I recall a trader who was struggling with his trading, getting out of winning trades too early and letting losing trades run. His coach worked with him tirelessly to keep daily journals and track his discipline. Amazingly, the more he worked on his "process", the more erratic his trading became. Eventually he could not sustain his career and went into other work. It was one of the first times I had seen coaching directly lead to a trader's demise. The problem was that the trader was placed on a strict risk management regimen. Essentially he had a mandate to make money, but lose very little. This tight regime led him to trade increasingly short term to limit his losses. That short term horizon did not allow him to meaningfully participate in the bigger picture ideas he generated. On the few occasions in which he did try to faithfully follow his research, he drew down before the position ultimately worked out and had to stop out prematurely. That compounded his frustration. Quite simply, the trader's strength was as a big picture thinker and investor. He was given a mandate to be a trader and that took him out of the zone of his strengths. Journaling and rigidly adhering to a process that did not capture his strengths only served to block and frustrate those strengths. His weakness was a function of strengths that could not find expression. So it is with many traders. They work and work and work on their "discipline" and "process", when in reality the problem is that their trading method does not capture their true cognitive and personality strengths. If you are finding that the usual psychological approaches are not helping your trading, I encourage you to check out the recent article on how our strengths can create weaknesses. My hope is that the article gets you thinking about your strengths in a new light, so that, instead of working on "problems", you can focus on leveraging the best of your information processing, emotional, and interpersonal assets. If your trading results aren't what you hoped, even after considerable work, perhaps you are trying to participate in markets in ways that thwart the best of who you are. Working harder at the wrong things can only produce disappointing results. We are best able to figure out markets if we first have figured out ourselves.
* If you want to know another person's psychology, just listen to their words and observe their actions. Are they dwelling on the past or creating opportunity for the future? Do they express anger and frustration or gratitude and fulfillment? Do they actively create positive experiences for others, or are they largely focused on their own needs? Do they seek adventure or the sameness of routine? If their words and actions were foods, how nourishing would you find their diet? Does your trading reflect awareness and acceptance, or does it come from a place of ego? All the psychology in the world won't help a trader living the wrong values. Our psychology reflects our values in action. * Seriously, if you haven't delved into Weighing the Week Ahead and all its links, you're missing some solid market prep. Check out winners of Jeff's Silver Bullet Awards: perhaps a gold bullet should go to winner David Bailey and colleagues for consistently provocative, thoughtful research. * Nice to see Merritt Black teaching new traders with a framework of auction theory and Market Profile. Recognizing value areas in markets and how volume behaves as we move away from value is key to understanding short-term price action. Jim Dalton's work remains a tremendous resource in making sense of seemingly random market behavior.
Two of the most powerful psychological assets in trading are awareness and acceptance. Let's look into those. Awareness means that we consciously direct attention to something. We become a keen observer; we focus our attention. Self-awareness means that we direct our attention inward and observe ourselves. Market awareness means that we step back from moment to moment price action and observe something about the market. We most effectively act on something if we sustain awareness of it. As Branden's quote suggests, however, awareness means little if it is not accompanied by acceptance. In a state of acceptance, we are open minded; we readily process what we observe. When we lack acceptance, our awareness cannot become insight. We shut off our awareness when we fight against it. Acceptance means that, sometimes, we have to process information that is uncomfortable. The trader who lacks awareness is clueless. The trader who is aware but who lacks acceptance is defensive. This is a very important principle. When we find ourselves becoming tense or frustrated in trading, it is often because we are aware of something we have difficulty accepting. Whatever that something is, is usually important. Yesterday I was trading long in the market early in the day and doing well. I then did my usual thing, waited for a qualified pullback and bought. The market ticked higher, stalled, and then went to a lower low on increased selling pressure and volume. My awareness said, "This shouldn't be happening." My acceptance said, "This is the wrong trade." I exited for a small loss. Then, however, a second level of acceptance kicked in. I said to myself, "A good trade that fails can be a signal in the opposite direction." In other words, if flows truly had shifted in the market, we should not look back and surpass the highs that preceded my qualified pullback. That acceptance of a change in market flows/direction allowed me to sell the next bounce and, indeed, continue to trade the short side in the afternoon. That made for a good day of trading, but it was only because I could truly accept the information the market was providing. Earlier in the week, I was locked into a view that we would move higher in the market and failed to accept the same exact information. That not only led to losing trades, but the failure to capitalize on potential winning ones. Interestingly, my lack of acceptance interfered with even my awareness. A closed mind cannot accept, but it also is hampered in processing what is in front of us. It is not enough to try to eliminate negative emotions in trading. Many of those emotions, from uneasiness and nervousness to frustration and discouragement, reflect an awareness that we are having trouble accepting. Losses and missed opportunities are less threatening when we view them as tools for expanding our awareness and gaining new perspectives. As in my case, the losing trade was the catalyst for winning--but only because of awareness and acceptance. Further Reading: The Power of Self-Awareness in Trading
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In mid-2014 I hit upon an idea for analyzing the strength and weakness of the overall stock market. Suppose we took every stock in the New York Stock Exchange and assessed whether it gave a buy signal, a neutral signal, or a sell signal for a standard technical indicator, such as Bollinger Bands. Such a measure would capture the breadth of strength and weakness for stocks as a whole, not just for the index itself. Would this be a useful measure? It turns out that the measure was indeed useful and I began collecting the data daily from the Stock Charts website. Then I hit upon another idea. The signals from cumulated stock performance on one indicator (such as Bollinger Bands) were different from the signals from other indicators (such as RSI and Parabolic SAR). Might it be useful to create an indicator of indicators? This would show occasions when we have strength and weakness across all stocks *and* all indicators. The resulting cumulative indicator measure is charted above from 2016 forward (indicator in red; SPY in blue). Even within the considerable uptrend we've had over that period in SPY, we've seen relative periods of overbought and oversold in the measure. Note that we currently stand at a significantly oversold level. Going back to June of 2014, when I first began accumulating these data, next ten day returns in SPY have averaged +.01% when we have been in the top half of the distribution for the cumulative measure. When we have been in the bottom half of the measure, next ten day returns in SPY have averaged +.63%. This is a significant value effect. Returns have been significantly better over a swing period when we've been oversold than when we've been overbought. If we break down returns by quartiles, the upside returns are even more striking in the weakest (most oversold) quartile, which is where we stand now. Interestingly, when the indicators have been simultaneously strong, we've seen superior upside returns over the same ten day horizon. In other words, the cumulative measure is capturing both a value effect (buy when things have gotten weak) and a momentum effect (buy when there is a broad thrust higher). Returns have been subnormal if we are not broadly weak or broadly strong. This is a nice illustration of the value of "big data" and especially the value of well-conceived unique data sets. As a discretionary trader, I find it crucial to be quantitatively informed. I observe that integration of discretionary and quantitative among the great majority of the successful traders and portfolio managers I work with. Even for longer time frame active investors, timing market entries and exits with shorter-term measures that capture value and momentum can meaningfully enhance returns.
During the summer months, I have made a concerted effort to work on my trading. My year to date results had been well below my average returns and indeed had turned negative for the first time in recent memory. I took that as a worthy challenge and engaged in a detailed review of what was working and what wasn't working in my trading. I'm pleased to say that the results of this work have been quite positive, not only turning the P/L around but also instilling both a consistency of process and a consistency of results. Below I share a few of the things I have learned in my trading that might be of help to other traders who are adapting to challenging, low volatility markets: 1) Think in Cycles - This has been one of the two greatest changes I've made in my trading. I stopped thinking about trends and ranges entirely, I don't focus on chart patterns, and I don't pretend to know what the "big players" are doing apart from noting volume patterns. Instead, I am identifying dominant cycles in the market at short, medium, and longer time frame and focusing on how those cycles interact with one another. I am focusing on cycles of volatility in the market, as well as cyclical price action. This has been a much more effective way to participate in directional market behavior, especially when implemented in event time. The cycle framework has naturally made me more flexible as a trader: at certain junctures in a cycle, I am a "trend" trader, following the momentum that occurs when cycles line up. At other cycle junctures, I am a "mean reversion" trader, adjusting to the "choppiness" that occurs when cycles are not aligned. Most of all, I've become better at focusing on dominant cycles and the ways in which volatility regimes shift the cycles that dominate. 2) Focus on Execution - A side benefit of the cycle framework is that it allows for simultaneous tracking of short term and longer term cycles. The short term cycles become extremely useful in entry and exit execution, allowing the trader to extract more from each trade. I find that the difference between good entries and exits and poor ones in low volatility markets is an important component of making and losing money. I might be trading a longer term cycle, but I will use a short term cycle to get in near a trough and exit near a peak. This is a bit counterintuitive, as you're buying when things look worst and selling when they've been recently strong. By giving execution a short volatility bias, it's helped me participate in directional moves that do occur. 3) Focus on Trading Spirituality, Not Just Trading Psychology - This is subtle and is a topic not everyone is comfortable with. Trading just doesn't work when it is *me* focused. Me making money, me losing, me becoming successful, me working on my state of mind, etc. Once the ego is the focus, we lose flexibility and perspective. I of all people should know that: as a psychologist, if therapy ever becomes about me, I lose my effectiveness. The skill of a therapist is in listening, understanding, and responding to another person. If I'm concerned about my income, my reputation, or my feelings about the other person, I lose my focus and my impact. In the past months, I've regrounded myself in my religion and made spiritual readings a daily part of my morning routine. The change in perspective has been dramatic. A turning point occurred when my research yielded a very good trade opportunity. I didn't feel excitement, conviction, greed, or any of those things. I felt grateful. It's a big change. I'll be doing a free online workshop this week and will be happy to amplify these ideas. Setbacks occur for a reason; they point the way to new directions we need to take. I hope you always have setbacks in your trading and I hope they always make you a better trader--and a better person.
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I've recently found group coaching sessions to be highly productive. When a group meets with me for coaching, we can discuss the common challenges members are facing and each person can learn from the experience of others. In recent sessions, I've outlined specific psychological and trading approaches that address those challenges, so that group members can take away concrete goals and directions for improving their trading. I'm pleased that Futures.io is hosting a free group coaching session with me at 4:30 PM on Wednesday, August 9th. The extended "ask me anything" format means that this will *not* be a lecture-style presentation. Rather, attendees will be part of a group that interacts for group coaching. Participants can ask questions about their personal lives, their trading approaches, psychological challenges they face in trading, how to join trading firms, and much more. Here is the link for registration for the event. Space in the room is limited, so please sign up early. And start thinking about the best questions you have regarding trading psychology. It's a great opportunity to learn from each other's experience! Thanks as always for the interest-- Brett
One of the most striking differences among traders I have encountered is their grounding in a problem-based mindset versus an opportunity-based mindset. The problem-focused trader is chronically frustrated, battling one challenge after another. The opportunity-focused trader is inspired, finding meaning and direction in setbacks. It's easy to become problem-focused when losing money and it's easy to perceive opportunity when things are going well. The successful traders I've known look for problems when things are going well, because they are always looking for opportunities to improve. They are also looking for what is going well during periods of drawdown, because that is where opportunities may be showing up. In a recent article, I outline why I believe we could be on the cusp of important market opportunities. Yes, it's been a challenging period for traders in terms of low-volatility market behavior and erratic trends. But, as I outline in the article, there *are* strategies and approaches that are working; I *do* see people succeeding. There is opportunity in current difficulty. What has kept me alive in markets since the late 1970s, besides risk management, has been research. Every week I update my database, explore ideas, and test out strategies. Easily 80% of what I look at is either worthless or duplicates what I already have. Another 10% is promising but ultimately has limited value. It's that final 10% that opens new doors and yields fresh opportunity. I could become discouraged about the 90% of research that never finds its way into my trading, or I could be energized by the 10% that moves me forward. If I were not innovating, what would keep me interested, driven, optimistic, and energized during periods of drawdown? Too often, we are mired in problem-based mindsets because our focus is solely on P/L. So our focus and passion rises and falls with our equity curves. When we approach markets with intellectual curiosity and a love of sharing ideas with like-minded colleagues, we create whole new sources of motivation. Trading was fun when it was new. The challenge is keeping ourselves re-newed.
