional experiences, not simply by writing things in journal and talking them aloud.  

Many of our most powerful learning experiences occur in the context of meaningful relationships.  The experiences we provide our children as parents; that are part of our romantic relationships; and that occur in counseling and therapy are processed deeply because of their emotional power.  Because they are also part of ongoing relationships, we achieve the repetition that helps us internalize those new experiences of ourselves.  Many of our most powerful changes occur within the context of (new) social roles.

What is your relationship with markets?  How do you experience yourself in your trading?  What emotional experiences are you internalizing over time during your trading?  There is a role for joy in trading and a role for pain.  Both help us learn from our experience and, together, they help keep us confident and humble.

Further Reading:


Friday, April 19, 2019

Becoming Your Best Self

In coaching, counseling, and therapy, people typically try to change the "texts" of their lives: their thought patterns, habit patterns, etc.  But what if our greatest changes come from shifting, not texts, but contexts?

In the most recent Forbes article, Aries, the black tabby cat, poses an interesting thought experiment:  

Suppose a movie is going to be made of your life.  Is it a film you would go out of your way to watch?

The sad truth is that most of us are living good lives, but not adventuresome ones; not ones that we would be proud to have made as books or movies.  

The article poses a unique perspective:  perhaps we are operating at states of energy and in environments that fail to bring out our greatest strengths.  If you're trading and living with less than movie-worthy adventure, perhaps this is not because you lack discipline or proper self-talk. 

Perhaps, like Aries, you need a change of context.

Further Reading:  


Tuesday, April 16, 2019

A Formula for Trading and Investing Disaster

Many problems of trading and investing have a simple source:  People follow the markets on a different time scale from their intended holding period.  Typically this means becoming psychologically attached to shorter-term movements up and down and not holding positions as initially intended.  The general rule is that, as pattern-recognizing beings, we will find patterns in whatever time frame we follow.  When our egos become attached to the patterns we perceive, we act on what we see at the moment and fail to maximize our trades and investments.

Imagine the same problem in relationships.  We could become very invested in each new, interesting person we meet and thus never follow through on cultivating any single relationship deeply.  In making short-term dating "trades", we would never truly invest in relationships.

Hanging on every tick in markets, making P/L a daily focus of attention, is a recipe for trading and investing disaster.  If we follow markets closely, that will be reflected in our actions.  Inevitably, we act upon what we see.

The answer to this challenge is not "discipline" or ever-louder exhortations to control emotions, follow plans, etc.  The answer is to not allow ourselves to become slaves to the screens and, instead, only follow markets when we have specific trading decisions to make.  Away from screens, we need to find fulfillment in a wide range of personal, social, and creative activities so that we don't try to impose those needs upon markets.

Too often, we "overtrade", not because our markets are full of opportunity, but because our lives are otherwise empty.

Further Reading:


Friday, April 12, 2019

Four Essential Ingredients of Trading Success

One of the great experiences I've had as a trading coach at a variety of trading firms is the opportunity to witness, first hand, what goes into sustained success.  Here are the four success ingredients I've noticed among top performers across different markets, time frames, and types of trading:

1)  A big picture perspective that indicates opportunity - I refer to this as "the idea".  It could be one asset mispriced relative to another one; an asset mispriced relative to changing fundamental information; a shift in momentum and market flows; etc.  Very often, this idea has been backtested or at least has objectively demonstrated its value in real time trading.

2)  A near-term perspective that provides a bet with superior risk/reward - I refer to this as "the trade".  The trader sees an opportunity to act upon the idea in a way that has limited downside (risk) and greater upside (opportunity).  Very often the trade reflects the lining up of short-term (market flow) information with the longer-term perspective.

3)  A methodology for sizing and managing positions, providing risk management and the management of opportunity - This amounts to bet sizing, so that the trader is taking proper advantage of an opportunity without courting undue losses and risk of ruin.  Very often, the successful trader will update bigger picture opportunity and near-term risk reward during the life of the trade to size up positions and/or scale out of them.  This allows them to lose less when ideas and trades are wrong and make more when they play out.  The successful trader very often displays average win sizes larger than average losses.  

