Of all the performance fields, sports have stimulated the most research. A 2001 review of findings in sport psychology, for example, takes up well over 800 pages and 30 chapters and already it is being replaced with a 900+ page volume in 2007. When I began writing my book Enhancing Trader Performance, I realized that traders--and mentors of traders--knew little about this research, and yet many of its findings are directly relevant to trader development.
One of my favorite researchers in the sport psychology field is Janet Starkes in the Department of Kinesiology at McMaster University in Ontario. Her research summary in the 2001 Handbook of Sport Psychology is a particularly clear integration of work in the areas of sport and dance.
Here are a few conclusions from the chapter by Drs. Starkes, Helsen, and Jack and what they might mean for traders:
** "The finding that experts in a particular sport are better than novices, not merely at physical skills but also on the underlying perceptual, cognitive, and strategic components of sport, is robust in both laboratory and field research" (p. 175). In other words, when people become skilled, they literally learn to see things in new ways and think in new ways. It's not just a difference of hardware (having better memory, vision, or concentration); experts develop their own software: internal programs that enable them to recognize patterns and act upon them rapidly.
** "The primary importance of the "10-year rule" is that it seems to hold up regardless of the domain investigated. As such, it is one of the most robust findings in expertise research to date" (p. 175). The development of the "internal software" that enables batters to recognize pitches, soccer players to seize openings in the field, and traders to find setups on the fly requires a lengthy process of development in which experience becomes internalized to the point where it is second nature. Structured practice, sustained over time, is essential to success.
** "Understanding what practice is best and how practice should be carried out are even more important questions than how much" (p. 175). As sport psychologists say, it's not that practice makes perfect. Rather, it takes perfect practice to make perfect. Practice that is effective provides immediate feedback and correction to learners and structures tasks in a logical progression, with skills broken down into components for repeated drilling. Sitting in front of a screen and trading is not practice; sitting in front of a screen and drilling placing and managing orders in the book based on readings of order flow is.
** "Data from sport studies also indicate that those practice activities that require the greatest physical effort and mental concentration are ultimately the most enjoyable" (p. 175). This gets at the heart of what develops expertise. The expert performer, in trading as in sport, is born with certain talents and finds the exercise of these to be fulfilling and enjoyable. This sustains the developing performer through the lengthy, 10-year learning curve. The "flow" state described by Csikszentmihalyi is also a state of enhanced information processing. A key to training success is structuring learning to sustain the flow state: that is a major function of coaches.
** "Whether one examines wrestling, figure skating, karate, soccer, or field hockey, there is a montonic relationship between the amount of practice in which one has engaged throughout one's career, and one's eventual athletic success" (p. 186). The way I stated this in my book is that, in every performance field, expert performers spend more time practicing and honing skills than in actually utilizing them in formal competition. Rarely, however, is this the case among traders. Is it so surprising that--according to industry insiders--the average trader blows out of their account within seven months?
On my personal site and in this blog, I cover a range of ideas related to the psychology of traders and the psychology of markets. Few of these ideas, however, are as important as the ones above. Trading psychology can be so much more than endless discussions of controlling emotions, instilling discipline, and thinking positively. The best trading psychology is training, properly structured and informed by research.
There are some good online trading rooms out there. I recently met Andy Swan of Daytrade Team, and it looks as though they're educating traders about trading patterns in real time. I have nothing but positive things to say about Woodie and the CCI Club, which is an unusually supportive and informative real-time forum for learning trading. John Carter's Trade the Markets service comes highly recommended as a place to observe and learn trading in real time. I've known Linda Raschke for quite a few years now and can only offer the highest praise for her continuing online, real-time efforts to educate traders in both futures and equities arenas.
Those are great places to start your training. Eventually you'll need a trading gymnasium: a place to practice skills, obtain feedback, and develop your own expertise. I'm pleased to see that the Chicago Mercantile Exchange, in partnership with the Chicago Board of Trade and the New York Mercantile Exchange, is taking a leadership role in addressing this need. With that kind of institutional support, we may yet get to the point where the development of traders can reach the level of sophistication that we're seeing in sports.
Wednesday, September 13, 2006
Tuesday, September 12, 2006
Market Psychology AM Update for 9/12/06
10:45 AM CT - Per my last entry, at the end of the day when you review charts, take a look at a 5 min chart of the NYSE TICK vs. the ES. You'll see how pullbacks in the TICK around the zero area represented good short-term entries to the long side once we had the upside breakout move. This is a pattern that you'll see during many uptrend days. Note also the tendency of those uptrend days to close near their highs and to make their highs in the last hour of trading. That means that you want to keep riding those short-term entries until the TICK and price take you out of the trade. The last trade of a trending move is always a loser... :-) Have a good one.
10:00 AM CT - One last note before I go off for my phone meeting. On a good breakout/uptrend day, what you'll see is a positively distributed TICK where the TICK will come down toward the zero area (not much below -200, certainly) on dips and then retest and take out highs on subsequent TICK rallies. You can think of an uptrending market as one in which successive dips in the TICK occur at higher price levels. With that in mind, those dips in the TICK become candidates for short-term entries to the long side. Have a great day--
9:38 AM CT - No Odds Maker signals so far this AM. We haven't gotten the pattern of thrust and then retracement needed for that signal; it's pretty selective. There were, however, a couple of signals among the Dow stocks. I might start tracking those here in the near future. I have to prepare for a phone conference with traders at an investment bank; will post again if any major new developments. Otherwise, have a great trading day. Update tonight on the Weblog.
9:30 AM CT - Once the Russell saw some lifting of offers, the averages moved in gear, with a continued positive TICK distribution. In general, when you see persistent positive TICK distribution, it will only be a matter of time before price catches up. Another important indication is persistent strength in advances vs declines, with 1200+ more issues now advancing than declining. As long as we stay above the recent trading range and see continued positive TICK and net volume at offer vs bid, the bias should be to the upside.
9:22 AM CT - The Russell and financials are lagging a bit here on this most recent ES runup. Be careful, despite very positive TICK distribution. I'm watching Russell closely for clues as to direction from here.
9:13 AM CT - Paper came in big and swiped a large offer from the locals at 1314.75, but since then we haven't seen persistence of buying (which surprised me). If we move back into the recent trading range, remember that 1309 as an average price would be a target.
8:55 AM CT - Huge battle between big bids and big offers at 1314.75. If we take out those offers, I'd expect some decent upside.
8:46 AM CT - You can see that the attempt at highs is labored here among the 3 indices, with volume at offer so far not getting it done. Interestingly, volume at bid was quite high even as we rose early, suggesting lots of selling into the rise. TICK distribution remains positive, however, so it will be tough to maintain solid downside as long as that's the case.
8:36 AM CT - We've opened strong; solid volume, positive TICK, advancing stocks lead by more than 750, but I need to see us break yesterday's highs in Russell and NAZ before I get too eager to chase highs.
8:28 AM CT - Good AM. A little data problem here, but not too serious. I'll be updating major shifts in volume this AM, along with any signals we might get from the Odds Maker setup described on the Trader Performance page. We dipped below the PM lows overnight, but since have recovered nicely and are trading near the highs of the afternoon. Note that we've had average daily prices of 1308-1309 for three days now: the big issue is whether or not this will be a magnet for current prices or whether we'll see an upside breakout from here. Update shortly after the open.
8:06 AM CT - Just a quick modeling note. Adam Warner notes that the volatility of the VIX itself recently reached a 52 week low. I examined 10-day average ranges in the VIX from October, 2003 to the present (N = 732 trading days). When the average daily range of the VIX was under 5% (N = 60), the next five days in SPX averaged a loss of -.52% (23 up, 37 down). That is much weaker than the average five-day gain of .17% (414 up, 318 down) for the sample overall. Returns seem to be better when there is volatility in the VIX itself.
10:00 AM CT - One last note before I go off for my phone meeting. On a good breakout/uptrend day, what you'll see is a positively distributed TICK where the TICK will come down toward the zero area (not much below -200, certainly) on dips and then retest and take out highs on subsequent TICK rallies. You can think of an uptrending market as one in which successive dips in the TICK occur at higher price levels. With that in mind, those dips in the TICK become candidates for short-term entries to the long side. Have a great day--
9:38 AM CT - No Odds Maker signals so far this AM. We haven't gotten the pattern of thrust and then retracement needed for that signal; it's pretty selective. There were, however, a couple of signals among the Dow stocks. I might start tracking those here in the near future. I have to prepare for a phone conference with traders at an investment bank; will post again if any major new developments. Otherwise, have a great trading day. Update tonight on the Weblog.
9:30 AM CT - Once the Russell saw some lifting of offers, the averages moved in gear, with a continued positive TICK distribution. In general, when you see persistent positive TICK distribution, it will only be a matter of time before price catches up. Another important indication is persistent strength in advances vs declines, with 1200+ more issues now advancing than declining. As long as we stay above the recent trading range and see continued positive TICK and net volume at offer vs bid, the bias should be to the upside.
9:22 AM CT - The Russell and financials are lagging a bit here on this most recent ES runup. Be careful, despite very positive TICK distribution. I'm watching Russell closely for clues as to direction from here.
9:13 AM CT - Paper came in big and swiped a large offer from the locals at 1314.75, but since then we haven't seen persistence of buying (which surprised me). If we move back into the recent trading range, remember that 1309 as an average price would be a target.
8:55 AM CT - Huge battle between big bids and big offers at 1314.75. If we take out those offers, I'd expect some decent upside.
8:46 AM CT - You can see that the attempt at highs is labored here among the 3 indices, with volume at offer so far not getting it done. Interestingly, volume at bid was quite high even as we rose early, suggesting lots of selling into the rise. TICK distribution remains positive, however, so it will be tough to maintain solid downside as long as that's the case.
8:36 AM CT - We've opened strong; solid volume, positive TICK, advancing stocks lead by more than 750, but I need to see us break yesterday's highs in Russell and NAZ before I get too eager to chase highs.
8:28 AM CT - Good AM. A little data problem here, but not too serious. I'll be updating major shifts in volume this AM, along with any signals we might get from the Odds Maker setup described on the Trader Performance page. We dipped below the PM lows overnight, but since have recovered nicely and are trading near the highs of the afternoon. Note that we've had average daily prices of 1308-1309 for three days now: the big issue is whether or not this will be a magnet for current prices or whether we'll see an upside breakout from here. Update shortly after the open.
8:06 AM CT - Just a quick modeling note. Adam Warner notes that the volatility of the VIX itself recently reached a 52 week low. I examined 10-day average ranges in the VIX from October, 2003 to the present (N = 732 trading days). When the average daily range of the VIX was under 5% (N = 60), the next five days in SPX averaged a loss of -.52% (23 up, 37 down). That is much weaker than the average five-day gain of .17% (414 up, 318 down) for the sample overall. Returns seem to be better when there is volatility in the VIX itself.
When Oil and Gold Are Falling, What Happens Next?
As I mentioned quite recently, much has changed in the markets. The past 40 trading sessions have seen quite a change of fortunes. While the S&P 500 Index is up over 5% during that period, oil is down over 13% and gold is down over 8%. Is this bullish, indicating a lessening of inflationary forces, or is it bearish, suggesting an economic slowdown? I decided to take a historical look.
Going back to 1990 (N = 4170 trading days), we find 162 daily occasions in which oil has been down 10% or more over a forty-day period and gold has been down 5% or more. Forty days later, the S&P 500 Index has been up by a very healthy average of 3.87% (120 up, 42 down). That is much stronger than the average 40-day rise of 1.45% (2669 up, 1501 down) for the sample overall.
Of course, many of these days represent overlapping periods in SPX. Let's break it down:
* We had falling oil and gold in March and April, 2003. That was a great time to buy stocks.
* Falling oil and gold in November and December, 2001 was not a good time to own stocks.
* We had one day that qualified in July, 2001, and it was a very bad time to own stocks.
* A series of days in April, 2000 with falling gold and oil offered mixed opportunity.
* June, 1998 also offered most lower stock prices after falling oil and gold.
* December, 1997 and January, 1998 were excellent times to own the S&P.
* July, 1997 was most positive as a time to own stocks.
* February, 1997 was a losing time to own stocks during falling oil and falling gold.
* February and March, 1991 were excellent times to hold stocks when oil and gold fell.
* November and December, 1990 were also good times to hold the S&P.
* March through May, 1990 featured falling oil and gold and were mostly excellent times for stocks.
The pattern I notice here is that the occasions in which stocks performed best during periods of falling oil and gold were ones in which the significant declines in oil and gold were sustained over multiple months. Very short significant periods of falling oil and gold were not so favorable to stocks as lengthy periods that extended for more than a month. The longer oil and gold stay weak, it would seem, the better it is for stocks forty days hence. I will track this in the daily market summaries on the Weblog.
Going back to 1990 (N = 4170 trading days), we find 162 daily occasions in which oil has been down 10% or more over a forty-day period and gold has been down 5% or more. Forty days later, the S&P 500 Index has been up by a very healthy average of 3.87% (120 up, 42 down). That is much stronger than the average 40-day rise of 1.45% (2669 up, 1501 down) for the sample overall.
Of course, many of these days represent overlapping periods in SPX. Let's break it down:
* We had falling oil and gold in March and April, 2003. That was a great time to buy stocks.
* Falling oil and gold in November and December, 2001 was not a good time to own stocks.
* We had one day that qualified in July, 2001, and it was a very bad time to own stocks.
* A series of days in April, 2000 with falling gold and oil offered mixed opportunity.
* June, 1998 also offered most lower stock prices after falling oil and gold.
* December, 1997 and January, 1998 were excellent times to own the S&P.
* July, 1997 was most positive as a time to own stocks.
* February, 1997 was a losing time to own stocks during falling oil and falling gold.
* February and March, 1991 were excellent times to hold stocks when oil and gold fell.
* November and December, 1990 were also good times to hold the S&P.
* March through May, 1990 featured falling oil and gold and were mostly excellent times for stocks.
The pattern I notice here is that the occasions in which stocks performed best during periods of falling oil and gold were ones in which the significant declines in oil and gold were sustained over multiple months. Very short significant periods of falling oil and gold were not so favorable to stocks as lengthy periods that extended for more than a month. The longer oil and gold stay weak, it would seem, the better it is for stocks forty days hence. I will track this in the daily market summaries on the Weblog.
Monday, September 11, 2006
Market Psychology AM Update for 9/11/06
11:00 AM CT - OK, I'm glad we had at least one Trade Ideas setup from Odds Maker today. Turned out to be a pretty good signal, all in all, given the tail-off in market volume. You can see the tension between monitoring order flow/using discretionary exits vs. letting the trade play out for the full 30 minutes. I would have been content with four ticks profit in a slow market, but could have pulled more out if I had been more patient. Waiting the full 30 minutes would have not made a huge difference vs. exiting early, in the end. Let's continue to track the signals tomorrow. Have a great day.
