Two Hallmarks Of Quality Trading

 

I recently wrote an important article on the topic of how the ways in which we trade impact our psychology.  We commonly assume that working on our heads will improve our trading.  Less often do we recognize that the best way to maintain a positive trading psychology is to trade well.

What does it mean to trade well?  Here are two key hallmarks of quality trading:

1)  Quality trading is planned, not reactive - Planned trading means that we begin with an idea that we have researched and then identify good risk/reward points for participating in the idea and proper sizing for the trades, so that we can easily survive being wrong.  Planning means that we clearly identify what needs to happen for us to exit and/or modify our positions.  When we overtrade or take positions out of a fear of missing moves, those trades are reactive.  In reactive trading, we make decisions for psycho-logical reasons, not logical ones.

2)  Quality trading is open-minded, not biased - Sometimes we see traders who trade with a fixed idea and/or a persistent directional bias.  They look for evidence to support their views and discount evidence that might lead them to question their positions (confirmation bias).  Open-minded trading  means that we can express ideas in multiple ways and that we can trade multiple, independent ideas.  We are not wedded to one side of the market or one trade idea.

A very simple way to evaluate our trading is to rate each trade on the two criteria above and sum up those ratings.  If we're developing as traders, we will become more planned and more open-minded in what we do.  We will develop processes that keep us planned and open-minded.  The goal is to trade well, not to simply make money.  If we trade well, we inevitably maintain a focused mindset and place ourselves in the best possible position to succeed.

Further Reading:

How We Trade Impacts Our Psychology

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Awareness and Acceptance in Trading

 

I had two interesting experiences recently.  The first occurred on Friday morning.  The stock market was short-term oversold and displaying early signs of strength before the NY open.  Prior to the decline, we had been seeing unusually low volume and volatility.  I had a string of losing trades during that period.  Each time I recognized the poor environment for what it was and limited my losses.  That awareness, I've found, has been essential in managing risk and maintaining a sound trading psychology.  It was not a great environment for my trading, and that accepting that allowed me to take the losses with equanimity.  Once the market showed strength on Friday, my research suggested the possibility of a short-covering rally.  I bought several positions early on and then other research kicked in shortly after the open suggesting that we could see a trend day.  Now the awareness was of a positive opportunity set.  I added to the positions and the resulting gains more than erased the prior losses.  It was awareness and acceptance of the environment--and the rapid updating of these--that allowed for good decision making.

The second conversation was with a trader who insisted that his goal for trading was to maintain a consistent high level of calm and confidence.  He wanted to be positive in his outlook (and aggressive in his risk-taking) no matter what was occurring in his trading and in markets.  I explained to him that feelings of doubt and uncertainty can represent information and are not necessarily things to brush aside.  My recent market experience was a case in point.  It was the loss of "conviction" that helped me limit losses and stand aside until opportunity presented itself.  Open-mindedness was the key from my perspective, not optimism.  The trader was surprised by what I had to say.  He had not considered that a state of doubt and uncertainty could be a wonderful guide for actions (and inaction!) in markets.

Awareness of the environment we're in and acceptance of the opportunity sets in front of us is essential to making sound trading decisions.  It's when our needs for profits and our desire for risk-taking drive our decision-making that we lose self-awareness, lose market awareness, and overtrade.  If markets were perfectly consistent, it would make sense for us to pursue a totally consistent mindset.  When opportunity sets vary over time, it makes sense for us to accept reality and adjust accordingly.  The weather might look overcast and windy, with a forecast for rain.  Staying "positive" and leaving the umbrella at home is no virtue.

Further Reading:

How to Change Negative Patterns in Our Lives

How Spiritual Growth Furthers Our Psychological Growth

Knowing Your Limits as a Trader

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The Importance of Rejuvenation

 

This is one of the great challenges of performance in trading:  We need routine ("process") to follow rules and best practices accumulated through experience.  We need variation in routine ("creativity") to discover new and better rules and practices.  

It is important to immerse ourselves in trading and maximize our focus to best apply what we've learned from research and experience.

It is important to step away from trading to refresh our views of markets and rejuvenate.

If you want to make changes in your trading--or in your life--those have to begin by breaking routine and changing something you do.  Daily.

When we rejuvenate, we can view what we are doing in a fresh light and figure out how to best break our routines.

Many traders fail for the same reason many marriages fail.  They get stale.  Love--for a person or for markets--never dies.  It has to be killed.  Routine kills.  

How are you rejuvenating?  How are you innovating?  How are you staying fresh in your approaches to markets?