4)  A framework for adapting trading to changing market conditions - The successful trader views the opportunity set as dynamic and will typically run periods of higher and lower risk taking as a result.  There is a regular process of taking in new information and feeding that into both ideas and potential trades.  This requires an openness to new data and the capacity to make changes in trading approaches in real time.  For example, a trader may emphasize directional, momentum opportunities in one type of market and relative value or "mean reverting" opportunities at other times.

Very often, trading problems result from overemphasizing one or two of these elements at the expense of others.  For instance, a trader may place great emphasis on big picture fundamentals and longer-term market opportunities, but lack an awareness of near-term flows to obtain good risk/reward trading opportunities.  Or a trader may focus on short-term "setups", but lack coherent ideas regarding why the asset should move as expected.  Or the trader will see good opportunities, but will fail to adequately capitalize on them through proper sizing and position management.  And, of course, many traders keep doing what has worked well after market conditions change, failing to adapt to shifts in the opportunity set.

When traders don't have an adequate grounding in all four areas, their performance is impaired and this can create psychological frustrations that further interfere with decision making.  In such cases, traders often look to psychology for answers to their trading woes, when in fact they need to make process improvements in one or more of the four areas above.  This is why mentoring is so powerful:  you can see, first hand, how the successful trader blends these success ingredients.

Further Reading:


Sunday, April 07, 2019

Can This Market Go Higher Still?

Well, I have to say that the current rising market has not felt orgasmically great for many participants.  It was a very challenging V bottom in late December and those hoping for a substantial pullback to enter an uptrend have watched the market move higher in January, then February, then March, and now early in April.  I speak with a number of traders, and I have to say I observe little euphoria.  If anything, the sense is frustration at not having participated in the rally.

So can this really continue?  Can the market go higher still?

My aim is to examine the evidence in as open-minded a manner as possible.  I want to be open to weakness and strength, bear and bull possibilities.  And, perhaps most of all, I want to openly acknowledge when my research shows little directional edge.

Back in September, we were seeing growing weakness across a number of sectors and a cumulative uptick/downtick line that could not make new highs despite fresh highs in the large cap indexes.  That led me to question the upside.  Conversely, in early March, I took a look at what happens after a year starts with consecutive strong months and found a surprisingly bullish outlook.  A couple of weeks later, my look at that uptick/downtick line reinforced the upside view.

Well, that line has continued to make new highs.  There are no signs of divergence as occurred at the 2018 peak.  Moreover, we're not seeing any expansion of short-term new lows, as happened late last year.  Indeed, fresh one-month new lows across all exchanges (as reported by have been quite low, which historically has led to bullish returns on a next 20+ day basis.  Usually, if there is going to be significant weakness, we see some sectors lead the way down, as housing did in 2007.  That weakness just isn't present at this time.

I noticed an interesting event at the Friday close.  Over 80% of all SPX stocks closed above their 3, 5, 10, 20, 50, and 100-day moving averages.  (Data from the excellent site).  That is very broad strength.  Going back to 2006, we've only seen 23 similar occurrences--and none since 2013!  Many of those occurrences were seen in 2009 and 2010 and then again in 2012 and 2013 during protracted rises following market weakness.  Indeed, if we examine those 23 occurrences over the next 20 and 50 days, we find 17 occasions up and 6 down for both time frames.  The average 20-day gain was about 1.5%.

What this says to me is that we're seeing significant upside momentum in stocks.  Historically, such momentum has led the market higher, though not necessarily at the same rate previously seen.  The main takeaway is that we can't conclude that we're heading lower simply because we're "overbought".  Whether we think the valuations are justified or not, whether we like macroeconomic forecasts or not, equities have found meaningful demand.  Perhaps that's not so surprising in a world of low interest rates and tepid growth:  U.S. stocks may offer some of the few havens for yield and growth.  It may also be the case that the stock market, which has been kindly disposed to the current U.S. administration ever since the 2016 election, could display similar behavior should odds of re-election increase.