10:45 AM CT - Volume has really tailed off here, so in reality I would probably take what the market gives me, work a bid for a point profit, and call it a win. Yes, it could always break down, but I don't see the sense of hoping for volume when you can take a point out relatively easily.
10:39 AM CT - The setup was triggered at 10:29 AM CT, so the time-based stop is 10:59. My idea was to use order flow to manage the position. For me, 1307.50 would be a "catastrophic stop" to the trade; I'd also rethink if we had another thrust of TICK above +1000. My preference is to let a negative TICK thrust take me out of the trade and only stay in for the full holding period if I'm seeing downside volume pick up.
9:58 AM CT - I continue to show the 1306.5 area as an Odds Maker sell signal if we seeing buying dry up around there. The market has been trying to hold lows in this low 1300s area, but we'll need much more sustained buying interest (TICK, volume at offer) to accomplish that. Watch that TICK distribution. I'm outta here for the day; update on the Weblog tonight. Have a great day.
9:49 AM CT - Some slowing of selling in ER2; keep an eye out.
9:43 AM CT - The move down qualifies as a downthrust. If we get a bounce to the 1306.5 area with buying drying up, that would trigger the Odds Maker sell signal. Note the continued Russell weakness, and the negative distribution of the TICK. That will need to change to break the significant upside resistance around 1307.5. Any test of 1303 will need to see expanded participation to create a downtrending move; be careful if we break that level but do not see an expansion of volume at the bid.
9:30 AM CT - Tough to trade this market if you're not a scalper who reads the order book. Some large offers stayed in the book as we broke 1305, and that pushed us down. Sellers in control; 1303 the overnight low; 1307.5 is the AM resistance.
9:27 AM CT - I'm not seeing the same big bids at 1305 so far; some flashing of big offers
9:22 AM CT - The big bids came back at 1305, so you can see what the locals are doing: pushing the market one way into their bids and then the other way into their offers. That creates the runs and the rangebound trade.
9:14 AM CT - Some flashing of big offers a few times at 1307; it's only if they stay in the book that they truly count. But so far they've warded buyers off.
9:02 AM CT - Some volume pickup when the market's moved down, but still very much a local dominated market, running up and down in that value range for the most part. Notice how the Odds Maker setup keeps you out of a slow, narrow market. There's no thrust up or down to begin the setup and thus no pullback from the thrust to trigger an entry. Obviously, we could widen the search by looking for volatile stocks or ETFs for the pattern, but that's for another day.
8:55 AM CT - What we're seeing is a lot more selling in the broad market than in the large caps. Note the Russell weakness and the declining stocks with a 1300+ lead over advances. TICK distribution has gone negative, and so has the balance of volume at bid vs offer. There's some real absorbing of selling around that 1305 level per my previous post.
8:52 AM CT - Some big bids defending the market at 1305.25 on a few occasions. Watch for a selloff if they can't hold the market.
8:45 AM CT - Volume is modest; certainly no great signs of either trending activity or heavy institutional involvement thus far. Note how we're traversing one end of the value range to the other, per the last update. Declining stocks lead advancers by nearly 1000 issues, and the TICK has stayed in a narrow range. Volume at offer has outpaced that at bid in early ES trade; NAZ showing a little strength here. More in a bit.
8:26 AM CT - I show the fat part of the value area over the past three sessions as running from 1306 to 1309.50. In a slow, rangebound market that region will serve as a magnet, and moves that fail to break out of that range will tend to test the opposite side as part of normal rotation. Note that we were unable to sustain a break below that range in the pre-open, so a move to new lows that shows strong participation would represent fresh supply hitting the market. Please note that any alerts generated from my Odds Maker screen are not intended as trade recommendations. This is simply a setup that I'm following in real time as part of learning the Odds Maker program and gauging its utility. Consider the information one input into your market thinking. It can't substitute for that thinking!!
8:10 AM CT - Good morning! We've traded lower in the preopening of the ES market, dipping below Friday's lows before recently moving back into Friday's range. We have overnight resistance at 1310 (Dec. contract) and the preopening lows represent our support. Recall that volatility in the overnight session is associated with greater movement during the regular day session, so I expect one of those levels to be taken out. We'll be watching to see if there are signs of institutional participation in such tests and if volume picks up at those extremes to handicap the odds of breakout vs. return to value. Meanwhile, if you haven't read the blog entry on combining system and discretionary trading and my Trader Performance page describing the Odds Maker setups I'll be tracking, please do so. I'll be watching this AM to see if we get any real time setups from the pattern I tested. Back after the open.
10:45 AM CT - Volume has really tailed off here, so in reality I would probably take what the market gives me, work a bid for a point profit, and call it a win. Yes, it could always break down, but I don't see the sense of hoping for volume when you can take a point out relatively easily.
10:39 AM CT - The setup was triggered at 10:29 AM CT, so the time-based stop is 10:59. My idea was to use order flow to manage the position. For me, 1307.50 would be a "catastrophic stop" to the trade; I'd also rethink if we had another thrust of TICK above +1000. My preference is to let a negative TICK thrust take me out of the trade and only stay in for the full holding period if I'm seeing downside volume pick up.
9:58 AM CT - I continue to show the 1306.5 area as an Odds Maker sell signal if we seeing buying dry up around there. The market has been trying to hold lows in this low 1300s area, but we'll need much more sustained buying interest (TICK, volume at offer) to accomplish that. Watch that TICK distribution. I'm outta here for the day; update on the Weblog tonight. Have a great day.
9:49 AM CT - Some slowing of selling in ER2; keep an eye out.
9:43 AM CT - The move down qualifies as a downthrust. If we get a bounce to the 1306.5 area with buying drying up, that would trigger the Odds Maker sell signal. Note the continued Russell weakness, and the negative distribution of the TICK. That will need to change to break the significant upside resistance around 1307.5. Any test of 1303 will need to see expanded participation to create a downtrending move; be careful if we break that level but do not see an expansion of volume at the bid.
9:30 AM CT - Tough to trade this market if you're not a scalper who reads the order book. Some large offers stayed in the book as we broke 1305, and that pushed us down. Sellers in control; 1303 the overnight low; 1307.5 is the AM resistance.
9:27 AM CT - I'm not seeing the same big bids at 1305 so far; some flashing of big offers
9:22 AM CT - The big bids came back at 1305, so you can see what the locals are doing: pushing the market one way into their bids and then the other way into their offers. That creates the runs and the rangebound trade.
9:14 AM CT - Some flashing of big offers a few times at 1307; it's only if they stay in the book that they truly count. But so far they've warded buyers off.
9:02 AM CT - Some volume pickup when the market's moved down, but still very much a local dominated market, running up and down in that value range for the most part. Notice how the Odds Maker setup keeps you out of a slow, narrow market. There's no thrust up or down to begin the setup and thus no pullback from the thrust to trigger an entry. Obviously, we could widen the search by looking for volatile stocks or ETFs for the pattern, but that's for another day.
8:55 AM CT - What we're seeing is a lot more selling in the broad market than in the large caps. Note the Russell weakness and the declining stocks with a 1300+ lead over advances. TICK distribution has gone negative, and so has the balance of volume at bid vs offer. There's some real absorbing of selling around that 1305 level per my previous post.
8:52 AM CT - Some big bids defending the market at 1305.25 on a few occasions. Watch for a selloff if they can't hold the market.
8:45 AM CT - Volume is modest; certainly no great signs of either trending activity or heavy institutional involvement thus far. Note how we're traversing one end of the value range to the other, per the last update. Declining stocks lead advancers by nearly 1000 issues, and the TICK has stayed in a narrow range. Volume at offer has outpaced that at bid in early ES trade; NAZ showing a little strength here. More in a bit.
8:26 AM CT - I show the fat part of the value area over the past three sessions as running from 1306 to 1309.50. In a slow, rangebound market that region will serve as a magnet, and moves that fail to break out of that range will tend to test the opposite side as part of normal rotation. Note that we were unable to sustain a break below that range in the pre-open, so a move to new lows that shows strong participation would represent fresh supply hitting the market. Please note that any alerts generated from my Odds Maker screen are not intended as trade recommendations. This is simply a setup that I'm following in real time as part of learning the Odds Maker program and gauging its utility. Consider the information one input into your market thinking. It can't substitute for that thinking!!
8:10 AM CT - Good morning! We've traded lower in the preopening of the ES market, dipping below Friday's lows before recently moving back into Friday's range. We have overnight resistance at 1310 (Dec. contract) and the preopening lows represent our support. Recall that volatility in the overnight session is associated with greater movement during the regular day session, so I expect one of those levels to be taken out. We'll be watching to see if there are signs of institutional participation in such tests and if volume picks up at those extremes to handicap the odds of breakout vs. return to value. Meanwhile, if you haven't read the blog entry on combining system and discretionary trading and my Trader Performance page describing the Odds Maker setups I'll be tracking, please do so. I'll be watching this AM to see if we get any real time setups from the pattern I tested. Back after the open.
A Walk Along the Third Rail
Religion and politics are two topics to steer clear of if you're hosting a social gathering (or a financial blog!). There are just some third-rail topics where, if you stake out any position, you're going to be open to potshots. It's why the immigration topic has proven so contentious, along with the reform of Social Security and health care. Of course, some people have figured out that you can get a lot of attention by walking along the third rail and staking out positions guaranteed to offend people. From Ann Coulter on the right to Michael Moore on the left, the third rail has become a way of life.
The majority of us are finding it increasingly difficult to steer clear of the third rails, given the commingling of religion and politics. On this 9/11 anniversary, Michael Moore pictures bin Laden and asks us to love enemies and forgive trespasses. The Obsession movie, on the other hand, anticipates calamities far worse than 9/11 if we do not take the Islamic enemy seriously. Do we begin the pull out of Iraq, or do we commit further resources toward the "War Against Terrorism"? Is there truly a "War Against Terrorism" out there, or is it a war against Western occupation?
Sometimes markets shed light on issues. Eddy Elfenbein of Crossing Wall Street notes the superior performance of defense stocks and asks if defense might be the NASDAQ of the decade. He notes that defense stocks sold off in advance of the end of the Vietnam War and ahead of the fall of the Berlin Wall, anticipating an end to hostilities. Today, the anticipation seems to be much different. Elfenbein suggests that this means that we might be in Iraq for a while.
Maybe. I suspect that a continuation of our presence in Iraq would be sufficient to keep defense stocks at lofty levels. I'm not sure it's enough to keep powering them higher. No, I think--and here's that third rail--that perhaps the markets are anticipating an escalation of hostilities.
Let's give the conservative leadership the benefit of the doubt for a minute and assume that they truly believe what they say. They believe that Islamic fundamentalism represents a potent threat to Western civilization. They believe that World War III has already begun--a war that is every bit as important to freedom as the previous world conflict.
What do you do if your watch is coming to an end and you deeply believe that the future is at stake if you do not act?
Father Thomas Berg recognizes the gravity of the issue and asks who we can trust for guidance. Perhaps our leadership asks the same questions.
And the markets reflect their answers.
The majority of us are finding it increasingly difficult to steer clear of the third rails, given the commingling of religion and politics. On this 9/11 anniversary, Michael Moore pictures bin Laden and asks us to love enemies and forgive trespasses. The Obsession movie, on the other hand, anticipates calamities far worse than 9/11 if we do not take the Islamic enemy seriously. Do we begin the pull out of Iraq, or do we commit further resources toward the "War Against Terrorism"? Is there truly a "War Against Terrorism" out there, or is it a war against Western occupation?
Sometimes markets shed light on issues. Eddy Elfenbein of Crossing Wall Street notes the superior performance of defense stocks and asks if defense might be the NASDAQ of the decade. He notes that defense stocks sold off in advance of the end of the Vietnam War and ahead of the fall of the Berlin Wall, anticipating an end to hostilities. Today, the anticipation seems to be much different. Elfenbein suggests that this means that we might be in Iraq for a while.
Maybe. I suspect that a continuation of our presence in Iraq would be sufficient to keep defense stocks at lofty levels. I'm not sure it's enough to keep powering them higher. No, I think--and here's that third rail--that perhaps the markets are anticipating an escalation of hostilities.
Let's give the conservative leadership the benefit of the doubt for a minute and assume that they truly believe what they say. They believe that Islamic fundamentalism represents a potent threat to Western civilization. They believe that World War III has already begun--a war that is every bit as important to freedom as the previous world conflict.
What do you do if your watch is coming to an end and you deeply believe that the future is at stake if you do not act?
Father Thomas Berg recognizes the gravity of the issue and asks who we can trust for guidance. Perhaps our leadership asks the same questions.
And the markets reflect their answers.
Sunday, September 10, 2006
Much Has Changed in Four Months
While the media divines the changes in the U.S. since 9/11 five years ago, I look back four months to 5/11 and see quite a few changes in the financial markets.
On 5/11, West Texas Intermediate Crude (cash) stood at $73.33 a barrel. Friday it closed at $67.33.
On 5/11, interest rates on the ten-year note were 5.15%. Friday, they were 4.79%.
On 5/11, gold was trading a bit over $715 an ounce. On Friday, gold closed at $621.
The CRB Index topped above 360 in May. On Friday, it closed a little over 320.
The Housing Index ($HGX) is down about 20% since May.
On 5/11, the S&P 500 Index had just hit a peak value for this bull market, a bit over 1325. As of Friday, the S&P is at almost 1299 and has not surmounted that May peak. The NASDAQ and Russell averages, in percentage terms, are even further from their May peaks.
M1 money supply also peaked in May, according to the Federal Reserve. M1 money supply, from late 2004 to the present, is down over a 20 month period. I last show that happening in late 2000, as the markets were topping, and in late 1997 in the lead up to the Asian currency crisis and market drop.
The good news is that the Fed seems to be having success in cooling the hot housing and commodity sectors. Such restraint of money supply needed to accomplish the cooling has only been reversed once we've had meaningful market drops. Let's see if this time is different.
On 5/11, West Texas Intermediate Crude (cash) stood at $73.33 a barrel. Friday it closed at $67.33.
On 5/11, interest rates on the ten-year note were 5.15%. Friday, they were 4.79%.
On 5/11, gold was trading a bit over $715 an ounce. On Friday, gold closed at $621.
The CRB Index topped above 360 in May. On Friday, it closed a little over 320.
The Housing Index ($HGX) is down about 20% since May.
On 5/11, the S&P 500 Index had just hit a peak value for this bull market, a bit over 1325. As of Friday, the S&P is at almost 1299 and has not surmounted that May peak. The NASDAQ and Russell averages, in percentage terms, are even further from their May peaks.