TraderFeed and The Three Minute Trading Coach will be on a short hiatus during a period of rejuvenation.  During that time, I will be researching new edges in the market and new ways of trading those--and I look forward to sharing those.  I will also spend time with extended family in a reunion:  connection brings rejuvenation.  Stay tuned, and thanks as always for your interest and support--

Brett

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Playing The Right Game

 

A number of traders that contact me are working very hard at improving the "setups" that they trade each day.  Often, they're doing a good job of improving their game, but are they necessarily playing the right game?

Let's take a look at relevant statistics with the SPY ETF as a market proxy.  What we want to see is how much of the movement in the index occurs during NYSE trading hours and how much occurs when the NYSE is closed.  

Going back to the start of 2019, we have gained about 188 points in SPY.  Of those, nearly 109 occurred in overnight action, when the NYSE was closed.  During 2021 thus far, the number of points gained overnight was very similar to the number gained during the day sessions.  Bottom line, much of the directional opportunity in the market has been unavailable to daytraders.

This is an important reason why a number of the traders I work with at SMB have begun researching multi-day edges in the market.  They've opened longer-term accounts, and they've been learning options strategies that provide them with superior risk/reward in holding positions overnight.  By changing the game they're playing, they've expanded their opportunity set--and that is paying off.  

I'm finding the same thing in my own trading.  I have three separate accounts.  Two hold positions over longer horizons (days to weeks) and one trades mostly intraday.  When I backtest a pattern in the market that shows a historical edge over a one-week+ horizon (such as when occurred when the sharp drop on June 19th was followed by a sharp rise), I enter and hold positions in the two accounts and then trade intraday pullbacks in the short-term account.  The net result is that I can pursue opportunity even when the market moves against me short-term.  This creates a win-win mindset.

Similarly, among the SMB traders, I find a more positive mindset because they can participate in far more opportunity and not face the frustration of having their ideas play out in time zones when they're not active.

It's a great example of how improving your trading can improve your mindset and trading psychology.  If you're frustrated that you're not taking advantage of the opportunity that is present, perhaps it's not simply that you're playing the game poorly.  Perhaps you need to reassess the game you're playing.

Further Resources:

How Spiritual Growth Can Further Our Psychological Growth

Three Minute Trading Coach:  Building Our Emotional Awareness

Building Our Capacity for Reaching Our Goals

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Intentionality: Expanding Free Will

 

The central problem of psychology is what Freud called the "repetition compulsion".  We repeat patterns of thought, feeling, and/or behavior even though those repetitions interfere with our happiness and success.  We can be fully aware of our maladaptive patterns at certain times and unwittingly repeat them a short while later.  Because our intentionality--our capacity for free will--is limited, our ability to act upon our goals and ideals is also limited.  Every problem of trading psychology ultimately boils down to a restriction of our ability to act upon our best plans and intentions.  The evidence-based approaches to psychology are a collection of techniques that help us become aware of our repetitions, so that we can write new endings to old stories.  At root, good psychology expands our intentionality:  our capacity for free will.

We can develop our capacity for intentional activity by sustaining intentional activity.  One routine that I like on the treadmill is to run with an uphill incline until I become tired and feel like quitting.  Then I decide upon how much further to run.  In other words, I sustain effort beyond the point of discomfort.  That usually means breaking a good sweat.

The problem for most of us is that we rarely break a sweat--in trading or in other areas of life.  We stay in our comfort zones and sustain an action until it becomes uncomfortable.  So, for example, when writing my book I'll eventually become fatigued and feel like taking a break.  That is when I most need to push further and write several more pages.

Similarly, I recently placed a few trades in the morning and got chopped up.  I felt discouraged and decided it was best to pack it in.  On reflection, however, I could tell that this was just discouragement talking; that, in fact, I was now seeing the market clearly.  I pushed forward, redoubled my analysis, hit a point of clarity, placed one more trade, and profited nicely.

Now here's the interesting thing:  When I push further and write a few more pages or do another lap on the treadmill, I break through my fatigue and often can do much more.  After the winning trade, I was not deflated and discouraged at all and felt energized for the rest of my day.  When we push past our comfort levels, we eventually tap into our second wind--a fresh source of energy and enthusiasm.  When we continually make efforts to push past our comfort zones, we become increasingly capable of drawing upon that second wind of consciousness.  

Every effort to sustain activity beyond our comfort zone is an exercise of will.  We are energized when we tap our intentionality.  We lose energy when we remain static, within what is familiar and comfortable.  A great best practice--in trading and in life--is to break a sweat every day by sustaining effort beyond the comfort zone.  As on the treadmill, we find that, over time, that comfort zone expands:  what once took significant effort now comes readily.  Note carefully:  Every part of our trading processes--from our preparation to our reviews--can become opportunities to expand our capacity for effort when we push beyond our comfort zones.

That is the expansion of free will, and it underlies all success--in markets, and in life.

