Friday, July 03, 2020

One Of My Favorite Trading Patterns

If you click on the above, you'll see a screenshot from my trading platform (Sierra Chart).  There are five measures arrayed from top to bottom:  1) ES futures, each bar represents 50,000 contracts traded and lines represent shorter and longer moving averages; 2) amount of volume for each bar that is traded at the offer price (buyers more aggressive) minus the amount of volume traded at the bid price (sellers more aggressive); 3) a 10-period moving average of volume at offer minus bid; 4) a five-period RSI for the ES futures; 5) a five-period detrended oscillator reading for the ES futures.

The idea is that, in one view, I can see:

1)  Are we overbought or oversold?  (RSI, Detrended Oscillator; Price vs. moving averages)
2)  Have we seen dominant buying or selling pressure? (Volume at offer/bid; moving average of volume at offer/bid)
3)  How much price change are we seeing in response to buying and selling pressure?  

The yellow arrows point to occasions in which we are getting short-term selling pressure and oversold levels with very modest downside price change.  These are occasions in which there is meaningful selling pressure, but it's unable to move price meaningfully lower.  These sellers are eventually trapped and help fuel the next leg higher in the uptrend.

The proportion of volume traded at offer vs. bid correlates with actual price change around +.46 over the past 10 months.  That is a significant correlation, but note that the amount of variance in price change accounted for by buyers lifting offers vs. hitting bids is only a little over 20% (.46 squared).  It's when we get decent buying and selling pressure that cannot move price significantly that we see reversal opportunities set up.  Many of the best short-term trading opportunities come from occasions in which buyers or sellers become trapped and must run for exits.  We can identify those occasions and anticipate the unwinds.

Reading the psychology of the markets is just as important as being aware of your own psychology.

Further Reading:

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Tuesday, June 30, 2020

Reprocessing Emotions For A New Trading Psychology

Our losses, our mistakes are part of who we are.  We cannot eliminate all emotion around our setbacks, nor do we want to.  Self esteem means embracing the experiences that shape us, including the bad and the good.  All are potential fuel for learning.

Imagine vividly mentally rehearsing making various trading mistakes and, during the visualizations, filling yourself with excitement over learning from these or gratitude for the opportunity to learn or peacefulness over the realization that you can embrace the losses and move forward.  Again, again, again, you conduct the visualizations while keeping yourself in an eager mindset, a learning mindset, a grateful mindset, a peaceful mindset.  With that repetition, we reprocess our emotions, so that, in real time, what we rehearse will become our experience, because it has become part of us.  

This Forbes article explains how we can develop an enhanced mindset: one that we can rehearse as part of reprocessing.  This short video introduces the mindset concept.

Experiencing our problems in a fresh mindset: this is a powerful avenue for creating a new trading psychology.

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Saturday, June 27, 2020

Valuable Trading Psychology Lessons From My Cats

Well, at present we have four rescue cats and that makes for a full house.  Every morning they wake me up (around 4 AM), and I start every morning by petting them, feeding them, and cleaning up their litter.  I'm a firm believer that we set the tone for our day by what we do at the start of the day.  I don't start by looking at market quotes, news, emails, or chats.  I start by loving and serving those I love.

Actions, repeated, transform us: We become what we do.

Here are three trading lessons I've learned from our cats over the years:

*  We can overcome even the greatest adversity by making use of the strengths we have and finding something in our environment that engages us:  The story of Mali

*  If we want to change a negative pattern in our thinking, feeling, or acting, we need to tap into a motivation greater than the one that underlies our problems:  The story of Naomi

*  We don't create our opportunities.  We put everything of ourselves out there, and opportunity finds us:  The story of Mia

Once we can put our egos aside, we can learn from everything in life--even humble cats.

Brett
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Thursday, June 25, 2020

The Key To Becoming Your Own Trading Coach

There are many techniques in psychology that can help us overcome negative emotions and thought patterns, and also ones that help us build positive patterns.  The Three Minute Trading Coach series of short videos is an introduction to these techniques.  Each video focuses on a different exercise that can help you improve the consistency of your trading by working on the consistency of your mindset.

There is a secret to making each of these methods work:  practice.  Most of our negative patterns have been with us long enough that they have become habits.  To break a habit pattern, we need to work at recognizing what triggers it, work on interrupting it, and work on replacing the old habit pattern with a new, positive one.  The goal is to create new ways of thinking, feeling, and acting that are so well rehearsed that they become a natural part of us.  That takes daily (and sometimes more than daily) practice.

A rule I've found helpful is to rehearse these techniques religiously for 90 days and they will become a natural part of you.  If you want consistency of trading mindset and consistency of trading, you need to work on those things consistently.  Once you do that, you don't need to hire an expensive professional.  You've become your own best trading coach.

