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--
Posts