Further Resources:

Trading and Training the Will

Radical Renewal:  Spirituality and Trading

Planned Trading and Intentionality

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A Simple Strategy For Making Your Trading Better

 

Here is a simple scheme for making yourself better as a trader month by month:

1)  Review your trading for the month.  Keeping statistics on your trading is an excellent way of doing this.  How many winning and losing trades did you have?  What were the average sizes of your winning and losing trades?  How did your largest winning trades compare with your largest losers?  What ideas were responsible for the winning and losing trades?  

2)  Identify the one thing you did best during the month and identify the one thing from the month that you most need to improve.  That means comparing your best and worst trades and/or your best and worst trading days.

3)  In the spirit of FIGS--focused, intensive, goal setting--identify the one thing you'll do each day to do more of what you did best and correct the thing you did worst.  This has to be a daily plan that you will tackle each trading session and that will involve building on your strength and addressing your weakness.

4)  Keep a daily report card of how well you accomplished the two goals set for the week and how you can extend your progress the next day.

5)  Repeat this process, setting new goals, each month.

You are most likely to become consistent in your trading if you are consistent in working on your trading.  The consistency and intensity of your work on yourself will shape your rate of progression.

Further Resources:

Free Blog-Book on the Spirituality of Trading

The YouTube Video Channel for Trading Psychology

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Learning From Our Best Trades

 

Please note:  I will be discussing this topic in greater length during my Sunday evening podcast with Better System Trader live.  You can use the link to sign up; the session will be held on Sunday, July 11th at 8 PM ET / 7 PM Central.

Since the writing of Trading Psychology 2.0, I have emphasized the importance of studying our best trades to identify "best practices" that are unique to our success.  It is in combining these best practices that we become able to develop "best processes" that make us consistent in our performance.  It's a great example of how our trading psychology follows from our development as traders:  we become confident and consistent as we develop our talent the right ways.

Friday was one of my best days in the market in a while, so I thought I would share a few of the learning lessons reinforced by the day's profitability.

If you click on the chart above (screenshot from Sierra Chart), you can see how Friday morning's trade in the SPX (ES) futures evolved.  We went into the day's session considerably oversold on short and medium time frames, but in an uptrend on longer time frames.  For example, we closed on Thursday with fewer than 50% of SPX stocks closing above their 3, 5, 10, 20, and 50-day moving averages, but over 50% of stocks closing above their 200-day moving averages (data from IndexIndicators.com).  Over the last two years, that has occurred 19 times, with 15 of those occasions closing higher five days later for an average gain of 1.74%.  So we went into the session with possible upside edge.  Interestingly, a pattern I had posted earlier in the week also suggested a multiday  upside edge.  So there's the first best practice:

Best Practice #1:  Only go into a trade with a backtested edge and preferably more than one.

So, did I enter a long position at the close of trading on Thursday?  Not at all.  In the historical sample, there were a few instances of decent sized losing days.  The backtest provides a worthwhile idea, but I want to see the idea playing out before committing my hard-earned capital!  You can see from the above chart that we moved nicely higher in overnight trading, with transactions lifting offers (pink arrow).  That means buyers are aggressive.  With that price strength, we see the short-term moving average cross above the longer-term one on the Ehlers Adaptive Moving Average system (yellow arrow).  This confirms we have moved to an uptrend.  This leads us to a second best practice:

Best Practice #2:  Wait for a good trading idea to turn into a good trade by getting confirmation from price action.

So, did I enter a long position on the moving average crossover?  No, I didn't!  Why not?  It was between 2:00 AM and 2:30 AM in the morning and I was sleeping!  Did I get frustrated that I had missed a signal, where the market continued rising afterward?  Not at all.  The backtested edge was over a multiday period, so my default entry mode was to buy the first short-term retracement in the market.  That occurred a little before 6 AM ET (blue arrows).  I entered a first clip of risk on the retracement and then added a second clip on the subsequent rise.  The market was now going my way nicely and I set a stop where I had entered the first clip.  That provided very good reward relative to risk, leading us to the third best practice:

Best Practice #3:  Don't worry about catching highs or lows when you enter.  Focus instead on inflection points that provide superior risk/reward.  

As the stock market opened for the day on Friday, I noticed that advancing stocks were swamping losers by more than 5:1.  The NYSE TICK was skewed toward upticks and, during the first hour of trading, we never saw significant levels of downticks.  In short, buyers were solidly in control.  I knew from my prior research that such strong openings out of oversold conditions often lead to upside trend days, as many short-sellers are stopped out and buyers jump back in.  That gave me confidence to hold the position rather than take quick profits, setting up our fourth best practice.

Best Practice #4:  Adjust your position sizing and holding period to evolving price action.  A backtest and favorable price action will get you into a trade, but it's the subsequent price behavior that gets you to build your size and hold onto the trade.

Notice that I don't start the day looking for "setups".  If there's no solid edge, there's no trading.  And notice that I'm not concerned about "missing" or "chasing":  I'm following the edge in the trade and the evolving market action.  I don't get big in the trade until I see confirming evidence lining up.  Finally, note that I'm not simply generating ideas from chart patterns or "macro" stories that link a limited number of data points.  There's no guarantee that a pattern that has played out in the recent past will play out in the immediate future, but the alternative is to trade in ignorance of market history.  That doesn't strike me as a rational and promising alternative.

Once you've identified your best practices, they can form the basis for a checklist that guides your trading going forward.  Consistent profitability begins with a consistent process.  Correcting mistakes can help us limit the downside, but it's by maximizing our strengths that we find meaningful upside.

Further Resources:

Sunday Evening Podcast With Better System Trading

How To Change Negative Patterns In Our Lives

Finding A Backtested Edge In Your Discretionary Trading - Video

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Asking Good Questions In Your Trading

 

In recent meetings with traders, I've heard a similar question:  When are stocks going to come down?  Those traders have been frustrated by the seeming steady march higher, as time and again, they have tried to sell "overbought" stocks and indexes.

When I hear the same question again and again, I've found it's usually the wrong question.

Here's an example of a good question, which I define as a question coming from a fresh, unexpected perspective:

"Last week, we saw a majority of SPX stocks trading below their 50-day moving averages, according to the Index Indicators site.  After such a correction, what has the market done when we've returned to a situation where over 50% of stocks are trading above their 50-day moving averages?"

Note why this is a good question:  It ignores what the chart looks like and instead defines correction as any period in which the majority of stocks trade below their moving average.  By that definition, a correction has already occurred, even though it looks as though we've simply moved higher.

Good questions often are grounded in what is not obvious.

Well, according to the backtesting function of Index Indicators (see the MarketCharts.com site for even more extensive backtesting), we've had 10 instances over the past two years in which stocks have traded below their 50-day moving averages and then crossed back above.  All 10 instances were profitable 10 days later, by an average of +3.16%.  Indeed, just these 10 instances accounted for well over half of all SPX gains over the two year period.

So far, it's been a good trade.

To be sure, 10 instances does not constitute proof, and one would not build an algorithmic trading system on such limited data.  But I'm not looking for proof or systems; I'm looking for promising hypotheses.  Once I have those and I notice that everything I look at intraday is confirming the hypothesis, I have an idea worth trading.  

Very often, when I have traded poorly, I have not grounded my trading in good questions.

There's no sense working on your "trading psychology" if you're looking at the same charts and trading the same way as everyone else.  Our edge comes from uniqueness of perception and analysis.  That's true in every human endeavor.

Further Reading:

How to Set Goals the Right Way

The Three Minute Trading Coach Video Series

Forbes Articles on Performance Psychology

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FIGS: Focused, Intensive Goal Setting

 

Many traders that I work with involve me in their performance reviews.  Sometimes they create weekly reviews, sometimes monthly or quarterly.  Invariably these reviews summarize what they did wrong over this period and how they could improve.  They set lots of goals, but then that's often the last I hear about those goals until the next review period!

There are three big problems with the goal-setting of many (and perhaps most) traders:

1)  Too Many Goals - By setting a large number of goals, traders have difficulties prioritizing the changes they want to make, and they find it difficult to give each of the goals proper attention.  As a result, they chronically feel as though they are falling short in achieving their goals and lose motivation.  Goals should move us forward, not discourage us!

2)  Vague Goals - A trader may set a goal of trading with greater discipline, so that they stop overtrading.  Great!  How are they going to do that?  How will they monitor performance to know that they're making progress?  A vague goal is only a good intention; it's not likely to energize or shape performance.  My experience is that vague goals get the least follow-through.

3)  Goals Lacking Vision - The best goals are tied to a vision of what is possible.  We want goals to bring out the best in us.  We want goals to excite and challenge us.  Many of the goals set by traders are prioritized to-do lists.  That turns the pursuit of goals into chores, robbing us of energy and enthusiasm.  If there's no emotion and excitement associated with our goals, we're unlikely to put forth our best efforts toward change.

In short, we don't see things as they are; we see them as *we* are.  Our moods and energy level help shape our perceptions and actions.  If we are overloaded with too many goals, vague goals, and goals not tied to an inspiring vision of the future, we are likely to lose our passion for markets and trading.  

Consider the radically different alternative of FIGS:  Focused, Intensive Goal Setting.  What if, at any given time, we worked on one goal and one goal only.  Suppose we worked on it every single day and made it the focus on each day's efforts.  And suppose we made it an emotionally intensive goal, where we actively rehearse and *feel* the consequences of not reaching the goal and the joy and benefits of making progress on the goal.  Suppose we grow--as people and as traders--by working one goal at a time in FIGS fashion, rather than by creating laundry lists of changes that are "shoulds" rather than "musts".

