Wednesday, October 16, 2019

How To Make Meaningful Changes In Your Trading

The above observation seemed to resonate with a number of attendees at the recent Traders4ACause conference.  It's not enough to write a journal and express written goals.  If you're not making daily efforts at change, change never occurs.

This is a very important principle.  Ultimately, everything we do is practice.  We are either practicing the right thoughts and behaviors or we are "practicing" the wrong ones.  We always internalize our experience.  It's when we tackle change on a daily basis that the change becomes part of us.  The great enemy of change is procrastination.

So how do we overcome procrastination?  As long as the prospect of change feels as though it will *consume* energy, we'll find ways to avoid it.  We're wired to conserve our limited energy supplies.  If something doesn't feel like a necessity, we tend to put it off.  

The key to undertaking daily changes is to find a framework for pursuing your goals that *gives* you energy.  That means framing goals in inspiring ways.  It means finding the right social support for your goals.  It means emotionally linking to the trader--and person--you ultimately want to become.  This is why "discipline" alone will not bring you to your life goals.  Ultimately, it is *how* we pursue our goals that determines whether they are energy-renewing or energy-draining.

Traders often wonder why they aren't improving.  After all, they're putting in screen time and journaling their results! But that approach wouldn't facilitate change in any field.  You could spend endless hours playing chess and keep summaries of your games, but nothing would change.  The real chess masters literally replay every one of their games and review in great detail what they could have seen differently, which moves they could have made.  In the process of extensively reviewing many, many games, they internalize new ideas.  They get far more experience than grandmaster wannabees because they pick apart each game and figure out how an expert would have set a strategy and put it into practice.  Move. By. Move.

That replaying of the game is a process of discovery.  You learn to see new and different things and identify new, promising areas of opportunity.  That is *exciting*; it gives energy.  So often we procrastinate because we approach the change process with no sense of urgency, enthusiasm, or inspiration.

The motivation to trade is very different from the motivation to learn trading.  You can learn quite a bit from money managers and traders by observing them outside of market hours.  It's the productivity of the non-trading hours that determines the ultimate level of mastery achieved.

Further Reading:


Saturday, October 12, 2019

Our Experience Is Who We Become

Riding on the plane on the way to Las Vegas and the Traders4ACause gathering, I had an interesting thought that I quickly tweeted:  What if all our usual assumptions about coaching, counseling, therapy, and psychology miss something essential?  What if the most important thing is not to use our thoughts, actions, and insights to change how we feel?  Rather, what if emotion itself is our gateway to change?  What if our feeling states are what we internalize over time?  

A lot of things begin to make sense if this is the case.  It's why psychological change has been linked to "corrective emotional experiences", for example, and why traumas can be so life changing.  We internalize our experience, which explains why the quality of home life is so important in a child's development.  

In the most recent Forbes article, I review fascinating new research in what is called "prospection":  our ability to connect our present selves with our futures.  It turns out that some of us are relatively "farsighted":  we are able to live our present lives in ways that connect deeply to our future.  Others are more "nearsighted", making short-term decisions that never build their desired future.  As the article explains, it's our emotional connection to the future that enables us to operate in farsighted ways.

So let's put these two ideas together:  1) we become our experience; and 2) our connection to the future enables us to achieve it.  I suspect it's a bit of what Ayn Rand had in mind when she noted that anyone who fights for the future lives in it today.  To achieve a positive, successful, fulfilling future, we must experience those things today--and each day.  The future is like a beautiful building:  once it is visioned, it is assembled stone by stone, wall by wall.  Too often, we fail to build our future because we're not spending our days laying bricks.

If this is correct, much of traditional trading psychology is wrongfooted.  It's not simply the negative emotions we tend to emphasize--fear, greed, and frustration--that undermine performance.  Rather, it's psychological nearsightedness.  In focusing on processes, discipline, and short-term performance, we fail to emotionally connect to our futures.  Take a look at your trading journals; take a look at your conversations about your trading and about markets:  How much fulfillment is expressed?  How much accomplishment?  How much excitement and enthusiasm over learning and discovery?

Identify all your communications about your trading:  from your self-talk to your journals to your conversations with others.  The emotional tone of those communications is what you are in the process of becoming.  Each piece of self-talk, each journal entry, each conversation is a brick you're laying in the structure that is tomorrow.  Can we truly expect to internalize success and satisfaction if those aren't daily parts of our experience?  How ironic it is that we spend our time worrying about "missing out" on trades when that is precisely the kind of preoccupation that misses out on our future.