M1 money supply also peaked in May, according to the Federal Reserve. M1 money supply, from late 2004 to the present, is down over a 20 month period. I last show that happening in late 2000, as the markets were topping, and in late 1997 in the lead up to the Asian currency crisis and market drop.
The good news is that the Fed seems to be having success in cooling the hot housing and commodity sectors. Such restraint of money supply needed to accomplish the cooling has only been reversed once we've had meaningful market drops. Let's see if this time is different.
Saturday, September 09, 2006
Blending System and Discretionary Trading
I've recently emphasized that the psychology of the marketplace is as important as the psychology of the trader. If you review my recent AM market updates, you'll see that the purpose of these is to track the market's psychology: the short-term sentiment of the large traders who account for only about 3% of ES trades, but 40% of its volume.
Two trading tools have very recently come out with new products that I'm working on integrating into my own trading (and also into the blog). The first one, Market Delta, is illustrated in my recent post on tracking volume and in my recent Trading Markets article. I find Market Delta to be most helpful in tracking order flow: the quantities of contracts traded, where they trade in the bid-ask matrix, where they trade relative to support/resistance/value area, and how these volume patterns shift over time. A review of the recent AM updates will illustrate this application.
The second tool is Odds Maker from Trade Ideas. To be honest, I've had a harder time integrating this tool into my trading. I'm not by nature a stock picker; I trade equity indices. I very much like using research into historical patterns to frame trade ideas, but have never gravitated to intraday research. Too much noise. As I've noted in my Trader Performance page, I've lengthened my time frame to focus on moves of several days rather than trade intraday patterns exclusively. That's given me the flexibility to do the market updates daily.
Still, Odds Maker is a powerful tool and not one that I wanted to ignore. What it does is go back three weeks (15 trading sessions) in time and scan for all occurrences of a pattern that you identify in the Trade Ideas program. It will then spit out a performance summary to tell you how many trades would have been made during that 15-session period, how many were winners and losers, the average size of winners and losers, and the net profit/loss trading that pattern. The performance summaries can be for the entire market, a selected basket of stocks, or an individual equity. User-controlled features help traders tweak entry and exit criteria and see how these impact profitability.
Major props to the Odds Maker programmers: the program accomplishes a tremendous amount of number crunching very quickly. Once you find a pattern that is promising, you can then track it in real time in Trade-Ideas to see how it performs. The goal, of course, is to not just curve fit patterns to the past 15 days, but find ones that are robust with respect to upcoming periods. (By running reports each day, you can update performance and see if your setups are stable or degrading).
The question, for me, is how do you integrate the Odds Maker setups with a reading of order flow? What I've done is develop Odds Maker setups that test well for equity index ETFs, providing trades lasting 30 minutes in duration. (My next post on the Trader Performance page will describe the setups more specifically). Once the trade is alerted by Trade Ideas, I then go into "order flow monitoring" mode. If the setup fits with the order flow patterns that I'm seeing with Market Delta, I go with the trade idea. If not, I pass it up. Similarly, if order flow shifts during the 30 minute holding period, I'll bail. If not, I'll use the time stop.
What this accomplishes, hopefully, is a combination of one source of edge with another, independent one. By trading a tested setup and then only following the setup when current market conditions are favorable, it may be possible to raise one's win/loss ratio and overall profitability. This blending of system and discretionary trading is what I pursue with my historical studies. Now, with Odds Maker, we can see if intraday historical studies can inform our reading of order flow.
The setups go live next week; stay tuned!
Two trading tools have very recently come out with new products that I'm working on integrating into my own trading (and also into the blog). The first one, Market Delta, is illustrated in my recent post on tracking volume and in my recent Trading Markets article. I find Market Delta to be most helpful in tracking order flow: the quantities of contracts traded, where they trade in the bid-ask matrix, where they trade relative to support/resistance/value area, and how these volume patterns shift over time. A review of the recent AM updates will illustrate this application.
The second tool is Odds Maker from Trade Ideas. To be honest, I've had a harder time integrating this tool into my trading. I'm not by nature a stock picker; I trade equity indices. I very much like using research into historical patterns to frame trade ideas, but have never gravitated to intraday research. Too much noise. As I've noted in my Trader Performance page, I've lengthened my time frame to focus on moves of several days rather than trade intraday patterns exclusively. That's given me the flexibility to do the market updates daily.
Still, Odds Maker is a powerful tool and not one that I wanted to ignore. What it does is go back three weeks (15 trading sessions) in time and scan for all occurrences of a pattern that you identify in the Trade Ideas program. It will then spit out a performance summary to tell you how many trades would have been made during that 15-session period, how many were winners and losers, the average size of winners and losers, and the net profit/loss trading that pattern. The performance summaries can be for the entire market, a selected basket of stocks, or an individual equity. User-controlled features help traders tweak entry and exit criteria and see how these impact profitability.
Major props to the Odds Maker programmers: the program accomplishes a tremendous amount of number crunching very quickly. Once you find a pattern that is promising, you can then track it in real time in Trade-Ideas to see how it performs. The goal, of course, is to not just curve fit patterns to the past 15 days, but find ones that are robust with respect to upcoming periods. (By running reports each day, you can update performance and see if your setups are stable or degrading).
The question, for me, is how do you integrate the Odds Maker setups with a reading of order flow? What I've done is develop Odds Maker setups that test well for equity index ETFs, providing trades lasting 30 minutes in duration. (My next post on the Trader Performance page will describe the setups more specifically). Once the trade is alerted by Trade Ideas, I then go into "order flow monitoring" mode. If the setup fits with the order flow patterns that I'm seeing with Market Delta, I go with the trade idea. If not, I pass it up. Similarly, if order flow shifts during the 30 minute holding period, I'll bail. If not, I'll use the time stop.
What this accomplishes, hopefully, is a combination of one source of edge with another, independent one. By trading a tested setup and then only following the setup when current market conditions are favorable, it may be possible to raise one's win/loss ratio and overall profitability. This blending of system and discretionary trading is what I pursue with my historical studies. Now, with Odds Maker, we can see if intraday historical studies can inform our reading of order flow.
The setups go live next week; stay tuned!
Friday, September 08, 2006
Market Psychology AM Update for 9/8/06
9:54 AM CT - OK, hopefully you were able to see that selling dry up after a big program (sell) hit the market and drove the TICK down sharply. None of the 3 main markets (ES, NQ, ER2) were able to make new lows for the AM on the downmove and subsequent selling was well absorbed. That provided a nice short-term trade back to the top of the AM range, where we'll see if any demand comes into the market. I'm outta here for some research. Once again, thanks for the feedback; have a great weekend. Wrapup tonite on the Weblog.
9:31 AM CT - Notice the drying up of selling at 1306.5, the lifting of the big offer at 1307.5, and then the aggressive buying on the heels, once that level was taken out. And now it's back in the preopening range. Very much a locals' market. I do think that, if we hold above yesterday's lows, we'll eventually take out the pre-open highs, FWIW. Watch for a positive skew to the TICK to validate. Back in a while.
9:29 AM CT - Whoa, someone lifted a big offer at 1307.5.
9:20 AM CT - The same pattern below occurred at 1306.25, with a big bid absorbing selling. If we can hold above yesterday's lows, I'd expect to see some volume come in as we test the overnight highs. Just an idea for the back of the mind.
9:15 AM CT - Interesting patterns at 1307.75. Several times we had a large bidder just sitting on that bid, absorbing selling, willing to get hit. Very shortly after, the selling abated and the market bounced a few ticks higher. This last time, however, a big seller took out that bid and selling volume rushed in taking us down several ticks quickly to 1306.50. That 1307.75 now becomes resistance; it's the level that sellers were willing to lean on before and--if the demand/supply equation does not change--that level should hold as an upside ceiling. If we move above that level, back into the early AM trading range, you know we have a rangebound market and tepid follow through among sellers. So far, however, volume has picked up on selling.
9:07 AM CT - What happens in markets like these is that you have large locals working big orders above and below the market. So they'll buy 'em up and push the market into their offers and whip 'em down and push the market into their bids. Until paper comes into the market and runs them over. If they don't see signs of institutional participation, they just get bolder with the whipping of the index in a range. That creates the unusual pattern you sometimes see of the market sitting, sitting, sitting, and then running up a few ticks at a time (usually in my face!). I just took half a point profit on a short position and just got out until the market decides to show its hand (if it does at all). Unless you have rapid-fire order execution and a keen sense for where to work orders, playing very narrow, slow, range bound markets is a great way to get chopped up.
8:58 AM CT - So far, the locals are playing ping pong with the market in a tight range, but the distribution of the TICK is pretty positive, and the proportion of volume at bid vs offer in ES is relatively even. It continues to look like a range bound market. I am not impressed with the bulls ability to push the market above preopen levels so far, but we're not seeing much from sellers in terms of TICK either.
8:42 AM CT - Moderate volume; we opened with a bit of a bounce--advancing stocks are slightly ahead of decliners--but locals have leaned on the market since the open. So far looks like a local dominated market, which suggests a possible rangebound market. The new Market Delta shows actual bid and offer in the book, and if you're familiar with reading depth of market displays, you can see the games that the locals play. It's a very advanced topic, however, so if you're just getting used to reading volume patterns, I wouldn't put too much energy into reading the actual order book. Better to focus on what actually trades, where it trades, and the flow of volume from bid to offer.
8:25 AM CT - Two trading events from the Chicago Mercantile Exchange that you might want to note if you're around:
November 2nd - I'll be part of a three-person panel in Chicago at the CME presenting on the topic of peak trading performance. I'll post specific times on my personal site.
November 15/16 - This is the Futures Trading Summit in Las Vegas, with quite a roster of presenters. I'll be presenting the first day and hanging out at nite with whomever is interested in the psychology of the markets and the psychology of traders.
8:14 AM CT - Good morning! Some volatility has come into the market, and that's made for good trading. We've had two consecutive days in which a large proportion of stocks have shown strong downside momentum, as measured by the Weblog's Demand/Supply numbers. That has occurred 26 times since 2004. The normal pattern is to get some follow through weakness the next day, before a bounce on day two. Interestingly, though, during 2006, we've seen that bounce the next day on 4 of 6 occasions. We twice have bounced off the 1304-1305 level (Dec. contract ES), so that is our support. Yesterday's afternoon highs (see the previous post and my Trading Markets article) provide upside resistance (1312.50-1313.75). The overnight range has been more muted than in the past two days, and that might provide us with more of a rangebound trade today. The key will be tracking volume patterns as we approach the edges of the support-resistance range. Back after the open; check out that Trading Markets article if you need a jolt of music to keep you awake.
9:31 AM CT - Notice the drying up of selling at 1306.5, the lifting of the big offer at 1307.5, and then the aggressive buying on the heels, once that level was taken out. And now it's back in the preopening range. Very much a locals' market. I do think that, if we hold above yesterday's lows, we'll eventually take out the pre-open highs, FWIW. Watch for a positive skew to the TICK to validate. Back in a while.
9:29 AM CT - Whoa, someone lifted a big offer at 1307.5.
9:20 AM CT - The same pattern below occurred at 1306.25, with a big bid absorbing selling. If we can hold above yesterday's lows, I'd expect to see some volume come in as we test the overnight highs. Just an idea for the back of the mind.
9:15 AM CT - Interesting patterns at 1307.75. Several times we had a large bidder just sitting on that bid, absorbing selling, willing to get hit. Very shortly after, the selling abated and the market bounced a few ticks higher. This last time, however, a big seller took out that bid and selling volume rushed in taking us down several ticks quickly to 1306.50. That 1307.75 now becomes resistance; it's the level that sellers were willing to lean on before and--if the demand/supply equation does not change--that level should hold as an upside ceiling. If we move above that level, back into the early AM trading range, you know we have a rangebound market and tepid follow through among sellers. So far, however, volume has picked up on selling.
9:07 AM CT - What happens in markets like these is that you have large locals working big orders above and below the market. So they'll buy 'em up and push the market into their offers and whip 'em down and push the market into their bids. Until paper comes into the market and runs them over. If they don't see signs of institutional participation, they just get bolder with the whipping of the index in a range. That creates the unusual pattern you sometimes see of the market sitting, sitting, sitting, and then running up a few ticks at a time (usually in my face!). I just took half a point profit on a short position and just got out until the market decides to show its hand (if it does at all). Unless you have rapid-fire order execution and a keen sense for where to work orders, playing very narrow, slow, range bound markets is a great way to get chopped up.
8:58 AM CT - So far, the locals are playing ping pong with the market in a tight range, but the distribution of the TICK is pretty positive, and the proportion of volume at bid vs offer in ES is relatively even. It continues to look like a range bound market. I am not impressed with the bulls ability to push the market above preopen levels so far, but we're not seeing much from sellers in terms of TICK either.
8:42 AM CT - Moderate volume; we opened with a bit of a bounce--advancing stocks are slightly ahead of decliners--but locals have leaned on the market since the open. So far looks like a local dominated market, which suggests a possible rangebound market. The new Market Delta shows actual bid and offer in the book, and if you're familiar with reading depth of market displays, you can see the games that the locals play. It's a very advanced topic, however, so if you're just getting used to reading volume patterns, I wouldn't put too much energy into reading the actual order book. Better to focus on what actually trades, where it trades, and the flow of volume from bid to offer.
8:25 AM CT - Two trading events from the Chicago Mercantile Exchange that you might want to note if you're around:
November 2nd - I'll be part of a three-person panel in Chicago at the CME presenting on the topic of peak trading performance. I'll post specific times on my personal site.
November 15/16 - This is the Futures Trading Summit in Las Vegas, with quite a roster of presenters. I'll be presenting the first day and hanging out at nite with whomever is interested in the psychology of the markets and the psychology of traders.
8:14 AM CT - Good morning! Some volatility has come into the market, and that's made for good trading. We've had two consecutive days in which a large proportion of stocks have shown strong downside momentum, as measured by the Weblog's Demand/Supply numbers. That has occurred 26 times since 2004. The normal pattern is to get some follow through weakness the next day, before a bounce on day two. Interestingly, though, during 2006, we've seen that bounce the next day on 4 of 6 occasions. We twice have bounced off the 1304-1305 level (Dec. contract ES), so that is our support. Yesterday's afternoon highs (see the previous post and my Trading Markets article) provide upside resistance (1312.50-1313.75). The overnight range has been more muted than in the past two days, and that might provide us with more of a rangebound trade today. The key will be tracking volume patterns as we approach the edges of the support-resistance range. Back after the open; check out that Trading Markets article if you need a jolt of music to keep you awake.
Breaking It Down: Analyzing Market Volume
Here's the "brick wall" chart I posted last night in the Trading Psychology Weblog. This is the new version of Market Delta; let's take a look at the information we can glean from the chart.As the arrows indicate, once we hit new highs for the day above 1313 in the December ES, large volume came in at the bid. We can see this from the red shading of the bars in the 13:00 CT time period and also from the magnitude of the numbers. At three different price levels, we saw more than 3000 contracts hitting the market at its bid price.
Now let's think like a professional trader for a moment. If you think a market is stalling out and you might want to lighten your long position, you are not going to rob yourself of a tick and bail out at the market. Rather, you'll expect that the market will trade at the bid, then the offer, then the bid, rotating back and forth as it stalls out. You'll work an order in the book, offering some of your inventory for sale to see if residual buyers will do your work for you.
On the other hand, if you're in a rush to get out of the market and think we're going lower, you're not going to play games and work an order to get an extra tick. "Don't be a dick for a tick" is what you'll tell yourself and you'll take what the market gives you, unloading some of your holdings at the bid.
That's pretty much how a market maker thinks. Now there's another class of trading professional that is less concerned with the moment to moment flow of prices around the bid and ask. This is a longer-timeframe participant who trades with an opinion. A hedge fund trader, for example, might have research that tells him or her that the odds of the market breaking its low for the day over the coming three sessions are quite high. That trader will use the rally--and the market's enhanced liquidity during the rise--to get into a short position and ride the anticipated move. Given the expectations of a 10+ point move in ES, the longer timeframe trader isn't going to get cute and work orders for an extra tick. If the bids are there in the book to be had, they'll hit them and get the position established.
When we see 5000+ contracts trading at a level over multiple price levels, we know that this is above average volume for this time of day. The odds are great that both of these groups of professional market participants are active. The skewing of volume from the green to the red--from the willingness to take offers to the need to sell shares--tells us clearly that their sentiment has taken a sharp U turn. That's the brick wall I referred to in my post.
When you see a brick wall, you note the price level and say "Sayonara". There is just too much supply relative to demand to sustain that price level. Conversely, in later market action, if we *do* take out that price level, what better market indicator could you have that the demand/supply equation has changed?
Now let's go to a different portion of the chart. Along the left side, you'll see a volume histogram and numbers along the chart's Y axis. What that's telling us is the volume that has printed at that price cumulatively through the day. When the numbers are green, we can see that the majority of the volume at that price during that day was at the market's offering price. Red indicates that the volume was at the bid. The histogram is broken down into green and red so that we can see, not only total volume relative to neighboring prices, but also the distribution relative to bid and offer.
Notice what happens to the histogram as we move from 1309 to the market's high price. We're seeing less cumulative volume at higher prices. What that tells us is that the market has not facilitated trade north of 1309. High volume at any price level tells you that, over time, the marketplace is accepting that price as value. What we have with the brick wall pattern is a rejection of value at a given price range. The "tail" left by a Market Profile (not displayed here) is also a tell-tale: a sign that supply overwhelmed demand on that occasion.
We also, if you notice, rejected value at the lower end of the market's range. That was a brick wall in a different direction: supply overwhelmed by demand. The observant trader will note those price levels well to see which side of the range will facilitate trade in the coming session. That will provide the demand/supply shift cues that alert you to a market breakout.
Props, BTW, to Market Delta for the major upgrade. There are a lot of features to the new version I haven't yet toyed with, but the triple display of volume breakdown--within bars at bid/offer; vertically by time (displayed on the X-axis); and horizontally by price (displayed by the histogram on the Y-axis)--provides a great deal of information that is relevant to short-term traders.
Thursday, September 07, 2006
Market Psychology AM Update for 9/7/06
10:40 AM CT - Just a parting note. Take a look at the previous entry and notice how we made the low in ES around 9:50 AM, but did not make AM lows in the NQ or Russell (ER2). My hope is that you can take away from these updates at least one useful idea per day. The important idea here is to watch sectors and other indices: not just the one you're trading. A move to new highs or lows that displays poor participation (see my recent post) is less likely to continue in its direction than one that is confirmed across the board. Update on the Weblog tonite.
9:46 AM CT - Notice that, after the bounce, we're getting lows in ES but not so far in Russell. Keep an eye on such divergences. The best breakout moves don't have those kinds of divergence. I'll be working on the Odds Maker setups this AM and the new version of Market Delta. Hope to have more to report tomorrow. Have a good one.
9:30 AM CT - We're seeing an attempt to put in a short-term bottom around the 1295 (Sep) 1305 (Dec) level. A breakout to new highs in the TICK would support such an effort. I'll post further if I see major developments; otherwise it's back to the research. Have a great rest of the AM.
9:20 AM CT - It's the absence of buyers rather than the onslaught of sellers that is notable here. Right after my last entry, the TICK faltered at +200 and could not sustain further buying. The volume at the bid and distribution of the TICK are dominating, with decliners now leading advancers by over 1600 issues. Selling the bounces will continue to work as long as those bounces in the TICK are so anemic.
9:10 AM CT - Once again, you can see how the absence of strong buying finally got the bears testing those overnight lows and taking us to new AM lows. The TICK, so far, is more positively skewed than yesterday and some sectors are showing some buying interest here. Volume at the bid modestly outweighs volume at the offer, and the TICK is moderately negative. I'm alert for the possibility of a reversal this AM, especially if we see sectors unable to make AM lows even as the major averages make or test lows. That distribution of the TICK will tell us a lot. It's when those thrusts to negative TICK extremes no longer produce new price lows that you want to think long and hard before chasing lows.
9:00 AM CT - Volume is a bit tough to read here because only about 2/3 of volume has migrated over to Dec. But you can see from the muted range of the TICK that we have very modest volume and rangebound trade--a surprise, given the drop yesterday and overnight. I hope you were able to see what I referred to in my last entry re: the muted response of the bulls. Buying dried up as we tried to break 1299 on the Sep contract. 1310 is the equivalent Dec. level. So far, however, we're also not picking up meaningful volume to the downside; nor is the TICK going significantly negative. We'll keep probing the highs and lows of this muted range until one side gets some volume going. I like to watch the distribution of the TICK for clues as to possible breakouts. In general, however, I avoid this kind of slow, rangebound action. Russells still look heavy.
8:47 AM CT - Please note that I'm still quoting levels from the September ES contract, though a good deal of volume has migrated to the Dec contract. Russell's a bit weak here, and decliners outnumber advancers by over 1200 issues. Note the difficulty so far in breaking that resistance at 1299; and how that set us up for the downside test. Establishing those trading ranges and tracking attempts to test the edges of those will often set up good initial AM trades. We have a nice range mentioned below, and the edges should give us a clue if bulls can muster strength here. So far, their counter has been muted.
8:35 AM CT - I think all trading should be done with lasers and glow sticks. And 135 bpm. Anyway, recent pre-opening selling has held in that 1296.50 area and we see pre-opening resistance in the zone from 1299.25 - 1299.75. So let's see the bulls take their turn and try to break that resistance. That will set up an initial trade for the short-term folks--either to test overnight highs just above 1301 or to retest the lows and the 1294.50 lows from late August. Back to the lasers.
8:00 AM CT - Good morning. The music is blaring in my office (although it's hard to hear the singer from the audience; but, hey, what's a club for?!) and the market's trading, so what can be bad? Check out the Weblog if you haven't already; it notes the very broad downside momentum in yesterday's market. After such a broad momentum down day, returns 1-5 days out are subnormal. And that's what we're seeing so far this AM: a continuation of the short-term downtrend noted on the Weblog. Recall that volatility in the pre-opening market tends to correlate well with volatility during the day session, so we're once again setting up for some movement here. We're well below yesterday's average price, and the general rule during downtrends is to sell bounces that stay below that average. My leaning on mornings like this is to not chase weakness, but to wait for the buyers to take their turn and show what they've got. If we get another situation like yesterday where the buyers try to take the market up and large sellers hit bids in force, then it makes sense to ride the downtrend. My posts this AM will be limited; I'll be spending time with research and new software that, hopefully, will contribute to the blog over time. OK, back to the music; see you after the open.
9:46 AM CT - Notice that, after the bounce, we're getting lows in ES but not so far in Russell. Keep an eye on such divergences. The best breakout moves don't have those kinds of divergence. I'll be working on the Odds Maker setups this AM and the new version of Market Delta. Hope to have more to report tomorrow. Have a good one.
9:30 AM CT - We're seeing an attempt to put in a short-term bottom around the 1295 (Sep) 1305 (Dec) level. A breakout to new highs in the TICK would support such an effort. I'll post further if I see major developments; otherwise it's back to the research. Have a great rest of the AM.
9:20 AM CT - It's the absence of buyers rather than the onslaught of sellers that is notable here. Right after my last entry, the TICK faltered at +200 and could not sustain further buying. The volume at the bid and distribution of the TICK are dominating, with decliners now leading advancers by over 1600 issues. Selling the bounces will continue to work as long as those bounces in the TICK are so anemic.
9:10 AM CT - Once again, you can see how the absence of strong buying finally got the bears testing those overnight lows and taking us to new AM lows. The TICK, so far, is more positively skewed than yesterday and some sectors are showing some buying interest here. Volume at the bid modestly outweighs volume at the offer, and the TICK is moderately negative. I'm alert for the possibility of a reversal this AM, especially if we see sectors unable to make AM lows even as the major averages make or test lows. That distribution of the TICK will tell us a lot. It's when those thrusts to negative TICK extremes no longer produce new price lows that you want to think long and hard before chasing lows.
9:00 AM CT - Volume is a bit tough to read here because only about 2/3 of volume has migrated over to Dec. But you can see from the muted range of the TICK that we have very modest volume and rangebound trade--a surprise, given the drop yesterday and overnight. I hope you were able to see what I referred to in my last entry re: the muted response of the bulls. Buying dried up as we tried to break 1299 on the Sep contract. 1310 is the equivalent Dec. level. So far, however, we're also not picking up meaningful volume to the downside; nor is the TICK going significantly negative. We'll keep probing the highs and lows of this muted range until one side gets some volume going. I like to watch the distribution of the TICK for clues as to possible breakouts. In general, however, I avoid this kind of slow, rangebound action. Russells still look heavy.
8:47 AM CT - Please note that I'm still quoting levels from the September ES contract, though a good deal of volume has migrated to the Dec contract. Russell's a bit weak here, and decliners outnumber advancers by over 1200 issues. Note the difficulty so far in breaking that resistance at 1299; and how that set us up for the downside test. Establishing those trading ranges and tracking attempts to test the edges of those will often set up good initial AM trades. We have a nice range mentioned below, and the edges should give us a clue if bulls can muster strength here. So far, their counter has been muted.
8:35 AM CT - I think all trading should be done with lasers and glow sticks. And 135 bpm. Anyway, recent pre-opening selling has held in that 1296.50 area and we see pre-opening resistance in the zone from 1299.25 - 1299.75. So let's see the bulls take their turn and try to break that resistance. That will set up an initial trade for the short-term folks--either to test overnight highs just above 1301 or to retest the lows and the 1294.50 lows from late August. Back to the lasers.
8:00 AM CT - Good morning. The music is blaring in my office (although it's hard to hear the singer from the audience; but, hey, what's a club for?!) and the market's trading, so what can be bad? Check out the Weblog if you haven't already; it notes the very broad downside momentum in yesterday's market. After such a broad momentum down day, returns 1-5 days out are subnormal. And that's what we're seeing so far this AM: a continuation of the short-term downtrend noted on the Weblog. Recall that volatility in the pre-opening market tends to correlate well with volatility during the day session, so we're once again setting up for some movement here. We're well below yesterday's average price, and the general rule during downtrends is to sell bounces that stay below that average. My leaning on mornings like this is to not chase weakness, but to wait for the buyers to take their turn and show what they've got. If we get another situation like yesterday where the buyers try to take the market up and large sellers hit bids in force, then it makes sense to ride the downtrend. My posts this AM will be limited; I'll be spending time with research and new software that, hopefully, will contribute to the blog over time. OK, back to the music; see you after the open.
Why Is It So Difficult to Change Time Frames?
When professional traders find that the patterns they've been trading no longer confer an edge in the marketplace, they try to make changes. Typically, they either try to change their time frame (go from shorter-term trading to a longer timeframe), change the patterns they look at, or change the markets they trade.
As I mentioned recently on my Trader Performance page, all such changes are difficult. That is because the changes entail unlearning old patterns--not just acquiring new ones.
In all my work with traders, I would say that the most difficult transition they've attempted is a transition from a short time frame to a longer one within the same trading instrument.
To trade a longer time frame means that you must let winners ride longer than you ordinarily would. It also means tolerating larger drawdowns and living with uncertainty longer. The instincts that help a scalper--getting out of losers quickly, for example--wreak havoc with efforts to trade longer time frames.
Once you have a "feel" for a market--which, really, is also a feel for a time frame--it is very difficult to unlearn that feel and develop a new one. The majority of traders, I find, do not navigate that change successfully. The rate of success is greater in applying the old time frame to a new instrument than in finding a new time frame in a familiar market.
Perhaps, however, there's another reason that it's so difficult to change time frames: Patterns that exist on an intraday time frame may be very different from those over longer periods.
Here's an example. As I mentioned recently in the Weblog and my market update yesterday, I've been playing with a trade setup in the Odds Maker program from Trade Ideas that involves buying pullbacks from upthrusts and selling bounces from downthrusts. The pattern tests out quite well on intraday data across a variety of stocks and markets. When I tested a similar pullback pattern over multiday periods, however, the buy setup actually yielded a negative edge!
Specifically, I went back to 2004 and looked at four-day periods in SPY that rose more than 1.5%. I then identified four-day periods that retraced a portion of that gain, but not all of it. Over the following four days, SPY did not resume its upthrust. Indeed, the average change over the next four days was -.30% (19 up, 19 down), weaker than the average four-day change over the 2004-2006 period.
Could it be that markets are more mean-reverting over short time frames than over longer periods? Might this help to explain why the transition from daytrading to swing trading is so difficult for many traders? As we extend the time frame, we go from markets in which locals are dominant to ones in which institutions determine the big moves.
Perhaps who dominates markets determines how markets move.
Changing from intraday to multiday trading might entail shifting from thinking like locals to thinking like institutions.
And that's very difficult for market makers.
As I mentioned recently on my Trader Performance page, all such changes are difficult. That is because the changes entail unlearning old patterns--not just acquiring new ones.
In all my work with traders, I would say that the most difficult transition they've attempted is a transition from a short time frame to a longer one within the same trading instrument.
To trade a longer time frame means that you must let winners ride longer than you ordinarily would. It also means tolerating larger drawdowns and living with uncertainty longer. The instincts that help a scalper--getting out of losers quickly, for example--wreak havoc with efforts to trade longer time frames.
Once you have a "feel" for a market--which, really, is also a feel for a time frame--it is very difficult to unlearn that feel and develop a new one. The majority of traders, I find, do not navigate that change successfully. The rate of success is greater in applying the old time frame to a new instrument than in finding a new time frame in a familiar market.