We see FIGS at work among people who work on their recovery from drug and alcohol dependence and addiction.  At some point, they "hit bottom" and make recovery their number one life priority.  They attend AA meetings every day, connect with a sponsor who helps them through rough patches, and work on their sobriety one day at a time.  What makes such change efforts powerful is the emotional commitment to reaching goals.  After someone has hit bottom, they *hate* their old habits and ways.  They never want to go back to the consequences they created for themselves and others.  Their goals are focused, but also intensive, because the goals aren't mere items on a list or in a journal.  The goals carry emotional intensity.

We don't change because we want to.  We change because we must:  we *need* to.  Without urgency, we don't sustain change efforts and simply relapse into old ways.  When goal setting is focused and intensive, we more readily create the conditions of urgency that help us see ourselves and others in new ways.  

FIGS starts with a simple question: What changes do you need to make?

Further Reading:

Mastering the Art of Goal Setting

How Goal Setting Helps Performance

When Goal Setting Falls Short

How Emotion Sets Our Goals in Motion

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Finding Better Edges In Your Trading

 

I thought I would do something different with this blog and actually chronicle the development of new edges in my trading.  I'll post my successes and failures and learning lessons, with an eye toward trading psychology and also the psychology of the things I'm trading.

One lesson that I've learned from working with the traders at SMB Capital is that their success is as much about *what* they trade as *how* they trade.  Both are quite important, of course, but if one is trading directionally and the stock, index, or asset being traded simply isn't moving, there won't be a lot of opportunity.  During this recent period of "meme trading", I've also noticed that very high levels of movement are not necessarily very high opportunities for profit.  We don't just want things that move; we also need them to move in meaningful and predictable ways.

When we trade suboptimal trading vehicles, it has the same potential impact on our results as utilizing suboptimal trading methods.  Both lead to significant missed opportunities.

One tool that I will be employing in finding superior opportunity is the Market Charts site.  Long time readers know that I have made use of the Index Indicators site to identify promising breadth patterns in the overall market.  The Market Charts site is a much expanded version of Index Indicators, tracking more indicators, multiple indicators, and a variety of stocks and ETFs.  I respect Mo's work and so view this as a worthwhile platform to begin finding fresh sources of edge.  (Please note:  I have no commercial interest in these sites; as always, I only share resources that I have found to be useful and promising).

Please note the recent blog post on innovating in our trading.  An important theme from that post is that innovation begins by asking different and better questions.  I will be looking to the Market Charts platform to first generate better hypotheses and only then to come up with superior trade ideas.  For example, might it be possible to generate long/short trades and portfolios by finding related stocks that have greater and lesser edge?  By being long the stock with good upside edge and short the stock without such an edge and weighting the pair for relative volatility, one could make money whether the overall market goes up or down, as long as the edge plays out.  In other words, does the presence of a historical edge predict *relative* performance?  

Good trade ideas come from good questions.

Much more to come!

Brett

Further Resources:

Three Minute Trading Coach:  Drama Creates Trauma

Playlist for The Three Minute Trading Coach

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How To Innovate In Your Trading

 

Very little has been written in trading psychology about innovation.  And yet, wherever I've encountered traders and portfolio managers with longstanding track records of success, I've seen evidence of innovation.  The innovator is the one who asks really good questions, really original questions.  The innovator is the one who sees changes in market behavior and wants to figure out what that's all about and how to take advantage of it.  

When we become completely P/L focused, there's little bandwidth left for innovation.  Superior trading requires an absorption in markets; superior good idea generation requires getting away from screens and seeing a bigger picture.

On a recent trip to Nashville, I had plenty of time away from screens and started asking simple questions, but questions I hadn't asked before.  For instance, I wondered if the best predictors of what happens in a given equity market index (such as SPX) might come from stocks outside that index (such as Russell 2000) or subsets of that index (such as the Dow).  In other words, do certain groups of stocks tend to lead momentum moves, trending moves, or reversal moves in a given index?  Oddly enough, I had always looked for data generated by an index to anticipate moves in that index.  But what if that's just playing the same game as everyone else?

Early days and we'll see what the research brings, but it's promising so far.  For example, it turns out that strength in the average RSI of small cap stocks is strongly correlated with future short-term strength in the SPX, accounting for almost all of the gains in SPY for the past two years.  Who knew?

But the great psychological benefit of innovation is that it leads to curiosity and discovery and fascination.  It rekindles our interest in markets when we could otherwise be ground down by choppy trading conditions and lackluster P/L.  Finding a new edge feels like becoming a new trader all over again, with all the new enthusiasm and excitement.  Come to think of it, that's also what leads to keeping relationships new and that's what leads to keeping life fresh and interesting.  When we innovate, look at new things, try new things, and learn new things, we are reborn--and that *gives* us energy.

Further Reading:

Trading Psychology 2.0

The Role of Creative Insight in Trading Success

Creativity is the New Discipline

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How We Sabotage Our Trading

 

Above you can see the floor of my office, where well over 30 books are in various stages of being read--simultaneously!  My technique for writing is to read and read and read different authors on a given topic and eventually something jumps out at me as an integrating idea.  It's really no different from looking at charts and market information from different time frames and suddenly picking up on a directional move in the making.  Analyzing, analyzing, analyzing: that takes focus.  The creativity comes from the synthesizing:  putting it together into a coherent picture.

One of the main topics of my reading is meditation.  It turns out that there are *many* different forms of meditation, many of which are quite unlike our common conception of the Eastern practice.  As I explain in the recent Forbes article, the most important function of meditation is to build focus and amplify our experience.  The problem is that the great majority of people who try meditation don't pursue it long enough to achieve that amplification.

The way in which we often sabotage our trading is through our automatic, negative thought patterns.  As the cognitive therapists emphasize, we typically learn negative habits of thinking, where automatic thoughts take over.  These can be self-critical thoughts, repetitive thoughts of being a victim, worry thoughts, etc.  What is not well appreciated is that such automatic thinking is meditation in reverse.  When we focus on our negative thoughts, we internalize negativity.  Ironically, we end up using our magnifying glass to accentuate the very thinking that sabotages us:  in trading, and in life.

We internalize what we focus on and that shapes who we become.  That can uplift us or it can sabotage us--

Further Reading:

Why We Fail To Reach Our Potential

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Three Steps To Avoid Trading On Tilt

 

I hear many traders early in their development wrestling with issues of emotional, reactive trading.  Here are three practical steps that can help traders avoid going on "tilt":

1)  Plan Your Losses - Big expectations lead to big frustrations.  Every trade should be accompanied by a very specific idea of what would tell you you're wrong and how much you're willing to lose on the trade.  It's when losses surprise us and become too large that they're likely to create disruptions in our mindset.  Your goal should be to lose well, in the right way.  Focusing only on how much you want/need to make sets up surprise and frustration.

2)  Take Breaks - After large gains and large losses, it's easy for P/L to get in our heads.  Always take a break after a large trade, clear your head, and assess the opportunity set with fresh eyes.  It is just as important to reset after big wins as big losses.  Both can lead to taking trades for the wrong reasons.  Quick meditation exercises to increase calm and focus can be *very* helpful.

3)  Keep Trading Size Moderate And Consistent - Too much size creates unusual P/L volatility and that leads to emotional volatility.  Your goal is to be consistently profitable and then grow your size while you retain your consistency.  If you *need* to be profitable, that creates undue performance pressure and emotional distraction.  Drama = distraction.  You want no drama in your trading.

The greatest edge of all in trading is self-awareness.  Frustration happens to us all.  The goal is not to trade without emotion, but to be so aware of our emotions that we know when to step back from the screens.

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Further Resources:

Three Minute Trading Coach:  Taking Breaks

Three Minute Trading Coach:  Taking Your Emotional Temperature

Three Minute Trading Coach:  Shifting Your Trading Psychology

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Short-Term Trading With The NYSE TICK - Part Three

 

The first post in this series and the second post took a look at the NYSE TICK and its relationship to price action as a way of identifying:  a) whether buyers or sellers are dominating the market and b) the degree to which their buying or selling activity is actually able to move the market directionally.  A valuable short-term edge sets up when buyers or sellers cannot move the market meaningfully higher or lower and then become trapped, setting up a move in the opposite direction.  

If you click on the chart above, you'll see a different TICK statistic, the NQ TICK, which assesses buying and selling activity (upticks vs. downticks) for the NQ100 stocks.  (Friday, 5/21; chart from Sierra Chart).  The horizontal yellow line represents the zero level for the NQ TICK and the white line is a short-term moving average of the one-minute TICK values.  At the bottom of the chart, we see the QQQ ETF.  Notice the blue arrows showing areas where there is net buying among the NQ stocks that cannot move price higher.  These become candidates for selling, as buyers are trapped and have to exit their positions.  These same patterns also show up for the TICK covering the Russell 2000 stocks.

Recall that the TICK measures the short-term psychology of market participants.  A different source of edge emerges when we place the different TICK measures next to one another.  We can see if there is uniform strength or weakness across the SPX, NQ, and Russell stocks.  If so, we have a nice tell for a trending market.  Conversely, if we see that one TICK measure is noticeably stronger or weaker than the others, we have a great tell for sector rotation.  And suppose we get a significant expansion or contraction of TICK extremes across the various measures.  That's a sensitive tell for changes in market participation, which often leads to changing market conditions.