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Tuesday, June 23, 2020

Two Best Practices I See Among Successful Developing Traders

I've worked over a period of years with two proprietary trading firms:  Kingstree in Chicago and SMB Capital/Kershner Trading in New York.  The advantage of working inside such trading firms is that I get to see what is really going on and, most important, I get to see the P/L of each trader.  Putting these experiences together, I can identify two best practices that have been associated with success among developing traders:

1)  A rigorous planning and review process - Winning basketball and football teams prepare intensively for each opponent.  They stay in shape with drills, review game film to find weaknesses in the opponent and correct their own weaknesses, and practice plays over and over again before game day. Similarly, successful developing traders review in detail what happened over the past day and week, plan for potential opportunity, and track their performance so that they are actively working on goals that enable them to get better.  One practice I've seen that works especially well is recording the market day and then replaying the video, stopping at key points, and seeing--frame by frame--how opportunity set up.  Think of how many more reps those traders are getting than the average noob.  SMB provides a nice example of a "monster trade review", in which the trader studies ways in which good trades could have become great trades.  Note how that reinforces--every single day--the idea of becoming a great trader.

2)  Developing multiple ways to win - To use Mike Bellafiore's phrase, successful traders work on developing a playbook outlining patterns associated with opportunity and how those set up in real time.  Like a good football team, the successful trader has a deep playbook that allows for an adaptation to many different conditions.  So, for example, any football team has a diverse set of running plays and passing plays that can exploit a wide range of defensive setups, field conditions, and game clock constraints.  Knowing which plays to run under particular situations is a key strength of any coach and quarterback.  Successful traders have studied opportunities in various kinds of markets and that set up at various times of day and over various time frames.  That means that, like the star quarterback, they can run the right plays given the conditions they face.  Successful traders are anything but one-trick ponies.

As I emphasized in the trading performance book, success in any performance domain is a function of talents we're born with and skills we cultivate through deliberate practice.  The traders I see succeeding are ones spending an unusual amount of time working on their trading outside of market hours.  They are getting feedback from coaches, mentors, and peer traders, and they keep score of their trading with detailed statistics.  The great traders love markets, love learning, and love growing.  To use Ellen Winner's phrase, they display a "rage to master".  It's not P/L that motivates them.  It's the process of mastering a field that speaks to their greatest talents and interests--and that is what brings the P/L.

Further Reading:

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Wednesday, June 17, 2020

Your Self-Talk Shapes Your Trading Psychology

Self-talk is our ongoing processing of life events.  Most often, this processing reflects whether events are good or bad for us, what we would like to happen, etc.  This is why I emphasize in the Radical Renewal book that self-talk is our ego.  To the extent that our egos intrude upon our trading, we cannot be fully market focused.  One way of dealing with this problem is meditation, which quiets self-talk and takes us out of ego mode. Another way of dealing with disruptive self-talk is to learn to step back from negative processing and interrupt its damaging effects, as described in the recent Three Minute Trading Coach video.

The meditation approach attempts to exit us from ego.  The cognitive approach keeps us in ego mode, but shifts the focus from negative to constructive.  From the cognitive perspective, the problem is not self-talk, but disruptive self-talk.  If we talk to ourselves in constructive, encouraging ways, we can maintain a positive mindset--and that is associated with superior learning and performance.  The key question is whether our self-talk is helpful to our subsequent processing of market information or whether it distorts our plans and intentions.  

One of my favorite forms of self-talk following a losing trade or missed opportunity is, "What can I learn from this?"  I don't continue trading until I have a concrete takeaway either in terms of the market or in terms of how I'm trading the market.  For example, I recently shorted the market in early morning trade and then watched as the market initially went my way and then rebounded sharply on higher-than-expected TICK readings.  I immediately said to myself that the buying support was significant and that I should be alert for a pullback to a higher low.  Sure enough, that scenario materialized and I was able to take the long side and profit from a move to overnight highs.

This form of self-talk is more about processing what *is* happening, rather than what is happening to me and my P/L.  Talking what is happening out loud is a kind of real-time journaling.  We talk it, we hear it, we internalize it.  A great goal for traders is to become better and better at constructive self-talk.  

More:

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Saturday, June 13, 2020

An Important Takeaway From The Recent Market

This past Monday, we had roughly 92% of all stocks in the Standard and Poors 500 Index trading above their ten-day moving averages.  That is very broad strength.  Just three days later, the percentage trading above their ten-day averages was a touch over 2%.  That is very broad weakness.  All within one week!  (Data from the excellent Index Indicators site).

What we are seeing is a market with an unusual amount of herd behavior.  Many of the market participants that I speak with simply cannot take a lot of heat.  On Thursday alone, the market went down about 6%.  At many hedge funds, that kind of drawdown could knock one out of the game.  When risk limits are tight, traders have to pile into trades and have to run for exits, and that contributes to volatility and market extremes.

A key tell for the market is relative volume (RVol).  When volume expands significantly day over day, that tells us that the herd is active.  For example, volume in SPY on Monday and Tuesday was between 70 and 80 million shares.  On Thursday, we traded over 200 million shares!  When we see volume elevated in the first hour and negative extremes in the advance-decline ratio and the NYSE TICK, we want to think about front-running the herd and we want to think about the possibility of a downside trend day.  Conversely, low relative volume tells us that the herd is not active and that we could see sector rotation.  Volume shapes the opportunity set:  that's an important takeaway from the recent market.

Further Reading:

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Wednesday, June 10, 2020

Why I Am Proud To Be A Trader

I recently received the above note from a young, enterprising trader.  It's the opportunity to have positive impacts on people's lives that keeps me working long hours.  When we believe in what we're doing, work doesn't feel like work.  It feels like a privilege.

For years, I've heard all the cliches:  Traders are money-hungry and selfish; traders rape the public; traders are egotistical a**holes; traders take advantage of the public; etc. etc. etc.

For years, I've let it pass.  How do you respond to people who don't know what they don't know?

They don't see the young people I work with who are learning skills from the ground up, working every single day to master complexity, to master themselves.

They don't see that two-thirds of the investors in the hedge funds where I work are pension funds, dedicated to preserving and growing the life savings of hard working Americans.

They don't see the teamwork that goes into success; they don't see the hours spent staying up at night wrestling with ideas and positions; they don't see the daily mentoring, the daily preparation, the daily dedication to improvement.

And if portfolio managers and traders combine their talents, skills, and efforts to become successful, they are labeled by certain politicians as "looters", as part of the "one percent" that preys upon the public.

For years I've let it pass, but now it has to be said:  

The successful people I work with have earned every penny of their success.  I work with them, I see their efforts, and I see the dedication they bring to trading and investing the capital of those who trust them.

I am proud to be a trader.

I am proud to work with traders.

Ayn Rand said it best:

The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws.

As this post explains, success in financial markets requires that we become our best selves.  Trading pushes us to evolve.  When we make the most of ourselves, we have more to bring to the world.  

There will always be envy.  There will always be resentment and negativity.  Illegitimi Non Carborundum.  Don't let the bastards grind you down.  Be all you can be as a trader and you will have made a great investment in life, one that rewards you and others for years to come.

Brett     

Sunday, June 07, 2020

Ask The Doc: Shifting Your Trading Mindset In Real Time

And that which consumes our minds, controls our trading!

Trader J recently wrote to me to explain something that has greatly helped his trading.  He rescued a kitten that had been abandoned and the cat has become a loving friend and companion.  As many readers know, my wife and I have rescued a number of cats and currently have four friends hanging out with us.

Trader J's observation is profound:  He notices that, when he is frustrated or upset with his trading, spending time with his kitten calms him down and enables him to return to good trading.  What is going on here?

There is a form of meditation called loving-kindness meditation in which we fill ourselves with feelings of love, gratitude, and closeness while sustaining a mindful state.  Regular practice of loving-kindness meditation enables us to anchor the positive feelings to the mindful state, so that we can access those emotional strengths whenever we become self-aware. 

What Trader J is doing is a kind of loving-kindness meditation, anchoring his closeness to the kitten to his mindful state.  While he is experiencing that bond, it's very difficult to stay frustrated, angry, or upset.  Focusing on the kitten enables Trader J to shift his mindset in real time.  Indeed, because of the power of anchoring, he can shift away from frustration any time he focuses on his little friend.

Your most powerful emotional bond can anchor your ability to exit tilt states in trading.  This is a very promising trading psychology method that anyone can learn for themselves.  With practice, you can access the love and closeness you feel for someone or something special, you can access powerful life experiences, or you can access favorite fulfilling memories and completely shift your mindstate.  The problem is not that we become frustrated in trading; the problem is that we have trouble exiting that frustrated state.  Trader J's experience points the way toward greater self-control.

More:

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Saturday, June 06, 2020

Three Research-Backed Ways To Change Your Trading Psychology

The problems that affect our lives--and that interfere with our trading--are patterned.  All of us have patterns of thought, behavior, and/or feeling that disrupt our work, our relationships, and our activities in markets.  Most often, those patterns are triggered by emotional events.  Once triggered, they can control us.  That loss of control can be devastating for our trading.

We change our trading psychology by: a) becoming aware of our patterns and triggers; b) interrupting those; and c) teaching ourselves to do something different in those situations.  If we can practice identifying, interrupting, and shifting our patterns, we can regain control over our lives and trading.

