What Are Your Best Trading Practices?

 

3/2/2025 - Quick update re: correlation.  I built a model covering the last five years.  The relationship between correlation and forward price change in SPX is not a simple one.  When we have a rising market and correlations are falling and becoming low, it's a sign that fewer shares are participating in the strength.  That often precedes a reversal of the strengths.  When we have a falling market and correlations are rising and becoming high, it's a sign of a broad selloff.  That often leads to a continuation of the weakness.  In stable and moderate correlation regimes, short term returns have been most favorable.  The takeaway is similar to what we know about breadth measures:  the degree of participation in a move is an important predictor of what is likely to happen next.  Simply looking at chart patterns misses this information.    

3/2/2025 - I woke up last night with a question in my head:  Suppose we were to look at the correlation of every single stock's movement with the movement of the overall index (e.g., the correlation of each of the 500 SPX stocks with the SPX itself)...what would it tell us if, across stocks, we are moving from more to less correlation and vice versa?  What would it mean to stay at a very high or low correlation?  What if it's the movement beneath the surface that contains the most important trading information?  The best trading practice is to be so immersed in asking questions and understanding markets that you'll generate fresh perspectives in your sleep.  Creativity comes from immersion.  Now for the hard work of building correlation models for the market!  :)

2/28/2025 - Powerful, powerful idea:  *Why* you are trading has a tremendous impact on how well you trade.  I met with a savvy trader yesterday who was celebrating 344 days of sobriety after a period of heavy drinking.  He shared what turned him around:  The pain of his family, who missed his old self.  Could he be consistent for 344 days just out of willpower?  Or was the positive pull of the family so strong that it inspired his recovery?  So often, we try to push ourselves toward our goals, when we need to find what will inspire and pull us.  I'm not sure we can trade consistently for P/L, but we can surely find consistency--maybe even 344 days worth--if we are trading for a worthy cause.  

2/27/2025 - Here's a best practice that we see at professional trading firms that is more difficult for individual, independent traders:  Processing market information in multiple ways.  When you're part of a trading team, it's common that you'll read market comments from people in your network, study relevant market charts, discuss your ideas with your teammates, and write your plans in a journal.  That means that you're processing your trading ideas often and in varied ways, ensuring that they will take hold.  Many times, traders fail to follow their plans, not because of emotional upheaval, but because of cognitive shallowness.  What you study more often and in more ways is more likely to stick in your mind and occupy the front of your mind.  One of the most important things an individual, independent trader can do is join a trading community and actively participate.  I've seen this first hand in the training meetings I've attended with Jeff Holden at SMB Capital.  The group chat is always active, and attendees hear ideas from each other and from Jeff and me.  And when trading reviews are active and interactive, we process market action and our own performance more deeply, accelerating our learning curves.

2/26/2025 - Another best practice:  Replaying each trade bar by bar.  How could I have improved the entry?  The adding of risk when risk/reward improves?  The taking of profits on pieces of the trade?  The exit?  Bar by bar replay your decision-making process and review how you would make incremental improvements.  Note that this accomplishes two things:  1) it greatly expands your exposure to market patterns; and 2) it reinforces what you did well and pushes you to fine-tune your improvements.  The best reviewing of trades is re-viewing our trades.

2/25/2025 - When we study our successful trades--and especially the processes that are part of our most successful trading--we gain insight into what we do well in markets.  No amount of work on our emotions can ground us in our strengths.  If we are not explicitly focused on our best practices, we cannot possibly trade at our best.

In this post and subsequent follow-ups, I'll share a few of my best trading practices.  Together, these form a template that not only guide my trading, but also anchor my efforts to be my best self.

The first best practice is to be extremely explicit with what is going on in the market across multiple time frames.  I watch very short-term market behavior and minute-to-minute indicators such as NYSE TICK, and I watch what has been happening through the day and last few days, and I observe how the market has been trading longer term (changes in volume, breadth, etc.)  The best trade ideas and trades come from seeing clearly across these time periods.  When what is happening shorter-term makes good sense with respect to what is happening medium-term, and when that is making sense with the bigger picture, the result is a sense of clarity.  My best trades come from seeing clearly, having a scenario in mind, and knowing--explicitly--what I need to see to validate or contradict what I'm seeing.

That strong degree of clarity only comes occasionally during a day or week.  The willingness to wait and wait and wait for everything to line up and everything to make sense is perhaps the best practice of all.  If I need to trade, I'll trade my needs, not the market.