Further Reading:

Thursday, October 10, 2019

Understanding the Psychology of the Market

It's been a somewhat frustrating recent market for traders holding positions.  We've had good volatility, but not great directional trending.  That can create choppy conditions, where the chop is occasionally violent.  What I've found is that markets that traders call "choppy" (and thus imply that they're not tradeable) are often ones that display cycling behavior.  Another way of saying that is that markets that don't exhibit good momentum can display good mean reversion (value) behavior.  It's all about identifying the market environment and adapting the trading to the behavior of market participants.

Above we can see recent action in the ES futures, with volume traded at the offer price minus volume traded at the bid price captured in the middle panel of bars.  At the bottom is an exponential moving average of the volume distribution, capturing when bulls have been more aggressive (lifting offers) and when bears have taken control (hitting bids).  Note the cyclicality of that behavior; note also the volume traded at each price point (left bars) and how we could not sustain a break below the value area during overnight trade.

All relevant to the psychology of the market.

I'll say something that is a gross generalization, but fits my experience.  Beginning traders struggle with their own psychology; experienced traders struggle with the psychology of the markets.  There are many tools out there that can help us read other players in the market better.  Right now I'm playing with uptick/downtick measures (like NYSE TICK) that are specific to the Dow stocks; the NASDAQ stocks; the S&P 500 stocks; the NYSE shares; and the Russell 2000 stocks.  

When we see significant upticking or downticking in one universe of stocks but not others, that says something about rotation and the perceptions of market players.  When we see all elements of the universe upticking or downticking at the same time, that says something quite different.  The pattern of upticking and downticking across various segments of the market reflects important distinctions between momentum/trending markets and mean-reverting/value ones.

Meanwhile, beginners look at price charts and fret about their own psychology.  Perhaps they're experiencing turmoil because what they're looking at does not adequately capture the psychology of the marketplace.  It's not that they're playing the game poorly; it's that they're playing the wrong game.

Further Reading:


Monday, October 07, 2019

Maximizing Your Trading Perception

A common mistake I see traders making is looking at many screens, with little deep thinking with respect to any of them.  Very often, what they're doing is scanning for "setups", not achieving an understanding of what is happening in the market.  In other words, they're frantically looking for trades rather than truly developing ideas.

If you click the above, you'll see a real-time screenshot of what I was following in the ES futures just an hour or so ago via Sierra Chart.  Each bar represents 5000 contracts traded.  The middle study captures the balance of volume that occurs at the offer price vs. at the bid.  The bottom study is simply a moving average of that bid/offer volume information.  At the left, we can see horizontal bars that display the volume traded at each market price, in a Market Profile-like fashion. Note how, in the overnight session, we've attempted to establish support around the 2937 point of control level (the price at which most volume has transacted) and are now probing the upside.  Seeing selling pressure drying up at that point of control suggested that we were not establishing a new value area and could probe the upside, creating a nice risk/reward trade.

But you had to have that information to frame the idea; you had to understand the relationships between volume and price in Market Delta and Market Profile frameworks; and you had to be awake and alert around the London open to actually see what was going on.  Our trading perception shapes what we will process, and our processing shapes our understandingHigh confidence trading comes from deep understanding.

Further Reading:


Friday, October 04, 2019

Changing Negative Trading Behaviors

I'm looking forward to the upcoming Traders4ACause conference, where I'll be doing something new.  Instead of talking to the group as traders, I will speak with them exactly the same way I talk to the psychology and psychiatry trainees I work with at Upstate Medical University.  In other words, I will teach the group literally how to act as their own therapists, using research-based techniques for dealing with problem emotions and behaviors.

A key idea is that before we can change any pattern of thought, feeling, or behavior, three things have to happen:

1)  We have to become better at recognizing the pattern occurring in real time;
2)  We have to switch our mindset so that we can approach the situation in a different way;
3)  We have to make a conscious effort to not follow our old pattern and try something new.

A vital element in this change process is that switch of mindset in the second step.  The various approaches to change involve different techniques for making that switch and seeing the problem in a whole new light.  For example, if you get worked up about missing a trade and then step back and rehearse a different internal dialogue, telling yourself that getting worked up--not the missed trade--is the *real* problem, that helps you distance from bad habits and exercise more control over your next actions and decisions.

The general rule is that we cannot change our problem patterns unless we become aware of them as they are happening and then emotionally connect with the costs of those patterns.  We don't change by writing in a journal.  We change by turning our problem patterns into enemies and finding the motivation to smack them down.

All change begins as an internal battle.  

I look forward to pursuing this area at the T4AC event and in future blog posts.

Further Reading: