Friday, December 13, 2019

Three Improvements You Can Make In Your Trading In 2020

I recently met with traders at SMB Capital regarding their goals for the new year.  Here are three things that emerged from those conversations that traders can profitably focus upon for 2020:

1)  Become more consistent in your trading - This means relentlessly keeping score on what you're doing.  We can't improve what we don't measure.  How many up and down days/weeks/months do we have?  Are we making more on our up periods than our down ones?  Are we taking less heat on our trades?  Are we making more money per unit of risk that we're taking?  Are we taking the right amount of risk?  Which types of trades are giving us our best returns?  An important principle is that consistency in trading should precede growth in risk-taking.  Another important principle is that our best and most consistent trading reflects our greatest personal and trading strengths.  Becoming more consistent as a trader means doing a better and better job of accessing the best within us.

2)  Grow your trading - If your best trading is in liquid markets and strategies, you most likely have room to grow the sizes of your positions and expand your rewards.  This is easier said than done, because it's easy to anchor ourselves in the dollars that we make and lose.  If we're accustomed to losing only a thousand dollars or so during a day, growing our risk-taking and risking many thousands of dollars can feel intimidating.  Out of that intimidation, it's easy to stop doing the things that justified the initial sizing bump.  That is why growing our trading should be done gradually and steadily, so that we're always expanding our limits, but never overwhelming ourselves.  It is very common that, when hedge fund managers get more capital, they deploy it in ways that vary from their strengths.  In the excitement of getting more capital and being able to make more money, they stray from what they do best.  Growing your trading means expanding your risks and rewards--and doing so in a way that preserves your consistency.

3)  Grow your edge - In this video with Mike Bellafiore, he and I emphasize the need to expand what we do in markets.  Success comes from having multiple, independent ways to make money.  Any single edge in markets has a limited shelf life.  Ongoing success requires digging and finding new ways to exploit market patterns.  This is the area that trips up most traders.  They spend so much time watching screens and focusing on trading that they neglect the research and development time needed to discover new ways to succeed.  It's like a pharma company that spends all its time selling a good drug and not developing a robust pipeline of new medications.  Eventually the drug goes off patent and the company no longer has an edge in its market.  This is why working in teams--in close collaboration with others--can be so valuable.  We learn from others--their successes and failures--and can synthesize that learning into our own understandings.  If we're not working on new sources of edge, we're actually working on becoming obsolete.

A good business plan for the new year will have concrete goals in each of these three categories and specific plans for how to achieve these goals.  A good business plan will also be accountable, with ways of tracking whether we're actually making progress on those goals.  Every single goal should have a dedicated spot on your calendar each day/week.  Goals become part of our psychology when they regularly guide our lives.

Further Reading:


Wednesday, December 11, 2019

Putting Our Trading Edge Into Practice

In my previous post, I laid out the source of my most durable--and really my only--trading edge:  the ability to detect selling that cannot push the market lower and buying that can't push us higher.  When sellers or buyers are "trapped" in that manner, they need to cover, and that leads to good trading opportunities in the other direction.  This is a pattern that shows up across multiple time frames, and identifying the most relevant time frames is a big part of trading this way successfully.

So here's the ES futures market as it's setting up this morning.  Note the cyclical action captured by the blue arrows.  Note also that the most recent down-phase of the cycles has not been able to retrace price very much thus far.  The middle panel of the display captures the amount of volume transacted at the market offer price (green) versus the amount at the bid price (red).  The bottom panel is a moving average of the ratio of volume at offer (buying pressure) to volume at bid (selling pressure).  We can see that recent selling pressure has come into the market, as noted in the previous post, but has not moved us meaningfully lower.  

All this leads to a hypothesis--*not* a conclusion--that we will make a higher price low above the market's point of control (left side graphic) when the down-phase of the cycle ends, setting up a potential buying opportunity where the shorts are trapped.  I don't act on that hypothesis until I see evidence in the day's trading that the pattern of sellers unable to move the market lower is continuing.

This is all relevant to trading psychology, but it's focusing on the psychology of the market itself.  In reading the patterns of buyers and sellers, we can identify unique opportunities that take advantage of skewed supply and demand.

Further Reading:


Sunday, December 08, 2019

My Only Edge in Markets

Here's a screenshot from Friday's trade in SPY (bottom panel), with the NYSE TICK (ratio of stocks upticking to downticking) in the top panel.  Overlaid on the TICK is a 10-period moving average, and the blue line represents the zero level, where upticks and downticks are equal.

I've studied the hell out of my winning and losing trades and the bottom line is that I only have one edge in trading.  When I identify spots where sellers are dominant, but can't push the market significantly lower, that works out as an area to buy.  The sellers are trapped and have to cover.  When I identify spots where buyers are dominant, but can't push prices to new relative highs, that is often worth fading.  The buyers are trapped and have to bail.

Everyone is overleveraged.  No one can take meaningful heat.  That is the source of my short-term trading edge.

I make money when I trade that edge.  I lose money when I try to be someone other than who I am in markets.

Which makes self-understanding and especially self-acceptance the only true source of trading edge.

Further Reading:


Wednesday, December 04, 2019

Not All Negative Emotions Are Problems

I recently spoke with an experienced, insightful trader who was experiencing performance anxiety.  He was so concerned with losing money that he failed to follow his own rules regarding entering positions, taking profits, etc.  As a result, he chronically felt frustrated, because his ideas were good, but his trading was mediocre.

It turns out that this trader had a pretty small account and was trying to use his trading to support himself and his family.  As a result, he was taking positions that were quite large--quite leveraged--relative to his capital base.  This ensured that, if he had a normal and expectable run of losing trades, his account would draw down meaningfully.

He knew that he could not afford to draw down significantly, so he was caught between a rock and a hard place.  He had to take risk to make the money he needed; he could not lose much of the money at all.  

In such a case, anxiety is a normal and healthy response.  It is information, not a problem.  It is telling us that the trader's goals are not realistic and are placing too much pressure on him and his performance.  He either needs to find other ways to support his family while developing his trading or find a position as a funded trader.  Most important, he needs to trade without the fear of risk of ruin.

Many times, the negative emotions of rational people are themselves rational responses to irrational situations.  If a spouse experiences emotional abuse from a partner, reactions of fear and anger are normal and natural--and they are telling us something!  Negative emotions can become prods to get us to look at our circumstances and expectations and make constructive changes in those.  Too often, we look to rid ourselves of negativity rather than looking into it and learning from it.

Further Reading:


Sunday, December 01, 2019

Training Your Mind By Training Your Body

This is a radical and powerful idea:

Figure out what you want to develop in your life and then create disciplines and workout routines that exercise those capacities.  That is training your body to cultivate your optimal psychology.

I recently reviewed research concerning the ways in which the right kinds of physical exercise can generate surprising psychological benefits.  After just a couple of days, that article has been downloaded 60,000 times, illustrating the level of interest people have in finding new ways of developing their potentials.  Counseling, coaching, and psychotherapy can be helpful in addressing performance challenges.  Through the right physical disciplines, however, we can directly experience the person we wish to become.  Are we interested in becoming more disciplined and self-controlled?  More resilient in the face of adversity?  More able to draw upon our storehouses of energy?  More grounded in a sense of self-mastery?  All of these can literally be exercised by the right disciplines.

It's a game-changer for psychology:  Don't talk with someone to reach your goals; do the things you wish to become.

Further Reading: