Useful Trading Tools - Part One: NYSE TICK

Suppose you could follow every single stock listed on the NYSE and track every few seconds how many of the stocks were trading on upticks versus how many were trading on downticks.  What would that information tell you?

A buyer who wants to own shares aggressively will execute with a degree of urgency and will pay up for those shares.  Such lifting of offers will cause stocks to trade on upticks.

Conversely, a seller who wants out of shares aggressively will also execute with urgency and will accept the bid price.  This hitting of bids causes stocks to trade on downticks.

By calculating the number of stocks trading on upticks minus those trading on downticks every few seconds, the NYSE TICK ($TICK on eSignal feed) is an immediate, real time sentiment survey.  It is based on the actual transactions in a broad stock universe and thus represents what traders are actually doing, not just what they say they'll do in a survey.

One application of NYSE TICK is to take the intraday readings and create a cumulative line, similar to an advance-decline line.  As you can see above, that cumulative line has been making fresh bull market highs.  That tells me that market participants remain net buyers.  Note how selling pressure was restrained during the most recent market tumble.  That was a great tell that the down move was a correction in a rising market, not the start of a bear market.

There are many other applications of TICK as well.  For instance, since 2012, individual readings that exceed about +900 or fall below -900 represent two full standard deviations from average.  That tells us that there is significant buying or selling pressure across the broad stock universe.  Note that such buying or selling has to be broad based, as you can only get those extreme readings if stocks beyond the S&P 500 list are lifting or selling off.  

To get those extreme TICK readings where so many stocks are upticking or downticking simultaneously, we need to see institutional participants aggressively buying or selling baskets of shares.  That is an excellent sentiment clue.

For instance, after early selling that took TICK to the -740 area during Friday's session, buyers entered in force and drove TICK above +1000.  From that point forward, more stocks traded on upticks than downticks.  That was a nice tell for the coming upward trend day.

And what if NYSE TICK readings stay pretty much between +500 and -500 for the day?  That is often a good indication that institutions are not participating aggressively and that there is little directional demand or supply for shares.  That can be a good clue alerting us to slower, rangebound trade.

So much of successful short-term trading boils down to rapid pattern recognition, derived from plenty of observation.  I have archived one- and five-minute TICK readings for years and studied their nuances.  For me, it's been a great tool for identifying who is in the market and which way they're leaning.

Further Reading:  Interpreting Markets With NYSE TICK

Adapting to Change: The Greatest Challenge in Trading

Here's why I'm writing a new book on trading psychology:

The status quo says that problems in trading performance are the result of emotional disruption, lapses of discipline, and failure to consistently act upon one's edge in markets.

That analysis simply does not match my experience, either as a coach or as a trader.

Successful traders don't suddenly morph into inconsistent basket cases.  And when you see multiple talented traders lose money at the same time, it's impossible to believe that an epidemic of lapsed discipline has suddenly struck the trading community.

Rather, what happens is that the edge that had been present in markets no longer exists.  Markets continually change--they shift in their patterns of trend, volatility, correlation, etc.--so that what once worked no longer yields reliable results.  The momentum trader makes money until volatility shrinks and we move into choppy, rangebound trade.  That brings frustration and emotional disruption, but the cause of the negative emotions is a failure of adaptation to markets--not a failure of discipline or rule-following.  Indeed, doubling down on following rules that no longer work can only cement further losses and frustration.

To be sure, once emotional upset enters the trader's experience, it can interfere with future decisions.  But no amount of psychological stress management will create needed adaptations to changed markets.  That can only be accomplished by treating losses as potential sources of information--as signals that alert us to altered market regimes.  

Once you view drawdowns as information--not merely as failures or as stresses--the door opens to a deeper understanding of markets and ways in which we can take our trading to that proverbial next level.  The challenge is not simply to learn trading; it's also to unlearn and relearn it when markets present different, fresh opportunity sets.

Market Structure and Adapting to Change

Links and Thinks to Start the Week

Well, with that uplifting risk management poster, let's see what inspirations we can find for the coming week!

*  My regression model for SPX remains moderately bullish 5-10 days out, though not as aggressively bullish as it had been last week.  The Cumulative NYSE TICK line is making all-time new highs and my sentiment measures based on ETF buying/selling pressure have jumped higher the last several days, but are not at a frothy extreme.  Per the recent post, upcoming posts will describe a few new measures that I use to track market strength and weakness.

*  Abnormal Returns continues to do a great job of curating the financial web and finding valuable nuggets.

*  Bella from SMB touches on a topic near and dear to my heart:  using data to improve the decision making of discretionary traders. 

*  Some good quant work on Rob Hanna's Quantifiable Edges site, including a recent look at stretched volatility readings.

*  A wealth of information on Rennie Yang's Market Tells service; another site I like for unique market analytics is Decision Point, which has recently merged with the Stock Charts service.

*  Charles Kirk on the value of wiping the slate clean and when it makes sense to read less.

Have a great week--

Tackling the Challenge of Daytrading

If I were starting a business, I would not seek a field in which opportunity is shrinking and one where competition is increasing.  With regularity, however, I see new traders pursue daytrading in the most crowded instruments, especially the S&P 500 Index. 

Let's look at a few stats:

*  Since 2010, the average volume in SPY has been almost 172 million shares.  Since 2012, that average volume has dropped by more than 25% to 122 million shares. 

*  Less volume means more domination of electronic market makers and less participation by directional speculators.  Since 2010, the average daily range in SPY has been almost 1.15%.  Since 2012, the average daily range has dropped by more than 25% to .83%.

*  With recent crises in Europe and Asia, an increasing proportion of market moves are occurring outside of U.S. hours.  Since 2010, SPY has gained over 72 points.  Only 39 of those were made during U.S. hours; the rest occurred during the overnight hours.  Those limited to the day time frame missed out on nearly half of all directional opportunity.

The point of this post is not that you shouldn't be a daytrader.  Rather, the point is that, if you're going to be a daytrader, you have to approach markets very differently from the herd.  You either need to be in non-crowded instruments that possess unique directional opportunities or you need to approach crowded markets in unique ways that find profitable opportunities in the reactions and overreactions of the herd.

Suppose you took a look at every NYSE stock trading on Friday and whether it was making a new high price or a new low price just for that day's session.  If you plotted the new highs minus the new lows at every minute of the trading day, the chart above is what you would have seen.  You would have noticed that, once we got past the first half hour of trade, the new highs dominated the new lows.  You would have also seen that, past that first half hour, the majority of stocks consistently traded above their day's volume weighted average prices.

But if you were trading off the charts that everyone else looks at, you quite likely wouldn't have seen the underlying strength across shares.  That would have made it difficult to identify the likely trend day early in the session.

Daytrading indeed has become more challenging.  It is hard to imagine achieving unique results without a distinct informational edge.  All the coaching, discipline, and psychological insight in the world won't help a person trade the market if they don't see the market.  Upcoming posts will focus on some tools for seeing the market better.

Keys to Daytrading Success and Why So Few Get There

Quality of Life and the Pursuit of Trading Excellence

Yes, I know, it's cruel to post a picture of a warm Mykonos beach when it seems that everyone is buried under polar vortex snow, but I promise there's a point to it!

Responding to the recent post on David Blaine and the development of expertise, reader David Ayer posed the following questions:

If trading as a mission is the only path to excellence, what about balance with the rest of things in life such as quality downtime or giving full attention to important others? Do these get sacrificed? If so are there mental health concerns?

I think these insightful questions reflect important concerns, but also misunderstandings.   

What we know about creativity is that it is at least a two-step process consisting of:  1) a period of immersion in a domain, where people absorb all they can about the world; and 2) a period of stepping back, where people can reflect upon what they've learned and put their observations together into new views of the world.  

It's a bit of a simplification, but I refer to the first process as analysis and the second as synthesis.  Creativity starts with a wealth of raw materials derived from intensive observation but doesn't blossom until there is an opportunity to synthesize what you've analyzed into a fresh perspective.

If you don't do the deep dives, analyze the charts, study the companies, put in the screen time, observe markets, research patterns, etc, you won't have the raw materials for synthesis.  There's nothing to synthesize if you haven't made the initial observations.  It's the immersion in observation that enables us to see what others don't--that gives us the rare and valuable raw materials.

But at some point people burn out if all they do is stare at a screen or conduct one deep dive after another.  It's the emergence from immersion that puts the mind in synthesis mode.  That's why so many of our choice insights come when we least expect them:  on walks, in the shower, or in dreams.

After a period of unusually intensive analysis, I took a vacation with Margie to Europe and we spent time in Mykonos.  It was a fresh setting, a beautiful locale, and a getting away from routine in every possible sense.  While photographing a picture-perfect sunset, a startling idea came to me based on everything I had been analyzing.  The essence of the idea was that all technical indicators boil down to a handful of variables, such as momentum and volatility.  The key is to distill all chart patterns and indicators into the smallest possible set of non-correlated variables, find optimal expressions for those variables, and then identify which of the variables are driving price action during particular market regimes.

It was a bit disorienting, as this undid much of my previous work, but it was also exhilarating.  The perspective seemed crystal clear--there was a "rightness" to it based on my recent observations.  I threw myself into pursuing the vision when I returned home and continue to refine the idea to this day.  The regression modeling that now is central to my daily market preparation leans heavily upon this structural, technical view.

So now let's revisit Mr. Ayer's challenging questions.  If you create a dichotomy between work and quality downtime, you'll always be a divided human being.  Creative productivity requires intensive work and quality downtime.  Indeed, from my perspective, one of the greatest performance problems traders face is both a lack of intensive, quality analysis time and a lack of quality downtime.  Traders stare at screens and flit from chat to chat without truly doing the deep analytic dives.  At the same time, they tell themselves that dedication to trading requires that they not take too much time away from markets.  As a result, their analyses and syntheses are lacking.

Analysis without synthesis is drudgery.  Synthesis without analysis is empty theorizing.  It is the combination of passionate immersion in markets and quality experiences away from markets that brings out our creative best.  What is the quality of your market time?  What is the quality of your time away from markets?  How efficient are you as a creativity machine?  As a generator of inspiration?  We can only find the right answers if we ask the right questions.

Greatness, Creativity, and Trading Success

Getting Away From Markets: Saturday Links

*  Shout out to Scott Lesh, who has designed beautiful jewelry from the copper roofing material recovered from the renovation of Frank Lloyd Wright's Unitarian Church in Madison, WI.  His "Suspension" pendant was one of the Valentine's presents I selected.  I love the idea of wearing a piece of a Wright building...

*  Shout out as well to Decicco's FoodMarket in Brewster, NY:  not only is the entire back of the store a world-class selection of craft beers, but there's an actual craft beer bar in the store where you can sample the products.  Hint:  the Decicco collaboration with Evil Twin to produce a unique version of Imperial Biscotti Break is worth the visit if you're in the NYC area.

*  The music video I watch with Mia Bella; we love the cat on the couch.

*  Talk about great music videos:  check out Pinn Panelle's redo of Skrillex and the bass guitar played with a magnetic field.  Truly creative effort.

*  Quantified Self is a great resource for performance-based self-monitoring apps and tools.  I particularly like the units that assess sleep quality each night...significant correlation between sleep quality and mood/energy level/productivity.

*  Excellent research articles on creativity and performance from Darya Zabelina.  My next book (scheduled to be completed late this year) will devote considerable attention to methods for expanding creativity.

Have a great weekend!

Performance Lessons From David Blaine

Very recently, I was standing at a bar with friends waiting for our dinner table when a casually dressed man approached me and fanned a deck of cards.  "Pick a card," he said in a laconic voice.  Behind me, I sensed people gathering.  One gasped and called out, "OMG, it's David Blaine!"

If you check out this video, you'll see a man in a car and his reaction to David's street magic.  That pretty well sums up my reaction as well.  Blaine is truly a master at his craft.  One could observe in his work a level of concentration and timing that would be the envy of any trader.  Only very infrequently do I get the sense of being in the presence of world-class talent.  That night, having David Blaine take the card I selected and have it appear--folded!--underneath someone else's watch while observing his every move, I most definitely had that sense.

Over the course of his time with us, I became less interested in the magic and more interested in Blaine the person.  I spent time with his right hand assistant and asked plenty of questions.  When I asked how much time David spent in practice each day, the assistant looked at me quizzically.  "That is all he does," was the response.  When I then looked puzzled, he explained, "You know what we're going to do after dinner here tonight?  We're going to a bar and David will do it all over again and try out new tricks.  Today he has done some things I've never seen before."

There it was:  the power of intense focused dedication to a craft, extensive deliberate practice, and continual performance-based learning.  The world-class traders I've known have been like David Blaine:  they treat trading as a performance activity and continually hone their craft.  What did you try out last week and what did you learn?  What will you be reviewing and practicing this weekend?  What are you going to be working on next week?  Those are the questions that capture not just a learning curve, but an expertise curve.

But there's more to David Blaine's success than intensive practice and mastery.  He challenges himself with extreme goals and dedicates himself to reaching those.  This is evident in his Ted Talk, where he describes how he prepared himself to hold his breath for 17 minutes.  Watching the video, you get this sense that this is not a person who has goals, but rather a person whose goals have him.  

And that's what I've learned over the years.  Average traders approach trading as a hobby or as a job; good traders tackle trading as a career.  But the great traders?  For them, trading is neither hobby nor career.  It is a mission.  When the trading day is done, like David Blaine they pack up after dinner and begin the quest anew.

Achieving Greatness as a Trader

Finding Opportunity Amidst Adversity: Mia Bella's Story

This is the story of Mia Bella, the gray kitten we last encountered in a high-kill animal shelter in rural Kentucky.  Afflicted with feline herpes and an ulcerated eye, she was not exactly prime adoption material.  That, unfortunately, virtually assured that she would be put down within weeks.

It had been a good year personally and professionally for Margie and me and we decided to step up our charitable giving.  Having already adopted three rescue cats, we chose to contribute to rescue organizations that we felt were doing admirable work.

So Margie and I dressed casually and visited one rescue organization after another to see the cats available for adoption.  What the rescue coordinators didn't know is that we had checkbook in hand and were there as much to see the people and facilities as see the animals.  Eventually, we figured, if we went to enough rescue groups, we'd find the right addition to our family.  But our real goal was to help fund wonderful people and organizations.

It was an inspiring experience.  We heard stories of heroic efforts to save injured animals, abandoned pets, and feral cats.  But one story really stood out:  the rescue coordinator had arranged for a truck to travel all the way from Connecticut to rural Kentucky to pick up a large group of animals that were scheduled to be put down.  How do you not contribute to *that* cause??

So when Margie and I visited the Petco in Port Chester, NY, they were just unloading crate after crate and placing them in the adoption area of the store.  Somehow, some way, the group was going to find a home for these transplanted critters!

Most of the cats were frightened and shaken from the long ride.  They hid in their cages and had to be coaxed to interact.  One gray kitten, however, was just the opposite.  She pawed at her door and pawed and pawed.  She wanted out in the worst way.  

Margie and I have a preference for colorful cats like the blind calico that I wrote about years ago.  (Mali is doing wonderfully, thank you!)  But the gray kitten was not to be ignored, so I opened her cage.  Immediately she bounded out and I picked her up.  She planted herself on my shoulder and purred and purred and purred.  Not just a sound coming from her throat, but a vibration running through her entire body.  Five minutes elapsed, ten minutes, fifteen minutes.  She would not leave my shoulder and she never once stopped purring.

Finally I put her back in the cage so I could interact with the other animals.  Nothing doing.  The gray kitten doubled down on pawing at her cage door until I opened it back up.  Then it was back on my shoulder and purring non-stop.  A woman at the adoption event watched all this and remarked, "She's chosen you."

There it was.  It was like so many opportunities in life:  you don't find them; you stay open minded and open to experience and they find you.

We named her Mia Bella and she fast became best buds with our Siamese beauty, Naomi (see above).  Mia sleeps in the crook of my leg every night and, yes, purrs nonstop when I pick her up.  I was so inspired by her determination to get out of the cage and her ability to connect with people after going through so much that I posted her story to the employees of our hedge fund.  The lesson I emphasized was that when you put yourself out there with everything you've got, great things can happen.  It was Mia's insistent pawing at her door and unwillingness to leave my shoulder that brought us together.  It was Margie and my willingness to go from one organization to another and extend ourselves that brought us to Mia.  

Over the years of writing TraderFeed I've shared ideas about markets and psychology over thousands of posts covering many years.  My experience has been if you share and share and share and stay visible to the world, eventually the right people will find you.  You won't create the next opportunity; it will choose you.  

So, dear reader, there are times you'll be down, you'll be drawing down, you'll give back all your gains, and you will question what you're doing.  It will feel like death row in rural Kentucky and every ounce of you will want to curl up in your cage and escape from the world.  That's when you have to put it all out there.  You paw and paw and paw at your cage and summon every bit of feeling you've got--not just in your throat, but through your whole being.  Because that's what will make the right person open the door to your cage and opportunity find you.

 Resilience and the courage of your convictions

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It's great to be back; thanks for the very warm welcome.

TraderFeed Resumes Publication February 14th!