Recent videos from the Three Minute Trading Coach series highlight specific, research-based ways of changing our patterns and shifting our trading psychology:

This video teaches a technique to change your mental and physical state when you notice a trigger situation, so that you can focus yourself and regain control in real time.

This video shows how the technique can be used during your preparation for trading, so that you can anticipate triggers and defuse them before they occur!

This video shows how you can use the technique during your mental rehearsals of good trading, so that you literally train your mindset to be at its best when you're trading your best.

The beauty of this is that, by practicing these techniques regularly, you can become your own trading coach.  Those are skills you will have for life, and they will help you in many areas of life.  Once we gain control over our repetitive problem patterns, we open a whole new world of freedom and performance.

Further Reading:

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Tuesday, June 02, 2020

Ask The Doc: Talking Aloud As A Trading Psychology Strategy

With this post, I'm starting a new feature that I'm calling "Ask The Doc".  This gives traders the opportunity to ask any trading psychology question that they're wrestling with.  When I see questions on related topics, I'll respond to those questions with a blog post here on TraderFeed.  To ask your question, you can use the comment section for the videos that are part of The Three Minute Trading Coach series or you can use the email address listed on the TraderFeed site.  

Trader Z referred to the section of The Daily Trading Coach where it discusses talking aloud as a strategy, and he asks how to best implement his talking aloud.  

The key idea here is that, when we talk an idea out loud--whether it's to ourselves or to a friend or fellow trader--we force ourselves to put the idea into clear words and make the idea understandable.  That allows us to not only speak the idea, but also hear it as we're talking.  Many times, hearing ourselves put thoughts, perceptions, and ideas into words, we gain a fresh perspective on what we're thinking.  We become an observer to our thinking...we become more mindful of our intentions.

Many times, we will hear ourselves talk aloud and realize that the idea is not a well-formed one.  Other times, we may surprise ourselves with the conviction we have in the idea.

Good advice for Trader Z is to pretend that he has been hired by a famous Market Wizard to serve as an analyst.  His job is to uncover and explain great ideas for the famous trader.  His job is also to follow the market in real time and identify good spots for entering trades based on the idea.  Of course, our trader won't want to let the Market Wizard down and won't want to get fired, so only the best ideas and best thinking will be talked aloud.  In other words, imagining that you're the analyst and are reporting to someone you look up to forces you to think about your thinking, focus on your best ideas, and be clear about your plans.

Talking aloud with another trader you respect is powerful because it allows for the possibility of feedback and keeps you actively--and interactively--engaged in your trading process.  Finding a trading partner for talking out loud and reviewing trading is one of the best strategies available for building mindful awareness of your thoughts and actions.  It's amazing how bad our worst ideas sound when we actually put them into words!

Further Reading:

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Saturday, May 30, 2020

Two Mistakes I See Traders Making

Yeah, mistake number one is getting a haircut at home...damn!

Seriously, though, I see traders making two mistakes that are hampering their profitability:

1)  Setting The Wrong Targets - Traders want to set their reward-to-risk at 3:1 or higher, so they end up doing one of two things that hurt their profitability:  they either set stops too tight and exit the trade on noise or they set the targets too far away and then see positions reverse on them, especially in lower volatility environments.  I find that traders will spend time honing their exits to limit adverse moves, but will put surprisingly little effort into defining targets.  I'm currently working on a project that uses a quant framework to estimate the probability of hitting various targets in given time frames.  It's looking promising, but it clearly shows that if traders will hurt their hit rates and profitability by seeking huge rewards relative to risk.

2)  Sizing Trades Too Aggressively - What happens is that traders have been profitable for a while and then decide that they can make much more if they size trades up considerably and just a couple of losses reverses all the gains they've made.  The reason the trader has been successful is because he or she has operated within a stable regime:  a steady trend, a relatively constant level of volatility, etc.  After that profitability, we see a change of regime and, just as the trader sizes up, the market no longer follows the same patterns.  Sizing up trading is a great goal, but it needs to be done across different market conditions, and it needs to be steady and gradual--not a huge jump in risk-taking that can disrupt profitability and psychology.

The common thread here is that traders can become *so* focused on making money that they no longer take good bets.  If we have a need to make money, our greed will control us.  The more we need something, the more it controls us.  For the developing trader, learning is the top priority.  Once profits become the priority, learning goes out the window--and that derails many a trading career.

Further Reading:

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Thursday, May 28, 2020

Very Important Trading Psychology Insight

Let's take a look at recent posts:

This Forbes article examines research on meditation and how meditative practice can make us better traders;

This Three Minute Trading Coach video describes a technique for reprogramming our minds by pairing stressful trading scenarios with a calm, focused state;

This Three Minute Trading Coach video illustrates a quick technique for entering calm, focused states in trading.