There is a world of valuable information available to traders beyond simple barcharts, trendlines, and support/resistance levels.  There is little value focusing on trading psychology if you don't have a trading edge.  Many trading edges come from understanding the psychology of the marketplace itself.

Further Reading:

One of My Favorite Trading Patterns

Understanding Tilt:  How Emotion Makes and Breaks Our Trading

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Short-Term Trading With The NYSE TICK - Part Two

 

In the first post in this series, we took a look at the NYSE TICK and how it measures the moment to moment sentiment in the overall market.  We also took a look at a pattern with edge, where buying pressure in the market cannot take prices higher.  Eventually, those buyers are forced out of their positions when sellers come in and that takes the market lower.  That pattern played out nicely in yesterday afternoon's market, which we see depicted above.  My cycle work was looking toppy and I tried to enter short positions in the market three times in the morning only to get stopped out with small losses.  Then I saw the TICK pattern play out in the afternoon and left the short position to run, more than making up for the losses, particularly given the overnight action.  One takeaway is that our best trades occur when the longer time frame picture and the shorter term market behavior line up.  It pays to be patient and wait for that alignment.

In the chart above, the yellow horizontal line represents the zero TICK level and the blue arrows show where net buying (where the moving average line of TICK is above zero) cannot produce price highs.  The longer that pattern plays out, on average, the more longs are trapped and end up needing to cover, creating a meaningful move to the downside, which we see play out with the very negative TICK readings late in the afternoon.  A good idea doesn't become a good trade unless we see traders trapped going the wrong way and needing to exit positions.

In the third post in this series, we'll look at the TICK in a different configuration and how it can provide upside edge.

Further Reading:

How Our Strengths Shape Our Trading Psychology

Forbes Articles on Trading and Performance Psychology

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Short-Term Trading With The NYSE TICK - Part One

 

So much of intraday trading boils down to pattern recognition.  When you view market activity day after day, year after year, you internalize patterns that recur.  Those can provide a meaningful edge in trading.

As long-term TraderFeed readers know, one of my favorite market indicators is the NYSE TICK (shown above; $TICK on most platforms).  The TICK is updated many times per minute and captures the number of stocks in the NYSE universe trading on upticks minus the number trading on downticks at every moment.  So we can think of the TICK as a moment to moment measure of trader sentiment across the market.  It tells us what traders are actually doing in the market, which is an important clue as to the psychology of the marketplace.  Trading psychology is not just about our own psychology; it's about understanding the psychology of those we're competing with.  We can pick up tells in the market just as we can at a poker table.  

If you click on the chart above (taken from my Sierra Chart screen), a one-minute chart of the NYSE TICK (above) and SPY (below), you'll see patterns noted by the arrows.  The yellow arrows show us occasions where there is increased buying pressure that is unable to move the market to new highs.  Those buyers will be trapped and will have to exit, fueling the next downleg.  The blue arrows show the market basing and selling pressure drying up, with higher TICK lows.  This led to a nice upleg.

Knowing if buyers or sellers are dominant (do we see net positive or negative TICK) and how well the buyers and sellers can move the market is very helpful information.  We want to see who is in control of price action and who is trapped.  In upcoming posts, I'll expand upon this edge.  The key is seeing enough patterns over time that you can recognize them in real time and act upon them.  It's amazing how you don't have to worry about your own psychology when you understand the psychology of the marketplace.

Further Reading:

NYSE TICK as a useful trading tool

Cumulative TICK

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How To Network Successfully

 

I want to thank the traders who participated in the first Traders' Virtual Happy Hour session on Sunday evening.  Over time, these efforts will get better and better at connecting traders with others to accelerate development and improve performance.  At the networking event, I presented two unique edges in the stock market and we heard about a unique approach to maximizing trading performance and quality of life.  We also heard about tools for evaluating where large market participants are buying or selling--a huge potential edge in the market.  Most of all, we provided a forum for traders to share what they're up to and connect to one another.

I am totally convinced that the most successful traders are those that are best at networking and learning from and with others.  When people share their successes, failures, and ideas, they accelerate their learning and become broader as well as better.

The wrong way to network is to focus on what you want to learn.

The right way to network is to focus on what you want to share.

When you share your learning, others share with you.  When you focus on your needs, you bring nothing positive to others.  For developing traders, it's easy to get caught up in what you *don't* know.  Still, it's important to identify what you've learned and what you can bring to others, because that cements your learning.