In any case, we're seeing broad strength and few signs of weakness.  A normal correction, given low levels of volatility and volume and the fact that stocks making new 52-week highs are not expanding, is clearly a possibility.  If the mood of participants that I speak with is indicative of a more general mood, any such pullback may find interest from frustrated traders late to the party.

Further Reading:


Friday, April 05, 2019

Reading the Relative Volume of the Market

Above we see a chart of SPY (five minute increments; blue line) over the past two trading days (4/3 and 4/4).  In red, we see the relative volume of SPY.  This is the ratio of the current trading volume to the average trading volume for that particular five minute period.  So, for example, the spike in relative volume at 13:50 PM for 4/3 tells us that the volume traded was five times the average volume that we've seen during that 13:50 - 13:55 PM period.  Conversely, during the prior topping period, note that volume was only half or so the expected volume for those time periods.

With relative volume, we can readily identify:

a)  Whether rising or falling prices are attracting trader interest;
b)  Whether larger institutional participants are active through the day;
c)  Price levels associated with unusually low and high volume;
d)  How the market behaves subsequently at those price levels.

It is not unusual to see cycles of varying duration in which falling prices attract volume (puking) and rising prices see volume dry up.  This pattern occurred on a large time scale during 2018 and during shorter time periods such as above.  Skilled traders can detect transitions in the relationships among price change and volume change to profit from cyclical movements that capture bull and bear psychology.

Further Reading:


Wednesday, April 03, 2019

Why It's So Tough To Get Bigger In Your Trading

A common view is that our psychology is a prime determinant of our trading.  If we can master our psychology and follow our plans, we should be more consistent and we can trade larger.  Profits should flow.

I beg to differ.

What if the direction of causality is the reverse?  What if it's markets--and our trading of them--that impacts our psychology?  What if it's the markets themselves that make it difficult to get bigger in our trading?

One thing I've noted so far in 2019 is that many, many market participants are not doing as well as they might have predicted they'd do in a trending stock market environment.  That includes portfolio managers who invest in stocks, as well as traders who move in and out of stocks.

Why might that be?

I propose that the central challenge of recent markets has been the relative instability of market volatility. 

Here is a stark comparison:  During January, SPY averaged a daily volume of a little over 97 million shares.  During March, that average daily volume dropped to 80 million shares.  Daily volume ranged in January  from a high of 144 million shares to a low of 59 million shares.  Daily volume in March ranged from 122 million shares to 56 million shares.  Yesterday's volume was around 40 million shares.

Why is this important?

Since the start of the year, the correlation between daily volume in SPY and the daily true range of SPY has been .81.  In other words, well over 60% of all market volatility has been a function of volume traded.  Volume has been declining over time and this has helped account for a VIX that has moved from about 23 to 13 thus far this year.

But that's only part of the issue.

The standard deviation of daily true range in 2019 has been half as large as the average true range itself.  That creates a situation in which, during March alone, we can have days with ranges as much as 1.99%, 1.82%, 1.64%, and 1.52% and as little as .40%, .42%, .48%, and .49%.  In other words, volatility itself has been volatile.  Using recent history to gauge how much the market can move in the near term has been quite difficult.

But, wait, it gets worse.

I maintain my own measure of "pure volatility" which assesses the average amount of movement per unit of trading volume.  It tells us how much "juice" we can expect for every amount of volume traded.  So far in 2019, that pure volatility measure has been more than cut in half.  So not only are we getting less trading volume; we're getting less movement for each unit of volume traded.  This helps to explain why traders feel as if volatility has gotten "crushed".  It's a double-barrel effect:  less volume and also less movement for every unit of volume traded.

And it gets worse still!