More to come--

The Power of Persistence

 

2/21/25 - Persistence springs from passion; passion springs from a deep, internal sense of conviction.  A wise portfolio manager once said to me that, when it comes to making decisions, there are only two good answers:  No and Hell, Yeah!  If it's not Hell Yeah!, then it's No.  How might life be different if we focused our pursuits on the Hell Yeah!?  Life is a portfolio of commitments.  When we are passionately committed to our pursuits, all of life becomes a statement of "Hell Yeah!"

2/18/25 - Straightforward questions to assess your growth trajectory as a trader:  1)  Who are you interacting with regularly to make them better at what they do?  2)  Who are you interacting with regularly that make you better at what you do?  In any performance field, success requires an enriched environment for development.  Shay's strength was passionately seeking out his enriched environment. 

2/17/25 - Very important observation for developing traders:  Notice how Shay (see below) was able to find his positive future by giving what he wanted more of.  He was isolated in a cage, but when he saw us in a room, he immediately went to us and was extremely loving.  It was because he gave love that we were inspired to provide him with a loving home.  Developing traders who are struggling reach out and what do they talk about?  Their struggles!  What they don't share are their lessons learned and their successes (no matter how limited).  If you want to learn with and from others, you're talking about forming and becoming part of a team.  If you want to team up with others, offer teamwork!  Give and give your successes and observations and accomplishments and others will be inspired to share their strengths with you.  That is how everyone makes everyone else better.  Give and give what you want more of. 

2/16/25 - Every one of our cats has had a story to tell.  I've written about Molly Ruth and making a fresh start in life.  We've also encountered Mia Bella and the importance of finding opportunity amidst adversity.  Naomi taught us about overcoming trauma, and now it's Shay's turn.  Shay (above) is one of our four rescue cats and the latest addition to the family.  He was in an animal shelter in southern New Jersey, after losing his home when the homeowner passed away.  He was treated well in the shelter, but was stuck in a small cage most of the day.  For a large, active boy, this was not easy.  When Margie and I came to the shelter to visit Shay (his name then was Chumungus!), we were placed in a room where he could interact with us.  Immediately, he went from Margie to me and back to Margie and back to me, rubbing against us and purring loudly.  He wouldn't stop:  his desire to interact was much stronger than any concern about strangers.  His persistence reminded us of Mia, who would not leave our side once she was out of her cage.  So we adopted Shay, and every night he sleeps between the two of us, going from one to the other and purring before plopping down to sleep.

Shay was in the animal shelter for quite a while.  He could have easily grown lethargic in his small cage and withdrawn from the world.  Instead, when opportunity came, he was all in.  He persisted and persisted with his back and forth between Margie and me until we had to bring him home.  In trading and in life, we can face setback after setback and find ourselves in a situation that seems hopeless.  If, like Shay, we can reach out and reach out and find those who can help us move forward, we can achieve our successful future.  Shay gave love and gave love and gave love when no one was loving him.  And that is what brought him to his forever home.  When we are feeling most abandoned and lost, that is when we most need to give and reach out.  If, in some small measure, you can be the future you hope to find for yourself, you'll inspire others to join you in that future.

.        

Succeeding at Life

 

2/13/25 - One thing I've learned from my participation in recruitment/hiring/onboarding at hedge funds is that whatever the trader does to be successful in markets leverages strengths that they have developed previously in their lives outside of markets.  Whatever that underlying process/talent/skill set may be, it is something that the trader is good at and that is intrinsically meaningful and rewarding to them.  The example I use in my upcoming book, Positive Trading Psychology, is how I gather stories and information from the clients I meet with as a psychologist and figure out themes running through their lives.  Only once I understand those themes do I know how I can help them in a way that will make sense to them.  Not coincidentally, it's sitting back and observing, observing, observing markets that helps me figure out their themes and frame my trades.  Same process.  Identify what you've been doing to make you successful in life so far and then figure out how to bring those strengths to markets.

2/12/25 - One incredibly valuable lesson I've learned from my experience with the traders at SMB Capital is that consistency of profitability comes before the achievement of absolute profitability.  In other words, the developing trader first becomes consistent in generating good ideas, structuring and sizing positions well, and managing their trades.  Only after they have demonstrated consistency in how they trade do they bump up how large they trade.  Another way of thinking about this is that process precedes profits.  Do things well one trade at a time and you internalize the sound trading that enables you to take more and more risk and earn more and more.