Networking is a lot like dating.  If you reach out to 10 people, 8 of those contacts will be so-so, 1 will be really promising, and 1 will be so awful that you'll have funny stories to tell the next evening at the bar.  It's all about "fail fast".  If you try reaching out to others and get butt-hurt because you don't get a response, you'll never persist and find that one in ten great opportunity to connect with someone.  If you keep meeting people, it's only a matter of time before you meet the right people.

Already I identified 13 traders who have done a special job of sharing.  I put them in touch with each other and I shared a unique idea with them.  I look forward to including you in such special lists!

Further Reading:

How To Be Great At Networking

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Six Relevant Pieces of Trading Wisdom

 

Here are six pieces of trading wisdom that I might touch upon in Sunday evening's happy hour session:

1)  Ego is our self-talk.  Our wisdom comes when we stop talking to ourselves and let markets speak to us.

2)  In stable market conditions, we work to refine our game.  In changing market conditions, we find new games to play.

3)  Opportunity is just as much a function of what you trade as how you trade.

4)  If you trade a style that fits your personality, you'll be a one-trick pony.

5)  Greatness is never achieved in isolation.  Great performers--in athletics, visual arts, drama, medicine, music, markets--learn from others and with others.

6)  If P/L is the most important thing in our lives, markets will always control us and dominate our psychology.

More to come!

Further Reading:

Radical Renewal

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Your Invitation to the First Virtual Happy Hour for Traders

 

How would you like an entirely new way of preparing for the trading week?  I know I would like that, so I'm creating a new approach to teamwork for independent traders.  It's a way of joining a team and benefiting from the insights of others no matter where you live or how you trade.

I encourage you to take a look at my most recent Forbes article, where I explain that the virtual environment from the past year is going to impact teamwork well after we've put the pandemic behind us.  (May that time come soon!)  The restrictions from the COVID period have led traders and trading teams to generate innovations that will be carried forward to help us work better, individually and in groups.

One thing this past year has taught me, personally as well as professionally:  isolation does not bring out the best in us.  Many traders I work with have felt isolated, lonely, bored, and burned out.  This has taken a toll on relationships, and it's made it difficult to trade with the kind of energy and enthusiasm that we need for perceiving and pouncing on fresh opportunities.  What I observe in the Forbes article is that there are very creative ways in which we can achieve teamwork, even when we are trading from home.

Last month I proposed the idea of a virtual happy hour for traders, drawing upon the success of craft beer outings that I have hosted for money managers prior to the pandemic.  The idea is to enjoy good food and drink, share ideas and experiences, and build relationships that accelerate our growth as traders.  (See also my Three Minute Trading Coach video on the topic).  The feedback was positive, so now let's give it a go!

The first virtual happy hour for traders will be at 7 PM Eastern time this coming Sunday, May 9th.  It will be a one hour event via Zoom.  I will share my observations and plans for the trading week and participants will share their ideas and learning lessons with each other.  There is no fee, there won't be any collection of email addresses for marketing, and I'm not looking to build a large community.  The happy hour is for experienced traders who are looking to take their trading to the next level and who are willing to help others do the same.  This latter point is key.  I'm only looking for people who will share best ideas and best practices.  Traders who feel a need to keep their trading ideas and methods to themselves would not be appropriate for this kind of teamwork.

And bring something fun to eat and drink!  It's a Happy Hour!!

So here's how you "register" for the event:

Send me an email to the address located at the top of the TraderFeed home page, the "Contact for Trading Firms and Media".  The email should *briefly* introduce you, your trading experience/markets/strategies, and the specific idea or strategy you would like to share with the group.  You'll be sharing your idea via the chat function of Zoom, so you should have a brief writeup of the idea ready to go and share when you come to the session.  If it looks as though there's a good fit, I'll then email you the Zoom link for the session and further details.  As noted above, I will not be collecting, selling, or using the email addresses for any kind of marketing.  I also will not be inviting people who show an interest in promoting themselves or who simply want to share generic ideas about controlling emotions, managing risk, having a positive attitude, etc.  The idea is for each participant to share one specific, unique idea or practice they have found helpful.

I'll also ask every participant to share their contact information with each other via the chat function.  That way, if you have a question about an idea proposed by a group member, you can reach out for discussion.  The sharing of contact information will promote networking and sharing of ideas beyond the happy hour.

This Traders' Happy Hour is definitely not for everyone.  It is based on a radical notion of teamwork and sharing, where we learn from each other in a fun environment.  It should be a fun experiment; thanks for your interest!

Brett

Further Reading:

Radical Renewal:  Spirituality and Trading - free blog book 

Trading Psychology 2.0 - How we can adapt to change, build on our strengths, cultivate creativity, and develop best practices

The Daily Trading Coach - A cookbook of evidence-based techniques for improving our trading psychology

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