Perhaps, however, there's another reason that it's so difficult to change time frames: Patterns that exist on an intraday time frame may be very different from those over longer periods.
Here's an example. As I mentioned recently in the Weblog and my market update yesterday, I've been playing with a trade setup in the Odds Maker program from Trade Ideas that involves buying pullbacks from upthrusts and selling bounces from downthrusts. The pattern tests out quite well on intraday data across a variety of stocks and markets. When I tested a similar pullback pattern over multiday periods, however, the buy setup actually yielded a negative edge!
Specifically, I went back to 2004 and looked at four-day periods in SPY that rose more than 1.5%. I then identified four-day periods that retraced a portion of that gain, but not all of it. Over the following four days, SPY did not resume its upthrust. Indeed, the average change over the next four days was -.30% (19 up, 19 down), weaker than the average four-day change over the 2004-2006 period.
Could it be that markets are more mean-reverting over short time frames than over longer periods? Might this help to explain why the transition from daytrading to swing trading is so difficult for many traders? As we extend the time frame, we go from markets in which locals are dominant to ones in which institutions determine the big moves.
Perhaps who dominates markets determines how markets move.
Changing from intraday to multiday trading might entail shifting from thinking like locals to thinking like institutions.
And that's very difficult for market makers.
Wednesday, September 06, 2006
Market Psychology AM Update for 9/6/06
11.10 AM CT - Per my initial update note, we are indeed testing the lows from late last week, where there's some good support. The continued volume at the bid and negative TICK have made the "sell the bounce" mode the way to go all AM--especially once we saw large volume beat down that rally attempt and cap the market in the 1308 region.
I've been working furiously with the Odds Maker program and am finally coming up with some signals that are working across multiple symbol lists and time periods. That suggests that the signals are robust and not just curve-fit artifacts. My experience, FWIW, is that you have to think like a market maker to come up with the good patterns. If you think like a trend follower or retail trader, you get randomness. The patterns I'm finding involve countertrend trading: buying dips under overall conditions of strength and selling bounces under conditions of weakness. Holding period is 30 min. I'll tweak and hopefully have something to share later this week. Have a great day.
9:58 AM CT - Sorry about the Blogger problems; my previous post below never got through. I'm retaining it nonetheless. The TICK continues its negative skew and volume picks up on the declines. The key, however, was seeing the large selling come in around that resistance point. That really put a lid on any possible early AM strength.
I'll be working with the Odds Maker program from Trade Ideas today, conducting some research. One nice feature of the program is that you can see it calculate the % winning trades as it scans the market. During the scan, sometimes the % will decline or rise quite a bit. That's telling you that the odds are changing as you test the pattern on the most recent data. That is very good information. I see Blogger is down again; I'll try to get this through. Have a great day; I'll post later if any major developments.
9:37 AM CT - Having Blogger problems; will update later. We're seeing persistent selling as we get into that 1308 region, and it's large selling--much of it executed by automated programs. This is keeping a lid on the market and, as long as we see a negative distribution to the TICK and more volume hitting bids than offers, we should stay below that resistance and look at bounces as selling opportunities. A move above the resistance would bring in quite a bit of buying/short covering.
9:23 AM CT - Yowza. Someone unloaded over 3000 contracts (sold at bid) around 1307.75-1308 at 9:20:35 - 9:20:47. That's not a small retail trader, folks. Someone is defending that resistance area with real size. The market absorbed it well, and that tells you something.
9:05 AM CT - One other thing: There's juicy resistance at 1308.75-1309. I want to see if the locals push that level to set off stops. If they can't pull that off, that would be a key sign that the bears have the upper hand.
9:00 AM CT - Volume picked up to the downside, and notice how different the distribution of the NYSE TICK is from recent sessions. What that tells us is that traders are tending to sell bounces, not buy dips. It doesn't mean we can't have short-covering rallies from here, but it does mean that market bounces in which buying dries up will make for candidates for selling. Volume remains moderate, but--reflecting the weak TICK--we're seeing more selling in the broad market than in the large caps. Notice, too, that the NAZ did not follow the other indices to lows on this most recent bout of selling. I'm cautious about selling into new lows when not all sectors are in gear.
8:45 AM CT - No question we have market weakness, with declining stocks outnumbering advances on the NYSE by over 1600 issues. I'm surprised volume has been stronger in the early going and will want to track that as the day goes on. We're less likely to get sustained (down) trending action if we see volume dry up in the AM. The NYSE TICK is clearly skewed to the sell side, and we're seeing more ES volume at the bid than offer, though not by a huge margin thus far. A few early attempts could not get the market below that 1307.50 area; I'm alert to the possibility that selling volume could dry up here and lead us to a bounce.
8:15 AM CT - Good morning. Looks like that loss of upside momentum tracked last night in the Weblog and mentioned in my last post is finally catching up to stocks. The immediate cause of the weakness is bonds. For the second straight day, we're seeing a selloff in U.S. fixed income, creating rising interest rates. This is taking a toll on the pre-opening S&P 500 Index, which is already below Tuesday's lows. Let's see how volume looks (magnitude and proportion at bid vs. offer) early in trade to see if we're likely to trade back into yesterday's range vs. test Friday's lows. My early hypothesis is that we put in a short-term high yesterday and should work off the recent overbought condition, eventually taking out Friday's lows. One last note: there is a decent correlation between the trading range of the overnight session and the trading range for that next day. If that holds, we should see a pickup of volume and volatility today. I'll post early after the open to see if that is indeed the case.
I've been working furiously with the Odds Maker program and am finally coming up with some signals that are working across multiple symbol lists and time periods. That suggests that the signals are robust and not just curve-fit artifacts. My experience, FWIW, is that you have to think like a market maker to come up with the good patterns. If you think like a trend follower or retail trader, you get randomness. The patterns I'm finding involve countertrend trading: buying dips under overall conditions of strength and selling bounces under conditions of weakness. Holding period is 30 min. I'll tweak and hopefully have something to share later this week. Have a great day.
9:58 AM CT - Sorry about the Blogger problems; my previous post below never got through. I'm retaining it nonetheless. The TICK continues its negative skew and volume picks up on the declines. The key, however, was seeing the large selling come in around that resistance point. That really put a lid on any possible early AM strength.
I'll be working with the Odds Maker program from Trade Ideas today, conducting some research. One nice feature of the program is that you can see it calculate the % winning trades as it scans the market. During the scan, sometimes the % will decline or rise quite a bit. That's telling you that the odds are changing as you test the pattern on the most recent data. That is very good information. I see Blogger is down again; I'll try to get this through. Have a great day; I'll post later if any major developments.
9:37 AM CT - Having Blogger problems; will update later. We're seeing persistent selling as we get into that 1308 region, and it's large selling--much of it executed by automated programs. This is keeping a lid on the market and, as long as we see a negative distribution to the TICK and more volume hitting bids than offers, we should stay below that resistance and look at bounces as selling opportunities. A move above the resistance would bring in quite a bit of buying/short covering.
9:23 AM CT - Yowza. Someone unloaded over 3000 contracts (sold at bid) around 1307.75-1308 at 9:20:35 - 9:20:47. That's not a small retail trader, folks. Someone is defending that resistance area with real size. The market absorbed it well, and that tells you something.
9:05 AM CT - One other thing: There's juicy resistance at 1308.75-1309. I want to see if the locals push that level to set off stops. If they can't pull that off, that would be a key sign that the bears have the upper hand.
9:00 AM CT - Volume picked up to the downside, and notice how different the distribution of the NYSE TICK is from recent sessions. What that tells us is that traders are tending to sell bounces, not buy dips. It doesn't mean we can't have short-covering rallies from here, but it does mean that market bounces in which buying dries up will make for candidates for selling. Volume remains moderate, but--reflecting the weak TICK--we're seeing more selling in the broad market than in the large caps. Notice, too, that the NAZ did not follow the other indices to lows on this most recent bout of selling. I'm cautious about selling into new lows when not all sectors are in gear.
8:45 AM CT - No question we have market weakness, with declining stocks outnumbering advances on the NYSE by over 1600 issues. I'm surprised volume has been stronger in the early going and will want to track that as the day goes on. We're less likely to get sustained (down) trending action if we see volume dry up in the AM. The NYSE TICK is clearly skewed to the sell side, and we're seeing more ES volume at the bid than offer, though not by a huge margin thus far. A few early attempts could not get the market below that 1307.50 area; I'm alert to the possibility that selling volume could dry up here and lead us to a bounce.
8:15 AM CT - Good morning. Looks like that loss of upside momentum tracked last night in the Weblog and mentioned in my last post is finally catching up to stocks. The immediate cause of the weakness is bonds. For the second straight day, we're seeing a selloff in U.S. fixed income, creating rising interest rates. This is taking a toll on the pre-opening S&P 500 Index, which is already below Tuesday's lows. Let's see how volume looks (magnitude and proportion at bid vs. offer) early in trade to see if we're likely to trade back into yesterday's range vs. test Friday's lows. My early hypothesis is that we put in a short-term high yesterday and should work off the recent overbought condition, eventually taking out Friday's lows. One last note: there is a decent correlation between the trading range of the overnight session and the trading range for that next day. If that holds, we should see a pickup of volume and volatility today. I'll post early after the open to see if that is indeed the case.
Participation: A Key Market Variable
When it comes to trading the equity indices, price can be deceiving. An index such as the S&P 500 can move to new highs or lows, and yet the majority of its components may not participate in that move. This can happen because the index is capitalization weighted. Some stocks are weighted more highly than others, allowing them to greatly influence short-term price movement. Moves to new highs in which there is poor participation of individual stocks in the index, for example, are less likely to continue in their present direction than moves that are broad in their participation.
One way I track participation is to follow a small group of stocks that correlate well with the overall S&P 500 Index. By tracking these issues, my task is more manageable than if I were to try to follow all 500 S&P stocks.
Above is a chart of the percentage of stocks in my basket that are making 20-day new highs minus the number making 20-day new lows. The red line represents the end-of-day cash index for the S&P 500; the blue line is the high-low differential for the stocks in the basket. If you look closely, you'll see how net new highs tend to peak ahead of the market's price peaks and net new lows tend to trough ahead of price lows.
Notice in the recent market, new highs have not expanded as the market has moved higher and, indeed, we've had fewer new highs in the basket during the last two days of market strength. This provides a yellow caution signal that participation in the move is waning. A break below the zero line (indicating we have more new lows than new highs) would be an even stronger cautionary note, as it was prior to the May price peak.
It's not at all difficult to create your own basket of issues. Find the sectors that are most important to your index and then find a group of stocks that correlate well with those overall sectors. My basket is relatively evenly weighted among consumer, cyclical, technology, and financial issues, for example.
I went back to 2004 (N = 654 trading days) and examined what happened in the market as a function of the new highs and new lows in my basket. When new highs minus new lows amounted to more than 40% of the total basket (N = 40), the next five days in SPX averaged a gain of .24% (25 up, 15 down). When new lows minus new highs comprised more than 40% of the total basket (N = 41), the next five days in SPX averaged a gain of .58% (28 up, 13 down).
Both of these are stronger than the remainder of the sample, in which neither new highs nor new lows are dominant. When neither dominate (N = 573), the next five days in SPX average a gain of only .06% (301 up, 272 down).
The bottom line? Participation matters. When we have many stocks participating to the upside or to the downside, returns are superior than if stocks are not making new highs or lows. Note that 20-day new high/low counts for the entire market are posted daily to the Weblog.
Tuesday, September 05, 2006
Market Psychology Update for 9/5/06
2:20 PM CT - Normally my updates will be during the morning (Central US time), which is when I'm trading, rebalancing the portfolio, etc., but once in a while I might get a few words in during the afternoon. What I wanted to emphasize here was how important it is relatively early in the day to identify: a) level of volume and nature of the market participation; and b) whether the market is moving in a range bound or trending manner. As noted below, we had early indications of moderate volume and range bound trade. Even when we got two good attempts at an upside breakout around 11 AM and 1:50 PM CT, upside volume dried up, just as downside volume had waned in the earlier AM. Knowing that the market has been trading in a range bound fashion and seeing volume dry up after a move to new highs provided an opportunity for short-term traders to either take long side profits or--at the very least--not chase the upside needlessly once the move had occurred. So far, the range for the day has been a little under 7 ES points! Despite the positive bias of much of the day's action, thanks to the positive adjusted TICK, this is a relatively slow market--and those tend to lack the institutional participation needed for sustained trending action. Update on the Weblog tonite.
10:20 AM CT - Can't say much has changed here: continued modest volume and rangebound trade, with some leaning toward volume at bid in ES and positive skew in TICK. I'm watching for a shift in those dynamics: as long as it's status quo, action is likely to be rangebound. I'm finding that patterns we normally think of as bullish test out as making money the *opposite* way in Odds Maker. This fits with the notion of the market as mean reverting. Selling an indicator of strength or buying an indication of weakness seems to work well intraday. For example, I bought downside breakouts of ranges and the pattern tested out profitably. More tonight; have a great day.
9:55 AM CT - Pretty much the same as before; I'm watching for a downward shift in the NYSE TICK, which--if it materializes--should break us below AM lows. Otherwise, volume has slowed, and we continue with runs and retracements of runs--very much a market typical of local domination. I'll be playing more with the Odds Maker; will report anything of major import. Otherwise, have a great rest of the trading day.
9:33 AM CT - We're establishing a range between the overnight highs and the AM low, which is around the day's average price from Friday. Volume at bid continues to modestly outweigh volume at offer in ES, but the TICK remains positively skewed. The result thus far is a rangebound market, albeit one with somewhat better volume than late last week (though that has been waning recently).
I find the Odds Maker quite interesting, fast, and easy to use once you get the hang of it. You take a pre-programmed market pattern (or one that you define), apply it to the entire market or your own defined subset, and then look back over 15 days to see how many signals were profitable, unprofitable; the size of average wins and losses; and overall profitability. You can tweak entries and exits and see how this affects profitability.
I took a simple pattern of a market dipping below its 30 minute linear regression channel and then trading back above it. I applied it to the ETFs and held on to the close. We had 7 winners out of 9 trades, with average win size handily outweighing the average loss. You can then scan for this pattern in real time (no signals so far today). More on this tonight in the Weblog.
9:08 AM CT - Some slow down of volume, with whippy action typical of local-dominated trade. The TICK remains skewed positively, even as we've seen hitting of bids in ES. As mentioned a bit ago, it is very hard to sustain a downside move under those conditions. It's been very interesting watching 5 minute new highs/lows picked up by Trade Ideas vs. a one-minute footprint chart off of Market Delta. When buying at offer slows down at a five-minute ES high and you start seeing individual stocks making five-minute *lows*, a short selloff in ES has materialized in ES this AM. The key is seeing which stocks are bucking the ES and leading the next move. Some possible patterns to watch for very short-term traders. Great example of selling (volume at bid) petering out with a positively biased TICK from 8:40 - 9:00 CT.
8:45 AM CT - Well, volume has indeed picked up and, in the ES, it's been skewed toward hitting bids, despite the modestly positive NYSE TICK. We hit the first lower targets and, if volume at the bid continues to dominate, next will target Friday's lows. We'll need to see a more negative distribution of the NYSE TICK, however, if we're to see meaningful downside action. I'm going to play with a little research; back with an update in a while.
8:22 AM CT - Here's a dark speculation worth keeping in the back of the mind re: the MidEast situation.
Thanks to 24/7 Wall St. for the kind mention of TraderFeed as a top twenty blog site. I'll have more to say about the list tonight on the Weblog.
Opening trade idea: If we can't muster buying pressure and move above the pre-opening highs in early trade, I'll look for a test of the pre-opening lows and then the average price from Friday (1310.5). Strong volume at offer and strong TICK will have us testing the preopening highs.
8:00 AM CT - Welcome back to the U.S. markets after a long holiday weekend. The expectation is that volatility will pick up now that the holiday is behind us. Let's keep an eye on early volume to see if this, indeed, will be the case. We've had six consecutive days of buying in the broad market, as described in the Trading Psychology Weblog, although the buying--as measured by the adjusted NYSE TICK--has not been at historically high levels. Interestingly, when we've had five straight days of buying in the TICK since late 2003 (N = 47), returns 1-3 days later have been subnormal. That is especially the case when the total cumulative TICK over those five days has been below +2000 (as it has been recently). So that keeps me alert for a pullback early this week. As always, however, before I act on that leaning, I'll need to see weakness materialize in the form of stocks making very short-term lows (I continuously track the number of stocks in my basket making five minute highs vs. lows) and in terms of large traders hitting bids rather than lifting offers. One project for this week is to take a close look at the Odds Maker feature from the Trade Ideas program. I'll be looking to see if we can generate some interesting short-term trading ideas from the Odds Maker. If so, I'll be happy to share those here. Next update planned for after the open.
10:20 AM CT - Can't say much has changed here: continued modest volume and rangebound trade, with some leaning toward volume at bid in ES and positive skew in TICK. I'm watching for a shift in those dynamics: as long as it's status quo, action is likely to be rangebound. I'm finding that patterns we normally think of as bullish test out as making money the *opposite* way in Odds Maker. This fits with the notion of the market as mean reverting. Selling an indicator of strength or buying an indication of weakness seems to work well intraday. For example, I bought downside breakouts of ranges and the pattern tested out profitably. More tonight; have a great day.
9:55 AM CT - Pretty much the same as before; I'm watching for a downward shift in the NYSE TICK, which--if it materializes--should break us below AM lows. Otherwise, volume has slowed, and we continue with runs and retracements of runs--very much a market typical of local domination. I'll be playing more with the Odds Maker; will report anything of major import. Otherwise, have a great rest of the trading day.
9:33 AM CT - We're establishing a range between the overnight highs and the AM low, which is around the day's average price from Friday. Volume at bid continues to modestly outweigh volume at offer in ES, but the TICK remains positively skewed. The result thus far is a rangebound market, albeit one with somewhat better volume than late last week (though that has been waning recently).
I find the Odds Maker quite interesting, fast, and easy to use once you get the hang of it. You take a pre-programmed market pattern (or one that you define), apply it to the entire market or your own defined subset, and then look back over 15 days to see how many signals were profitable, unprofitable; the size of average wins and losses; and overall profitability. You can tweak entries and exits and see how this affects profitability.
I took a simple pattern of a market dipping below its 30 minute linear regression channel and then trading back above it. I applied it to the ETFs and held on to the close. We had 7 winners out of 9 trades, with average win size handily outweighing the average loss. You can then scan for this pattern in real time (no signals so far today). More on this tonight in the Weblog.
9:08 AM CT - Some slow down of volume, with whippy action typical of local-dominated trade. The TICK remains skewed positively, even as we've seen hitting of bids in ES. As mentioned a bit ago, it is very hard to sustain a downside move under those conditions. It's been very interesting watching 5 minute new highs/lows picked up by Trade Ideas vs. a one-minute footprint chart off of Market Delta. When buying at offer slows down at a five-minute ES high and you start seeing individual stocks making five-minute *lows*, a short selloff in ES has materialized in ES this AM. The key is seeing which stocks are bucking the ES and leading the next move. Some possible patterns to watch for very short-term traders. Great example of selling (volume at bid) petering out with a positively biased TICK from 8:40 - 9:00 CT.
8:45 AM CT - Well, volume has indeed picked up and, in the ES, it's been skewed toward hitting bids, despite the modestly positive NYSE TICK. We hit the first lower targets and, if volume at the bid continues to dominate, next will target Friday's lows. We'll need to see a more negative distribution of the NYSE TICK, however, if we're to see meaningful downside action. I'm going to play with a little research; back with an update in a while.
8:22 AM CT - Here's a dark speculation worth keeping in the back of the mind re: the MidEast situation.
Thanks to 24/7 Wall St. for the kind mention of TraderFeed as a top twenty blog site. I'll have more to say about the list tonight on the Weblog.
Opening trade idea: If we can't muster buying pressure and move above the pre-opening highs in early trade, I'll look for a test of the pre-opening lows and then the average price from Friday (1310.5). Strong volume at offer and strong TICK will have us testing the preopening highs.
8:00 AM CT - Welcome back to the U.S. markets after a long holiday weekend. The expectation is that volatility will pick up now that the holiday is behind us. Let's keep an eye on early volume to see if this, indeed, will be the case. We've had six consecutive days of buying in the broad market, as described in the Trading Psychology Weblog, although the buying--as measured by the adjusted NYSE TICK--has not been at historically high levels. Interestingly, when we've had five straight days of buying in the TICK since late 2003 (N = 47), returns 1-3 days later have been subnormal. That is especially the case when the total cumulative TICK over those five days has been below +2000 (as it has been recently). So that keeps me alert for a pullback early this week. As always, however, before I act on that leaning, I'll need to see weakness materialize in the form of stocks making very short-term lows (I continuously track the number of stocks in my basket making five minute highs vs. lows) and in terms of large traders hitting bids rather than lifting offers. One project for this week is to take a close look at the Odds Maker feature from the Trade Ideas program. I'll be looking to see if we can generate some interesting short-term trading ideas from the Odds Maker. If so, I'll be happy to share those here. Next update planned for after the open.
Patterns in Minds and Markets
What seems significant can be purely random, and sometimes what seems random is quite significant.
An interesting discussion on a mailing list rekindled my memory of having tried a little experiment. I went to a website that performs runs tests on number sequences to test whether or not those sequences are random. I did my best to construct a random series of numbers, moving my fingers at will around the keyboard. The test found that the number sequence I entered showed probable evidence against randomness. In fact, my best effort at being random was significant at the .03 level.
Later, I entered the daily price changes for the S&P 500 Index for August, 2006, a period of seeming positive trend. Nope. Little or no evidence against randomness.
It turns out that human beings are quite patterned in their efforts to produce randomness. Their random sequences have fewer runs of numbers than are found in true randomness. If we're tossing a fair coin, for example, we should get runs of five consecutive heads about 3% of the time. Interestingly, my attempt to generate a random sequence with 1's and 2's didn't even have runs of three (which should occur about 12.5% of the time). It was statistically significant at the .01 level!
What does this mean for trading? Quite simply, unaided human judgment is poorly positioned to detect what is significant and what is random. We see a string of rising prices and conclude it must be a "trend". Intellectually, we know that any pattern of six dots positioned on a piece of graph paper must form certain shapes occasionally as a matter of chance. Nevertheless, we persist on finding meaning in such "chart patterns".
We assume that sequences are significant and that randomness lacks sequence. And that is all wrong.
It's also the source of many psychological problems in trading. When we have sequences of winning trades, we view this as significant and conclude that we have skill and a hot hand. Not infrequently that affects our next series of trades. Conversely, when we have sequences of losing trades, we imbue that with similar significance and lament our slump. Often our next trades reflect our diminished confidence.
We'll buy a trading system after it's had a hot period--and then get rid of it after a series of flat or losing periods. After extended drops, traders reliably withdraw their money from Rydex funds and their equivalents; bullish sentiment rises with a rising market. The human mind seems wired to detect patterns, and even when we try to be random, we find ourselves patterned.
When asked about his cigar as a possible symbol of a sexual organ, Freud replied, "Sometimes a cigar is just a cigar."
And sometimes a pattern is just a pattern.
Our ability to detect patterns is at once the source of trading skill--and weakness.
An interesting discussion on a mailing list rekindled my memory of having tried a little experiment. I went to a website that performs runs tests on number sequences to test whether or not those sequences are random. I did my best to construct a random series of numbers, moving my fingers at will around the keyboard. The test found that the number sequence I entered showed probable evidence against randomness. In fact, my best effort at being random was significant at the .03 level.
Later, I entered the daily price changes for the S&P 500 Index for August, 2006, a period of seeming positive trend. Nope. Little or no evidence against randomness.
It turns out that human beings are quite patterned in their efforts to produce randomness. Their random sequences have fewer runs of numbers than are found in true randomness. If we're tossing a fair coin, for example, we should get runs of five consecutive heads about 3% of the time. Interestingly, my attempt to generate a random sequence with 1's and 2's didn't even have runs of three (which should occur about 12.5% of the time). It was statistically significant at the .01 level!
What does this mean for trading? Quite simply, unaided human judgment is poorly positioned to detect what is significant and what is random. We see a string of rising prices and conclude it must be a "trend". Intellectually, we know that any pattern of six dots positioned on a piece of graph paper must form certain shapes occasionally as a matter of chance. Nevertheless, we persist on finding meaning in such "chart patterns".
We assume that sequences are significant and that randomness lacks sequence. And that is all wrong.
It's also the source of many psychological problems in trading. When we have sequences of winning trades, we view this as significant and conclude that we have skill and a hot hand. Not infrequently that affects our next series of trades. Conversely, when we have sequences of losing trades, we imbue that with similar significance and lament our slump. Often our next trades reflect our diminished confidence.
We'll buy a trading system after it's had a hot period--and then get rid of it after a series of flat or losing periods. After extended drops, traders reliably withdraw their money from Rydex funds and their equivalents; bullish sentiment rises with a rising market. The human mind seems wired to detect patterns, and even when we try to be random, we find ourselves patterned.
When asked about his cigar as a possible symbol of a sexual organ, Freud replied, "Sometimes a cigar is just a cigar."
And sometimes a pattern is just a pattern.
Our ability to detect patterns is at once the source of trading skill--and weakness.
Monday, September 04, 2006
Dr. Brett Raves
There are so many creative people in the world, doing excellent and inspiring work. I do my share of ranting; here's a few raves:
1) David Paul Larson - Went to my first fashion photo shoot today and was completely impressed with the professionalism of this Chicago-based photographer. He teamed up with Maggie from Akira Chicago and Laura of Ford Models Chicago and I realized how much skill it really takes to coax looks from a model and capture them on film. Great industry contacts; great people. The place to go if you're getting a start in the modeling world.
2) Metropolis - While we're doing the edgy and arty thing, this is the place for the cutting edge in industrial, EBM, goth, and electronic music. The top-ten lists will give you an idea of the creative work that never gets picked up over the airwaves.
3) Assemblage 23 - Tom Shear's music combines dance electronics with considerable emotional depth. He's recently branched out to form his own label, supporting bands that otherwise might not gain exposure. I notice his 23db Records now has a presence on My Space, with a nice clip from backandtotheleft. The video sites are where new acts are to be found.
4) Intelligentsia Coffee - There aren't too many things in this world that deserve to be called "world class", but this Chicago emporium is one of them. The small company had a fine mention in USA Today a little while back, but it's the effort they put into sourcing and roasting the finest crops from around the world that makes them stand out. The Los Delirios is an early AM friend.
5) Decision Point - I've got to get a trading rave in here somewhere! This is just a helluva site and, Carl Swenlin, you can quote me. I've followed Decision Point since its early days as an AOL site and seen the expansion of quantity and quality of data. Sectors, indicators, indices, asset classes: everything is charted and nicely linked to related pieces of information--some of which you just can't get elsewhere (e.g., advance-decline lines for sectors and indices).
It's an inspiration when people produce things of quality and beauty. Their efforts feed the soul, and this is my small thanks.
Three Creative Sources of Market Insight
One of the joys of blogging about trading is the opportunity to discover interesting people doing worthwhile research on the markets. Many times these researchers labor in relative obscurity, undiscovered by the majority of traders. What sustains them is a love for their work and a conviction that they have discovered important truths. They are not writing to attract thousands of hits and banner ads. They write to share their work within a larger community of traders and make their mark upon the field.
In this article, I'd like to single out three such creative sources of market insight.
The first is the work of the late George Lindsay, who first published his research on market timing in his newsletters. Later, his articles appeared in a publication from Investors Intelligence called "The Encyclopedia of Stock Market Techniques". After Lindsay's passing, Investors Intelligence collated his articles and issued them as a bound set. It is a treasure trove of meticulous market insight--all the more impressive because the research was conducted long before computerized analysis was the norm.
The foundation of Lindsay's approach is that there are stable relationships governing the timing of market turning points and recurring price pattern formations that appear in the major indices. His best known pattern is the "Three Peaks and a Domed House": a complex series of highs and lows that typically covers over a year of trading action. Less known, but perhaps every bit as important, is his observation that market rises and declines tend to fall into fixed durations, alternating between short and longer cycles. He also found a common structure to market cycles in which there is an equivalence between the time it takes for one part of the cycle to transpire and the timing of the next part.
It is most unfortunate that Lindsay did not leave behind a book to cement his contributions to the trading world. Fortunately, Carl Futia, a blogger, has picked up the Lindsay work and posts frequently on the research. See, for instance, Futia's recent Lindsay posts and his very interesting original work on Box Theory and staircases. Futia notes that many self-made market researchers have had their day in the sun, only to be eclipsed later. Once they are found to have feet of clay, their methods--as well as their reputations--may be consigned to the scrap heap. That's too bad, because, in many cases, very careful observation and insight went into the original work. Even the best theories can be misapplied. Futia is performing a real service in keeping the Lindsay flame alive.
A second creative line of market research is Terry Laundry's T-Theory. This approach gained publicity when it was mentioned by Marty Schwartz in his "Pit Bull" book. The essence of Laundry's work is that there is an equivalence between the time it takes markets to decline and the time it takes them to rise. The key to this concept is that declines are measured from momentum peaks, and not from ultimate price highs. This equivalence occurs over multiple time frames and allows for an anticipation of market cycles. Here, for example, is a graphic that illustrates the market's current large T formation. He also applies T-Theory to interest rate markets. The site includes an introduction to T-Theory written in 1997 and many updated examples that require some thought and analysis. To the best of my knowledge, T-Theory was developed independently of Lindsay's work, but there are interesting and promising areas of overlap for market timers.