Now imagine applying this framework to your life!  Focus on living each day productively and meaningfully in a goal-oriented fashion and, once you've found that consistency, gradually elevate your goals.  Thus, achieving small goals every day builds the mindset for eventually tackling larger goals.  If we focus on making each day consistently profitable in life's rewards, we build the mindset for tackling greater and greater life visions.  For better and for worse, we internalize what we do each day. 

2/10/25 - The single most important ingredient of a successful life is regularly doing things that you find to be deeply meaningful.  Research in psychology finds that happiness is necessary but not sufficient to produce overall emotional and physical well-being.  In addition to doing things that are fun and enjoyable, it is important to engage in purposeful activity that is fulfilling for us.  A great question to pose each day is, "What am I going to do today that is so meaningful and fulfilling that it will inspire me and give me positive energy?"  For many market participants, it's not solely P/L that provides that emotional fulfillment.  Perhaps it's the intellectual challenge of discovering new edges in markets; perhaps it's being part of a trading team and learning from and helping others; perhaps it's continually reviewing and refining performance to become better and better at navigating ups and downs.  What about your trading process is meaningful to you?  

Of course, when we are engaged in meaningful, energy-producing activities outside of trading, we're best equipped to bring our best psychology to our market activity.  Younger people make the mistake of seeking a fun life.  Older people make the mistake of seeking a comfortable life.  Every day should bring meaningful goals and challenges that push us to become more than we are, even as they pull us to greater and greater energy and engagement in life.

2/9/2025

*  Margie and I celebrated our 41st anniversary this weekend.  We met at a singles event in Ithaca, NY, during which I had way too much to drink.  When I got home, I wanted to sleep in and was concerned that the morning light would wake me up, so the idea came to me to sleep in my walk-in closet.  I woke up hung over, stumbling out of my closet.  I knew that Margie was special, and I knew that I would have to grow the f*ck up to be in a great relationship with her, especially given that she had three children by her prior marriage.  What I couldn't do for myself, I was able to do for her:  great relationships inspire us to be more than who we are.  We become who and what we love.

*  Great traders invest in their careers:  they constantly study to find new sources of edge, and they continually work on their game.  I have never met a successful trader who copies the work of others.  The same can be said of successful artists, scientists, and businesspeople.

*  We cannot live energized lives with out of shape bodies.  Our emotional and spiritual development draw upon our physical energy.

*  Mali teaches us that strength comes from how we compensate for our weaknesses.  

*  Mia teaches us that persistence pays off, even when you're on death row in rural Kentucky.

*   We internalize what we consistently do.  We succeed at life when we turn each day into small successes.

.  

What Goes Into An A+ Trading Opportunity?

 

2/9/25 - Once we identify an A+ opportunity, we've only begun to exploit its potential.  By tracking short-term action where buyers/sellers cannot move the market to new highs/lows (the inefficiency pattern mentioned below), we have potential entry points with solid reward relative to risk.  If the inefficiency patterns break for some reason, we can exit quickly when the market makes a new relative high/low.  Because we're overbought/oversold over multiple time frames, the potential reward is significantly greater than the risk.  

Still, this leaves us with two crucial aspects of the trade:  *what* we trade and the sizing of our positions.  We're looking for instruments that show clear overbought/oversold levels at the multiple time frames and we're looking for instruments that are moving most between these overbought and oversold levels.  In other words, we look for what is trading:  1) cleanest and 2) what is moving the most.    

With respect to sizing, every subsequent inefficiency (selling that can't move the market to sequential lows; buying that can't move us above our most recent peaks) becomes an opportunity to add to the position.  When we hit overbought/oversold levels at the three periods mentioned below, we have opportunities to take profits.  What this means in practice is that, early in the unfolding of the opportunity, we're sizing up and, as the pattern is working out and we are moving to overbought/oversold levels on the three time frames, we're taking profits.  Position management is every bit as important to profitability as the timing of entries and the selection of trade setups.  By taking profits quickly when we hit first levels of overbought/oversold on the adaptive moving average measures and moving our stops accordingly, we generate fresh risk/reward.  Too often, traders focus on entries, less on exits, and very little on dynamic trade management and *what* to trade.  If profitability were simply a function of the setup, it would be easy to automate the setup pattern and make money consistently.  It's how we select opportunities and what we do with them that defines our success.  