From these three posts, we can identify a very important trading psychology insight:

It's not emotion that interferes with our trading; it's the inability to stay grounded in the present.

Think about it:  Many of the problematic emotions of trading take us out of the present moment.  When we feel fear, we're worried about the future.  When we're afraid of taking a trade, we're regretting a recent loss.  When we're pushing ourselves to size up, we're focused on the future.  When we focus on a missed trade or a poor exit, we're caught in the past.

It's the distraction of the past and present that prevents us from being truly immersed in markets and feeling the patterns that we've studied and observed.  Even if you *could* eliminate emotion from trading, you'd wind up losing your *feel* for markets.  We want that capacity to feel!  But we want to stay grounded in the present, as the observer of our feelings, so that we can distinguish a feeling taking us back to the past or one caught up in the future versus one that comes from a deep, intuitive feel of what is happening here and now.

If you're struggling with discipline in your trading, perhaps it's not emotion that you need to banish.  Perhaps it's mindfulness that you need to boost.  That is a game changer in trading psychology.

Further Reading:

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Sunday, May 24, 2020

Getting Better Before You Get Bigger

One of the very talented traders I work with at SMB recently talked about pushing his trading to get bigger and make more money.  It's a great issue for him to be tackling, as his trading has been remarkably consistent.  So why not focus on getting bigger--and bigger--and bigger to make more and more and more money?

In a recent Confessions of a Market Maker podcast, I joked that pushing ourselves to get bigger in our trading (a common topic among male traders) is akin to pushing ourselves to get bigger in the bedroom.  If there is one formula for diminished performance in both domains, it's focusing on size.

Research suggests that risk-taking is linked to personality traits (particularly extraversion), but is also domain specific.  One can take risks in one area of life and be quite averse in others.  Many traders moderate their risk-taking precisely because they need to maintain an even mindset during their trading.  As soon as they experience the drama of rising and falling P/L, their trading processes become disrupted.  For those traders, thinking big and acting big is a path toward getting small.

For many traders, we want to get better and better before we get bigger.  And we want to get bigger, not necessarily by taking more risk per unit of capital, but by increasing our capital base.  In other words, if I'm trading stock index futures and leveraging my best trades by three-to-one, the answer to getting bigger is not necessarily to go to five- or ten-to-one.  The answer is to increase my capital base and keep doing my consistent thing with 3:1 leverage.

The best path to a consistent trading psychology is consistent trading.  And the best path to growing your trading is to do so sustainably, maintaining consistency of trading and mindset.  Pushing yourself to get bigger, putting outcome ahead of process, too often means that our egos have hijacked our trading.  If we fill our minds with P/L concerns, what room is left to process markets?

Further Reading:

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Friday, May 22, 2020

How To Stay Passionate About Your Trading

All too often, I see traders begin their careers with passion and energy and then gradually lose the spark.  I see it in people's romantic relationships as well.  What starts out with energy and excitement eventually becomes routine.  And no one ever felt passionate about routine.

I recently discussed with a savvy trader how he has changed up his review process to make it more challenging and meaningful.  Tackling the right new challenges *gives* us energy.  It's something we look forward to.  As I discussed on the Confessions of a Market Maker podcast recently, we stay passionate about our trading when we have fun with what we're doing; when what we're doing is meaningful to us; and when we're connected to people through what we're doing.

What a great report card for evaluating ourselves:

*  Am I having fun with my trading?
*  Am I learning new and meaningful things in my trading?
*  Am I energized by my trading processes?
*  Am I connecting with the right people in my trading and do we make each other better?

Research suggests that we perform best when we are in a positive mindset:  when we are energized and engaged.  Yes, it's great to write journal entries and scan charts and review performance.  But all that can eventually become routine.  How are you going to stay passionate about your trading?

The Three Minute Trading Coach:  How to Shift Your Trading Psychology
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Wednesday, May 20, 2020

Training Your Mindset For Success

The most recent Three Minute Trading Coach video demonstrates a simple technique we can employ to return to a focused, mindful state during the heat of trading.  Where we get the greatest value in mastering our trading psychology, however, is not through the occasional use of techniques or reading pieces of advice.  We master our mindset through regular, disciplined training.

What that means is that any technique has to be practiced again and again and again before it truly becomes a part of us.  It could be a golf stroke, a baseball pitch, or a way for a singer to hit a very high note:  only repeated practice makes the new skill part of us.  But once we master the skill, we have it for life.  The key, as Muhammad Ali points out, is having a burning vision of being a champion that is so inspiring and motivating that it drives us through the suffering of day-after-day practice.