So many psychological problems of trading boil down to underaction, failing to act when it is appropriate to do so, and overaction, taking actions that are not warranted. Undertrading means that we fail to "pull the trigger" on our ideas. Overtrading means that we trade outside the range of our ideas. As Gandhi's quote suggests, our actions express our priorities. The trader who fails to act is very often prioritizing preservation of capital and avoidance of risk and loss. The trader who acts excessively is prioritizing gain and avoidance of "missing out". What I find in working with traders is that underaction and overaction occur in a specific context. Very often the trader has figured out the idea that would have them long or short a market or stock. What they have not explicitly outlined is the specific set of conditions that would have them act upon this idea. In other words, traders have an idea, but not a clear "setup" criterion that would have them execute that idea. In the absence of a clear entry or exit signal, traders are left with ambiguity. That ambiguity is the fertile ground in which those psychological priorities--avoidance or risk, fear of missing out--grow and become dominant. It is necessary to have sound ideas with edge to succeed in trading, but having great ideas is not sufficient to bring success. One also must know how to implement those ideas. Without a sound basis for implementation, ideas cannot come to consistent and optimal fruition. To be sure, we see the opposite problem as well. Traders will grasp as "setups"--patterns of price movement--as ideas and trade these without any objective verification of having a probabilistic edge in outcomes. "Selling is holding at the X price level" may be a useful observation, but it is not a plan and in itself confers no edge. A common problem among daytraders is such eagerness to trade and make money that relatively little time is spent researching ideas that are actually worth trading and that have the potential to make money. Once we distinguish between the idea we're trading and our plan for executing that plan, we're in a better place to figure out when we need to work on our ideas and research (i.e., trading the wrong ideas) and when we need to work on the trading of those ideas (i.e., faulty execution of our ideas). Very often, we overtrade and fail to act on valid opportunities simply because we have not been explicit about the idea we're expressing and how we are expressing it.
Very quickly, evaluate yourself on the following criteria: 1) Innovation - Researching new sources of edge in your trading, drawing upon different inputs; learning new strategies and markets; finding new opportunities; learning from your experience and the experience of others. 2) Flexibility - Ability to find opportunity in different market conditions, different markets, and different time frames; ability to move from being aggressive to being patient and back again; ability to trade different strategies and different sides of markets. 3) Self-Improvement - Always assessing what you could do better and making steady improvements; following through on goals with concrete plans and actions; keeping yourself in peak performance condition. If I had to identify one flaw affecting struggling traders, it would be stasis. The static trader does not innovate; is too fixed in doing one thing; and has no consistent process for improvement. Most important, struggling traders aren't following Elon Musk's advice and questioning themselves. Show me what traders are working on outside of market hours, and I will show you the odds of their future success. A passion for trading in the absence of a passion for innovation and improvement is a sure path to losing money.
Einstein observed that we cannot solve our problems with the same level of thinking that created them. In other words, problems exist in our deficiencies of perspective. Once we reach a next level of perception, thought, and analysis, problems can give way to solutions. An important contribution of mentors and coaches is to introduce us to next levels of thinking. If we are locked into our old modes of perception and thought, we will be locked into our level of performance.
On Wednesday, July 19th, I'll be speaking at Stock Twits' second ever Futures Forum in New York City. We'll be meeting at Slattery's Midtown Pub and enjoying food and drink--and I'll be presenting key ideas regarding getting to the next levels of trading performance. (Registration information for that free event can be found here). One very important idea is that almost always we are already performing at that next level of performance on some occasions. It is when we are at our best that we can clearly perceive our next level of development. That is what we are ready for. That is what we are already capable of. At times, we are closer to our goals; at times we are more distant. When we clearly identify what we're doing when we are nearer to our ideas, we start to piece together a roadmap for getting to our next level. What are you doing well now and how are you doing those things? Those are some of the most important questions in trading psychology. Our next level of thinking is the thinking we're doing when we're performing at our best.
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), and Trading Psychology 2.0 (Wiley, 2015) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Clinical Associate Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2012). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.
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