6/12/2025 - In the research I've conducted re: the personality and life history predictors of trading success, several factors consistently stand out. One of those is the capacity for pattern recognition. Successful traders are more curious than others and look at more things in a greater variety of ways. This enables them to see patterns that, over time, they discover to be meaningful.
Many traders equate pattern recognition with the patterns they track on charts. This is certainly one form of recognition, but not the type I most commonly see among hedge fund portfolio managers. They collect a great deal of data on inflation, monetary policies around the world, behaviors of various markets, sentiment, economic growth, etc. and piece the information together to form coherent views of stocks, bonds, currencies, etc.
The identification of market cycles across different periods, as described below, is yet another form of pattern recognition. I view this as a look from the "bottom up", since it assembles price and volume data across shorter to longer intervals. In my own trading, I combine this with a "top down" view which looks for historical, statistical patterns in the market. For example, in the chart above, we can see a cycle bottoming out across the various indicators described below. At the same time, we had displayed very few stocks making fresh one- and three-month lows in the lead up to this period. When we look historically, the absence of weakness is quite bullish, especially over a 10-20 trading day horizon. Markets usually don't plunge until one or more sectors display deterioration.
The combination of the statistical pattern and the real time cyclical pattern produces a trading view with considerable supportive evidence. That pattern recognition underlies our psychological confidence in our ideas--and our ability to size up positions. I did not develop confidence in my trading by working on my psychology; I improved my psychology through better and better pattern recognition.
6/11/2025 - Above is a screenshot from yesterday's market in the micro-ES futures contract. The previous posts in this series will explain much of what I'm tracking in real time. The bars on the top portion of the chart represent the SPX futures, where the candles capture the high/low/close for each 15,000 contracts traded. As a result, we're drawing relatively few bars in the overnight sessions and many more during the busier morning hours. This helps identify market cycles.
The green and red lines going through the candlestick bars are the short-term (red) and longer-term (green) moving averages defined by the MESA Adaptive Moving Average system. When the red line crosses above the green, it's confirming an uptrending move and vice versa. Note that I track the identical cycle movements for shorter-term charts (2000 contracts per bar) and longer-term charts (50,000 contracts per bar). I use the shorter-term crossovers to help trade the longer-term shifts in trend/cycle.
The vertical blue and red lines at the bottom of the chart represent the Woodies CCI trend measures, where blue is uptrending and red is downtrending. The green and red dots above these lines represent significant buying and selling. Together, with the adaptive moving average crossovers and across the shorter- and longer-term charts, these help visualize occasions when trends are dying out and reversing and when trending behavior is present. It is the lining up of these patterns across shorter- and longer periods that identifies opportunities to ride the cycles and exit them.
This way of looking at markets may or may not be helpful for you. It is my way of distilling a great deal of directional and cyclical behavior across multiple time frames. What many traders see as "choppy" markets are often markets dominated by shorter-term cycles that are tradeable. Similarly, what looks like trending markets are often markets dominated by longer-term cycles. What is important from the perspective of trading psychology is that you find *your* way of representing and visualizing market behavior that aids your decision-making. Many, many times traders become frustrated with markets and make poor decisions because they are locked into one time period and one type of market behavior and fail to perceive the contexts of market movements.
6/10/2025 - The foundation for cycle identification with the charts denominated in volume rather than time (see below) is the MESA Adaptive Moving Average (MAMA) system developed by John Ehlers. This creates shorter and longer-term moving averages based upon the cyclicality of the market and then identifies crossovers between the shorter and longer-term averages. I construct the MAMA on multiple volume-based charts, from very short-term to medium and longer-term. When there are upside and downside crossovers at multiple intervals, that's when the cycles are lining up and it becomes possible to take a solid reward-to-risk trade. All of this is easily constructed in the Sierra Chart platform. I rely on the NYSE TICK measure during NYSE hours to get a more finely grained indication of buying/selling pressure to identify when short-term cycles are turning. I outline all of this--and will present an illustration--to emphasize an important point in trading psychology: We are most likely to work on our trading and refine our trading if we develop our own ideas based upon what makes sense to us. Too often, traders attempt to copy others and then lack conviction to stick with their ideas. The goal of this post is certainly not for traders to copy what I do, but to encourage traders to figure out what they need to do.
6/9/2025 - A particular challenge for active, intraday traders is that market activity (volume/volatility) changes significantly as a function of time of day. On average, there is much more volume and movement in US stock index futures, for example, during the New York Stock Exchange hours than overnight; there is much more volume and movement early and late in the day than at midday. When we measure cycles in time units, we end up comparing apples and oranges. If the underlying time series is not relatively stationary/uniform, we cannot identify cycles that are relatively uniform in frequency or magnitude. When the X-axis of our charts represents volume, not time, each bar is a standard amount of volume traded and we draw more bars during busy periods and fewer during slow periods. Cycles appear quicker or slower but are more uniform in composition. When we create charts where the bars represent different volume sizes, we now can see when and how shorter-term cycles line up with longer-term ones. The shorter-term cycles can guide execution to trade the longer-term cyclical movements. It becomes easier to trade trends when we see these as the directional portions of longer-term cycles. Illustrations soon to follow...
Understanding those cycles not only allows for sound entries, but guides the process of holding trades. If you're oversold across multiple periods and go long, there's little incentive to take profits when the shortest cycle turns to overbought. Indeed, waiting for the shortest cycle to turn down while the others are still rising and far from their peaks can create opportunities to add to positions.
The challenge of this approach to trading, which I'll be illustrating in the near future, is that until cycles align, the best trading is no trading. The goal is to find a few meaningful "setups" and exploit them fully. One of the most difficult forms of trading discipline can be the discipline to not trade. That means that the disciplined trader needs the discipline of doing things other than trading during the majority of periods when cycles are not fully aligning. When you know what to look for, your best trades come to you--and there is no need to chase random moves.
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