In coming videos, I will outline research-backed strategies for practicing ways of improving our mindset.  But the videos won't matter if you don't have that burning desire to "live the rest of your life as a champion."  Goals and practice channel our efforts, but it's vision that drives our efforts to train ourselves for success.

Hell is not just an afterlife.  We can find hell on this earth if we look back at our lives and find ourselves filled with the regret of, "I could have been a champion."  At SMB, very successful traders earn a shirt, which is presented to them in a group happy hour.  At one level, you could say, "WTF, all that work for a shirt??"  But, of course, that misses the point.  The shirt is a step on the path toward living your life as a champion.  The shirt is a tangible goal that focuses our efforts to be our best selves and train, train, train ourselves for success.

What is your "shirt"?  What is your tangible, visionary goal that will drive tomorrow morning's practice?

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Sunday, May 17, 2020

The Key To Successful Trading Psychology

We generally think of the sleep and waking states as binary.  We are either asleep or we are awake.  A very important recognition, reflected in the recent Forbes article, is that sleep and waking are a continuum.  Much of the time, we are not fully awake and we are not fast asleep.  Our bodies are awake and we talk and act and trade, but we are not self-aware. We can drift from thought to thought, habit to habit, routine to routine quite mechanically, seemingly awake but not awakened.

A paradox in trading is that we need routines and processes to trade with consistency, but this same immersion in routine can leave us lacking self-awareness.  Most of us have had the experience of making poor trades and then, at the end of the day, wondering, "How could I have done that?!"  Quite literally, "I" did not do that.  It was "me" reacting.

Without self-awareness, we are reactive.  Action requires intention: the "I" must be in the driver's seat.  Trying to get rid of emotion in our trading, in and of itself, will not build our capacity for intentional action.  We can be just as reactive in quiet boredom as frustrated fury.

Experienced trading psychology coaches recognize this:

*  The AlphaMind Podcast, with Mark Randall and Steven Goldstein, emphasizes mindfulness as an important component of performance, facilitating self-management and even pain management.

*  Yvan Byeagee, in his Trading Composure blog, describes a process for mindfulness and its ability to "detach" us "from unfruitful patterns of behavior".  

*  Adam Grimes, on his site, explains that meditation, a key path toward mindfulness, helps us "work toward a state of clarity and...the stopping of random thoughts and influences."

Gary Dayton, speaking with Andrew Swanscott and the Better System Trading podcast about mindfulness in trading, notes that even traders with many years of experience feel emotions related to profits and losses and that suppressing and controlling emotions doesn't work.

What the Forbes article adds to these valuable insights is that the development of our intentionality is enhanced when we operate within an intentional community.  It is not coincidence that serious students of meditation learn within communities headed by a master teacher.  Nor is it coincidence that peak performance, whether from an Olympic athlete or a performing artist, is never developed in a vacuum.  There are always schools, always coaches and mentors, always supervised practice and structured feedback.  Operating within a high performance community keeps us continually mindful of what we need to do to perform at our best.  It is no coincidence that, at trading firms such as SMB Capital, preparing for the day, searching for trade ideas, and reviewing performance is all undertaken in a team context, where being around awake people helps keep each trader from falling asleep at the trading wheel.  

Viewed from this perspective, every single day offers a potential workout of our intentional muscles.  Each day lived purposefully cultivates our capacity for self-direction and true wakeful living.  The key to successful trading psychology is living life purposefully, expanding our capacity to sustain direction and intention.  At root, all bad trading is mindless trading.

Further Reading:

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Friday, May 15, 2020

Why We Need A Checkup From The Neck Up

The most recent Three Minute Trading Coach video explains how we can take our emotional temperature and keep ourselves in the calm, focused zone in which we best see market patterns and act upon them. 

Why is this particularly necessary for traders?

Trading appeals to competitive individuals and the competition for trading profits is an ongoing and fast-paced one.  The stronger our competitive drive, the more susceptible we become to frustration.  Frustration occurs when an important goal is blocked:  when we want and need an outcome and something gets in the way of achieving it.  

It is not possible to eliminate frustration altogether, nor is it even desirable.  Frustration can be channeled in such as way as to spur new searches for ways of reaching our goals.  For the experienced trader, frustration often contains information.  The market we're trading right now might not be acting the same as the one last week or last month.  For the self-aware trader, frustration pushes us to re-examine what we're doing and how we're doing it.

But we can't channel frustration if we're unaware of it in real time.  That is why the simple three-item checkup from the neck up described in the video is helpful during trading.  As Ziglar points out, without such a checkup, we are all prone to "stinkin' thinkin'" and "hardening of the attitudes".  We fail in trading when we fail in sustaining an optimal mindset.