During the past month alone, pure volatility has declined by well over 50%.  In the past month, we've had readings above 17 and readings around 10.  So not only is volume shifting quite a bit from day to day; the amount of movement created by that volume has been shifting.  That makes it very difficult to estimate how much a market can move going forward.

If we have instability of movement, it is extremely difficult to set rational stop out levels, price targets, place to add to or reduce positions, etc.  That makes it tough to manage positions and maintain favorable risk/reward--and it also makes it difficult to size up positions.  Just when traders think they have a stable environment and make some money, they size up their trades, only to have volume and volatility shift--and potentially work against them.  

Imagine a football quarterback playing a game on a field where the weather changes radically from quarter to quarter, minute to minute.  The running plays that worked well in the first quarter when conditions were dry now work poorly when the field is wet.  The passing plays that worked in warmer temperatures become harder when it's very cold.  Yes, the quarterback would get frustrated and lose confidence, but the fundamental problem is not one of psychology.  The quarterback needs a real time meteorologist, not a shrink.

Very few traders that I know have real time tools to help them gauge the volatility environment of the stocks, indexes, or markets they are trading.  As a result, they assume that patterns observed in the recent past will persist in the near-term future.  My analysis of volume, volatility, and pure volatility suggests that this is a faulty assumption.  The equivalent of the quarterback's real-time meteorologist would be real-time tools to assess who is in the market, what they're doing, and how that is impacting price movement.  From this regularly updated information, we could make more informed decisions about price targets, sizing, etc.  

It is not clear to me that staying calm, focused, and composed and sticking to pre-existing plans is a formula for success, either on changing football fields or in radically shifting markets.  In fast-changing circumstances, we need to develop the ability to think, plan, and execute on the fly--and we need the tools to help us make continuous adjustments.

Further Reading:


Sunday, March 31, 2019

What Is YOUR Self-Talk?

The latest Forbes article makes the case that self-talk is destiny.  How we process the world--and how we talk to ourselves about ourselves and world--shapes our reality.  That, in turn, defines what we experience as possible and impossible and shapes our actions.  Nowhere is this more true than in trading, where we are constantly dealing with issues of being right and wrong, uncertainty, and making/losing money.

If you click on the above graphic, you'll see a matrix that describes four styles of self-talk.  These styles can be positive or negative in their emotional tone and they can either increase or reduce the energy available to us.  Let's take a look at the four styles and what they might mean for you:

Challenging - This is self-talk that pushes us to do better, do more, and tackle new and larger goals.  

Worrying - This is self-talk that anticipates negative outcomes in the future, triggering fight or flight responses.

Calming - This is self-talk that reassures and puts things into perspective, dampening negative feelings and keeping us focused.

Self-Blaming - This is negative self-talk directed against oneself, dampening initiative and generating depressed feelings.

Clearly, at different times we may engage in different self-talk.  Much of trading psychology talks about dealing with negative emotions (worry, frustration, self-blame) and ways of sticking to trading plans (calming, focusing).  That is an important shift.

The Forbes article adopts a different perspective, however.  Just as we are in danger of living lives that are too sedentary (creating health risks), we can adopt mindsets that are too sedentary.  Many of us can deal with adversity by calming ourselves and avoiding undue worry and self-blame, but not many of us consistently talk to ourselves in challenging and energizing ways.

Take a look at the work of Emilia Lahti and David Goggins cited in the Forbes article.  These are peak performing professionals who have used unusual physical challenges to push their mindsets to redefine what is possible.  A useful exercise is to listen to a David Goggins video clip and think of his talk as your self-talk.  This kind of challenging talk is often found in athletic settings and in the military, but rarely do we see it in office settings--and rarely do I find it on trading floors.

It's great to reassure ourselves, accept losses, and find learning lessons in our setbacks.  That is necessary for a solid trading psychology, but is it sufficient?  If our self-talk is not intensely challenging, how will we intensively tackle new challenges?  A calm mindset is helpful at times, but sedentary calm will never rouse us to do better, do more, and throw ourselves into challenges that expand who we are and what we can do. 

