TraderFeed

The TraderFeed Home Page: Trading and Market Psychology Resources

2010-07-11T07:25:00.000-05:00

Welcome to the TraderFeed blog. TraderFeed began in December, 2005 as a project to help me think aloud about trading and market psychology, market patterns, and the short-term trading of financial markets. Over the subsequent four+ years, the blog grew into the largest single archive of trading psychology material on the Web, with over 3700 posts.

In anticipation of my joining a hedge fund on a full-time basis, I have stopped posting new material to TraderFeed, but have retained the blog as an archive. Below are links that will help readers navigate through the many posts.

Many thanks to readers for their interest and support. I hope the links below will help developing traders make the most of their market ventures.

Brett Steenbarger

** A great place to get started with the main ideas of the TraderFeed blog is this post and its links.

** For more depth on these themes, here are the three books I've written:

The Psychology of Trading - Examines psychological patterns and their impact on trading

Enhancing Trader Performance - How traders can accelerate their learning curves

The Daily Trading Coach - A set of 101 lessons to help traders coach themselves to success

** Best posts of TraderFeed for 2010: Volume One, Volume Two

** Best posts of TraderFeed for 2009: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2008: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2007: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2006: Volume One, Volume Two, Volume Three

** Posts archived by theme are also available on the Trading Coach blog
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Trading and Poker: Reaching the Next Level of Success

2010-06-27T08:39:00.001-05:00

Well, that's another way poker might be like trading: It's easy to participate, difficult to sustain success. Many just play for the thrills of winning and losing; relatively few systematically learn from experience and build skills over time.

One reason online poker is particularly promising is that players can play so many hands at one time. This allows for the possibility of accelerated learning; the online poker participant can gain years of live tournament experience in a matter of weeks. But this is only possible if the experience is structured in such a way as to generate frequent, timely feedback and goal-focused efforts at improvement.

Imagine a training program for traders in which there is daily observation of leading traders making decisions, frequent interaction with those traders to understand what they are doing and why, and supervision of students' trading decisions by those traders. It would be like having world-class poker champions sitting behind your shoulder as you play, offering immediate observations and coaching. Expertise development that normally might require many years of effort could now occur in a fraction of that time.

That is the vision.

The key is recognizing that it is the structure--and not just the content--of a learning experience that accounts for its success. Most learning efforts fail because there are too few cycles of performance-feedback-goal setting-corrective effort per unit of time and no clear curricular progression guiding the content of those cycles.

Interested in reading more about enhanced learning and developing elite trading skills? Here are a few sources worth checking out:

* Enhancing Trader Performance - This is the book that I wrote to capture the progression of successful traders from novice status to competence to expertise.

* The Talent Code - Dan Coyle's book nicely draws upon research to show that elite levels of performance are as much a function of training as inborn ability.

* Talent is Overrated - Excellent book by Geoff Colvin that documents how the structure of practice is a major contributor to successful performance.

The core concept is that, whether you are a poker player, trader, or something else, you can become much better at what you do by creating more and better learning cycles. For the real champions, nothing less will suffice.
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Best of TraderFeed 2010 - Volume Two: Trading and Market Psychology

2010-05-09T07:26:00.000-05:00

Here is the second and final installment of TraderFeed's Best of 2010 posts. You can find the first group of best posts here. The links below cover March - May, 2010.

* Suggestions for Your Trading Journal

* Why I Am A Trader

* Lessons From Blues Man

* Questions for Your Trading Business

* Strategy and Tactics in Trading; see also Grand Strategy and Tactics

* What to Look for in a Range Day

* Identifying Breakout Moves

* Best Practices for Traders

* Overcoming Trading Bias

* Failed Breakouts and Patterns to Trade

* Overcoming Large Trading Losses

* Exiting the Performance Roller Coaster

* When Trading Becomes an Addictive Problem

* Accessing Inner Expertise

* Listening to the Market's Communications

* Keys to Daytrading Success

* The Value of Keeping Score

* The Importance of Goal Setting

* Hidden Volatility Assumptions in Our Trading

* Calculating Price Targets; See also Defining Effective Targets and Alternative Targets

* The Perils of Impotent Goals

* Productivity in Life and Trading

* Considerations in Selecting a Trading Coach

* Core Competencies of Successful Traders

* Stress, Burnout, and Renewal in Trading

* How to Grow Your Trading Size

* Creating Change With Imagery, Visualization, and Anchoring

* Keeping Your Eyes on Ideals

* The Role of Vicarious Trauma in Shaping Identity

* Assessing Your Trading

* Coaching Insights for Traders; also see More Insights for Traders

* The Four-Leaf Clover Principle

* How Body Becomes Soul

* What New Traders Most Need; see also What Competent Traders Most Need

* Trading and Self-Development: Links to Core Ideas in Trading Psychology

Best of TraderFeed 2010 - Volume One: Trading and Market Psychology

2010-05-08T12:44:00.001-05:00

In anticipation of winding down the blog, I assembled highlight posts from January and February, 2010, covering trading psychology and market topics:

* Building Motivation Through Optimism

* Changing How We Think

* The Trading Process and Generating Trade Ideas

* Finding Your Solutions

* The Trading Process and Trade Execution

* Turning Trading Goals Into Performance

* Self-Appraisals for Traders

* Trading and Job Satisfaction

* Becoming a More Consistent Trader

* Coaching Fundamentals for Traders

* A Key to Trade Execution

* Trading Breakout Moves

* A Worthwhile Life Lesson

* Assessing Your Trading Edge

* Risk and Overtrading

* Defusing Trading Stress

* Know Who You Are as a Trader

* Ideas for Improving Your Trading

* The Essence of Greatness

* Play as a Key to Development

* A Psychological Checklist for Traders

* The Dark Side of Trading

* Reflections on Love

* Overcoming Psychological Trauma

* Simulation as a Key to Learning

* Building Market Intuition

* Frontiers for Trading Psychology

* Happiness and Quality of Life

* Greatness and Creativity in Trading

* Vitality and Success

* Finding Your Niche in Life and Trading

* Formatting Your Trading Journal

Core Ideas in Trading Psychology: Trading and Self Development

2010-05-07T07:12:00.000-05:00

This is the final post in the series summarizing core themes running through the TraderFeed blog. The other posts in the series are:

Introduction to Trading Psychology

Trading as a Performance Activity

Changing Problem Patterns

Solution-Focused Change

Mirrors and Corrective Emotional Experiences

Implicit Learning and Somatic Markers

Market Structure and Adapting to Market Change

Identifying Historical Patterns in Markets

Reading Market Psychology Through Volume and Price

Reading Market Psychology Through Intermarket Themes

We develop as people by recognizing and modifying patterns in thought and behavior that limit our ability to act upon our ideals and reach desired goals. We also develop by recognizing and building upon those patterns that define who we are at our best. Self-development is thus a continuous quest for self-mastery: replacing randomness with intent, so that we are living life by design, not default.

Markets, too, trace out patterns at various time frames. Our development as traders hinges upon our ability to recognize those early and act upon them decisively, thoughtfully maximizing reward relative to risk. The skills we need for self-development, at a psychological level, are very similar to those required for our development as discretionary traders. Ultimately, we are trying to replace trading patterns that are outside of our control--and ones that are more poorly informed--with ways of processing and acting upon information that consistently draw upon our strengths.

People are neither wholly determined and conditioned by their environments, nor fully free, self-determined agents. Our peculiar makeup psychologically is that we have partially free wills: at times we are masters of our fates; at times, we are reactive and robotic, lost in routine and habit. Our evolution, personally and as a species, is defined by expanding free will: over time, if we are developing as people and traders, we become more intentional, more self-determined. Our lives are based more on values than needs; our thoughts, feelings, and behaviors reflect where we are going, not trapped in where we have been.

The value of trading, properly conceived and exercised, is that it can become a vehicle for self-development. If not properly conceived and executed, trading can become an addictive and destructive activity. Good trading is trading that is self-determined, self-enhancing, and rewarding in terms of personal and financial development; bad trading reinforces and repeats the negative patterns that hold us back in life.

It is rare to find activities that reward you financially for your growth and development as a human being. That is one of the great appeals of trading.

More on these themes can be found in the posts on The Value of Trading as a Performance Activity; What is the Value of Trading; Achieving Greatness as a Trader; The Dual Road to Trading Success; Trading and Addiction; Addictive Behavior and Trading; Trading and Goal Setting; The Power of Goals; Vitality and Psychological Energy; and Performance as Lifestyle. Psychological methods and perspectives on self-development for traders can be found in The Daily Trading Coach book.

Core Ideas in Trading Psychology: Reading Market Psychology Through Intermarket Themes

2010-05-06T04:37:00.000-05:00

Previous Posts in This Series:

Reading Market Psychology Through Volume and Price

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Patterns

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

One of the most fundamental indications of market sentiment on a day to day basis (and over time) is the degree to which traders favor riskier assets over safer ones. If traders are anticipating economic weakness, they will tend to place their money into the more stable currencies and stock markets of developed nations, and they will tend to retreat to the relative safety of high quality debt (Treasuries, AAA rated corporate bonds). If traders are anticipating economic strength, they will tend to place their money into the faster growth regions of the world (developing nations' stock markets and currencies) and will seek out the higher yields of lower quality debt. In an expanding world, traders expect demand for commodities to rise and will be buyers of oil and metals; in a world of anticipated economic contraction, commodities become relatively unloved assets.

Market psychology also plays out in traders' preferences for particular sectors within the stock market. If they anticipate economic expansion, they will want to own growth oriented sectors: small cap issues, tech stocks, and consumer discretionary shares. If they are betting on economic contraction, safer large cap stocks become attractive, as do sectors that can sustain demand during hard times: health care, utilities, and consumer staples stocks.

In the shifting patterns of relative strength and weakness, we can infer market psychology. We tend to forget the denominators when we look at stock prices: everything is valued in dollars. By changing the denominators, we can see what is relatively strong and weak: a great deal of perspective comes from shifting denominators.

When we integrate sector and intermarket themes with the earlier mentioned shifts in volume and sentiment, we can develop a rich understanding of how traders and investors are feeling and where they are placing their bets. This is valuable information for shorter and longer time frame traders alike.

Good resources for assessing intermarket and sector themes can be found on the FinViz and Barchart websites, including their heatmaps.

Core Ideas in Trading Psychology: Reading Market Psychology With Volume and Price

2010-05-05T04:40:00.000-05:00

Previous Posts in This Series:

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

An important theme throughout the TraderFeed blog is that reading the psychology of markets is a core trading skill. Markets, like people, behave in patterns. Those patterns shift over time, with shifts accompanied by markers that accompany changes in state: changes in direction and changes in volatility.

The first important state marker to be able to read is volume. Volume tells us *who* is in the marketplace. Volume also correlates highly with volatility. When volume jumps, it tells us that institutional participants have become more active. When volume dries up, it tells us that the market is dominated by market makers: the liquidity providers. Is a news item or price movement to a new level significant? Volume will typically provide us with an answer: events are significant if they can attract the participation of large traders. It is their revaluation of assets that creates market trends.

What is most important about volume is relative volume: the degree to which current volume diverges from recent volume. If we want to know if the volume from 11 AM to 12 Noon is high or low, we should compare it to the median volume posted during that hour. If we want to know if today's volume is high or low, we should compare it to the most recent median volume. Because relative volume is so closely connected to volatility, reading volume and its shifts provides important clues as to how far markets can go for or against us. That is useful information in setting stop loss points and profit targets.

Equally important, the astute trader wants to see the total volume that transacts at each price over the course of a trading day or week. The range at which the lion's share of volume has transacted defines a market's value area. Many trade ideas--at short and longer time frames--can be formulated by handicapping the odds that a market will return to a value area (if higher or lower prices cannot attract volume) or that a market will accept prices higher or lower than value (if those prices attract volume). The former situation defines a range market in equilibrium; the latter defines a trending market. In the former market, traders make money by fading strength and weakness; in the latter, they make money by going with market direction.

It is the oscillation of price between range and trending modes across a variety of time frames that defines the market's complexity, as market participants reveal their sentiment: either accepting value or redefining it.

The astute trader can also read the psychology of markets by seeing whether volume is dominantly transacted at the market's bid price (suggesting that sellers are willing to take lower prices to get out of their trades) or at the market's offer (suggesting that buyers are willing to pay up for higher prices to get into trades). This measure of sentiment, which is effectively gauged by the Market Delta tools, can be tracked over time to see if buyers or sellers are becoming more or less aggressive.

We can also track market sentiment to see if more transactions across the broad stock market universe are occurring on upticks vs. downticks. When buyers are more aggressive, we will see more transactions occurring on upticks; when sellers are more aggressive, we will see more transactions occurring on downticks. This measure of sentiment, captured in the NYSE TICK, can be tracked over time to reveal whether sentiment in the market is waxing or waning.

When we read these shifts in sentiment over time and combine them with a reading of shifts in relative volume, we can determine whether the largest market participants are becoming more or less bullish. That will tell us if volatility (volume) is expanding with direction (sentiment) and whether moves to new price levels are likely to result in market trends.

Much of the skill of reading these shifts is placing market dynamics at a shorter time frame within the context of the longer time frame. What is a trending market at the short time frame may be a movement within a range at the longer time frame. A breakout at the short time frame may be trend continuation at the longer time frame. Context rules. A great deal of developing a feel for markets is a recognition of the patterns that occur as market participation (volume) and market sentiment (direction) shift, with longer time frames exercising impact over shorter ones.

More on this topic can be found in the NYSE TICK Primer post; also the posts on Cumulative Adjusted TICK; VWAP and Range Markets; Identifying Downside Trend Days; Identifying Upside Trend Days; VWAP and Day Structure; and Recognizing Range Days.

Core Ideas in Trading Psychology: Identifying Historical Patterns in Markets

2010-05-04T02:48:00.000-05:00

Previous Posts in This Series:

Market Structure and Adapting to Market Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

One of the core themes that runs through the TraderFeed blog is the importance of identifying historical trading patterns in the markets. I owe an appreciation of this theme to the influence of Victor Niederhoffer, whose blog and books have added greatly to the market literature.

The key idea is that, as a trader, you want to think about markets like a scientist. You make observations, you formulate theories about what is happening in markets, you express those theories as hypotheses, and you test those hypotheses with specific trades that you place. Over time, your trading experience either validates your market understanding or contradicts it, supporting or leading to modification of your basic theories.

We know that historical observations of market patterns can help generate successful mechanical trading systems. Less well appreciated is that those observations can generate hypotheses for discretionary traders. Knowing, for example, that in 17 of 20 recent occurrences where the market has made an X day low it has ended up Y% higher in the next X days does not, in itself, necessitate that you take that trade. It does, however, help you frame a trade idea if you perceive that we are in a correction within a bull market (your underlying theory).

Should the historical patterns hold, you might gain confidence in your assessment of the market's strength and trend. Should the pattern not hold, you now have concrete evidence that the market is not living up to its historical script. That could suggest that the market trend is turning: some unique factors may be at work in generating recent returns. As a scientist, you are benefiting from hypotheses that are disconfirmed as well as those that are confirmed: losing trades that were placed with a positive expectancy may be providing unique market information.

When traders identify multiple historical patterns that are independent but that point to the same anticipated market outcomes, that can provide an added measure of conviction to trades: those are strong hypotheses.

Among resources for identifying historical market patterns are the excellent Quantifiable Edges, Market Tells, Market Rewind, SentimenTrader, MarketSci, Vix and More, and CSS Analytics sites. If you check out the blogrolls for those sites, you'll see many more good resources.

If you have an interest in testing historical patterns, do investigate the resources at the excellent Vertical Solutions site. And if you're a do-it-yourself type, the Trading Coach book has a chapter devoted to using Excel to identify historical market patterns.

For more on this theme, check out the posts on Trade Like a Scientist: Parts One, Two, and Three.

Core Ideas in Trading Psychology: Market Structure and Adapting to Market Change

2010-05-03T06:30:00.001-05:00

Previous Posts in This Series:

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

A key idea running through the TraderFeed blog as well as my books on trading psychology is that markets play out the same patterns as people: they exhibit particular states, provide markers for when they are shifting those states, and change their behavior when transitioning to new states. (See The Psychology of Trading for a detailed presentation of states and state shifts).

The states exhibited by markets are range modes (periods in which value is established in a relatively narrow band of prices and price does not move far from this value area) and trending modes (periods in which value is established at successively higher or lower price levels until fresh supply or demand from longer time frame participants enters the market and creates a range equilibrium). Every market state can be described as a joint function of directional tendency and volatility. Thus we can have volatile and non-volatile range markets, and we can have volatile and non-volatile trending markets.

Because markets change states at multiple time frames, the time series of price changes in markets is non-stationary. That means that the mean price change (direction) and standard deviation of price changes (volatility) in one period can vary significantly from those in the next period. If we think of price movement as generated by a process, then non-stationarity means that there is not a single, unchanging process generating all price changes. Markets, like people, display "multiple personalities": they behave differently when occupying different states.

Many of the market patterns described by technical analysts, including breakouts, double tops and bottoms, etc., represent transitions from one state to another. Some of the best profit opportunities occur in markets when traders behave like psychologists: reading patterns and transitions and timing actions accordingly.

A major reason that traders do not succeed is that they fail to read market structure--the states that markets are in--and thus are not sensitive to the shifts in structure that mark transitions between trending and non-trending modes. This leaves traders placing stop loss points and profit targets at levels that do not reflect the market's most recent levels of directionality and volatility.

Skilled, experienced traders learn to sense shifts in market states and thus recognize when trends are slowing down and turning into periods of consolidation; when range markets are heating up and ready to break out. When new participants enter the market and influence the pace of state change, as in the case of algorithmic trading occurring at short time frames, this can disrupt the implicit learning and pattern recognition of even those skilled traders, necessitating new periods of observation and internalization of patterns.

Failure to restrain risk during such periods of structural change in markets is a major reason why traders who made money consistently during one market epoch fail to sustain success during later periods. The challenge of trading is not only to learn market patterns, but also to adapt to new patterns as the drivers of price change (the themes dominating markets, the participants active in markets) shift over time.

For more on the topic of market structure, see the posts (including links) on Strategies and Tactics in Trading, Calculating Price Targets, and Three Basic Trade Setups.

Core Ideas in Trading Psychology: Implicit Learning and Somatic Markers

2010-05-02T07:14:00.000-05:00

Previous Posts in This Series:

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns Briefly

Trading as a Performance Activity

Introduction to Trading Psychology

Perhaps the most common psychological change that traders need to make is the ability to quiet their minds and focus their concentration. Many of the problems described by traders, from emotional frustration to negative self-talk, distract traders from their best trading practices and plans.

One of my earliest observations as a psychologist working with traders was how common it was for experienced traders to go through periods in which they traded like rookies. How could that be?

The literature review that I conducted to write the Trading Performance book led me to an interesting conclusion: the skills that are central to trading involve frequent exposure to subtle patterns in the shift of supply and demand. Over time, these patterns are internalized, so that experienced traders develop a "feel" for markets. This is known as implicit learning (see the Performance book for a full description): the trader recognizes the pattern, but cannot necessarily verbalize it.

There are many patterns in life that we sense, but cannot fully place into words. My favorite example is the young child who creates grammatical sentences when she talks, but cannot tell you the rules of grammar she is using. Similarly, I can sense clearly when a person is talking in a very sincere or insincere manner, but cannot necessarily tell you all the subtle cues--the changes in vocal inflection, the nuances of facial expression--that lead me to that conclusion. As for the experienced trader, for the seasoned psychologist, it's a gut thing: the result of thousands of exposures to patterns that recur, but rarely the same way twice.

Once the concentration of the psychologist or trader is broken, the access to those subtle gut hunches is lost. In that situation, the experienced professional loses contact with years of experience and, indeed, becomes a rookie. Caught in frustration, worries about profitability, or distracted by family turmoil, the trader is no longer attentive to somatic markers, the felt cues that tell us that a pattern is present.

This is why, in the Trading Coach book, I highlighted exposure methods as particularly promising for traders. Those methods train us to stay calm and focused, even as we are mentally rehearsing (or actually undergoing) stressful situations that typically trigger our problem patterns. It isn't that we need to remove emotion from trading--our feelings provide our best somatic markers. Rather, we need to ensure that self-relevant emotional turmoil does not overwhelm the intuitions that are present when we are focused on markets.

All this having been said, I would estimate that 80+% of traders fail because they have never developed implicit learning in the first place--not because their gut hunches are swamped by distracting thoughts and feelings. Trading is indeed a performance activity and it takes many concentrated months of exposure to patterns to make them our own. Placing money at risk before cultivating that implicit learning is no different from entering a battlefield without military training. You'll be so busy looking for setups that you'll never realize that you're the one being set up.

For more on the topic of implicit learning, check out the posts on Implicit Learning and the Unattached Mind, Implicit Learning and Single-Trial Learning, Building Market Intuition, Intuition and Trading Decisions, and Somatic Markers and Trading. Cognitive and behavioral exercises to aid trading performance can be found in the Trader Performance book, along with a detailed account of implicit learning.

Using Twitter for Reader Updates

2010-05-01T17:35:00.000-05:00

As noted a little while ago, I am in the process of winding down the TraderFeed blog. My continued thanks to supportive readers; I do intend to keep the blog up as an archive for future reference. In addition, before winding down altogether I'll be finishing my series of posts on "core ideas in trading psychology" and will assemble a "best of" set of links for 2010 (along with the links from prior years).

One enjoyable aspect of the blog has been linking to mainstream media stories and posts from other blogs that shed light on markets and trading. Going forward, I will use Twitter to link to particularly insightful material; you can follow the Twitter stream here. My new work will prevent me from directly commenting on markets--there's just too much room for perceived breach of confidentiality given that I'll have access to all trading at the firm--but I will look forward to highlighting good resources when I find them.

Unfortunately, for the same reasons of confidentiality, I will not be able to respond to market- or coaching-related emails going forward.

Thanks for your interest and understanding--

Brett
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Core Ideas in Trading Psychology: Creating Change Through Mirrors and Corrective Emotional Experiences

2010-05-01T07:35:00.001-05:00

Previous Posts in This Series:

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

When people find themselves locked into repetitive patterns of thought, feeling, and/or behavior that interfere with their lives, how do they escape? As all too many dieters are aware, we can know our problems and want to change them, but sustaining change can still be challenging.

A core idea in the Psychology of Trading book is that we tend to operate within a relatively narrow bandwidth of consciousness. If we imagine our possible states of mind and body as arrayed along a radio dial, we are generally stuck with a few presets on that dial. Life events can shift us from one state to another without our awareness, triggering patterns of thought and behavior specific to that state. That is how we can be wholly determined to quit smoking in one frame of mind, only to lapse into a smoke when we are bored or after we eat and drink.

The most effective techniques utilized by psychologists are those that enable people to become aware of those state shifts and reprogram the triggers unique to particular states. If, for instance, frustration in reaching my goals tends to trigger negative patterns of self-talk for me and those lead me to withdraw and feel depressed, I can use visualization and real life experience to place myself in frustrating situations and rehearse alternative modes of self-talk and behavior. With sufficient repetition, we internalize those new modes and reprogram our radio dials.

It is not simply the act of talking with a therapist that creates change: it is the act of doing things differently and generating new experiences that eventually become part of our selves. Alexander and French referred to these as "corrective emotional experiences". They recognized that insight into problems, in itself, is not enough: change is accelerated and cemented through powerful emotional experience. Ironically, we know that powerful emotional experience can generate sudden, substantial life changes when it comes in the form of psychological trauma. Less acknowledged is that positive, powerful emotional experience can also catalyze major shifts in our life course.

From this vantage point, then, we can see that the problem of being stuck on the radio dial really boils down to having too few powerful and constructive life experiences. Every relationship, every activity, every day at work potentially provides us with new ways of experiencing our selves. Every aspect of our environment becomes a mirror, reflecting to us who we are. Trading is one of those mirrors: it can reflect experiences of mastery and pride of accomplishment or frustration and failure. Romantic relationships are another mirror; who we are with helps shape our experience of our selves.

To create change, therefore, we must become architects of our own experience. That means carefully creating our life mirrors, particularly selecting mirrors that take us out of our comfort zones on the radio dial to generate fresh experiences of the self. If we stay in life routines, we will live out the same routines in life; change cannot occur. Implemented properly, trading journals are not only tools for reflecting on our performance; they provide blueprints for our life's architecture.

For more on psychological techniques for achieving corrective emotional experiences, see the Daily Trading Coach book; for more on the role of mirroring in trading development, see Enhancing Trader Performance. Posts relevant to creating life mirrors include The Devon Principle, my Theory of Romantic Relationships, and How to Change Yourself.
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Core Ideas in Trading Psychology: Solution-Focused Change

2010-04-30T19:12:00.000-05:00

Previous Posts in This Series:

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

One of the key themes running through the TraderFeed blog, as well as the books that I've written on trading psychology, is that effective change comes from building on positive patterns of thoughts and behavior. We can think of these as "solution patterns", as opposed to the "problem patterns" that typically become the focus of coaching and counseling efforts.

The essence of the solution-focused approach is that we can often find the answers to our problems by looking at instances in which those problems are not occurring. For instance, if a trader who is troubled by a problem of overtrading exercises good restraint on a particular day, we would try to find out how he accomplished that. We would examine his preparation for the market day, his efforts to guide his decision-making with rules, his thought process while positions were on, etc. Out of this examination, we can figure out what he did right: what works for him. By crystallizing those positive actions into solution patterns, we can do more of what works and begin to build new, positive habit patterns.

The value of the solution focused method is that it does not impose answers from the outside: it builds upon the existing strengths of the trader. The key idea is that, in some ways, at some times, we trade well: we do not fall into problem patterns and instead enact the skills that define who we are when we are at our best. This requires a major mind shift for many traders: they are so focused on their problem patterns that they never note their strengths. And if they aren't aware of what they are doing right and how they're doing it, how can they hope to build on those competencies?

This is why it is valuable, in keeping trading journals, to identify clearly what you are doing well as well as what you need to improve. By turning positive trading behaviors into forward-looking goals, we build on strengths and move ourselves closer to our ideals.

For more on solution-focused methods, check out The Daily Trading Coach and the posts on Focusing on Trading Solutions and this post (and its links) on Becoming Solution Focused.
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End of the Week Readings

2010-04-30T05:04:00.000-05:00

* What distinguishes successful traders;

* Investors not pricing in risks in muni market;

* ECB may face dilemma re: raising rates;

* Strategies for hedging inflation risk;

* Making the case for transparency in financial reform;

* More Americans counting on Social Security for their retirement incomes;

* Sentiment is dangerously bullish.

One Good Trade: One Good Trading Book by Mike Bellafiore of SMB Trading

2010-04-29T19:31:00.001-05:00

Kudos to Mike Bellafiore, one of the principals at SMB Trading, for his forthcoming book One Good Trade. I recall when Mike first talked with me about writing about a book covering the proprietary ("prop") trading world. I thought it was a fantastic idea. Prop trading firms have traditionally been quite secretive about what they do and how they do it. Mike has lifted that lid, offering a variety of lessons that new and experienced traders can benefit from.

One Good Trade is filled with anecdotes of real traders facing real challenges in learning and mastering markets. Mike covers the fundamentals of trading success, from discipline and hard work to keeping daily work plans and mastering basic trading plays. He also explains how traders are hired at prop firms and the mistakes that lead many of those traders to fail.

Intraday traders will benefit from the hands-on trading material that describes selecting stocks "in play" and reading the tape to gauge when supply and demand come out of balance. The latter portion of the book covers what traders need to do to sustain their development, including training innovations that SMB has pioneered.

The book is written in an engaging way and, hands down, is the best inside look at intraday prop trading that I have encountered. I've had the pleasure of working with Mike and partners Steve Spencer and Gilbert Mendez and can attest to their commitment to training traders. Some of the work they are doing in video-based training is, in my opinion, state of the art. But best of all, One Good Trade offers uncommon trading wisdom. From Mike:

"There is nothing to 'get' as a trader. What works one month may not the next. Trading set ups you crush one year may be extinct the next. As prop traders our job is to recognize present patterns and exploit them. But we also must have the humility to accept that these patterns might change at any moment. And when they do we must find new patterns. We must adapt."

One Good Trade is one good resource for adapting to markets.

Note of disclosure: No one at Wiley or SMB requested this review or knew what I was going to write in advance. I do not accept reimbursement for the reviews I write. According to the Wiley website, One Good Trade is scheduled for release in August, 2010.
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Core Ideas in Trading Psychology: Changing Our Problem Patterns With Brief Therapy Methods

2010-04-29T07:25:00.000-05:00

Previous Posts in This Series:

Trading as a Performance Activity

Introduction to Trading Psychology

One of the key themes running through the TraderFeed blog, as well as my books on trading psychology, is that changes in our behavior, thought, and emotion can be effected by relatively brief, targeted change methods.

All of our behavior--from our ways of thinking to our typical modes of responding to situations--is patterned. The sum of our patterns is what gives us our personalities. Many of our patterns begin as coping responses to challenges that we face early in life. For instance, if I find myself repeatedly hurt by others, I may learn to maintain a high degree of privacy and guardedness. Keeping to myself, I can't get hurt.

Such patterns may be adaptive for the situations that we are in, but they become maladaptive once we enter different environments. Thus, the withdrawal that worked when growing up now becomes a liability in forming new, romantic relationships. By then, however, the pattern has been overlearned; it has been internalized as part of the self. As a result, I can find myself repeating patterns that bring unwanted consequences. Worse still, I can be unaware that I'm repeating those patterns.

The process of changing our patterns of thought, behavior, and feeling begins with becoming aware of our repetitive patterns and the consequences of those patterns. While such awareness will not, in itself, change us, it is a necessary step: once we clearly recognize what we're doing, why we're doing it, and how it is hurting us, we can step back and try to do things differently. If I see that I am hiding behind a wall of guardedness in relationships because of previous problems in relationships--and if I clearly perceive how that is holding me back from cultivating new, meaningful relationships--then I can try, little by little, to take down that wall. Many times, that breaking of the wall (the changing of our patterns) starts in the relationship with a therapist.

When problem patterns do not overwhelm a person's life and prevent them from functioning in the world--and especially when those problems have been relatively recent and situational, not chronic and pervasive--it is usually the case that short-term, highly active and focused approaches to change can be effective in generating and sustaining change. These approaches fall under the category of brief therapy. Illustrations of how people can change problem patterns through such short-term approaches can be found in my Psychology of Trading book. A description of specific techniques drawn from the brief therapy literature, including behavioral, cognitive restructuring, and psychodynamic approaches, can be found in the Daily Trading Coach book. A more thorough coverage of brief therapy methods and research can be found in my co-edited volume on the topic.

Very often, repetitive patterns in behavior and relationships interfere with trading. At a simple level, they can interfere with our concentration and market focus. More broadly, however, those patterns have a subtle, destructive way of playing themselves out in our trading. The person who felt unappreciated by parents now takes on too much risk in markets to become successful and attract the desired admiration; the trader who experienced painful losses as a child now freezes up when markets move against him; the person who rebelled against authority and control in his early years now finds himself breaking his own trading rules.

When problems from your personal life are interfering with your trading, it is always the right strategy to stop trading and pour yourself into resolving those problems. This does not have to be with a trading coach: any competent psychologist schooled in brief therapy methods can help you understand your patterns, interrupt those, and replace them with more constructive ways of dealing with the world.

Then you can return to trading as a free person with full focus, ready to acquire and utilize a lifetime of skills.

For more on the topic of brief therapy, check out this post and its links on therapy for the mentally well. See also this post on coaching traders in real time.
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Catching Up on Midweek Reading

2010-04-28T19:28:00.000-05:00

* Using visualization to create change;

* The importance of our attributions;

* Stock market insights from Herb Greenberg;

* Looking for M tops in the broad indexes;

* Prospects for a second half slowdown and more fine reading;

* Leveraged loans on the rise;

* Fed trapped by "extended period" language;

* Trying to slow a red hot economy in Brazil;

* The case for Greek default;

* Companies with strong growth during the recession.

Core Ideas in Trading Psychology: Trading as a Performance Activity

2010-04-28T07:49:00.000-05:00

Prior Posts in This Series: Introduction to Trading Psychology

There are three meta-themes that have dominated the TraderFeed blog and my three books on trading psychology. The first is that trading is a performance activity; the second is that personal and professional development is a function of building on strengths, not just addressing weaknesses; the third is that markets exhibit state shifts and repetitive patterns that mirror those we observe in ourselves. This series of posts will elaborate on the three themes; this post will focus on the performance aspects of trading.

What accounts for trading success? Is it having setups and trading systems that are better than those of others? Is it having an iron self-discipline? Is it a function of personality or inborn talent?

There are many possible explanations for why people succeed in markets. The idea of trading as a performance discipline is that the process of mastering markets is similar to the process of mastering any performance domain, such as athletics or public speaking. We begin with certain talents such as the abilities to process information quickly and synthesize large amounts of data, the capacity to sustain attention, and personality traits that enable us to keep a relatively steady mindset in the face of uncertainty.

These talents, and the interests that develop early in life, help guide us toward activities that we find to be rewarding and fulfilling. As we pour ourselves into those activities, we develop skills that are specific to the performance field. Such skill development is often facilitated by work with coaches and teachers, who structure practice sessions that hone particular skills. Such deliberate practice is what turns talent into actual performance, as we progress from being novices to developing competence and eventually expertise.

This developmental course is typically a lengthy one and involves numerous setbacks as well as milestones. What sustains the growth process is a very strong interest in the performance field and a learning process that nurtures continued motivation and a sense of growing mastery. Talent and interest will not turn into expertise if they are not channeled into ongoing learning, review of performance, and efforts at improvement.

This is why traders require training--like a physician or Olympic athlete--not just education. This is also why simulated trading, the practice of specific trading skills prior to risking capital, is an essential step on the way toward learning to manage real money and handle real risk. It is the deep, intensive exposure to markets over time that enables traders to internalize the market's recurring patterns and develop a feel for trading.

Many traders fail to reach a high level of development because they change what they're doing--run from one approach to another--long before they could ever build and internalize core trading skills. Many others fall short of their potential because their development is relatively unstructured, with vague goals and few concerted efforts to learn from experience.

Think of how an Olympic athlete develops from childhood to the point of elite competition and think of how they train for an Olympic event: that will provide a useful template for how traders can reach similar elite levels of performance. Psychology is necessary for elite performance; it is not sufficient.

Much more detail on these themes can be found in my trading performance book. See also the posts on Constancy of Purpose, Devotion to Development, Resilience, Enhancement of Perception, and Multiplier Effects. Also relevant is Finding Your Niche in Life and Trading.
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What Competent Traders Need Most

2010-04-27T21:18:00.000-05:00

I've written quite a few posts to attempt to guide beginning traders. But what if you're a trader who has reached the stage of competence? Now you can consistently cover costs and sustain modest profits. How do you get to the next stage of expertise, where you can make a solid living from your trading?

What many competent traders do is try to magnify their modest profits by trading more instead of by trading larger. Because they have modest account sizes, they cannot size their trades significantly, so they try to put on more trades. Such overtrading takes them out of their niches of competence and leads them to lose money.

Those traders don't recognize that they may already have the skills to become excellent traders. After all, a trader who can make $200/day trading 5 lots in the ES futures could be making $2000 a day trading 50 lots, not a bad six figure income. Given the liquidity of the market, the trades that work with 5 lots by and large will work with 50 lots. It's just a matter of growing into that size. The actual trading doesn't have to change significantly.

Probably, this issue occurs in other areas of business. The successful local restaurant might have all the makings of a powerhouse chain of eateries, but without access to capital and a managerial talent pool, that growth never happens.

That is why access to capital is key for the competent trader: either capital one has saved up or that one can access through trading for deep-pocketed firms.

The second thing that competent traders need is access to expert traders. A beginning trader, like a Little League ball player, can benefit from coaching from a more experienced person. It doesn't take an expert to coach a rookie. But once athletes becomes college stars, they require hands-on mentoring from coaches and mentors with expertise. It is not too unusual to see self-made competent golf players, traders, or singers. It's rare to see expertise develop in relative isolation.

That is because expert coaches and mentors help to mold and accelerate learning curves, to make the most of a person's talent. If you've reached a stage of competence, it is vital to use online resources, personal networking, and/or access to trading firms to learn from pros. Look at the history of great achievers in business, the arts, sciences, and sports: even the self-made greats stood on the shoulders of giants.

More:

What Makes an Expert

Decision Point and the Value of Market Overview

2010-04-27T07:24:00.000-05:00

As I wind down the blog, I want to offer a shout out to the excellent Decision Point site, which has served for a long time as a valuable information source for me. I find it to be the best single source for tracking sector behavior in the stock market, as well as key market indicators. A review of the charts each week provides an excellent overview of how the market is trading.

One valuable aspect of such chart review is that it enables traders to synthesize information into broad market themes. It also helps traders identify when markets are in trending or range bound mode and whether they are gaining or losing strength/weakness.

At this juncture, those charts are telling us of a bull market that has been transitioning from mounting a wall of worry to riding a path of euphoria. New 52-week highs have continued to grow among NYSE common stocks (top chart), thanks in part to very significant relative strength among small-cap stocks ($SML; middle chart). Indeed, with a steadily rising advance-decline line, $SML is not so far away from its all time highs.

Such strength has emboldened traders. The 10-day moving average of the CBOE equity put-call ratio has been moving steadily lower (bottom chart; note the inverse scaling), as traders become increasingly bullish in the face of rising prices. As a rule, bull markets end with divergences and waning strength; so far, the charts I follow on Decision Point have not been displaying those kinds of cracks in the market foundation.
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What New Traders Need to Learn

2010-04-26T18:12:00.001-05:00

Kudos to John Forman, who has assembled an edited volume specific to the questions most asked by developing traders. A variety of experienced traders and market bloggers have participated in the volume, offering a mix of viewpoints. It is often quite difficult for new traders to obtain impartial guidance in starting their careers, so such resources are quite valuable. The topics for the questions range from trading mechanics and trading psychology to market analysis and trading careers. Good stuff!

In general, I would highlight three areas of learning that I would want to have if I were looking to start out as a trader today:

1) Macroeconomics - I would want to have a grasp of intermarket relationships and how monetary policy affects interest rates, currencies, and economic growth. This information may not determine the trade over the next half-hour, but it does govern the market's longer time frame picture and help determine market trends. A lack of understanding of macroeconomics and intermarket relationships has been a major reason many short-term traders have lost money fighting the market over the last few months.

2) A Trading Theory - A trader needs a framework for thinking about price movement and making sense out of the steady stream of price changes across markets. I'm not sure that it matters greatly whether traders subscribe to one theory or another, but I am certain that having an explanatory framework is better than not having one. Personally, I have found Market Profile theory to be an especially useful way of conceptualizing market action across time frames. Other people find Elliott Wave theory or any of a variety of technical analysis frameworks to be useful.

3) Observation - Hands down, the smartest thing I ever did when learning how to trade was to watch markets for a long time before trying to trade them. I collected charts of intraday action and, each day, looked for the best trading opportunities. Over time, I started to see repetitive patterns among those opportunities and those became important to my subsequent trading. Watching not only price, but volume, sector behavior, intermarket action, and such measures as NYSE TICK help you recognize the dynamics of breakouts, reversals, and trends.

Knowing what I know today, if I were starting out as a trader or advising a beginning trader, I would advocate at least a full year of learning, observation, and practice trading before putting money at risk. I strongly believe that a major reason new traders don't succeed is that they fail to put in the necessary time to learn markets and acquire skills.

More:

Learning How to Trade

Minding Our Selves: How Body Becomes Soul

2010-04-26T07:45:00.000-05:00

In the past, I've written about how life experiences serve as mirrors: they reflect to us something of who we are, which we then internalize as part of our identities. This is particularly true of relationships: we continually experience ourselves through the people in our lives: in a very real sense, who we allow into our lives helps shape who we become.

We also have relationships with our bodies, in a sense. Our bodies are constantly sending us signals about their state: whether we are tense or relaxed, energetic or fatigued, fit or falling apart. A common problem with sedentary occupations such as trading (and a common problem as people become older) is that they stop taking care of their bodies and focus on more "practical" things, like making money, raising children, and keeping up a home.

Over time, a divergence develops: the mind is trying to stay sharp and the person is trying to stay focused, energetic, and motivated, and the body is sending a completely contrary set of signals. It is very difficult to stay at the top of one's game if the other side in our mind/body relationship is sending frequent signals of exhaustion or deconditioning.

I see this often among traders--and too often in myself: neglecting the body and then not having enough fuel in the tank to sustain a crucial piece of motivation or optimism that could lead to that good career decision, that extra effort that gets noticed, or that one good trade after a couple of losers.

If our bodies are mirrors to our selves, what experience of your self are you living with and internalizing each day? A promising strategy for working on the mind might just be minding the body.

More:

Vitality and Success in Life

Goals That Make a Difference

Readings to Kick Off the New Week

2010-04-25T21:00:00.000-05:00

* The thought process behind trading success;

* I'm proud to have had some small impact upon the excellent Market Rewind site; many thanks to Jeff for his post;

* Much thanks to MarketSci for quant insights and this kind post;

* A look at market sentiment and lots more fine reading;

* Nice source for market buzz;

* Interesting view: the bull market caused the financial crisis;

* China to keep easy monetary policy;

* Bond markets not anticipating inflation;

* Anticipating continued ease from the Fed;

* Stocks not quite so cheap after their bull run.

The Four-Leaf Clover Principle

2010-04-25T09:14:00.001-05:00

This morning, I went for a jog in the forest preserve park down the street from our home. Winding down the run, I cut through a section of the park and noticed to my surprise that, after the recent rain, clover covered the ground.

I have quite a few childhood memories of clover. As a grade-school age kid, I had a daily paper route and delivered newspapers from house to house. I used to watch the ground when I walked to see if I could find any four-leafed clover. If I found any, my mother pronounced it a lucky omen. She preserved the clover by pressing it in a heavy book and keeping it safe in a clear wrapper. I recall opening our family picture album and having a few pressed clover fall out. Maybe my mom thought that would bring luck to the family.

Those memories returned to me during the jog and I began to scour the ground for a four-leaf clover. I thought that would be a nice reconnection to my past; maybe it would be lucky, too.

There were no four-leafed clover in the first patch of ground that I examined. Nor the second, third, or fourth. Disappointed, I raised my head and began walking home.

On the way, the thought soon struck me that you can never really look for four-leafed clover. I never actually found one by looking for it; rather, I would be walking along and one would suddenly jump out at me. It was being primed to see one, but not *trying* to see it, that would lead to the discovery.

Most things are like that in life, I realized. You can't *make* things happen. You can't make people like you, you can't make stocks move your way, and you can't make yourself successful. When you press to make things happen, you're no longer properly primed to see opportunity when it presents itself. You're so busy looking for the clover that you miss the patch that lies several steps ahead.

How many times do we press to get in a trade, when it's just sitting back, seeing the trend, and finding a good place to participate that makes us the real money? How often do we try to make a public speech turn out perfectly or try to get to sleep, only to have the trying interfere with what comes naturally?

What makes the four-leafed clover lucky is that it presents itself to us; we cannot make it appear. It's true of all life's four-leafed clover: they appear when we're ready to see them.

I smiled as I made my way home. I realized that there were a couple of areas in my life where I had been pressing to make things happen. What I needed to do was stand back, do the right things, and position for the best possible outcomes. All we can do in life is walk through lots of clover fields and keep our eyes open. Eventually the four-leafed opportunities will present themselves.

As I walked just beyond the picnic tables, a few steps before I reached Greene Rd. to return home, a large four-leafed clover stood out on the ground. I held back a tear as I carefully plucked it and brought it home. I pressed it in a book and put it in an airtight clear wrap.

Somewhere, Mom was smiling. And I was feeling lucky: my blog topic for the morning was set.
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Oil Price in Euros: Yet Another Economic Challenge for Europe

2010-04-24T17:41:00.000-05:00

Here I used a pair of ETFs: the oil ETF USO and the euro ETF FXE to estimate the movement in the price of oil denominated in euros.

Because of the weakness in the euro and the firmness of oil prices, we see that oil has moved up about 50% since the bear lows in March of 2009. With the recent drop in the euro and rise in oil prices, we see that the price of oil in euros has been moving steadily higher thus far in 2010.

With many European economies being energy importers, not producers, such a rise in oil prices can only provide headwinds to economic growth in the eurozone.
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Core Ideas in Trading Psychology: Introduction to Trading Psychology

2010-04-24T08:34:00.000-05:00

This post will begin a review of the key ideas from my three trading psychology books and the roughly 3700 blog posts on this site. Wherever possible, I will link to posts and resources pertinent to each topic for ready reference.

But first an introduction to trading psychology. The relevance of psychology for trading is based upon two important realities:

1) Trading is a performance activity, much like athletics or performing arts. Psychological variables influence both the acquisition of skills in any performance field and the application of those skills. While there is much more to performance than mindset alone--talents, skills, and interests must align--the wrong mindset can greatly hamper performance;

2) The human mind does not process information efficiently or effectively under conditions of risk and uncertainty. To simply "trade what you see" is a recipe for falling prey to a variety of cognitive and emotional biases. The trader's psychological development is crucial to learning how to properly gauge risk and reward when performance pressures mount.

Trading psychology is not something that is simply appended to trading practice: it is an integral part of functioning as a trader and is acquired in the process of learning how to trade. It is through the trader's developmental process that he or she learns how to manage risk, how to temper overconfidence and fear, and how to sustain positive motivation.

Indeed, a proper training curriculum for a new trader is one which helps the trader and the trading develop over time. A great deal of psychological learning comes from making the classic mistakes that bedevil all new traders: making impulsive decisions, allowing fear to overtake opportunity, overtrading, allowing losing trades to run and capping winners, and the like. If you can make those mistakes--and learn from them--long before you put the lion's share of your capital at risk, you will have an opportunity to grow into the trader you're capable of becoming.

Sometimes the best therapy for your trading is to get into therapy yourself. The markets are an expensive place to be working out your issues about success/failure, competency/adequacy, and need for approval/esteem. Many people take their repetitive patterns from family and romantic relationships and enact them in trading. When that is the case, psychological development needs to precede trading development: resolving those issues is the best way to approach markets with a clear and open mind.

Eventually, you will be able to take your psychological development to the next level of trading: you will recognize when others are making the mistakes you used to make. You will see markets acting on fear and greed and you'll be able to take the other side of those reactive trades. You'll observe when market sentiment is tilted one way and price can no longer sustain its trend. Developing yourself psychologically doesn't mean that you'll be free of emotion; it means that you will become increasingly competent at using your feelings as useful trading information.

The Psychology of Trading is a good introduction to the topic of how life's challenges play themselves out in the trading world.

Enhancing Trader Performance is a good introduction to the learning curves of traders and the process of developing competence and expertise.

The Daily Trading Coach is a good compendium of self-help ideas and techniques for traders looking to coach themselves toward better performance.
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ETF Pairs as Sentiment Gauges: HYG and LQD

2010-04-23T20:14:00.000-05:00

In recent posts, I have focused on several ETF pairs as sentiment gauges for the broad stock market. Those include:

* IWM:SPY
* EEM:SPY
* XLY:XLP

Above, we see a different ETF pair that tracks the relative performance of high yield credit (HYG) vs. investment grade credit (LQD). The idea is that, when investors expect stable and positive economic conditions, they will display their risk appetite by pursuing higher yield. When investors expect unstable and poor economic conditions, they will tend to be risk averse and seek the relative safety of high quality credit over high yielding issues.

As the chart above illustrates, throughout the bull market, we've seen high yield debt outperform investment grade issues. While the pace of that outperformance has waned recently--we have not made fresh 2010 highs since January--we've not seen any underperformance of HYG that would lead us to worry about an increase in perceived default risk.
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Midday Briefing for April 24th: Firm Energy Shares

2010-04-23T12:55:00.000-05:00

Energy is an important market sector, as it reflects not only demand for energy-related companies, but also for energy as a commodity. If traders and investors are expecting global growth, that should show up in terms of greater industrial activity and increased demand for oil and other fuels.

Note the upside breakout among energy stocks (XLE; above) today, reflecting firmness in crude oil prices. Should we get runaway growth in the current low interest rate environment, one would expect that to eventually show up in the prices of raw materials and energy--and the companies in those sectors.
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New Highs and Lows in the Stock Market: What They're Telling Us

2010-04-23T07:17:00.000-05:00

Here we can see the steady march higher of the S&P 500 Index (SPY; blue line) during the bull market, plotted against the number of stocks across the NYSE, ASE, and NASDAQ that have made 65-day new highs minus new lows. What we see is that dips in the 65-day highs minus lows have occurred at successively higher price points, a hallmark of a bull market. We also see that the 65-day highs minus lows have stayed persistently above zero since the important February bottom.

In evaluating market cycles, we generally want to look for momentum peaks--points at which the largest number of stocks make their new highs--and lows. As Terry Laundry has stressed, there is a proportionality between the time it takes markets to make momentum highs and cycle lows and the time it takes a subsequent bull cycle to make a fresh peak. With the momentum high in early September and the cycle low in early February, that formulation suggests that this bull phase could last into the summer.

Interestingly, that is consistent with today's market analysis by SentimenTrader, who investigated historical periods of persistent upside momentum and found that those rarely turn tail quickly. That view also meshes with the analysis of Market Tells, which finds intermediate-term bullish action tends to follow strength in their version of the S&P Oscillator.

All that is not to say that we won't have our share of short-term market pullbacks between now and then. It does suggest, however, that automatically assuming that an overbought market will reverse in the near term can be hazardous to your wealth. As long as more stocks are making 20- and 65-day highs than lows and the advance-decline line is making fresh bull highs, those pullbacks will tend to provide opportunity for investors to buy into a strengthening economy that continues to enjoy low interest rates and little inflation.

More:

Stock Market Cycles

Thanks to Readers: Lessons From The Blog

2010-04-22T17:49:00.000-05:00

Dear Readers,

I am absolutely humbled by the large number of heartfelt responses to my recent blog post announcing that I will be winding down the blog. I've experienced many gratifying moments in my career, but few can compare with today. To be able to be a part of so many people's personal and professional development is a real honor.

In response to a question that many readers raised, yes, I will do everything I can to keep the blog up and archive "best of" posts. If, as expected, I do join a trading firm on a full-time basis, it is likely that my contract will prevent me from doing new writing. There is just too much room for conflict of interest if the firm is sharing its positions with me and then I'm writing about markets for the trading public.

Similarly, if I'm developing coaching innovations for the firm, they don't necessarily want me sharing those with others, including competitors.

So, for a while, I will take a break from writing. For many of the same reasons, I will need to take a break from trading.

I look back on the opportunities that have come from the blog--the books and book sales, the coaching opportunities, the valuable contacts and colleagues--and the return on the investment of my time has been immense. It's been phenomenally rewarding personally and emotionally, but it's also contributed to many hundreds of thousands of dollars of income. All without subscriptions. All without advertising.

And that's the thought I want to leave you with: If you put yourself out there, share your best ideas, reach out to people, and give more than anyone ever could expect you to give, you'll attract the right kinds of people--and the right kinds of opportunity. If you have passion and you have talent, make yourself visible: the best people will find their way to you and everyone will benefit.

Thanks again for your kind and warm support--

Brett

More:

Networking and Success

Productivity and Life Success

Winding Down the TraderFeed Blog

2010-04-22T07:20:00.000-05:00

I've been blessed with many colleagues and friends through the TraderFeed blog; it has been a most gratifying experience sharing ideas about psychology and markets over the years. With nearly 3700 posts on topics ranging from short-term trading techniques to behavioral finance and self-help methods for problems affecting traders, the blog has become the largest compendium of trading psychology-related material on the Web.

Unfortunately, or perhaps fortunately, my continued writing of the blog will need to wind down in coming weeks due to a major career change. My future coaching involvement with traders will preclude me from writing: much of what I'll be doing will need to be proprietary. When the i's are dotted and the t's crossed, I'll announce that change in coaching involvement more specifically.

The reason for the career change is pretty simple: If I as a coach am not pushing myself to grow and develop, then my efforts to help others evolve are fraudulent. I cannot offer others more than I can achieve myself. To take myself to the next level as a psychologist, I need to pursue challenges that will bring the best out in me.

Remember this: Your growth always lies on the other side of your discomfort. Whether it's in the weight room or in career decisions, you'll never develop yourself by staying in your comfort zone. People don't become old when they reach a certain birthday; they become old when they decide to live life without crossing that line of discomfort.

So, as the blog wraps up, what topics would you like for me to tackle? I'll happily take suggestions as comments to this post. I may not be able to get to all topics in the days ahead, but I'll make a sincere effort. As always, thanks for your understanding and support.

Brett

More:

Living a Performance-Based Life

Fresh Wednesday Readings

2010-04-21T20:43:00.000-05:00

* How to overcome stubborn streaks in trading;

* What to do about negative patterns of self-talk;

* A V-shaped recovery and many more good midweek readings;

* More on EEM:SPY as a sentiment indicator;

* Nice after hours trade for those who stay late;

* Daytrading for sports!

* US equity market vs. global bourses and other good reading;

* IMF calls for different policies in China and Japan;

* No inflation in the foreseeable future;

* Overview of the economy: housing and jobs lag.

Midday Briefing for April 21st: Small Cap Strength

2010-04-21T14:23:00.003-05:00

While we've seen selling in the large cap S&P 500 Index today, small caps are holding near their bull highs and we actually have a few more stocks rising on the day than declining. Sector performance is mixed, with weakness among financial and health care stocks and relative strength among the industrial and consumer discretionary shares.
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Quick Look at Commodities

2010-04-21T11:32:00.000-05:00

Commodities (DBC, above) have traded higher through the bull market, but have lagged stocks since January thus far. I am watching commodities closely, as a breakout to new highs could have implications for raw materials and energy stocks, inflation concerns, and the broad economy.
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Morning Briefing for April 21st: Watching the Range Trade

2010-04-21T04:50:00.002-05:00

8:58 AM CT - Note the relative strength among bank and homebuilder shares, but only a little more than 500 advancing stocks than decliners so far. Health care and materials shares relatively weak; watching closely to see if this is simply sector reallocation or if the rally in banks can lift the broad market.

We're trading toward the top of a broad multiday range; handicapping whether we can attract fresh buying at the highs vs. fall back into the range will set up the best trades for today. I'll be watching the intraday advance-decline line and new 20-day highs/lows carefully during the day for clues as to the likelihood of sustaining a breakout: with a little over 1300 new 20-day highs on Tuesday, we're seeing some thinning of participation on this most recent leg up in stocks. Note also that we're falling short of recent highs overseas, in EEM and EFA.
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A Few Things That I Believe: Observations From The Doc

2010-04-20T21:23:00.000-05:00

* We are in a cyclical bull market within a secular bear market. The secular bear market began in 2000 and, like secular bear markets before this one (1929-1949; 1966-1982), this one could last for 15 years or so. Even after secular bear markets have put in price lows (1932, 1974), we've typically seen years of weakness and bottoming action until stocks become an unloved asset class. The March, 2009 may have been a price low for stocks, but we've got a way to go before stocks are a shunned investment.

* All that being said, we *are* in a cyclical bull market and only recently have we begun to see the kind of bullish sentiment extremes that might accompany a topping process. This bull market has lasted a little more than a year. Most bull markets last longer than that. I'm not convinced we'll roll over until there are stronger hints of a move away from low interest rates. The inability of traders and investors to recognize the difference between cyclical market moves and secular ones has created much pain for bulls and bears alike.

* I find it hard to believe that the Fed will have the political cover to raise interest rates until we see hard signs of inflation. That means that commodities might have to rally hard before we see the bull market in stocks roll over. If we're not overheating, I'm can't imagine the Fed raising rates in a high unemployment environment. So we stick with monetary ease until we overheat.

* A rise in long Treasury rates (decline in bond prices) will be a good tell for inflationary expectations and anticipation of overheating. As long as rates stay tame, it's hard for me to imagine stocks going to hell.

* I'm open to the possibility that all the above might be wrong and that the next driver of stock prices will be monetary tightening and a hard landing among emerging market economies. If the emerging nations stop serving as the engine of global economic growth, that's when we could see a second economic slowdown. I'm not convinced that the China miracle won't end up looking like the Japan miracle.

* I don't know how we emerge from burdensome debt other than to transition from being a consumption-driven economy to being an export-driven one. Over the long haul, growth-by-export will support a weak U.S. dollar, though any near term economic slowdown led by emerging markets would likely see a flight to the dollar.

* It is hard for me to imagine a transition away from a consumer-driven economy without deflationary pressures coming from household deleveraging, weakness in commercial real estate, and pressure on local/state governments and local/regional financial institutions. The panicky flight to high yield debt (junk bonds, muni debt) could end badly if we get a second bout of deflation.

* If I have to bet on the future, I'll bet on countries with favorable demographics, favorable balance sheets, favorable rates of taxation, and freer markets. Free markets are messy and far from perfect, but they are ultimately self-correcting; centralized ones are not.
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Midday Briefing for April 20th: Broad Range

2010-04-20T12:29:00.000-05:00

We are trading in a broad multiday range in the ES futures (above), defined by yesterday's lows around 1180 and the bull highs around 1210 from 4/15. Sector performance is mixed: consumer discretionary and energy shares are at their bull highs, whereas health care stocks, consumer staples, materials, and financial issues lag. We're also seeing 10-year rates, gold, and oil well off their bull peaks. In all, this is looking like a period of distribution, sector rotation, and consolidation following a strong and persistent bull run.
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ETF Pairs as Sentiment Gauges: IWM and SPY

2010-04-20T06:43:00.000-05:00

Recent posts have looked at EEM vs. SPY and XLY vs. XLP as sentiment gauges for the broad stock market. Above we see yet another ETF pair, IWM vs. SPY, as a gauge of speculative sentiment among traders and investors.

The underlying logic is much the same as EEM vs. SPY: traders will be drawn to the smaller, more entrepreneurial, growth-oriented companies when they anticipate economic expansion and will gravitate toward the larger, safer issues when they expect economic weakness.

As we can see above, the small and midcap stocks that are part of IWM have been outperforming the large cap SPY issues, recently moving to relative strength highs. That strength can also be seen in the advance/decline line specific to NYSE common stocks: the broad list of smaller cap issues has been moving the line to bull highs lately.

It is interesting to juxtapose the bullish speculative sentiment of IWM vs. SPY with the more tempered outlook given by EEM vs. SPY. Within the universe of U.S. stocks, we see risk-taking sentiment among traders; that same sentiment is not extending itself globally. Indeed, if we look at large cap stocks across Europe, the Far East, and Australasia (EFA), we can see that those overseas bourses as a whole have not sustained bull highs thus far in 2010.

As long as there is broad participation in upward movement in the U.S., I don't expect any major market correction. Should we begin to see small caps underperform their larger cap counterparts and overseas markets--especially in emerging economies--underperforming the U.S., I would become far more defensive.
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ETF Pairs as Sentiment Gauges: EEM and SPY

2010-04-19T18:32:00.001-05:00

I recently took at look at ETF pairs--consumer discretionary and consumer staples issues--as sentiment gauges for the broad stock market. Above we see another ETF pair: emerging market stocks (EEM) vs. U.S. large caps (SPY) as another gauge of speculative sentiment in the stock market.

EEM represents trader and investor interest in the fastest growing economies in the world. While these display high potential appreciation, they are also quite vulnerable to downturns in global economic strength. SPY represents a universe of shares with lower growth potential, but also higher stability.

When traders and investors anticipate strong global economic growth, they will tend to favor more speculative, growth-oriented regions of the world. That will show up as EEM outperforming SPY. When traders are more risk averse and anticipating global slowdown, they will tend to seek the relative safety of large cap stocks in the world's largest economy. That will show up as SPY outperforming EEM.

What we've seen lately (above) is that, despite very rapid economic growth in Asia and South America, EEM has stopped outperforming SPY. Early in the bull market, we saw EEM dramatically outperform SPY. Since the fourth quarter of 2009, however, that outperformance has stopped.

This leads me to believe that traders and investors are anticipating a monetary tightening cycle among emerging market central banks, restraining growth potential. To the degree that economies in the U.S. and Europe are looking to exports to emerging market economies to fuel their own growth, we could see some headwinds going forward. I will be watching this theme closely, as it could lead to a more challenging environment for all stock markets as the year progresses.
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Midday Briefing for April 19th: Continued Risk Aversion

2010-04-19T12:21:00.000-05:00

Although major indexes have traded below Friday's lows thus far today, we're seeing bank stocks ($BKX, above) holding above those lows. We're also seeing relative strength from the most risk-averse stock sectors: health care and consumer staples shares. Meanwhile, oil and gold have been trading lower, Treasury yields are below Friday's levels, and USD is up vs. euro and Aussie dollar. All in all, we're seeing continued risk-sensitivity in the wake of concerns re: allegations of fraud at major banks.
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Morning Observations From the Doc

2010-04-19T08:08:00.000-05:00

* As we can see, financial stocks (XLF) broke out to bull market highs in March, only to pull back sharply on very expanded volume on Friday. The catalyst, of course, was the GS news and subsequent selling of bank stocks. Much discussion has focused on whether this will lead us to a sustained correction after a remarkably consistent run up. Less commented upon is the fact that SPY volume more than doubled on Friday from its recent average levels and the daily price range did the same. The GS news has pulled in more institutional participants who, to that point, had found no reason to sell a market that showed rising earnings in a low interest rate, accomodative monetary environment. It's as much a potential shift in volatility regimes as in directional trade;

* Overheard from one savvy trader: "What are the good financial stocks that are getting punished along with the banks?" Sometimes asking the right questions is half the battle. Figuring out how to express the answer to the question is a big part of the other half;

* From a recent email I sent to a sharp trader buddy: "Algos cannot change whether stocks go from point A to point B, but they do influence the path. The more path dependent the trader, the more vulnerable he is."

* I was looking at real estate in the northeast this weekend. No question that activity has picked up. Particularly vulnerable, however, was the luxury condo market: plenty of developments sitting only partially filled, with price declines failing to bring people in. And that's one of the better real estate environments. Miami has over 14,000 housing units for sale, over 8000 of which are condos. To cover costs, condo owners/developers have to rent their units out and that gives little incentive for buyers to step up and risk owning property in failing developments. And how about tenants who bought early and now face a glutted market should they need to sell? Just too much tail risk for buyers, and that has to impact the trajectory of the housing recovery at the high end.

* "A pessimist sees the difficulty in every opportunity. An optimist sees the opportunity in every difficulty." - Sir Winston Churchill
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Bulls Continue to Dominate: A Survey of Stock Market Sentiment

2010-04-18T21:52:00.000-05:00

After Friday's decline, the CBOE equity put/call ratio moved toward levels that have been normal for the bull market, but hardly showed bearishness. Indeed, we can see the extreme bullish sentiment that accompanied the market's recent run up.

Meanwhile, the AAII poll of trader sentiment shows bears at 30%, the lowest reading since the first quarter of 2008. According to the Investor's Intelligence survey, 51% of participants are bullish, 19% bearish. Readings of less than 20% have tended to occur at intermediate-term market tops; the last such reading occurred early in January.
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More Coaching Insights for Traders

2010-04-18T14:45:00.000-05:00

As a follow up to the recent coaching insights for traders, here's a second round of thoughts and observations:

* Pull out your largest trades--and your most active trading days-- in the past three months and assess the P/L just for those. That will tell you quite a bit about how you are dealing with risk and reward;

* Pull out your top ten winning and bottom ten losing trades over the past three months and compare their P/L. That will tell you quite a bit about your trading discipline;

* If you are much more unhappy when you lose than happy when you win, a 50% win ratio will feel like losing over time, even if you're making money;

* If you are always looking for the next trade, you will ultimately overtrade;

* If you are confident in your ability to make money, you will not fear missing market moves;

* If you are a consistent trend follower or a consistent countertrend trader, you will not consistently make money;

* Dissect your best trades and you will find out who you are as a trader;

* You won't always make money, but you should always expect to trade well;

* You can't control markets, but you can always control when you bet and how much you bet;

* If an athlete spent as much time working on his game as you do on your trading, would the athlete make a living as a professional?

* Great traders work on themselves after a winning streak;

* Confidence when losing, humility when winning: a formula for long-term success in markets.

More:

My Observations as a Trading Psychologist

Sunday News, Views, and Review

2010-04-18T06:41:00.000-05:00

* How is personality related to trading success?

* How to turn stress into positive emotion;

* Gauging three states in markets: uptrending, downtrending, mean reverting;

* Rising Federal spending posing economic challenges;

* Fed insider's perspective on the shortcomings of proposed financial reform;

* Marriage can be good for your health;

* Investors returning to hedge funds;

* Reverberations of allegations of fraud at GS; more on the GS transactions;

* And now allegations against MER;

* Concerns resurface in Dubai;

* Economic repercussions of Iceland's volcanic eruption;

* Preview of economic numbers coming out.

An Updated Look at Stock Market Strength

2010-04-17T18:27:00.000-05:00

Even after Friday's broad decline, we can see that over 80% of shares remain above their 50-day moving averages, per the top chart offered by Barchart. As the advance-decline line specific to NYSE common stocks from Decision Point shows (bottom chart), we remain in an uptrend after the Friday drop. Indeed, we had over 400 new 52-week highs among NYSE stocks on Wednesday and Thursday, the highest levels registered during the bull market. All of this suggests to me that we may have seen a momentum peak in stocks and could expect some continuation of Friday's pullback, but that it would not be surprising to see further price peaks following that correction.
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Where to Trade: Finding a Trading Career

2010-04-17T07:21:00.001-05:00

Props to SMB Trading for their excellent post on finding a new trading home. Time and again, I've found that long-term success in markets is not just a function of who the trader is and the strategies they trade, but also their trading environment. Being around successful traders can help you become a successful trader; having the right tools can help you do the job well. As Steve mentions in his post, the right technology is crucial; proper resources to assess and monitor risk can make all the difference in one's eventual distribution of returns.

My experience supports Steve's observation: In the present environment, many traders are losing their jobs, many proprietary trading firms are consolidating. This is especially true among discretionary, "point and click" traders and firms. The combination of low volatility and intense competition from very efficient, well researched algorithmic intraday programs has made it difficult to survive in the intraday trading environment. I am seeing people who have made money consistently in the past now struggling...and I am seeing that on a firm-wide level as well.

But what hurts many traders and firms as much as the low volatility and intense competition for the next tick is the absence of a facilitative trading environment. Whether it's the environment of an individual, independent trader or the environment at ABC Chop Shop, rarely is the environment set up for ongoing learning and development. If Firm A hires analysts and produces fresh trading ideas each day, then brings traders together each morning to generate further ideas, and then provides mentorship opportunities to learn from each trading day and Firm B provides little more than a trading box, screen, and order management platform to traders, which firm is more likely to thrive in good times and survive in tough ones?

When developers create their algorithmic trading programs, they intensively examine what works and what doesn't work. They monitor how those programs are performing in real time and have procedures in place to determine the proper degree of risk to allocate to those programs. They trade multiple programs, so that they always have income streams when any single strategy is underperforming.

Individual traders? It's rare to find ones who sustain the process of keeping a substantive journal from day to day. If there's an entry in a journal, it reads something like, "I lost money again today. I need to be more patient with my trades and get out of losers quickly."

C'mon. Who is going to win in such a scenario? The well-researched and continually tuned computer program or the frustrated trader who doesn't take the time to translate a good intention into a concrete plan for action?

But it's like growing up in a dysfunctional home or without a home at all: It's difficult to generate the right kind of environment for yourself when you've never experienced one. This is a particular challenge for independent traders. If you've never been part of a high performance environment, it is difficult to weave one from whole cloth.

I give a great deal of credit to some of the efforts to generate online trading rooms that illustrate actual trading in real time: they not only provide a needed layer of mentoring, but also build a community--a trading environment--among their subscribers. IOAMT comes to mind here, but there are others; do your diligence in researching and pursuing these. Through the online medium, there's no reason why traders cannot create high performance, learning environments.

But I'm overlooking the best part of Steve's post, just as SMB missed it in titling that post. For the best and brightest, it's not just a matter of finding a new trading home, but rather creating one. Some of the people I like best are those that grew up in suboptimal home environments and used those to create new, positive ones for themselves and their children. Traders can do the same: by teaming up with the right partners, you can generate the environments that can take you to the next level of performance.

And have a helluva lot of fun in the process.

Environment matters. Few people will challenge themselves to stay outside their comfort zones. An environment that stimulates you, challenges you, and backs you up can be every bit as important as the markets and setups you trade.

More:

What is the Ideal Trading Environment?

A Picture of Risk Asset Selling

2010-04-16T13:37:00.000-05:00

The futures heat map from FinViz shows how the GS-related selling kicked off a general divestment of risk assets, with stocks, metals, and energy lower, bonds down, JPY and USD higher and EUR and AUD lower.

Catching these broad themes can be very helpful in identifying when selling is part of a broader risk-aversion and when it represents a simple correction in a single market.
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Midday Briefing for April 16th: Following Up a Sell-Off

2010-04-16T12:44:00.000-05:00

Note how we saw a significant uptick in volume and volatility on the downside breakout that followed the GS news. We traded below support at 1185 on very weak NYSE TICK only to move back above that level. We're now building volume and accepting value between 1185 and 1190. How the day shapes up--as a trend day down or as the start of a range market defined by the bull highs and today's lows--will hinge upon how we trade relative to that volume bulge.
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Dr. Brett's Coaching Insights for Traders - Volume One

2010-04-16T03:08:00.000-05:00

* If you're not seeing the market well, step back and reassess your views. If you're not trading well, step back and reassess yourself. The capacity to flexibly engage markets and disengage from them is an important component of career longevity.

* If you're frustrated, figure out which needs of yours aren't being met and set yourself up for situations that meet some of those needs. The markets can't always meet your needs; make sure you have a life. It is very expensive to act out those unmet needs in markets.

* Knowing your past patterns won't, in itself, prevent you from repeating them, but not knowing them will almost surely guarantee that you'll fall into old traps. The first step in change is catching yourself in the act of repeating an unwanted pattern.

* What percentage of your trades are accompanied by very strong conviction, where everything comes together, makes sense, and you see markets well? Why are you trading when you lack that conviction?

* How, specifically, has your trading evolved in the last year? Real evolution comes from adding to strengths, not just reducing mistakes.

* What tangible evidence do you have in your P/L that you're evolving? If you're not consistent in implementing a change, that change hasn't truly become part of you. Making changes is easy; sustaining them is the key to success.

* If you want to do differently, think differently. If you want to think differently, perceive differently. If you want to perceive differently, shift the physical and emotional state that you are in. All change starts with a personal gear shift. Stay in the same life gear and you will get the same life results.

* Life goals start with today's goals. Life achievement starts with today's accomplishments.

* There are times, however fleeting, in which you are close to your ideals. Hang onto those and figure out how they occurred: there is a positive pattern worth capturing.

* Many people will be there when you're down. A true friend will share your dreams and accomplishments. Those that are there for you when you're down and not for your achievements are not friends. Ever.

* Change is a race against inertia: as with rockets, it takes a certain thrust to overcome the pull of gravity. Without thrust and fuel in the tank, we inevitably return to earth.

* If you have a hero in life, there, somewhere, is a hero within. Success and fulfillment comes from being that hero inside.

More:

Human Performance as a Lifestyle

Macro Perspectives and More

2010-04-15T19:56:00.000-05:00

* The role of social cognition in trading;

* What you trade is less important than how you manage the trade;

* Record optimism among retail options traders;

* More sovereign credit concerns;

* A look at income distribution and implications in the U.S. and China;

* Markets calling the bluff of the EU;

* Growth in China, but inflation slowing;

* Is China overheating?

Reflections of Economic Strength: Chart Review

2010-04-15T04:54:00.000-05:00

Here's a quick chart review reflecting the recent market strength that has followed from strong economic performance in the U.S. and Asia.

Emerging market stocks (EEM; top chart) have broken to a fresh bull high; shares across Europe, the Far East, and Australasia (EFA; second chart from top) are challenging their bull highs.

We're also challenging highs in 10-year Treasury rates ($TNX; second chart from bottom) and in the oil ETF (USO; bottom chart).

Meanwhile, we saw a meaningful expansion of stocks making fresh highs on Wednesday and new highs in the advance-decline lines for the major averages. As noted by the excellent Quantifiable Edges service, the CBOE equity put-call ratio hit its lowest level since 2004. The bull strength is not going unnoticed by traders, and that is changing a wall of worry into a fear of missing the market movement.
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Midweek Reading and Perspectives

2010-04-14T21:22:00.000-05:00

* Creating change with brief therapy techniques;

* Nice overview of outlook for currencies;

* Finding opportunity by trading stocks in play;

* Prospects for monetary tightening in Asia;

* Stocks in Asia continue higher;

* Not much economic optimism among small businesses;

* Continued economic risks for Greece;

* No expectations for a change in Fed language.

A Brief Trading Self-Assessment

2010-04-14T02:42:00.000-05:00

* How many of your trades today (or this week) had an explicitly defined risk and reward?

* How many of your trades today (or this week) did you execute according to the defined risk and reward?

* How many of your trades today (or this week) were based upon clear market patterns and a clear identification of how the market was trading?

* How many of your trades today (or this week) were placed out of fear of missing a move? Out of frustration following a loss? Out of boredom in a slow market?

* How many of your trades today (or this week) would you place again if you had the same circumstances?

* How many of your trades today (or this week) came from advance planning and preparation?

* How many of your trades today (or this week) were sized properly, given your level of confidence in your ideas and your desired risk management?

* What did you learn today (or this week), and how will you put that learning to work tomorrow (or next week)?

* How did you feel about your trading at the end of the day (or week)? Proud? Disgusted? Regretful? Satisfied?

* What can you do tomorrow (or next week) to feel proud of and satisfied with your trading?

More:

Moving Beyond Fear and Anxiety

Developing Emotional Well-Being as a Trader

Six Questions to Ask at the End of the Day

Preparing for the Trading Day

Tuesday Insights and Highlights

2010-04-13T18:18:00.001-05:00

* The dangers of micromanaging trades;

* What goes into emotional well-being and why it's important;

* Great list of deep market truths;

* Views on higher interest rates and other excellent reading;

* Looking for strong growth and possible rate hikes in China;

* Finding a bearish edge in the low volume rise;

* Perspectives on a cover-up of the financial crisis;

* What's driving the housing market in Southern California;

* Here's the way to keep up with the latest among financial blogs.

Midday Briefing for April 13th: More Range Trade

2010-04-13T13:36:00.001-05:00

We're seeing another one of those range days, in which price oscillates around a relatively flat volume-weighted average price (VWAP; red line). We rejected lows on the move below the overnight range and, at present, are consolidating near the range highs. We have near-term resistance from yesterday in the 1195 area; the NQ futures and Russell 2000 Index are at a resistance area corresponding to yesterday's highs.

Morning Briefing for April 13th: Market Taking a Breather

2010-04-13T10:32:00.000-05:00

We can see that the 1185 area in the ES futures (above) acted as resistance last week and now is offering a measure of support after this morning's market drop. We're seeing selling in the euro and Aussie dollar vs. USD; gold and oil are also lower. Small cap stocks are holding up relatively well, however, and the 70 area represents key near-term support for IWM; 1980 is key support for NQ. With 977 more declining stocks than advancers, so far this is a normal market breather, not a wholesale rejection of these price levels.
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ETF Pairs as Sentiment Gauges: XLY and XLP

2010-04-13T07:42:00.001-05:00

Let's think through the relative strength relationship between Consumer Discretionary (XLY) stocks and Consumer Staples (XLP) shares. When traders and investors anticipate economic growth, they are more likely to favor Consumer Discretionary shares, as these will see increased demand. Conversely, if market participants anticipate recession, they will tend to favor the Staples companies that can hold up their sales even during economic retrenchment.

Above, we see the S&P 500 Index (SPY; blue line) plotted against the relative strength relationship between XLY and XLP (pink line; 6/1/2009 = 100). We can see that the relative strength between the two consumer ETFs has tracked strength in SPY throughout this bull market, as economic growth assumptions have led investors to buy U.S. stocks.

We can view this relative strength relationship as a kind of longer-term sentiment measure, rather than as a short-term timing tool. As long as SPY is making new highs and XLY is continuing to outperform XLP, we can infer that investors' favorable economic expectations remain intact. When XLY underperforms relative to XLP even as SPY remains at or near highs, we can infer that investors are anticipating economic weakness. This occurred during 2007, when XLY/XLP topped out well ahead of the large cap indexes.

If you look historically, you'll also see that XLY/XLP bottomed ahead of SPY during the late 2008/early 2009 market lows.

In upcoming posts, I will take a look at other ETF pairs and how these might serve as sentiment gauges. For more, see Sector Relationships and Sentiment.
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Life Insights From Great Inventors

2010-04-12T19:44:00.000-05:00

* "Opportunity is missed by most people because it is dressed in overalls and looks like work." - Thomas Edison.

* "The scientists of today think deeply instead of clearly. One must be sane to think clearly, but one can think deeply and be quite insane." - Nikola Tesla

* "Concentrate all your thoughts upon the work at hand. The sun's rays do not burn until brought to a focus." - Alexander Graham Bell

* "A problem well stated is a problem half-solved." - Charles Kettering

* "The best thinking has been done in solitude. The worst has been done in turmoil." - Thomas Edison

* "There is nothing in a caterpillar that tells you it's going to be a butterfly." - R. Buckminster Fuller

* "A successful person isn't necessarily better than her less successful peers at solving problems; her pattern-recognition facilities have just learned what problems are worth solving." - Ray Kurzweil

* "It doesn't matter if you try and try and try again, and fail. It does matter if you try and fail, and fail to try again." - Charles Kettering

* "What we do during our working hours determines what we have; what we do in our leisure hours determines what we are." - George Eastman

* "God, to me, it seems, is a verb not a noun, proper or improper." - R. Buckminster Fuller

* "Everything comes to him who hustles while he waits." - Thomas Edison

* "When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us." - Alexander Graham Bell

* "We often say that the biggest job we have is to teach a newly hired employee to fail intelligently... to experiment over and over again and to keep on trying and failing until he learns what will work." - Charles Kettering
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Continued Bullish Sentiment: The CBOE Equity Put-Call Ratio

2010-04-12T18:04:00.000-05:00

We are seeing unusual levels of bullish sentiment in the CBOE equity put-call ratio, with the lowest level of put buying relative to call purchases since the market rally began. Indeed, the excellent SentimenTrader site reports that we haven't seen such bullish options sentiment since 2000, which marked a very important stock market peak.

Meanwhile, we saw 301 new 52-week highs among NYSE common stocks, as reported by Decision Point, but that is down from levels reached last week. When bullish sentiment cannot translate into incremental market strength, that turns me cautious.
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Midday Briefing for April 12th: Slow Range Trade

2010-04-12T13:57:00.000-05:00

We're looking at roughly a five-point intraday range in the S&P 500 e-mini (ES) futures, as slow volume contributes to a range trade. Gold, oil, and currencies show a similar mixed picture; in my basket of stocks, 22 are up from their opening prices, 18 are down. So far, the bouts of selling that we've seen have occurred at higher price levels. If that continues, we should be able to make a run at the overnight price highs. I'd like to see us stay above 1193 on any further selling squalls to make that run.
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Low Volume Bull Market: What to Make of It

2010-04-12T10:17:00.000-05:00

One of the points I made in the recent indicator review concerned the relative absence of selling pressure in the stock market. Even on down days in the market, the number of declining stocks has not greatly exceeded the number of advancers. This pattern has also shown up in the NYSE TICK: we've seen relatively few readings of less than -800 during the day. Those clusters of selling pressure that have occurred have, for the most part, led to buyers scooping up value--not any sustained downturn.

We can see that relative absence of sellers in the market thus far this morning. We have only seen one NYSE TICK reading greater than +800 and none less than -800 to this point. As we can see from the blue moving average of TICK, however, the average TICK level has stayed above zero throughout the session. That makes it difficult for stocks to sustain any downturn.

If you think about it, the relatively low number of significantly high or low TICK readings suggests that not many programs are being transacted in the market: institutional activity is relatively light. That is exactly what we've been seeing in the volume statistics and in market volatility overall. Institutional players have no compelling reason to sell stocks, given continued low interest rates and firming economic activity. They also have no compelling reason to be big buyers, given opportunities that they perceive in other markets and other parts of the world.

The result is a relatively low volume drift upward. I do not necessarily see this as a sign of complacency or as a sign of an imminent market downturn. Rather, I suspect that U.S. stocks are not seeing major capital flows, as traders and investors perceive greater global, macroeconomic opportunity elsewhere: in the perceived safety of high yields and the growth stories of emerging markets.
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Indicator Update for April 12th

2010-04-12T08:16:00.000-05:00

Last week's indicator review found that we remained in a bullish trending mode, but that yellow signals were beginning to flash, indicating potential divergences.

This week, we see a continued uptrend among the S&P 500 sectors that I track with my proprietary measure of Technical Strength. Indeed, we're seeing particular relative strength among Consumer Discretionary and Energy shares, as well as Financial stocks. No sectors are in either neutral or bearish trend modes, telling us that market strength has been broad.

That breadth of market strength is also evident in the Advance-Decline line specific to NYSE common stocks (middle chart), a very useful indicator posted daily by Decision Point. Note that we've had many more days with advancing stocks leading declining ones over the past month; when decliners have led, they have not shown the kind of plurality that we saw during the previous market selloff. Quite simply, we're not seeing significant selling pressure in the market, which has also been evident in the positive Cumulative NYSE TICK balance, as noted by Market Tells.

Finally, we see that the percentage of stocks trading above their 50-day moving averages (bottom chart) as posted by Barchart, remains quite high and very near its peak since the February lows. This tells us that intermediate-term momentum remains strong, even as some shorter-term momentum measures show some divergences. (The percentage of stocks trading above their 20-day moving averages is at a bullish 71%, but down from the 80+% levels registered in March; new 20-day highs exceeded 1500 on Friday, down from over 3000 in March).

In all, we remain in a bull mode. Some caution lights around short-term momentum and strength remain, but we are not as yet seeing the kind of technical deterioration that normally accompanies a market about to tank. As always, I will update indicators daily via Twitter before the market open.
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Reflections on the Kent State University Program in Financial Engineering: Investing in Your Career

2010-04-11T20:19:00.000-05:00

I had the pleasure today of talking with graduate students from the Kent State University master's of science program in financial engineering. They were interviewing for internship positions at trading firms; those internships can eventually lead to full time positions with proprietary trading firms, hedge funds, and investment banks.

I can't begin to tell you how impressed I was with the students. They blend analytical abilities, strong teamwork skills, and a sound work ethic. Most of all, they are learning tomorrow's skill sets today.

The Kent State program is unique in that it combines a quantitative and analytical focus with practical trading skills. The program operates a trading floor on site and provides students with experience in trading a variety of markets. Guest speakers from the financial industry visit the students and provide real-world insight and members of the board of advisers (which I am one) help the students find promising internships and jobs.

When these students graduate, they will have significant skills in statistics, programming, and financial modeling. They will be able to test trading ideas, develop trading systems, and manage the risk of individual positions and diverse portfolios. They will also have the training in economics to help them identify global risks and opportunities.

Personally, if I were a young person starting out a trading career, I would seek out this kind of training. There is a vast world of trading activity and opportunity that you never read about in the popular magazine articles and books on trading. There are cutting edge skills you can learn to help you identify and profit from these opportunities.

Invest in your education and you will see a significant return on that investment. While education in the world of finance is not cheap, a lack of education can prove particularly expensive.
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The Risk Rally Continues

2010-04-11T18:19:00.000-05:00

On the heels of news of a bailout program for Greece, the euro has rallied very sharply against the U.S. dollar (top chart), putting in a multiweek high and establishing support at a double bottom. Meanwhile, it's not just against the euro that we're seeing USD weakness: note the strong Aussie dollar (middle chart) and the recent rally in gold.

The weak dollar is supporting firm commodity prices, as we're seeing a general risk rally opening the week. The U.S. stock index futures are trading at bull market highs to start the week and we're seeing firmness in oil, copper, and gold. I will post a market indicator update before the open on Monday to review where we stand going into the fresh week.
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Sunday Morning Views and Reviews

2010-04-11T06:24:00.000-05:00

* Making use of trading journals to identify and change problem patterns in trading;

* Using the body to regulate emotional responses;

* Plenty of good reading from Kirk;

* Prospects for devaluation of GBP;

* Nice overview of the market environment going into earnings season;

* Forecast for housing; lows may not be in;

* Thoughts on China running trade deficit;

* Looking for broadening of the economic recovery;

* Five dividend stocks on the radar;

* iPAD to shake up publishing world in Japan;

* Rising inflows into emerging market stocks.

Vicarious Trauma and Personal Identity

2010-04-10T16:43:00.000-05:00

Sometimes therapists exposed to the emotional traumas of their clients experience vicarious traumatization: they can become overwhelmed by their immersion in the painful memories and life events of others. Vicarious traumatization is most likely to occur when we identify and empathize with a person who has experienced disruptive threats to personal safety and security.

I had my first taste of vicarious traumatization when I worked in a rural community health center. Every day I met with people who were experiencing the results of sexual abuse, incest, physical violence, drug and alcohol abuse, and neglect. I found it difficult to separate myself from my work: I did not want to become hardened and jaded like many social service workers I encountered, but I also did not want to lose myself in the barrage of the worst of human nature.

Eventually, I did a 180 degree turn, moved to a major university, and specialized in student counseling with a young, relatively healthy population. The vicarious experience was upsetting to me, but also constructive in that it led me to a fulfilling application of psychology.

Since that time, I've become convinced that vicarious traumatization occurs in varying degrees throughout life. Whenever we are exposed to the pain and upheavals of people we care about, we internalize that experience. Their life crises can become our own turning points.

There is no question in my mind that working with traders who have experienced career-ending losses in markets has helped to shape my own views on risk and approach to risk management. Seeing the shattered marriages and relationships of people I knew and worked with led me to approach marriage very carefully and only commit when I was certain that this was the right decision.

A friend's horrendous experience with a drug overdose--and years of work seeing people's lives ruined by drugs and alcohol--totally ended my days of partying. If I am in a setting where there is excessive drinking or drug use, I leave. The connotations are all wrong for me. I viscerally experience the lives and relationships ruined, not the joy of a party.

I'm quite certain that I will never truly retire. Long experience seeing people languish and deteriorate during their retirement years have tarnished my view of those golden years. My personal experience of others' retirement is one of empty lives and motion without direction. Intellectually, I recognize that retirement does not have to become a living death, but that is not my vicarious emotional reality.

I could go on and on. Seeing the mistakes parents have made with their children has shaped my childrearing. Seeing traders fleeced by crooks offering phony holy grails has sharpened my views on integrity.

In each case, I have developed facets of who I am in response to traumatic outcomes I've witnessed among others.

I suspect I'm not alone in such a developmental course. The people we're close to are always role models: sometimes in a positive way, sometimes in reverse. That's not necessarily a bad thing: You can emotionally imprint some of the best trading behaviors by witnessing the consequences of some of the worst.

More:

Trading, Trauma, and the Brain

Drama and Trauma in Trading

Kicking Off the Weekend With Fresh Views

2010-04-10T07:35:00.000-05:00

* How personal, problem patterns tend to cycle;

* Approaching your trading business as an entrepreneur;

* Excellent 10-year look at whether overnight session predicts day session; also see this long-term look at how much upside we've gotten overnight vs. during the day;

* Really valuable wisdom about investing and adapting to markets;

* Thanks to a savvy trader for these insights into the value of risk;

* Worthwhile trading lessons from Babe Ruth;

* Prospects for a muni bond crisis;

* Luxury spending returning, but slowly;

* Higher yields spur demand for Treasuries;

* The challenges of finding high dividend stocks;

* Risks of a failure in Greece.

A Look at Price Changes During Day and Overnight Sessions in the Stock Market

2010-04-09T19:59:00.000-05:00

It is natural to think of the day session in the S&P 500 Index (SPY) as an extension of overnight trading both in stock index futures and in the stock markets overseas. That is not the case, however. Since the start of the bull market in March, 2009, the correlation between overnight action in SPY (percentage change from yesterday's close to today's open) and day session action (percentage change from today's open to today's close) has only been .08. In a pure statistical sense, these are separate markets.

If we create indexes out of the price action of the day (pink line) and night (blue line) sessions, we can see this lack of correlation. Of the roughly 50 SPY points gained since the March, 2009 low, about 32 have occurred during the day session and 18 overnight. Note, however, that the day session price changes are much more volatile than the overnight series: during periods of strong rise and price correction, we've seen most of the changes occurring during the day session. Indeed, the standard deviation of price changes overnight is about 40% less than that occurring during the day.

What this tells us is that deciding whether to hold or not hold stocks overnight based upon what has happened during the day might be hazardous to traders' wealth. These are different markets, with different distributions of returns. While trading the day session only can eliminate the ambiguity of the overnight trade, it also truncates a significant portion of the bull market returns.
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An Intraday Look at a Momentum Measure

2010-04-09T13:57:00.000-05:00

This display from Barchart gives a five-minute perspective over the past three days, tracking the percentage of stocks trading above their 20-day moving averages. We can see that today's levels are below those of two days ago, indicating no swell of upside momentum as we trade near the bull highs. Notice also how the percentage of stocks above their moving averages has stayed in a narrow range through the day today--yet another indication of a range day.
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Midday Briefing for April 9th: Back in the Range

2010-04-09T13:07:00.000-05:00

After making a marginal new high in mid-morning trade, we've returned back into the trading range, returning toward VWAP. Sector performance from the open has been mixed, advancing stocks lead decliners by about 500 issues, but gold and oil have traded off their day's highs. All in all, it's a mixed thematic picture that has helped markets challenge recent highs, but which have not been able to support a trending move to new levels of value.
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Notes on Trading a Range Market

2010-04-09T09:55:00.000-05:00

We've seen some decent moves this morning, but note the importance of catching day structure early in the session. By making the call of range day, we are prepared to fade moves away from the day's volume-weighted average price. We can also then focus on how markets trade above and below VWAP to handicap the odds of a breakout from the trading range.

As a rough rule, I look for the amplitudes of moves above and below VWAP in a range market to be similar: If we trade two points above VWAP before retreating, I'll look for a reversal move to travel two points below VWAP. Focusing on that rule can be helpful in identifying range extensions that become range breakouts.

More:

VWAP and Range Trade

Tracking Market Strength With Moving Average Indicators

2010-04-09T07:53:00.000-05:00

A useful display in the Barchart site charts the percentage of stocks trading above their 20 day moving averages (top chart) and above their 50-day averages (bottom chart).

In general, we can say that the intermediate-term trend is up when more than 50% of stocks are above their 20- and 50-day averages. The longer-term trend is up when over 50% of stocks are trading above their 200-day moving averages. When all three are above 50%, it has been very difficult to make money on the short side for anything more than short-term trades.

Pullbacks in the number of stocks trading above their 20- and 50-day averages to below 50% with the number of stocks trading above their 200-day averages greater than 50% have marked excellent intermediate-term buying opportunities. When those pullbacks occur at successively higher prices, we have a clear longer-term bull market.

Divergences between price and the number of stocks trading above their 20- and 50-day moving averages have marked recent intermediate-term tops in the market. While we've been seeing those divergences relative to the 20-day benchmark, we recently made a fresh peak in the number of stocks trading above their 50-day averages. Given that momentum--the number of stocks trading above their moving averages--tends to peak ahead of price, we can use the trajectories of these indicators to gauge the likelihood of market moves continuing vs. reversing.
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Morning Briefing for April 9th: Near the Highs

2010-04-09T04:51:00.001-05:00

8:56 AM CT - I've added the top Market Delta chart to show how we built volume between 1185 and 1187 in the ES futures, only to fail at resistance outlined below and return to the lower end of the overnight range. Sector performance is mixed; only 23 more declining stocks than advancers. So far, this is looking like a range market; if so, we should oscillate around that VWAP line around 1185. I'm watching how we trade around that volume bulge area at 1185-1187 to handicap the odds of sustaining new bull highs today.

Amidst strength in Asia and Europe and firm crude and metals prices, we broke above yesterday's highs in the ES futures (above) and are now at the top of a multi-day trading range. How we trade near these highs will set the day's trading agenda: failure to sustain buying pressure would target a move back to the overnight lows and the middle of the multiday range. Sustaining the break above yesterday's range would target fresh bull highs. Although we are trading near those highs now, only about 900 stocks registered fresh 20-day highs on Thursday. That has me watching for possible divergences should we trade higher today. More later this AM.
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Reflections on Dr. Brett's Blow Up

2010-04-08T19:59:00.001-05:00

I've worked hard over the years on my trading, developing ideas, indicators, and ways of looking at markets. And making some money.

Today, however, I blew out and lost everything.

It happened so suddenly: one minute everything is going fine, then suddenly I'm falling to earth and my chute won't open.

I was sick to my stomach for much of the morning. It is not easy to see everything you've achieved suddenly wiped out.

And the worst part of all was knowing that it could have been prevented.

No, I didn't lose my money in big trades and oversized risk. What crashed was the hard drive on my computer and everything I had on it: all the writings, all the research, all the records.

So all day today, I've been restoring files and reinstalling programs.

If I hadn't prepared for a catastrophic loss with a good backup service, I truly would have wiped out.

And that's the lesson of all this: to succeed, you have to keep an eye on the ideal, but keep the other eye on what can go wrong. It's the tail risk, the statistically unlikely, catastrophic outcomes, that catch up to people over time and bring them down. That's because no one likes to think about negative outcomes, and it's certainly no fun to actively anticipate and plan for them.

But planning for catastrophe can be the difference between a day's setback and the setback of a lifetime. It's that seahorse vision that accounts for long-term surviving and thriving: one eye on opportunity, the other on threats. One perspective driving you forward, the other keeping you in the game. One plan for the future; the other for backing up and preserving what you have.

Hope and strive for the best. Plan for the worst. And make sure that life's fat tails of risk can't take you out of the game for good.
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Keeping Your Eye on the Ideal

2010-04-08T15:57:00.000-05:00

As I stressed in an important earlier post, great traders creates bridges between the real and the ideal: from where they stand now to where they ideally project themselves in the future. In enacting their ideals, they--to paraphrase Ayn Rand--are living in the future today. That taste of a bright future keeps them motivated and focused. They are not just concerned with solving problems and reducing their bad trading; they're actively trying to build strengths.

This key post on how to change yourself emphasizes that the key ingredient in positive change is the ability to experience ourselves through our ideals. By acting in ways that fit our values and goals, we receive feedback that affirms those values and goals--and we begin to experience ourselves in line with our experience.

From that vantage point, it is far better to trade less often and trade exquisitely well than to trade frequently and haphazardly. Each trade is an opportunity to experience ourselves; each trade is a mirror that shows us who we are. What we see in the mirror is what we'll internalize.

What do your trades mirror about you? Do your trades mirror confidence, decisiveness, hard-nosed discipline, and creative planning? Do they mirror fear: fear of loss, fear of missing opportunity? Do they mirror frustration and a loss of control?

Traders often want to change themselves in order to change their trading. They don't recognize that changing their trading can become a powerful mechanism for changing themselves. By keeping their eyes on the best within them, traders can build solid bridges from the real to the ideal and become the person that they are when they're at their best.

More:

Correcting Weaknesses by Building Strengths

Midday Briefing for April 8th: Bounce

2010-04-08T12:10:00.000-05:00

Notice how we rejected the early lows today when we dipped below yesterday's lows and now have moved above the overnight highs, back into the thick of yesterday's trading range. This is setting up the low 1170 area as important support and, even if we're beginning a topping regime, should have us testing the bull highs--particularly if we see a drying up of selling pressure, as has occurred thus far today with rising lows in NYSE TICK.

Observe also how other risk assets have bounced this morning, supporting the strength in stocks. Resistance starts to kick in around the 1185 area in the ES futures, so that will be a level to watch.
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Morning Briefing for April 8th: Risk Aversion

2010-04-08T07:59:00.000-05:00

Continued concerns over Greece have renewed pressure on the euro, and we can see that stocks have moved back into the top of a multiday trading range after the upside breakout on 4/2. We're also seeing a pullback in oil; gold, however, is stronger. Risk-aversion seems to be the theme of the moment. I am watching closely to see if we can stay below the 1176/1177 area that had represented resistance in the prior trading range. Accepting value into that range would signal the likely start of a consolidation period following the market's strong upside run.
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Imagery, Visualization, and Anchoring: Building Positive Trading Behaviors

2010-04-07T16:18:00.000-05:00

My recent post outlined important steps to take in raising one's trading size. This is one area where imagery exercises can be especially helpful in adapting to changes in your trading. My earlier post on the use of imagery highlights how the proper use of visualization methods can accelerate change processes. The idea is to make the desired change again and again in your mental rehearsals, so that you are prepared to make the right decisions when real-life opportunities occur. Imagery, used in such a manner, is a form of practice: it enables us to build new habit patterns in a rapid and controlled way.

When imagery is paired with a highly focused and relaxed state, it begins to look like a self-hypnosis routine. What you're really accomplishing with the imagery is a kind of self-suggestion: you are preparing yourself to act in a desired way in a targeted situation. Indeed, by staying very focused and calm during actual trading, you can activate the scenarios that you've practiced. Such "anchoring" is an unusually flexible and powerful psychological technique: by linking a desired behavior to a distinctive mind state, you invoke the behavior whenever you enter that state.

Notice that the goal of the exercise is to turn a positive trading behavior into a regular, automatic practice. Too often traders focus on reducing or eliminating problems, when in fact they would be better off by building on their best trading practices and making those more consistent. That is the essence of the solution-focused approach, and it's a great application of imagery.

More:

Changing Behavior: What Works

Preparing for Hot Trading Situations

Growing Your Trading Size: How to Take More Risk

2010-04-07T06:55:00.000-05:00

A developing trader recently asked me one of the most common--and important--questions that I encounter: How do I become comfortable growing my size and taking more risk?

One advantage to starting out trading small is that you have the time to make all your mistakes without wiping yourself out financially. Many traders take imprudent levels of risk early in their development and never survive their learning curves.

But learning to trade small has its downfalls. Once habituated to a given level of risk and reward, we can find it difficult to adjust to the much larger dollar volatility of returns when we trade larger. Nothing is more discouraging than making money over an extended period trading small, only to give it all back in a few losing trades once size is increased.

That larger size, increasing the dollar size of both wins and losses, can also magnify emotional responses to performance. Ironically, this can be as problematic after large wins as after large losses.

Three principles should dictate your trading development vis a vis the size and risk issue:

1) If a bump up in size *feels* much different to you, it's more likely to impact your trading adversely. Gradual increases that you adapt to thoroughly before bumping up your risk again can help you grow into a large trader naturally;

2) If you're not profitable and trading well at incrementally larger size/risk, don't bump up the size/risk further. Make sure you're trading well at your current level before expanding your business;

3) Follow your percentage P/L, not your dollar P/L. Get yourself accustomed to thinking in basis points (hundredths of a percent) and percents, not in absolute dollar amounts. That way, when you're down 50 basis points in a day on a $5,000,000 portfolio, it won't feel significantly different from being down 50 bp on a $500,000 portfolio.

In percentage terms, trading larger doesn't have to mean taking more risk. The key is risking a fixed portion of your portfolio value each trade, each day and growing your size as your portfolio grows. That will also have you cutting your size when you draw down.

Just remember: at some point, you *will* encounter strings of losing trades. Make sure your larger size will not dig you into a damaging hole when the inevitable slump occurs. Too many traders focus on trading big, when their proper focus should be on trading bigger.

More:

The Psychology of Reward and Risk

Learning How to Lose

Avoiding Risk of Ruin

Morning Briefing for April 6th: Mixed Signals

2010-04-06T10:12:00.000-05:00

Note how we traded lower during pre-opening trade only to move back into the overnight range and then back into yesterday's range (top chart). Advancing and declining stocks are relatively even, and we're seeing little change in oil. Rates are lower, and USD is lower vs. Aussie dollar but up vs euro. All in all, the themes that were strong yesterday are mixed today. NYSE TICK (bottom chart) shows very little significant selling pressure for the second day running. We're also not seeing very strong buying pressure. As long as Cumulative TICK stays positive and we don't see significant selling pressure, I expect stocks to be able to drift higher in a low volatility mode.
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Tuesday Morning Views

2010-04-06T05:37:00.000-05:00

* Questions for the end of the trading day to move your performance higher;

* The importance of job satisfaction for traders;

* Excellent perspectives on practice and gaining experience;

* Australia raises rates; AUD higher;

* Bond buyers continue to look for yield and other good readings;

* USD gaining as a reserve currency vs. euro;

* Prospects for an overbought market;

* No expectations of change in Fed policy;

* No double dip for housing likely;

* Where surfing the Web is riskiest.

Trading Stress, Burnout, and Renewing Our Emotional Fuel

2010-04-05T19:50:00.000-05:00

A while back I wrote a post on the topic of what stresses traders out. When traders face high levels of emotional stress over time, the result can be a form of burnout. Overwhelmed by obstacles and challenges, traders shut down. They stop learning, and they stop taking the actions needed to move their progress forward.

In a past post, I highlighted five signs of psychological burnout among traders. Many times, that burnout results when trading is no longer providing a sense of purpose and accomplishment. When traders lose sight of the process of trading--and improvements they're making in their trading processes--it becomes easy to fall into a rut where P/L dictates mood. That can make slumps very difficult to endure.

Very often, it's not just the stresses of markets that overload traders; it's also the stresses that traders can impose upon themselves. It's easy for achievement-oriented traders to become their own worst enemies when they're not making money: instead of focusing on constructive improvements, they beat up on themselves and add self-imposed stress to trading pressures.

Changing our self-talk can be a very effective way of defusing stress. The key is to become a good observer of our own thought processes so that we can ask whether we are approaching a situation in a constructive or destructive manner. If setbacks are treated as learning experiences, they are unlikely to generate stress and distress. If we view setbacks as failures and reflections on our competence, then we generate our own stress.

One of the most important steps we can take in preserving and enhancing our motivation and drive is to stay goal-oriented. If we are fixed on a meaningful goal, we're likely to acquire energy. If we're fixed on our shortcomings (and blaming ourselves for those), we're likely to lose energy. Burned out traders use up their emotional fuel. A key to longevity--and successful self-coaching--is keeping the meaningful goals always in front of us, so that we are always renewing our emotional fuel.
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Another Look at the Global Growth Theme

2010-04-05T16:58:00.000-05:00

We are seeing upside breakouts across markets, suggesting that the growth theme is truly global.

Note that emerging market stocks (EEM, top chart), which had been lagging, have broken to the upside with a vengeance. Today we saw that strength carry over to another recent laggard, small cap stocks in the U.S. (IWM, second chart from the top).

Amidst indications of global growth, we're seeing considerable strength in oil prices (USO, second chart from bottom). We're also seeing the long end of the yield curve price in a bit of inflationary expectation, with 10-year rates breaking to the upside ($TNX, bottom chart).

Until we have more concrete evidence of central bank tightening in the face of such growth--and that might have to wait for inflation to push unemployment off the front pages--I would expect markets to continue to respond to the low interest rate/low inflation/improving growth environment.
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Stock Sector Performance and the Sentiment of Money Managers

2010-04-05T14:28:00.000-05:00

In my previous post, I showed how the day's theme manifested itself through the relative performance of various asset classes that trade on futures exchanges. Often, we can also detect those themes via the relative performance of sectors within the stock market.

As the above graphic from FinViz indicates, we've seen strength among natural resource-related stocks (Basic Materials) today, with the growth-sensitive industrial and tech stocks also performing well. The more defensive consumer goods, utilities, and health care issues have been relative performance laggards.

In a strong market, we should see growth-oriented and natural resource-related sectors outperforming more defensive sectors; a weak market will feature the reverse. By tracking relative performance over time, we can detect sector allocations and reallocations and read the short-term sentiment of money managers.
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Midday Briefing for April 5th: Growth Themes Dominating

2010-04-05T12:47:00.000-05:00

As the above futures heat map from Barchart.com shows, we're seeing markets respond to global growth themes. Energy contracts are quite strong, as are metals, as traders and investors anticipate continued strong demand. We're also seeing solid upside among stock indexes and continued selling of 10-year Treasuries, pushing yields toward the 4% level. Currencies from resource-rich countries continue to outperform the U.S. dollar, led by the Canadian dollar. As long as the growth themes dominate, particularly with inflation not in the headlines, there is underlying support for the stock market.
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Morning Briefing for April 5th: Watching Divergences

2010-04-05T08:08:00.001-05:00

9:47 AM CT - I've added the chart of NYSE TICK (top chart) to show how buying sentiment is strongly dominating the session. That is expanding market strength, with small caps leading the way higher. Clearly, the theme of robust growth is keeping the trend alive, and we're seeing strength among the indicators early today, with advances leading declines by almost 1600 issues.

Note that, as we're setting up for the market open, we're seeing fresh highs in the S&P 500 Index futures, but the NASDAQ 100 futures (above chart) are decently below their highs, trading in a multi-day range. The same is true for the Russell 2000 Index, which--in premarket trade--is set to open modestly higher but below its bull peak.

Meanwhile, watch the behavior of the Consumer Discretionary (XLY); Consumer Staples (XLP); Energy (XLE); Health Care (XLV); Financial (XLF); and Technology (XLK) ETFs. All are trading below their bull peaks. As noted in the recent indicator update, this has been a significant bull run, but it has become far more selective lately.
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Indicator Update for April 5th

2010-04-05T07:13:00.000-05:00

Last week's indicator review found that upside momentum had pulled back, but that little had changed from the prior week's bullish outlook. This past week has seen a continuation of this mode, as we reached fresh bull highs in the major stock market averages and new highs in the advance-decline line specific to NYSE common stocks.

Sector behavior continues to be solidly bullish (top chart), as assessed by the proprietary Technical Strength measure. Note that we've barely seen any bearish readings in Technical Strength over the past four trading weeks. Energy stocks showed the greatest gain in strength, on the heels of a strong oil market. We also saw gains among Materials shares, reflecting commodity strength. All sectors are in short-term bullish modes, with Technology stocks displaying weakness relative to the others.

As I mentioned recently, there are yellow caution signals for the bull, including diminished upside momentum and quite bullish sentiment. The weakened momentum is evident from the Cumulative Demand/Supply Index (middle chart), which nonetheless remains very modestly positive. Recall that this index tracks the cumulative number of stocks trading above vs. below their volatility envelopes; it tends to peak ahead of price, and this cycle appears to be no exception. As long as we see successive troughs in the Cumulative DSI at higher price levels, the longer-term trend of the market remains up.

Finally, we see that new 20-day highs vs. lows (bottom chart) have weakened noticeably as this rally has progressed. This is perhaps the greatest of the yellow lights that I'm seeing in the market: the rally is becoming more selective, not broadening. That typically precedes corrective action. Thursday saw over 500 new 20-day lows; a continued elevation of that number would make me particularly cautious about the upside.

In sum, it appears that we have an aging bull cycle within the larger bull market that began last year. As always, I'll be posting updates to the indicators each morning before the open via Twitter.
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Wrapping Up the Holiday Weekend With More Good Reading

2010-04-04T19:48:00.000-05:00

* What we find among emotionally intelligent traders;

* The most important form of training for success;

* Excellent, thoughtful post on how not all markets are the same;

* Facing competition from a superstar can lead competitors to give up;

* Stock trading journal offering a free trial;

* NCAA lesson in staying in a rhythm;

* Issues in selecting an emerging markets ETF;

* Bullish sentiment on the rise;

* End of the bull market in bonds?

A Few Caution Signals for the Bull Market in Stocks

2010-04-04T13:21:00.000-05:00

After hitting fresh bull market highs late this past week, we saw continued bullish sentiment in the CBOE put/call ratio (top chart), with readings more characteristic of those that have occurred at recent market tops than bottoms.

Upside momentum has continued to wane as the market has plowed higher (bottom chart), but is nowhere near oversold levels.

Meanwhile, the rally has continued to become more selective. Across the NYSE, NASDAQ, and ASE, we saw 3059 20-day highs on March 5th, 2706 on March 17th, 1554 on March 23rd, and 1362 this past Thursday. Thursday also saw 501 new 20-day lows, a level elevated from those seen in early March.