When we're in the calm, focused mindset, we want to be completely absorbed in markets.  When we're frustrated, we want to be completely aware of our state so that we can take the necessary breaks and return ourselves to our zone.  In the next video and blog post, I will describe a powerful technique that can quickly restore our optimal trading mindset and provide us with the perspective to learn from our frustration.  With the right, proven techniques, we can truly become our own trading coaches.  And it all starts with sitting back and conducting our checkup from the neck up.

Further Resources:


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Tuesday, May 12, 2020

How To Stop Forcing Trades

We often hear the term "overtrading", but what *is* overtrading?  Quite simply, it's trading that no longer has any probabilistic edge.  An example would be a poker player in Vegas who feels a need to bet a chunk of his or her stack despite holding a mediocre hand.  When we overtrade, we trade for psycho-logical reasons, not logical ones.  

A common form of overtrading is "forcing" trades.  That's where we become so convinced about an upcoming opportunity that we don't wait for a sound risk/reward place to enter the market.  Rather, we push too much size and try to predict the next move rather than wait and *identify* when it's occurring.  Forcing trades is a great example of how our egos can get in the way of our making moneywe are so eager to be right that we overplay our hands.

So how do we stop forcing trades?

The important concept to keep in mind is that when we quiet the mind, we also quiet the ego.  As Radical Renewal discusses, our stream of self-talk *is* our ego.  To focus on markets and trade them well, we don't want to be chattering to ourselves positively *or* negatively.  Rather, we want to quiet the chatter and simply "listen" to markets the way we would listen to someone we care about during a conversation.  A good listener doesn't "force" the conversation by constantly jumping in with what he/she wants to say.  The good listener is attuned to the other person and knows what to say and when because of *understanding* that other person.

To stop forcing trades, we need to be quiet enough in our minds that we can sit and sit and sit and let the market make sense to us.  Then we will know what to do.  Meditation, where we learn to sit still, breathe regularly, and focus our minds on a single thing, is actually a training in quiet mind.  Meditation is practice in not forcing; it is training in *not doing*.  Meditation quiets the chatter of self-talk and that keeps our egos our of our trading.

In a coming Three Minute Trading Coach video, I'll demonstrate a simple meditative exercise that can quickly return us to the "zone" where ideas come to us and we no longer need--or want--to force.  It's amazing how much we can see in markets when we simply open our minds.

Further Reading:

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Sunday, May 10, 2020

The Three Minute Trading Coach: When Should We Take Trading Breaks?

The Three Minute Trading Coach is a new video series that features specific trading psychology challenges and techniques for mastering those.  Every video will have a practical takeaway idea that can help your trading.  Over time, the videos will form the backbone for an online course in trading psychology, accompanied by a how-to handbook.

Many new traders are flocking to financial markets, no doubt as a response to the work-from-home trend and growing unemployment.  My hope is that these videos and the soon-to-come handbook will help these new traders with their learning curves.

Here's the first installment of The Three Minute Trading Coach:


Thanks for your interest and support--

Brett
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Thursday, May 07, 2020

How To Adapt To Changing Markets

Show me a successful trader during 2020 and I will show you someone who has adapted well to massive changes in the trading environment.

Above is information you normally don't see on your trading screens.  This is the amount of movement that we are averaging for each unit of volume that we're trading.  The blue bars on the chart represent 50,000 contracts traded in the Standard and Poor's 500 futures (ES) from the start of 2020 to the present.  The red bars are a 20-period average range per bar.  Note that, as the market fell and volume increased, the amount of movement for each unit of volume rose exponentially.  Similarly, as volume has come down recently, we have also seen less movement for each amount of volume.  In short, we've seen a great volatility expansion in 2020 followed by a great volatility collapse.

One of the great misconceptions of trading is that all we need to do is find our edge in markets and then all the rest is psychology and staying in the right mindset.  The reality is that markets are ever-changing and so are the edges in trading them.  The market we saw at the start of the year was very different from the declining market of mid-February through mid-March and that market was very different from the present market.  The breakout trades that worked wonderfully and made people so much money when the VIX was north of 50 are now working far less reliably.  The successful trader understands the market environment and finds edges appropriate to what the market provides here and now.

Much of the frustration traders experience is the result of an inability to adapt.  It is a great example of how poor trading can negatively impact our trading psychology.  The answer to this situation is not merely to calm ourselves; we have to adjust to the trading environment we're in.

In a talk with SMB traders, I shared an interesting statistic:  the correlation between yesterday's market volume in SPY and today's volume is a whopping +.82 since the start of 2018.  Think about that:  volume tells us *who* is in the market.  The odds are good that the players who dominated yesterday's trade will also be dominant today.  If we want to find out what the upcoming market will look like--and the opportunities likely to present themselves--we need to actively study the last few trading sessions.  More specifically, if we want to figure out how to make money in today's market, we need to closely examine what worked for us yesterday and the day before.  Playbooking the most recent days' trades will provide us with the practice in pattern recognition that can prepare us for today.