2/7/25 - Two ideas go into an A+ opportunity in my own trading.  The first is a lining up of time frames.  As I've shared in the past, following the work of Marcos Lopez de Prado, I construct my charts on event time, not chronological time.  These charts utilize open-high-low-close, but the bars represent an amount of volume traded, not units of time.  For instance, with the MES contract, I follow three periods, with bars of 5000, 15,000, and 50,000 contracts traded.  Each chart then tracks overbought and oversold levels based upon the adaptive moving averages created by John Ehlers.  These averages track crossovers of short- and longer-term lines, but the lines adjust their speed based upon how markets are moving at that time.  When we have all three event time periods oversold at once or overbought at once, we have a lining up of time frames.  Trade opportunities may present themselves based upon overbought/oversold levels of individual adaptive moving averages at a particular event time period, but the A+ opportunities occur when we're stretched at multiple periods.

The second thing I look for once the market is stretched across periods is what I call inefficiency.  I use indicators of buying and selling pressure, such as the NYSE TICK, to tell me what traders are doing in real time.  When we see buying/selling pressure that cannot move the market higher/lower, that tells us that the buyers/sellers have become exhausted.  Their buying/selling is being absorbed by larger market participants.  

When we see buying/selling inefficiency in markets that are stretched on multiple time frames, the ingredients are there for major unwinds.  I want to take advantage of the buyers/sellers who are trapped.  Because a large amount of volume is trapped, as measured by the volume bars, the resulting move is generally significant--not a quick scalp.  My experience is that the batting average on these trades when all the variables line up is quite high.  In my next post, I'll outline ways of making the most from these A+ opportunities.

The key here is to find a way of understanding market action that makes sense to you and that plays into your information processing and personality strengths.  When you trade the unique patterns that reflect your best understanding of markets, you can then achieve unique returns.     

2/6/25 - What goes into an A+ trade for one trader is often quite different from what goes into the best trades for others.  This is because each of us brings unique talents to markets and varied skills that help us make us of these talents.  Studying your best trades over a period of time can help you figure out how you best detect and exploit opportunity.  Too often, developing traders are interested in trading and making money and not interested enough in figuring out who they are in markets and what they do well.  Those traders have emotional disruptions of their trading, not because they are so emotionally troubled, but because they are pursuing something important to them without drawing upon their greatest strengths.  The best way to be calm, focused, and secure in trading is to stay connected to what we do really well.  That is what ultimately gives us the energy and enthusiasm to persevere and succeed.  What do you see most clearly in markets?  What interests you the most in trading?  What are you doing well when you're making money?  What kind of markets bring you the greatest opportunity?  In relationships, we date before we commit.  It makes sense to date markets--try out different markets and styles of trading--before figuring out what you will commit yourself to.  Premature commitments yield failed marriages--in all areas of life.  Next, I'll share what I do best and worst as an illustration of building trading success on what we do most successfully--  

Over the years, I've been struck by how many top performing discretionary traders don't have win percentages of much over 50%.  Most of their trades are relatively small winners and relatively small losers.  They are *very* good at risk management and so they have very few large losers.  But they are also good at recognizing their best opportunities--what we might call their A+ trades--and making the most of these.  In his book One Good Trade, Mike Bellafiore of SMB Capital stresses that, "Consistently profitable traders obsess about making One Good Trade and not money.  Your job is to make One Good Trade and then One Good Trade and then One Good Trade" (p. 31).

From this perspective, One Good Trade includes losing trades that one manages well.  One Good Trade also refers to profitable trades that follow one's trading rules.  If my above observation is correct, however, trading success also requires awareness of One Great Trade:  one's A+ opportunity.  It's the relatively few big winning trades that account for the difference between most good traders and the great ones.  It's the (all too rare) combination of disciplined risk management and aggressive pursuit of special opportunities that define the great trader.

Having met with many traders over the years, I can confidently say that the great majority don't know--in detail--what goes into One Great Trade.  They might have a sense for good opportunities, which they might call A trades, but they haven't truly studied their A+ trades:  those few trades in a month or year that account for a large share of total profitability.  What goes into an A+ trading opportunity?  If you don't study those One Great Trade occasions in detail, replaying them and analyzing them intensively, how can you find the conviction to pursue them with aggressiveness?

I've been studying my own A+ trades and opportunities and will share them in an update to this post.  But my unique opportunities are unlikely to be yours.  Anything great cannot be copied from someone else, whether it's a painting, musical work, or writing.  The odds are good that your A+ opportunities are hiding in plain sight.  They are among your standout winners, even though you may not have fully exploited their potential.  Much of the time, we become so immersed in solving trading problems and controlling trading emotions that we never fully study our trading strengths.

One Good Trade keeps you in the game and can make you consistently profitable.  If you can identify One Great Trade, you'll have a template for success that you can build upon.

More to come.

Further Reading:

Finding Our Greatness

.