All of these are yellow caution lights for the bull that I will be following closely going into the new market week. Tomorrow morning I will post the weekly indicator review and, of course, each morning before the market open I'll post an update of indicators via Twitter.
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Insights and Inspirations From Legendary College Basketball Coaches

2010-04-04T07:10:00.001-05:00

In this Final Four season, I thought I would share some insights and inspirations from a few favorite coaches:

* "Winning takes talent. To repeat takes character." - John Wooden

* "Mental toughness is to physical as four is to one." - Bob Knight

* "Two are better than one if two act as one." - Mike Krzyzewski

* "Failure is not fatal, but failure to change might be." - John Wooden

* "Confrontation simply means meeting the truth head-on." - Mike Krzyzewski

* "It's the little details that are vital. Little things make big things happen." - John Wooden

* "The key is not the 'will to win'...everyone has that. It is the will to prepare to win that is important." - Bob Knight

* "If you don't have time to do it right, when will you have time to do it over?" - John Wooden

* "Believe that the loose ball that you're chasing has your name on it." - Mike Krzyzewski

* "Talent is God given. Be humble. Fame is man-given. Be grateful. Conceit is self-given. Be careful." - John Wooden

* "You don't play against opponents. You play against the game of basketball." - Bob Knight

* "When you cleanse yourself of a big victory, you may open yourself up for an even bigger victory." - Mike Krzyzewski

* "It's not so important who starts the game but who finishes it." - John Wooden

* "Everybody hears, but few listen." - Bob Knight

* "Discipline is doing what you are supposed to do in the best possible manner at the time you are supposed to do it." - Mike Krzyzewski

* "It's what we learn after we know it all that really counts." - John Wooden

* "Everyone wants to be on a winning team, but no one wants to come to practice." - Bob Knight

Three Core Competencies I See Among Successful Traders

2010-04-03T19:05:00.000-05:00

I've been impressed by how different successful traders are in their personalities, their ways of trading, and their ways of viewing markets. There are, however, a few similarities that stand out among those who have made their livings from markets:

1) Thinking in Themes - Traders look at different themes across different time frames, but the good ones synthesize market information and arrive at a view of how their markets are likely to trade. Instead of impulsively buying or selling when a market makes a new high or low or when a chart assumes a particular configuration, they see a broader chessboard: how other markets are trading, how the smaller timeframe fits into larger ones, etc. This ability to synthesize data and arrive at themes is a large part of what helps traders make sense of markets and develop the confidence to take meaningful risk in search of superior rewards.

2) Managing Risk - The successful traders lose, and many times they lose frequently. But they know how to lose. They define their acceptable losses in advance and ensure that their largest winning trades will make far more money than they lose from their largest losers. They keep daily, weekly, and monthly losses under control, so that they can learn from losing periods and return into the black once they see markets well. The really good traders go into slumps like the rest of us, but they don't draw down very far during those periods.

3) Staying Flexible - Successful traders have the ability to place big bets on views they feel strongly about, and yet they also have the ability to change those views promptly when markets no longer confirm their expectations. This mental flexibility is what enables a trader to catch breakouts from ranges, as well as the ends of trending moves. The really good traders mentally rehearse a variety of market scenarios; they don't just get married to one. This prepares them for rapid action when they see one of those scenarios unfold in real time.

Understanding how *you* trade when you're at your best is perhaps the single most important thing you can do to move your performance forward. If you understand *your* three core competencies during your successful periods, you're more likely to draw upon those with greater consistency--particularly if you can transform your best practices into firm trading rules.
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Selecting Trading Coaches: Three Considerations

2010-04-03T14:52:00.001-05:00

Suppose you've been struggling in the markets. You've been thinking of consulting a trading coach, but you're not sure what to look for. Here are three considerations you might keep in mind:

1) Figure out the problem before you search for a solution - Many people think they need help in taming their emotions when, in fact, it's faulty trading that is frustrating them. A while back, a trader talked to me about his need for counseling; although he was usually a calm person, his emotional outbursts were interfering with his decision-making. When we drilled down to figure out what was sparking the outbursts, we found that he was making major mistakes in placing his stop-loss and exit points. By correcting his trading process, we eliminated much of the problem. Don't always assume that working on emotions will help trading; sometimes the reverse is the case!

2) Take the time to find the right fit - We know from a wealth of research in psychology that the best predictor of success in any efforts at change is the relationship between the people working on the change. A coach can be experienced and qualified, but if the fit isn't there, the experience is likely to prove limited. One aspect of that fit is ensuring that the coach has some decent knowledge of the markets and strategies that you're trading. Personally, whether its athletics, chess, or markets, I would never work with a coach that didn't have some background in the game itself.

3) How well does the coach follow his/her own advice? - I wonder about performance coaches who don't evidence solid performance in their own fields. If a coach is not a productive, high performer, how well can he or she guide your performance? Look for tangible achievements, not boasts of success: a productive person produces. One simple gauge: check out the coach's website. If it's not updated in a while and if it is weak in its content, you know there's a problem. People who have ideas and innovations to share are happy to put their best foot forward to the world: it's the most effective marketing possible.

Finally, make sure you've tried everything on your own before deciding to rely on any coach. My Daily Trading Coach book was specifically written so that traders could learn to act as their own coaches. Once you acquire skills to move yourself forward, you'll have those for life: that can serve you well for a long and successful career.

More:

Steps Toward Coaching Yourself

Self Coaching and Training

Good Holiday Weekend Reading

2010-04-03T08:09:00.000-05:00

* One of my better posts: the most important source of trader self-sabotage;

* Lessons learned from writing this blog;

* Interesting pivot indicator from BZB Trader;

* Improvement on the jobs front;

* Thanks to a sharp reader for the link to this multimedia view of the increase in unemployment;

* Comparison of job losses across recessionary periods;

* Top reads from Abnormal Returns;

* Here's a fresh short-squeeze portfolio;

* Four promising dividend stocks;

* Different ETFs for playing China.

Clarifications Regarding Price Target Calculations

2010-04-02T18:36:00.000-05:00

I've been inundated with questions regarding the first and second posts detailing methods of calculating price targets. Here are responses to the more common questions:

* All calculations are in Excel; Excel functions will calculate medians and averages for you. No complicated spreadsheet programming or statistical software is needed;

* The data come from my archives, which is why they go back to late 2002. It's a sample of convenience that cuts across a variety of market conditions;

* Other values can be used, and I encourage readers to experiment with their own formulas. In place of the day's average price, you could use the pivot level for the day or the day's VWAP. A promising variation is to use today's open and calculate price targets around that;

* The basic approach from my second post can be used for any stock or ETF. You'll simply need to adjust the constant in the formulas for R1/S1, R2/S2, R3/S3, etc. Instead of using .60, .80, and 1.0 as in SPY, for instance, you'll need to define the proper constants for each market;

* Using weekly data instead of daily data will give you price targets for the following week. (Those constants need to be adjusted as well). That is very useful for swing traders. I post weekly price targets for SPY each Monday morning via Twitter;

* Formulas for the ES futures will look different, because the pivot and volatility calculations will incorporate overnight trading data. With SPY, there is no overnight data embedded in the formulas.

Hope that's helpful. My goal in providing the formulas is to encourage you to think of trading in a different way, with an emphasis on exits and targets, not just entries. If my posts raise questions and lead you to explore the data on your own and find relationships different from the ones that I have shared, I will have succeeded in my mission!

Thanks as always for the interest and support.
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Productivity and Success in Life and Markets

2010-04-02T15:37:00.000-05:00

As the saying goes, the difference between "try" and "triumph" is a little "umph". But where does that "umph" come from?

When we read through the research literature on factors that distinguish highly productive and successful people, we find that the capacity to sustain directed effort ranks high on the list. Dean Keith Simonton found that creative geniuses fail (i.e., they produce undistinguished works) as often as their more pedestrian colleagues. What differentiates the geniuses is that they produce so much more than others. If 5% of one's output represents true excellence, the person who generates 100 works will have five memorable successes. The person who generates 10 works may produce nothing memorable.

I find this to be true among very successful traders: they simply generate more ideas than their peers. They come up with more ideas regarding market, they invent more ways of viewing markets, and they arrive at more tweaks to guide their trading. It's not that they run from one promised holy grail to another. Rather, they generate new views of markets and trading that open doors to fresh opportunity.

One trader I worked with came up with a promising idea for a trading signal. He tried it in one market and it failed dismally. He persisted and tried it in another market and it gave random results. He then tried it on a different time scale and found considerable promise. After further refinements, that signal now makes good money for the trader.

Had the trader given up after the first or second attempt, he would have never found a creative solution for his trading. It was persistence--the capacity to sustain a search--that enabled him to succeed.

But it wasn't that he was more motivated to make money than other traders. Rather, he was more motivated by the process of finding solutions. He loved the hunt, the challenge of finding new ways to view and trade markets. What turned him on was the process of discovery, not just the prospect of profits.

What gave the "umph" to his "try" was interest and curiosity. He was as engaged in markets when they were closed as when they were trading. He didn't have more motivation than others; he had the right kind of motivation.

More:

Blueprint for an Uncompromised Life

What It Means to be Free

Intentionality and Trading

Bonus Post #2: A Different Method for Calculating Volatility-Adjusted Price Targets

2010-04-02T06:47:00.000-05:00

My recent bonus post explained one of the ways that I've found helpful to think about and calculate price targets for the trading day. As background for this topic, please check out the posts on defining effective price targets and the importance of volatility in trade planning.

This will be my second and final bonus post on the topic. As with the earlier one, I will be keeping it on the site for a limited time as a thanks to current readers. If the ideas interest you, you might want to print the post out or jot down the relevant ideas.

In this post, I will explain how I calculate the daily price targets that I post each morning via Twitter. I'm in the process of tweaking my weekly target calculations and will wait for a future occasion to share those.

CALCULATIONS

The calculations begin with the day's pivot level, as I define it:

Pivot = (H + L +2C)/4

Today's pivot price is defined as the average of yesterday's high price plus yesterday's low price plus two times yesterday's closing price. That gives us an approximation of yesterday's average trading price.

Going back to late 2002, we touch the pivot level during today's trade on 70% of all trading days. This is a useful "reversion" target if we open above the pivot, but cannot sustain buying or if we open below pivot and cannot sustain selling. (The current day's VWAP for the index futures contracts is generally my first reversion target).

As mentioned in the earlier post, the overnight high and low price and the prior day's high and low are generally my first price targets. Along with the pivot level and VWAP, those are generally targets for the first trades I will place during the day. Once I know those targets, it's a matter of: 1) discerning the balance between buying and selling sentiment, as well as sector and intermarket dynamics, to gauge direction; 2) assessing today's volume relative to yesterday's (and the prior five days' average volume) to gauge evolving volatility; 3) executing the trade in the identified direction at a price that provides a favorable level of reward relative to risk; and 4) holding the trade to the price target most likely to be hit given the market's current strength and volatility.

(The above paragraph is a concise description of how I trade on the day time frame).

The price targets above the prior day's high are identified as R1, R2, and R3. The price targets below the prior day's low are identified as S1, S2, and S3.

To calculate this levels, we need an estimate of recent volatility. That estimate in my calculations is the median daily price range for the past five trading sessions in SPY. Thus, each day we calculate the Daily Range: DR=((H-L)/O)*100. That is the difference between the day's high and low prices divided by the opening price multiplied times 100 (to give us a percentage). The Volatility estimate (V) for our calculations is the median of the prior five days' DR values.

As I mentioned earlier, going back to 2002, the median volatility for the prior five days correlates with today's volatility by .80. Knowing V gives us a good idea for today's DR.

So now we can define our R and S price targets:

R1 = Pivot + (.60*V)
S1 = Pivot - (.60*V)

Going back to 2002, we touch R1 or S1 about 84% of the time. If the volume today is anything like yesterday's volume, R1 or S1 should be hit during the day.

R2 = Pivot + (.80*V)
S2 = Pivot - (.80*V)

Going back to 2002, we touch R2 or S2 about 66% of the time. If today's volume is above average, we should hit R2 or S2 during the day.

R3 = Pivot + V
S3 = Pivot - V

Going back to 2002, we touch R3 or S3 about 50% of the time. If today's volume is meaningfully above average, we should hit R3 or S3 during the day.

R4 = Pivot + 1.2 V
S4 = Pivot - 1.2 V

Going back to 2002, we touch R4 or S4 about 36% of the time. We need to see volume today much greater than the recent average volume to have confidence in hitting R4 or S4.

Obviously, you could define R5 and S5 levels (and beyond) accordingly for relatively rare occasions of high volume trending and range breakouts.

NOTES ON THE CALCULATIONS

These price levels were calculated and tested empirically in Excel using historical data. They are not based on any Fib or any other numerical scheme.

A worthwhile tweak on the above methodology would be to use today's Open price in lieu of the Pivot for the calculations.

Another tweak substitutes weekly data for daily data to use for swing trading.

Another tweak is to adapt the formulas to different trading markets.

Knowing how far a market is likely to move in a direction is invaluable in guiding the placement of stop and exit levels and calculating the risk/reward parameters of a trade. By adjusting price targets for recent volatility, traders can adapt quickly to faster and slower market conditions. The price targets are not necessarily hard exit levels; rather, they provide anticipation of where those proper exits are likely to occur.
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Reflections on Life, Motivation, and Impotent Goals

2010-04-01T18:23:00.002-05:00

Motivational guru Tony Robbins once observed, "People are not lazy. They simply have impotent goals - that is, goals that do not inspire them." My experience is that this is very true of traders: many of their goals are impotent. They are written in a journal or a post-it note attached to the computer monitor, but they are not inspiring goals. They don't bring a hunger for action.

We chastise ourselves for lack of discipline when we don't follow through on our goals, but we never stop to think that maybe our goals sell us short.

Show me a person who has trouble getting out of bed in the morning and I'll show you a person with impotent goals. A child has no problem leaping out of bed early Christmas morning to see what Santa has brought. That same child on a school morning? It might take a few rousings to get out of the sack.

A big part of middle age is getting so caught up in putting out fires that you forget all about setting the world ablaze. Kids have no problem dreaming about hitting that 9th inning home run for the Yankees or being a superhero. Somehow that gets lost in concerns over "practical" matters, as The Little Prince realized. But an impotent life is not a practical life at all.

Your job isn't to find the next great market trend or setup. It's to find the goals that inspire you, that will get you springing out of bed in the morning and excited to be tackling life through the day. As long as you have those, you'll stay young at heart--and spirit. And you'll persist and find those trends and setups.

More:

Vitality and Life Success

Five Questions for Starting a Virtual Trading Group

2010-04-01T12:34:00.001-05:00

If I were helping start a virtual trading group, I would suggest that each member come to the first "meeting" with the following information:

1) What recent improvement in your trading process has been most effective for you? Please explain this "best practice" and how you incorporate it in your daily trading;

2) What entry setup is most effective for you? What markets and time frames do you utilize this setup?

3) What is most effective for you in managing risk? How do you incorporate good risk management on a daily basis?

4) How do you most effectively exit your trades, and how do you plan those exits?

5) Where do you most need to make improvements in your trading, and how can the group help you with that?

If you don't have concrete answers to those questions--or aren't willing to share those answers--a group won't be of benefit. But if you have clear strengths to share and are open to allowing others to assist with your weaknesses, a group can become much more than the sum of its parts.
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Divergences Showing Up in the Stock Market

2010-04-01T10:16:00.000-05:00

Note the divergence between the ES futures (top chart), which made a fresh high this morning, and the Russell 2000 Index (IWM, bottom chart), which has stayed below yesterday's high and well below its prior peak. During the market's solid run up, small cap stocks led the way. Now we're seeing them underperforming, and that is showing up in the rather tepid readings from the new 20-day highs vs. lows. We've seen, thus far, only a little over 1000 stocks make 20-day highs so far today, well below the 3000+ new highs from earlier in March.

If you examine daily charts of the S&P 500 sectors, you'll also see that many did not register new highs so far today. I'm keeping a close eye on those divergences, as failure to follow through on the upside would target a return to the recent trading range.
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Advice on Joining or Forming a Virtual Trading Group

2010-04-01T08:09:00.002-05:00

I've been impressed with the number of readers who have expressed an interest in forming or joining a virtual trading coach, per the comments to my recent post.

In keeping with my suggestions regarding networking, I would like to second the ideas tossed out by a few traders that interested participants do more than simply indicate their availability. By outlining what markets you trade, how you trade them, how long you've traded, and what you're looking for in a group, you will help others reach out to you. It will also make it easier for others to respond to you should you reach out to them.

The key to making groups work is to find common interests and complementary skill sets. It's just as important to identify what you would bring to a group as what you hope to get out of it. The more you can make those things visible, the easier it will be for you to connect with others.
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