Finally we have research from Down Under, conducted by Tom Henderson. His Camron site is quite large, and this map will prove helpful for exploration. There are some excellent observations regarding commercial vs. non-commercial traders, the importance of volume analysis and the "bid-ask count", and the fragmentation (and de-fragmentation) of trade data. I also like the work on price targets and control zones. The insight that pre-opening sessions offer information about the coming day's trade is important, as is the recognition that it is crucial to track the behavior of the market's largest participants by watching for tell-tale signs. I believe there are some important conceptual overlaps between Futia's boxes and Henderson's control zones: approaches that, to my knowledge, have developed independently. Henderson has withdrawn some of the pages from his site; I hope he'll learn from Lindsay's example and create a vehicle that will allow his work to outlive him. Laundry has created a foundation for perpetuating his work.
I'm sure there are many more creative researchers and sites that I am not aware of, and I hope readers will alert me to those, so that I can do my small part to provide the exposure their work deserves. Some of the best market insights can be found outside the media limelight.
In this article, I'd like to single out three such creative sources of market insight.
The first is the work of the late George Lindsay, who first published his research on market timing in his newsletters. Later, his articles appeared in a publication from Investors Intelligence called "The Encyclopedia of Stock Market Techniques". After Lindsay's passing, Investors Intelligence collated his articles and issued them as a bound set. It is a treasure trove of meticulous market insight--all the more impressive because the research was conducted long before computerized analysis was the norm.
The foundation of Lindsay's approach is that there are stable relationships governing the timing of market turning points and recurring price pattern formations that appear in the major indices. His best known pattern is the "Three Peaks and a Domed House": a complex series of highs and lows that typically covers over a year of trading action. Less known, but perhaps every bit as important, is his observation that market rises and declines tend to fall into fixed durations, alternating between short and longer cycles. He also found a common structure to market cycles in which there is an equivalence between the time it takes for one part of the cycle to transpire and the timing of the next part.
It is most unfortunate that Lindsay did not leave behind a book to cement his contributions to the trading world. Fortunately, Carl Futia, a blogger, has picked up the Lindsay work and posts frequently on the research. See, for instance, Futia's recent Lindsay posts and his very interesting original work on Box Theory and staircases. Futia notes that many self-made market researchers have had their day in the sun, only to be eclipsed later. Once they are found to have feet of clay, their methods--as well as their reputations--may be consigned to the scrap heap. That's too bad, because, in many cases, very careful observation and insight went into the original work. Even the best theories can be misapplied. Futia is performing a real service in keeping the Lindsay flame alive.
A second creative line of market research is Terry Laundry's T-Theory. This approach gained publicity when it was mentioned by Marty Schwartz in his "Pit Bull" book. The essence of Laundry's work is that there is an equivalence between the time it takes markets to decline and the time it takes them to rise. The key to this concept is that declines are measured from momentum peaks, and not from ultimate price highs. This equivalence occurs over multiple time frames and allows for an anticipation of market cycles. Here, for example, is a graphic that illustrates the market's current large T formation. He also applies T-Theory to interest rate markets. The site includes an introduction to T-Theory written in 1997 and many updated examples that require some thought and analysis. To the best of my knowledge, T-Theory was developed independently of Lindsay's work, but there are interesting and promising areas of overlap for market timers.
Finally we have research from Down Under, conducted by Tom Henderson. His Camron site is quite large, and this map will prove helpful for exploration. There are some excellent observations regarding commercial vs. non-commercial traders, the importance of volume analysis and the "bid-ask count", and the fragmentation (and de-fragmentation) of trade data. I also like the work on price targets and control zones. The insight that pre-opening sessions offer information about the coming day's trade is important, as is the recognition that it is crucial to track the behavior of the market's largest participants by watching for tell-tale signs. I believe there are some important conceptual overlaps between Futia's boxes and Henderson's control zones: approaches that, to my knowledge, have developed independently. Henderson has withdrawn some of the pages from his site; I hope he'll learn from Lindsay's example and create a vehicle that will allow his work to outlive him. Laundry has created a foundation for perpetuating his work.
I'm sure there are many more creative researchers and sites that I am not aware of, and I hope readers will alert me to those, so that I can do my small part to provide the exposure their work deserves. Some of the best market insights can be found outside the media limelight.
Sunday, September 03, 2006
The Most Important Psychological Skill for Traders - Part Two
My last post explained how psychological disruptions of trading are linked to state shifts that manifest themselves emotionally, cognitively, and physiologically. Very often these shifts involve states of heightened arousal due to frustration, fear, and anger. The previous post explained how these states can be defused by combining focused concentration with deepened, slowed breathing. With consistent practice, traders can become quite adept at calming their minds and bodies and interrupting processes that interfere with good decision making.
A related skill that I describe in The Psychology of Trading is "taking your emotional temperature." This simply means that you periodically stand outside yourself as an observer and notice your thoughts, feelings, and physical state. By making this self-observation a regular practice, you can become skilled at catching state shifts as they are occurring. This enables you to utilize the focusing and breathing exercises proactively, before emotional triggers can disrupt trading decisions.
Such a proactive use of the focus and breathing is especially effective when combined with cognitive techniques. Here's how to do it:
First off, I recommend that anyone trying these methods reduce their trading size significantly. By taking P/L off the table temporarily, it allows you to focus on developing your self-control. Then, with your success in the exercises, you can gradually build back to a normal trading size. (Note that if reducing your trading size by itself eliminates your emotional disruptions, that in itself may be your problem: you may be trading too large for your account size and your personal risk tolerance.)
Second, before adding cognitive components, it's necessary to truly master the focusing and breathing from the previous post. I generally have people practicing those methods at least twice a day for a full week before adding new components. The goal is to be able to calm yourself significantly with just a focused mind and a few deep, slow breaths. This takes consistent practice.
Once you can focus and relax yourself on demand, you're ready to add a cognitive module to your self-mentoring. Before you start trading, sit comfortably and vividly imagine market situations that would normally lead you to become fearful or frustrated. For example, you can "play a movie in your head" of the market moving against you and hitting your stop-loss point. The key is imagining the market action and your stop in vivid detail--while you are doing your deep, slow breathing. Then continue your "movie" by vividly imagining yourself taking the right course of action in that situation. Imagine how you would talk to yourself in that situation and what actions you'd take in the market--again, all the while keeping yourself calm and focused, breathing deeply and slowly.
You may need to repeat your "movies" several times with variations. In all, I recommend spending at least 15 minutes with this exercise prior to the market open. What you're doing is literally training yourself to stay calm and focused (and to do the right things) in situations that used to take you out of your game. By repeating these situations in your head many, many times, you normalize them (and your response to them) and make them familiar and non-threatening. Facing a situation again and again successfully in your mind prepares you to do the right things when those situations actually occur.
Notice that this method will work, not only for trading problems, but any situation that tends to trigger you and lead to unwanted reactions. Mental rehearsals under conditions of self control are a method for extending our free will, our ability to respond to events as we wish. This is not only helpful in trading, but in all of life.
A related skill that I describe in The Psychology of Trading is "taking your emotional temperature." This simply means that you periodically stand outside yourself as an observer and notice your thoughts, feelings, and physical state. By making this self-observation a regular practice, you can become skilled at catching state shifts as they are occurring. This enables you to utilize the focusing and breathing exercises proactively, before emotional triggers can disrupt trading decisions.
Such a proactive use of the focus and breathing is especially effective when combined with cognitive techniques. Here's how to do it:
First off, I recommend that anyone trying these methods reduce their trading size significantly. By taking P/L off the table temporarily, it allows you to focus on developing your self-control. Then, with your success in the exercises, you can gradually build back to a normal trading size. (Note that if reducing your trading size by itself eliminates your emotional disruptions, that in itself may be your problem: you may be trading too large for your account size and your personal risk tolerance.)
Second, before adding cognitive components, it's necessary to truly master the focusing and breathing from the previous post. I generally have people practicing those methods at least twice a day for a full week before adding new components. The goal is to be able to calm yourself significantly with just a focused mind and a few deep, slow breaths. This takes consistent practice.
Once you can focus and relax yourself on demand, you're ready to add a cognitive module to your self-mentoring. Before you start trading, sit comfortably and vividly imagine market situations that would normally lead you to become fearful or frustrated. For example, you can "play a movie in your head" of the market moving against you and hitting your stop-loss point. The key is imagining the market action and your stop in vivid detail--while you are doing your deep, slow breathing. Then continue your "movie" by vividly imagining yourself taking the right course of action in that situation. Imagine how you would talk to yourself in that situation and what actions you'd take in the market--again, all the while keeping yourself calm and focused, breathing deeply and slowly.
You may need to repeat your "movies" several times with variations. In all, I recommend spending at least 15 minutes with this exercise prior to the market open. What you're doing is literally training yourself to stay calm and focused (and to do the right things) in situations that used to take you out of your game. By repeating these situations in your head many, many times, you normalize them (and your response to them) and make them familiar and non-threatening. Facing a situation again and again successfully in your mind prepares you to do the right things when those situations actually occur.
Notice that this method will work, not only for trading problems, but any situation that tends to trigger you and lead to unwanted reactions. Mental rehearsals under conditions of self control are a method for extending our free will, our ability to respond to events as we wish. This is not only helpful in trading, but in all of life.
Saturday, September 02, 2006
The Most Important Psychological Skill for Traders - Part One
A holiday weekend is a good time to review trading journals, pick apart your results, and engage in self-assessment.
If your results are not what you hoped for, an important question to ask yourself is, "Why?".
There are three basic reasons why traders don't succeed:
1) They are trading a market and time frame that lacks opportunity;
2) They are trading a method that does not possess an objective edge in the marketplace;
3) They have a promising market, time frame, and method, but are not executing it properly.
Of these reasons, #3 is the most frustrating for traders. They feel as though they have the tools to succeed, but they themselves get in the way of their own success. Many times this is because emotional factors interfere with sound decision-making.
My recent post on techniques for dealing with emotional disruptions of trading offered a number of links to articles on cognitive, behavioral, and solution-focused methods for gaining self-control. Many more articles on trading psychology are available on my personal site, and a much more detailed explanation of the relationship between psychology and trading can be found in my book. It was because interest was so high in learning self-help methods for dealing with emotional disruptions of trading that I included step-by-step self-help manuals as the last two chapters of my latest book.
My hope is that these resources will help traders become their own mentors.
After my recent post, I received several emails asking a similar question: "What is the best technique I can use for getting myself in control?"
Most psychological disruptions of trading involve either under-control or over-control: traders either become impulsive and lose discipline when frustrated (resulting in overtrading), or they become anxious and negative (and miss out on opportunity).
The key to understanding these problems, as I stress in my book, is to recognize that they are generally state-dependent. They do not occur at all times, under all conditions. Rather, they are triggered by particular events and associated emotional states. The trader who is frustrated or depressed trades differently from the trader who is in a normal, non-aroused emotional state. This is because of brain physiology: we activate different brain regions and functions under conditions of arousal vs. conditions of calm concentration.
For this reason, the most important psychological skill for traders is simply the ability to control your body's level of arousal. It is near-impossible to maintain a collected frame of mind when your body is racing in flight-or-fight response patterns or withdrawing in the face of defeat. If you can control the body, you are much better positioned to achieve cognitive and emotional control.
Three steps can help you gain rapid control if you practice them frequently:
1) Stop whatever you are doing and take a break;
2) Sit comfortably and focus your attention on something neutral. As I mention in my book, a sound and light machine is ideal for this: you simply focus on the patterns of light and eliminate (as much as possible) stray thoughts. Biofeedback games can also be effective in focusing your attention;
3) Once you have your attention fixed, regulate your breathing by taking longer, deeper, and slower breaths. The slowing and deepening of the rate of your breathing will help slow your heart rate, lower your muscle tension, and reduce other biofeedback indicators of stress.
In the beginning, you may need to do this exercise for 10-15 minutes at a time a couple of times per day. As you become more skilled, you'll find that it takes less and less time to get yourself focused and calm. Eventually, just focusing your mind and taking a few deep breaths will get the job done. But it takes steady, consistent practice.
The exercise interrupts negative patterns of thought by controlling your concentration. It also slows your body down, which in turn helps you slow down racing thoughts. Because so many negative behavior patterns are triggered by states of frustration, heading off these states by proactively engaging in this exercise is especially effective.
Take a look at your P/L. How much money have you lost by not following your rules due to emotional disruption? If that figure is significant, the investment of time you spend learning these techniques will produce meaningful returns.
In my next post, we'll take a look at how you can integrate cognitive methods into the basic relaxation exercise.
If your results are not what you hoped for, an important question to ask yourself is, "Why?".
There are three basic reasons why traders don't succeed:
1) They are trading a market and time frame that lacks opportunity;
2) They are trading a method that does not possess an objective edge in the marketplace;
3) They have a promising market, time frame, and method, but are not executing it properly.
Of these reasons, #3 is the most frustrating for traders. They feel as though they have the tools to succeed, but they themselves get in the way of their own success. Many times this is because emotional factors interfere with sound decision-making.
My recent post on techniques for dealing with emotional disruptions of trading offered a number of links to articles on cognitive, behavioral, and solution-focused methods for gaining self-control. Many more articles on trading psychology are available on my personal site, and a much more detailed explanation of the relationship between psychology and trading can be found in my book. It was because interest was so high in learning self-help methods for dealing with emotional disruptions of trading that I included step-by-step self-help manuals as the last two chapters of my latest book.
My hope is that these resources will help traders become their own mentors.
After my recent post, I received several emails asking a similar question: "What is the best technique I can use for getting myself in control?"
Most psychological disruptions of trading involve either under-control or over-control: traders either become impulsive and lose discipline when frustrated (resulting in overtrading), or they become anxious and negative (and miss out on opportunity).
The key to understanding these problems, as I stress in my book, is to recognize that they are generally state-dependent. They do not occur at all times, under all conditions. Rather, they are triggered by particular events and associated emotional states. The trader who is frustrated or depressed trades differently from the trader who is in a normal, non-aroused emotional state. This is because of brain physiology: we activate different brain regions and functions under conditions of arousal vs. conditions of calm concentration.
For this reason, the most important psychological skill for traders is simply the ability to control your body's level of arousal. It is near-impossible to maintain a collected frame of mind when your body is racing in flight-or-fight response patterns or withdrawing in the face of defeat. If you can control the body, you are much better positioned to achieve cognitive and emotional control.