How inspiring and challenging is your self-talk?

Further Reading:


Wednesday, March 27, 2019

Three Reasons It's So Difficult to Succeed at Trading

We all have heard the statistics:  the very low percentage of market participants who ultimately make their livings from their trading.  Here, from a trading psychology perspective, are three reasons why sustained success is so elusive:

1)  Markets are ever-changing - It is common for a trader to find success with a particular strategy (such as trend/momentum trading), only to lose money consistently when market conditions change.  The successful traders I've known find multiple ways to win, which provides them with diversification and ways of succeeding across market environments.  But that requires research and the ability to continually acquire new sources of edge.  Many people are interested in trading; not so many in continually learning and adapting.  The challenge is not just succeeding in trading, but sustaining success.

2)  Trading requires the ability to navigate a contradiction - Trading is all about making money, and yet it is the focus on money that leads to many of the behavioral mistakes of money management.  The more we focus on making more and trading larger, the more we can overtrade and trade reactively.  The best traders I've known are idea focused, not primarily focused on profits and losses.  What attracts many people to trading is precisely what needs to be put aside in order to succeed.

3)  Markets are more efficient than ever - Strategies described by great traders of the past simply do not work any more.  With so much computing power devoted to markets at every time frame, it's unlikely that one will find success by looking at the same charts, indicators, and data series as everyone else.  I'm seeing many traders succeeding by focusing on less efficient markets and more specialized trading strategies.  At some point in time, making a living from gold mining in California became very difficult.  The easily accessed ore was already mined.  That required going to new areas and utilizing new mining techniques.  Many traders seek success by doing what others are doing.  That's like digging for gold where everyone else has been digging.

There are many would-be pundits and gurus talking about sure-fire ways of making money in markets.  Very, very few provide verified track records of their success.  The reality is that it is quite difficult to succeed at trading, just as it's difficult to make a living from playing a sport or from singing and dancing.  It's fine for the developing trader to have eyes on the stars as long as they also have feet squarely on the ground.

Further Reading:

Friday, March 22, 2019

Overnight Versus Day Performance in SPY: What It Might Mean For Your Trading

Note the blue and red lines in the chart above.  If you were to just look at those, you would conclude that they are totally separate instruments.  Trend is different.  The volatilities of the time series are different.  And yet, they represent a single market:  the SPY ETF of U.S. stocks.  The blue line represents cumulative price changes during the overnight (from each day's close to the next day's open) and the red line represents cumulative price changes during the day session (each day's open to the same day's close).  

What can we infer from these time series?

Much of the overall upward trend in stocks has been expressed during overnight and pre-market hours in response to overseas buying and buying in response to pre-opening data releases.  Day traders have not participated in the general upward drift of stocks over the past 15 months.

Flows from overseas impacted by the returns from international markets are markedly different from flows dominated by U.S. participation.  The series is dominated by the trade during the last quarter of 2018, when U.S. participants bailed out of stocks relative to non-U.S. participants.  Much of the rebound so far in 2019 has been those U.S. participants jumping back into stocks.

Swing trading has been difficult because these time series are independent.  We cannot assume continuity from day periods to overnight periods.  The correlation between price behavior during the day and during the overnight has been -.03.  For this same reason, investors managing risk very tightly can easily get stopped out when trading in one period fails to follow through with the action of the previous period.  

I will hazard yet another perspective:  Recent trading in U.S. stocks has been dominated by the herd behavior of equity and macro funds.  Those funds, spooked by seeming Fed tightening, began selling in 2018 and then accelerated their selling to retain profits for the fiscal year.  When the Fed emphasized "patience" in its rate and balance sheet policies, those funds were underinvested and needed to gross up their exposures to generate performance for the new year.  

Interestingly, we're starting to see divergences in behavior among sectors, with banks, industrials, and small caps underperforming.  That may be an initial indication that the herd might be behaving in less herd-like ways going forward.  At some point, the fundamentals of individual companies and industries will begin to matter once again.