A small gray kitten sits in a cage in rural Kentucky.  She paws at the door, but no one comes.  With soft fur and an outgoing personality, she would normally be a good candidate for adoption.  But her right eye is severely inflamed and running.  It could be treated, but there's no reason for the shelter to undergo the expense.  You see, this is a "high kill" shelter:  over 90% of the animals will be put down if they're not adopted within weeks.  And, really, who will want a cat with active feline herpes virus and pending vet bills for her eye?

So our kitten remains in her cage, pawing the door.

Little does she know that all of that is about to change.  Within days, she will be teaching an important lesson to traders at a major financial institution.

What can traders learn from a gray kitten on death row??

That will be our first lesson in trading psychology when TraderFeed resumes publication on February 14th.

The TraderFeed Home Page: Trading and Market Psychology Resources

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

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

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

Brett Steenbarger

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

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

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

Enhancing Trader Performance - How traders can accelerate their learning curves

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

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

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

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

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

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

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

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

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

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

That is the vision.

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

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

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

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

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

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

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

* Suggestions for Your Trading Journal

* Why I Am A Trader

* Lessons From Blues Man

* Questions for Your Trading Business

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

* What to Look for in a Range Day

* Identifying Breakout Moves

* Best Practices for Traders

* Overcoming Trading Bias

* Failed Breakouts and Patterns to Trade

* Overcoming Large Trading Losses

* Exiting the Performance Roller Coaster

* When Trading Becomes an Addictive Problem

* Accessing Inner Expertise

* Listening to the Market's Communications

* Keys to Daytrading Success

* The Value of Keeping Score

* The Importance of Goal Setting

* Hidden Volatility Assumptions in Our Trading

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

* The Perils of Impotent Goals

* Productivity in Life and Trading

* Considerations in Selecting a Trading Coach

* Core Competencies of Successful Traders

* Stress, Burnout, and Renewal in Trading

* How to Grow Your Trading Size

* Creating Change With Imagery, Visualization, and Anchoring

* Keeping Your Eyes on Ideals

* The Role of Vicarious Trauma in Shaping Identity

* Assessing Your Trading

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

* The Four-Leaf Clover Principle

* How Body Becomes Soul

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

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

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

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

* Building Motivation Through Optimism

* Changing How We Think

* The Trading Process and Generating Trade Ideas

* Finding Your Solutions

* The Trading Process and Trade Execution

* Turning Trading Goals Into Performance

* Self-Appraisals for Traders

* Trading and Job Satisfaction

* Becoming a More Consistent Trader

* Coaching Fundamentals for Traders

* A Key to Trade Execution

* Trading Breakout Moves

* A Worthwhile Life Lesson

* Assessing Your Trading Edge

* Risk and Overtrading

* Defusing Trading Stress

* Know Who You Are as a Trader

* Ideas for Improving Your Trading

* The Essence of Greatness

* Play as a Key to Development

* A Psychological Checklist for Traders

* The Dark Side of Trading

* Reflections on Love

* Overcoming Psychological Trauma

* Simulation as a Key to Learning

* Building Market Intuition

* Frontiers for Trading Psychology

* Happiness and Quality of Life

* Greatness and Creativity in Trading

* Vitality and Success

* Finding Your Niche in Life and Trading

* Formatting Your Trading Journal

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Core Ideas in Trading Psychology: Trading and Self Development

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

Introduction to Trading Psychology

Trading as a Performance Activity

Changing Problem Patterns

Solution-Focused Change

Mirrors and Corrective Emotional Experiences

Implicit Learning and Somatic Markers

Market Structure and Adapting to Market Change

Identifying Historical Patterns in Markets

Reading Market Psychology Through Volume and Price

Reading Market Psychology Through Intermarket Themes

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

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

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

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

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

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

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

Previous Posts in This Series:

Reading Market Psychology Through Volume and Price

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Patterns

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

Previous Posts in This Series:

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

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

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

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

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

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Core Ideas in Trading Psychology: Identifying Historical Patterns in Markets

Previous Posts in This Series:

Market Structure and Adapting to Market Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

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

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

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

Previous Posts in This Series:

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

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

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

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Core Ideas in Trading Psychology: Implicit Learning and Somatic Markers

Previous Posts in This Series:

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns Briefly

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

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

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

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Using Twitter for Reader Updates

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

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

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

Thanks for your interest and understanding--

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

Previous Posts in This Series:

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

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

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

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

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

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

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

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