Three steps can help you gain rapid control if you practice them frequently:
1) Stop whatever you are doing and take a break;
2) Sit comfortably and focus your attention on something neutral. As I mention in my book, a sound and light machine is ideal for this: you simply focus on the patterns of light and eliminate (as much as possible) stray thoughts. Biofeedback games can also be effective in focusing your attention;
3) Once you have your attention fixed, regulate your breathing by taking longer, deeper, and slower breaths. The slowing and deepening of the rate of your breathing will help slow your heart rate, lower your muscle tension, and reduce other biofeedback indicators of stress.
In the beginning, you may need to do this exercise for 10-15 minutes at a time a couple of times per day. As you become more skilled, you'll find that it takes less and less time to get yourself focused and calm. Eventually, just focusing your mind and taking a few deep breaths will get the job done. But it takes steady, consistent practice.
The exercise interrupts negative patterns of thought by controlling your concentration. It also slows your body down, which in turn helps you slow down racing thoughts. Because so many negative behavior patterns are triggered by states of frustration, heading off these states by proactively engaging in this exercise is especially effective.
Take a look at your P/L. How much money have you lost by not following your rules due to emotional disruption? If that figure is significant, the investment of time you spend learning these techniques will produce meaningful returns.
In my next post, we'll take a look at how you can integrate cognitive methods into the basic relaxation exercise.
Friday, September 01, 2006
An Opportunity for Education and Training
As I mentioned in today's update, I normally don't get involved in seminar events for traders. The majority rely on vendor revenues and compensate speakers by offering promotional time/space. Consequently, many if not most of the presentations amount to infomercials and material rehashed from the speaker's articles or books.
To the credit of the education folks at the Chicago Mercantile Exchange--and their partners at the Chicago Board of Trade and New York Mercantile Exchange--they are sponsoring a different kind of training event. The Futures Trading Summit, to be held in Las Vegas from November 15-16, will feature speakers who either have worked with professional traders or who actually are professional traders. The goal of the Summit is to make professional trading methods and tools available to sophisticated, serious retail traders.
Among the speakers will be Yra Harris (a global macro trader featured in the book "Inside the House of Money"); Jim Dalton (expert on Market Profile and author of "Mind Over Markets"); and experienced author/educator/option trader Sheldon Natenberg. Note that many different markets and trading approaches will be covered. An interesting component of the two-day event is that registrants will have the opportunity to practice trade the markets and receive a print-out of the Trader DNA performance reports used by many professional traders. In my presentation, I'll then show traders how to utilize this (and other) information to improve trading performance--including an extension of the info I share in my morning updates.
My understanding is that the event will be simulcast over the Web for traders who cannot attend in person. Those traders will also be able to obtain the performance reports and feedback. One nice thing for those who can attend is that the Trading Expo event in Las Vegas will be held right afterward. For those wanting to shop the vendors and attend that event, this would be an opportunity to do Las Vegas and participate in a range of educational events.
I applaud the exchanges for reaching out to the trading public to offer a high-quality educational event. They did not ask me to write this; nor am I compensated for marketing the event. Rather, I have an interest in bringing to serious individual traders the tools and knowledge that are utilized by professional trading firms. For those who can attend the event, I will make myself available after the formal programming ends on the 15th to answer any questions, address any issues, and help traders out in any way I can.
And if you can't make it to Las Vegas, I'll be participating in a panel presentation for the Chicago Mercantile Exchange in early November. Keep an eye on the Trading Psychology Weblog for details.
To the credit of the education folks at the Chicago Mercantile Exchange--and their partners at the Chicago Board of Trade and New York Mercantile Exchange--they are sponsoring a different kind of training event. The Futures Trading Summit, to be held in Las Vegas from November 15-16, will feature speakers who either have worked with professional traders or who actually are professional traders. The goal of the Summit is to make professional trading methods and tools available to sophisticated, serious retail traders.
Among the speakers will be Yra Harris (a global macro trader featured in the book "Inside the House of Money"); Jim Dalton (expert on Market Profile and author of "Mind Over Markets"); and experienced author/educator/option trader Sheldon Natenberg. Note that many different markets and trading approaches will be covered. An interesting component of the two-day event is that registrants will have the opportunity to practice trade the markets and receive a print-out of the Trader DNA performance reports used by many professional traders. In my presentation, I'll then show traders how to utilize this (and other) information to improve trading performance--including an extension of the info I share in my morning updates.
My understanding is that the event will be simulcast over the Web for traders who cannot attend in person. Those traders will also be able to obtain the performance reports and feedback. One nice thing for those who can attend is that the Trading Expo event in Las Vegas will be held right afterward. For those wanting to shop the vendors and attend that event, this would be an opportunity to do Las Vegas and participate in a range of educational events.
I applaud the exchanges for reaching out to the trading public to offer a high-quality educational event. They did not ask me to write this; nor am I compensated for marketing the event. Rather, I have an interest in bringing to serious individual traders the tools and knowledge that are utilized by professional trading firms. For those who can attend the event, I will make myself available after the formal programming ends on the 15th to answer any questions, address any issues, and help traders out in any way I can.
And if you can't make it to Las Vegas, I'll be participating in a panel presentation for the Chicago Mercantile Exchange in early November. Keep an eye on the Trading Psychology Weblog for details.
Market Psychology Update for 9/1/06
9:18 AM CT - One more thing. Go back to the 8:25 AM post, and you'll see why I added that comment. We had a failed breakout attempt at 1311 as mentioned earlier, then moved back into yesterday's range, then retested the average price from yesterday. This pattern is a reliable one. The distribution of the TICK and willingness of sellers to hit bids from here will determine whether we traverse the entire range from yesterday. Best of luck trading, and have a great holiday.
9:00 AM CT - The NYSE TICK remains positive all AM, and as long as there's that bid underneath the market, a sustained decline is unlikely to materialize. So where does that leave us? We've got the resistance at 1311 and need to see some healthy volume lifting offers to surmount that level, and we've got the overnight lows--and the low from the market's initial dip on jobs news--as support. If volume tails off dramatically from here, we could stay in this rangebound mode. So far, volume is starting to wane from levels that, earlier, were a bit better than what we've seen the last couple of days (not much to say!). I'm off to work on research on a longer-term trading system; have a great holiday weekend! Update tonight on the Weblog and daily postings here through the weekend.
8:51 AM CT - There was quite a bit of reaching up and lifting of offers from breakout traders at 1310.75 and 1311 and large locals absorbed that volume and shoved the market right back down. Now that level becomes important resistance, and whether we can sustain buying at and above that level will tell us much about whether we're likely to get any trending move for the day. Given the Russell weakness--a change from recent days--I doubt the bull will rule the day.
8:37 AM CT - Major buy orders hit the market from 8:34:44 to 8:35:06 a bit ago. I like to track where those print (1311) and see how the market absorbs them. That tells you a lot about the strength of a breakout move.
8:25 AM CT - Oh yes, BTW, if we trade back into yesterday's trading range and cannot break higher, a move back to yesterday's average price of about 1306 is probable. Given the small size of yesterday's range, that's not much of a move, but it's a trading concept worth operating with in general. If you take a break during trading, check out the Futures Trading Summit sponsored by the CME, CBOT, and NYMEX. I'll be on the program and will have more to say later about this worthwhile event. Normally I'm not keen on trading seminars and don't participate in the usual industry BS events. As an exchange-sponsored event, this promises to be different.
8:10 AM CT - Interest rates spiked initially on the jobs news, moved back lower (corresponding to stock index strength and a move above 1309 on the ES, and now rates are back up at morning highs and stocks have eased back a bit. Still, not much has changed from yesterday. We continue to see a bid underneath the market, as reflected in the TICK (see Weblog), and that helped us hold the pre-opening lows of 1303 yesterday, and it helped us hold the pre-opening lows of 1304.75 today after the economic report came out. So we have a couple of good levels below us to lean on, and--given a bit of favorable seasonality pre-Labor day and start of the month--I again would look for buy setups that stay above these levels. A break below the levels would represent fresh selling interest and would eliminate any long side bias. As I've emphasized in these updates, however, figuring out who is in the market and how actively they're participating is key to understanding how much opportunity we're likely to have. (See my previous post on VIX and opportunity, BTW). If we have below average volume early in today's trade, I'd once again expect choppy, rangebound market action that offers very limited opportunity. A break above the pre-opening highs or below the pre-opening lows that is accompanied by sustained, raised volume would represent an important market shift of participation and would much more likely be associated with a trending move. I have my doubts whether we'll see that today--especially as the day goes on and we get closer to the long weekend--but let's keep an open mind. Markets sometimes make their moves when we're least expecting it.
9:00 AM CT - The NYSE TICK remains positive all AM, and as long as there's that bid underneath the market, a sustained decline is unlikely to materialize. So where does that leave us? We've got the resistance at 1311 and need to see some healthy volume lifting offers to surmount that level, and we've got the overnight lows--and the low from the market's initial dip on jobs news--as support. If volume tails off dramatically from here, we could stay in this rangebound mode. So far, volume is starting to wane from levels that, earlier, were a bit better than what we've seen the last couple of days (not much to say!). I'm off to work on research on a longer-term trading system; have a great holiday weekend! Update tonight on the Weblog and daily postings here through the weekend.
8:51 AM CT - There was quite a bit of reaching up and lifting of offers from breakout traders at 1310.75 and 1311 and large locals absorbed that volume and shoved the market right back down. Now that level becomes important resistance, and whether we can sustain buying at and above that level will tell us much about whether we're likely to get any trending move for the day. Given the Russell weakness--a change from recent days--I doubt the bull will rule the day.
8:37 AM CT - Major buy orders hit the market from 8:34:44 to 8:35:06 a bit ago. I like to track where those print (1311) and see how the market absorbs them. That tells you a lot about the strength of a breakout move.
8:25 AM CT - Oh yes, BTW, if we trade back into yesterday's trading range and cannot break higher, a move back to yesterday's average price of about 1306 is probable. Given the small size of yesterday's range, that's not much of a move, but it's a trading concept worth operating with in general. If you take a break during trading, check out the Futures Trading Summit sponsored by the CME, CBOT, and NYMEX. I'll be on the program and will have more to say later about this worthwhile event. Normally I'm not keen on trading seminars and don't participate in the usual industry BS events. As an exchange-sponsored event, this promises to be different.
8:10 AM CT - Interest rates spiked initially on the jobs news, moved back lower (corresponding to stock index strength and a move above 1309 on the ES, and now rates are back up at morning highs and stocks have eased back a bit. Still, not much has changed from yesterday. We continue to see a bid underneath the market, as reflected in the TICK (see Weblog), and that helped us hold the pre-opening lows of 1303 yesterday, and it helped us hold the pre-opening lows of 1304.75 today after the economic report came out. So we have a couple of good levels below us to lean on, and--given a bit of favorable seasonality pre-Labor day and start of the month--I again would look for buy setups that stay above these levels. A break below the levels would represent fresh selling interest and would eliminate any long side bias. As I've emphasized in these updates, however, figuring out who is in the market and how actively they're participating is key to understanding how much opportunity we're likely to have. (See my previous post on VIX and opportunity, BTW). If we have below average volume early in today's trade, I'd once again expect choppy, rangebound market action that offers very limited opportunity. A break above the pre-opening highs or below the pre-opening lows that is accompanied by sustained, raised volume would represent an important market shift of participation and would much more likely be associated with a trending move. I have my doubts whether we'll see that today--especially as the day goes on and we get closer to the long weekend--but let's keep an open mind. Markets sometimes make their moves when we're least expecting it.
How Much Opportunity is in the Market?
In my post for today's Trading Psychology Weblog, I took a look at 40-day segments of the S&P 500 Index market going back to 1990 and found that there was a dramatic difference in the size of the market's expectable movement as a function of the current day's VIX, its options volatility reading. When the VIX was high, the median move size in SPX over 40 days was three times as great as when the VIX was low.
This appears to be the case for daily and weekly data as well. How much potential opportunity in the market there is--its total amount of offered movement--correlates quite well with the volatility priced into the index options.
Going back to 1990 (N = 4204 trading days), we have 287 occasions in which the daily VIX was greater than 30. The median daily high-low range on those occasions was 2.275%, and the median size of the daily move (from yesterday's close to today's close) was 1.21%.
When VIX was between 25 and 29.99 (N = 432), the median range (daily change) was 1.75% (.95%). A VIX between 20 and 24.99 (N = 940) gave us 1.32% (.67%), whereas a VIX between 15 and 19.99 (N = 1225) provided .97% (.49%). That tells us that a VIX between 15 and 20 has given us about half the movement of a market with a VIX above 25.
What happens when VIX drops below 15, as is the case at present?
When VIX has been between 12.5 and 14.99 (N = 729), the median range (daily change) has been .74% (.34%). Those numbers drop to .63% (.31%) when the VIX is below 12.5 (N = 591). In all, there is nearly four times as much movement in a high VIX market as a low one. A market such as we had in June, in which VIX rose above 20, has twice the movement of the present market.
Bottom line? Not all movement is opportunity, but you can't have opportunity without movement. Since June, opportunity has been cut in half for daytraders of the S&P market. Imagine if basketball players one season found the rims set for a height of 10 feet, then 12 feet the next season and 9 the one after that. Suppose the pitching mound in June was 59 feet from home plate, but 40 in August.
That is the challenge of being an equity index daytrader.
This appears to be the case for daily and weekly data as well. How much potential opportunity in the market there is--its total amount of offered movement--correlates quite well with the volatility priced into the index options.
Going back to 1990 (N = 4204 trading days), we have 287 occasions in which the daily VIX was greater than 30. The median daily high-low range on those occasions was 2.275%, and the median size of the daily move (from yesterday's close to today's close) was 1.21%.
When VIX was between 25 and 29.99 (N = 432), the median range (daily change) was 1.75% (.95%). A VIX between 20 and 24.99 (N = 940) gave us 1.32% (.67%), whereas a VIX between 15 and 19.99 (N = 1225) provided .97% (.49%). That tells us that a VIX between 15 and 20 has given us about half the movement of a market with a VIX above 25.
What happens when VIX drops below 15, as is the case at present?
When VIX has been between 12.5 and 14.99 (N = 729), the median range (daily change) has been .74% (.34%). Those numbers drop to .63% (.31%) when the VIX is below 12.5 (N = 591). In all, there is nearly four times as much movement in a high VIX market as a low one. A market such as we had in June, in which VIX rose above 20, has twice the movement of the present market.
Bottom line? Not all movement is opportunity, but you can't have opportunity without movement. Since June, opportunity has been cut in half for daytraders of the S&P market. Imagine if basketball players one season found the rims set for a height of 10 feet, then 12 feet the next season and 9 the one after that. Suppose the pitching mound in June was 59 feet from home plate, but 40 in August.
That is the challenge of being an equity index daytrader.
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