Of course, if we get a genuine catalyst and volume today expands meaningfully above the most recent volume, we know that new players have entered the market and consider the catalyst to be trade-worthy.  That is important information and often precedes momentum moves higher or lower.  Being able to see the new traders in a market or stock and which way they're leaning can itself provide a meaningful edge.

Further Reading:

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Wednesday, May 06, 2020

Cultivating a Mindset of Plenty

A trader recently wrote to me about missing a couple of trading opportunities on the day.  He shrugged those off, found fresh opportunity, and finished with a nicely profitable, low stress day.

How did that happen?

It's no coincidence that this trader looks at an unusual number of stocks and instruments to trade during the day.  He also scans across multiple time frames and programs multiple alerts.  This means he has a vastly expanded opportunity set relative to other traders:  he's mining in more locations and thus is more likely to strike gold.

But there is an important psychological component to this.  Because he has studied so many markets and time frames and opportunities, he comes to trading in a mindset of plenty.  His framework is one of abundance, not scarcity.

If you have a very scarce opportunity set, any missed opportunity is a threat and a source of potential great frustration.

If you have an immense opportunity set, any missed opportunity is no big deal.

In other words, the best thing for your trading psychology is a highly diverse playbook.  There is little reason for frustration and tilt trading if fresh opportunity is around the corner.  When you have multiple ways of making money, you can enter any set of market conditions with a constructive mindset. 

What's your outlook on trading?  On life?  One of abundance and plenty, or one of scarcity?  It doesn't matter how large your account size is:  you'll be happier in a full cabin than an empty castle.

Further Reading:

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Monday, May 04, 2020

How Is This Pandemic Making You A Better Person?

I have often written that good traders have two kinds of trades:  one that they profit from and another that they learn from.  In losses, great traders find learning and growth.  The key is managing those losses so that we can ultimately benefit from our learning curves.

Now we have a much more serious crisis on our hands.  Some people I see are frustrated, emotional, and defeated by the prospect of a continuing pandemic.  Others are using the crisis as an opportunity to grow, to do things they normally would never have done.  Sometimes it's by learning new things; sometimes it's by getting closer to family; sometimes it's by finding opportunity in markets despite limited opportunities elsewhere.

Tomorrow I will be speaking with employees at a firm where I work.  I will be making myself available as a psychologist to help them and their families survive and even thrive during the pandemic.  I won't bill the company for these visits.  I won't invoice the families.  It's what I have to do.

I look at myself staying safe at home and then I look at the many nurses, doctors, and other healthcare staff that put themselves on the line every day.  It makes me ashamed.  It makes me want to man up and put myself out there in some fashion to make this time better for others.  

So my schedule will get busier.  I'll get less sleep and more calls.  I'll get over it: there are people with real problems, real suffering out there.  This pandemic has led me to reach out to people in ways I never would have before.  I can't control how this will play out ultimately, but I can make sure it makes me a better person.  The virus only wins if it kills our souls as well as our bodies.

How is this pandemic making you a better person?  The goal is to emerge from this difficult period as much better versions of ourselves.  Here are five ways people I'm working with are using this time creatively and constructively:

1)  Trying out a new, different charting platform that gives access to new market information and studying new and different edges in the market.  Imagine you and three other like-minded traders doing this on your own, each coming up with new market approaches and perspectives and sharing those within your group.  

2)  Taking classes and learning totally new things.  So many sources of online learning out there:  we can literally go back to school and become part of a passionate learning community.  Couples can take a class together and share in the learning:  how about a cooking class or an exercise class?  How about learning a new language and preparing for a future trip overseas?

3)  Giving back.  So many religious communities and community groups are holding events and meetings online.  Some of these are social; some are focused on improving the community.  Many communities are focusing efforts on helping out vulnerable populations:  what can you contribute?

4)  Building your fitness.  Most of us have time to be able to take the jogs, do the stretching, lift weights, and raise our level of fitness.  What a great way to make sure that staying-in-place is not a time of passivity and deterioration!  And how about cognitive exercise??  I've returned to new biofeedback routines to improve my concentration.

5)  Building your relationships.  It could be little things, such as the new foreign films Margie and I watch in the evening, or fun projects like a family-wide Mother's Day call coming up.  It could also be larger things, like improving your teamwork at home; doing new and fun things with your children; or using Zoom time to spend quality time with friends.  Social distancing may continue for a while, but we can stay connected and actually deepen our relationships.  

It all starts with a vision:  Creating an image of the better person you'll become at the end of all this!

Further Reading:

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