Making Technical Analysis Dynamic

A while ago, I posted on the topic of divergences appearing in the U.S. stock market.  Specifically, we were near all-time highs in the large cap averages, but a significant number of stocks were making new lows and small caps in particular were dramatically underperforming.  When I examined past instances of such underperformance, I found very different results depending upon the VIX regime that we were in.  When divergences occurred in high volatility environments, the forward results for SPX were bearish and volatile.  When the same divergences occurred in a low VIX environment, the forward results for SPX were actually nicely bullish.

The same results could have been found if I had been looking at chart patterns, oscillator readings, or other trading "setups".  It's not that they lack value; it's that their value is contingent upon the context in which they occur.  Should you buy after a couple of days of strength?  In a low volatility, range bound market, the answer might be quite different than in a rising volatility market displaying momentum characteristics.

This is a limitation of how traders tend to implement technical analysis.  Too often we assume a static reality, so that a given chart pattern, oscillator reading, or Fib level has a fixed meaning and significance.  Psychologists tend to be skeptical of static depictions of reality.  Most human interaction is context-dependent:  someone reaching out to hold my hand crossing a street means something different than the same gesture in a hospital room.  Or, as the old joke has it, "bear right" means one thing in a car, another thing on a hunting trip.

Challenges in anticipating market movement may be a function of our need to find fixed setups.  Looking for the same patterns in very different markets might be a formula for temporary trading success.

I strongly suspect this is an important topic.  

Connie Brown was on the right track when she proposed that oscillators behave differently in bull and bear markets, requiring different interpretation.  As many technicians have noted, oscillators themselves are more useful in certain market conditions (range bound) than others (strongly trending).  John Ehlers and Ric Way compute dynamic cycles for stocks and indexes, with frequencies and amplitudes that wax and wane with shifting market conditions.  Their use of quantification to turn static indicators into dynamic ones also strikes me as quite promising.

But what if, as market regimes change, fresh technical indicators gain predictive value and others become less relevant to forward price movement?  In such a dynamic world, "setups" would always be evolving; you'd always be learning markets.  Your edge wouldn't be a core set of trading patterns, but your ability to identify and trade the patterns that possess an edge here and now.

The implications for coaching are significant:  Advising traders to "stick to your plans" and "follow your process" works as long as market regimes are stable.  Then it doesn't work.  In a world of changing markets, adaptability is the new discipline.

The implications for mentorship are also significant.  Teaching the same chart patterns and technical rules at all times to all traders is like using the same training for soldiers who will be performing in the desert, at sea, and in rainforests against established military forces at some times and insurgent guerrillas at others. If there's one thing elite fighting forces and well trained athletic teams know, it's that you study the opponent and adapt your strategy and tactics to the situation.

How many traders truly study markets and adapt their strategies and tactics to the threats and opportunities they identify?

In the next post, let's take a look at what a dynamic technical analysis might look like.

Further Reading:  What Are You Doing Between Trades?
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Moving Forward by Giving Back

Over a most enjoyable lunch with Francisca Serrano and Sergio Malagon, one topic that came up was "giving back".  Both made the point that the students who attend their classes make particular efforts to share ideas and experiences with one another.  As a result, the number of teachers expands exponentially, as everyone is both teacher and learner.  When they first asked me to speak at their Madrid workshop, they made it clear that proceeds would go to a cancer research charity--particularly meaningful, given Francisca's experience as a cancer patient.

This topic came up in my interview with Ima Sanchis of La Vanguardia.  How can one maintain emotional balance when periods of uncertainty and loss are assured in trading?  One answer is that successful trading must become more than a profit/loss figure at the end of a day, month, or year.  Successful trading is an opportunity to learn and develop, to participate in the learning and development of others, and to use the proceeds of success to make the world a better place.  Francisca and Sergio provided an excellent example of tapping into deep personal motivations to energize their development as traders and trading educators.

One way to give back is to leverage the online medium to share ideas broadly.  That is the great strength of StockTwits, as well as trading blogs.  Through webinars, the world becomes a classroom, with the potential to apply lessons to markets in real time.  In that vein, I look forward to participating with the Big Mike Trading Forum in a free seminar on trading psychology on Tuesday, June 17th at 4:30 PM ET.  The focus will be on specific psychological techniques for dealing with the most common--and challenging--emotional disruptions of trading.  Registration for the GoToMeeting session is available for all TraderFeed readers and Forum participants.

If past experience holds, giving away ideas and techniques will lead to worthwhile contacts with others eager to share their work and we will all profit.  It's yet another way in which trading is like life:  best lived as a team sport.

Further Reading:  Teamwork and Trading Success
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Toward an Olympic Training Program for Traders

Starting this week, TraderFeed will be taking a pause and posting on a weekly rather than daily basis.  This is because I am pursuing a number of new directions in markets and coaching and need to focus attention on those.  My goal is to integrate elements from those projects in my weekly posts and push the envelope in terms of integrating market analysis, trading practice, and psychology.

As you may have gathered from my recent posts, I have developed a deep interest in melding mentorship and coaching by driving both to real time and creating ever more powerful performance-based learning.  Bringing together high-level trader training and trading psychology--in real time--is the closest I can imagine to an Olympic training program for traders. 

That is the vision:  an Olympic-style training program for traders.  There are elite institutions for training musicians, artists, athletes, physicians, and scholars.  Where is there elite training for traders?  Not in the seminars that promote the usual hash of technical analysis.  Not in coaching that imposes a psychotherapy model of intervention on a performance development process.  Not in classrooms, not in consulting offices--because none of those are real time, and none integrate the learning and hands-on skill development that is central to expertise development.

I look forward to chronicling this pursuit in coming posts.  As always, I deeply appreciate the interest and support of readers.  

Brett
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Taking Trader Coaching to the Next Level

A particularly valuable function of coaching is the ability to provide fresh perspectives on problems.  As the Einstein quote suggests, attempting to solve problems with the same ways of thinking that created those problems can only lead to self-reinforcing and damaging cycles.

If you think about how coaching occurs in performance fields--from performing arts to chess to athletics--you will see that coaching is always hands-on and coaching is always real time.  The hands-on, real time aspects of coaching enable the fresh inputs of a coach to become integrated into a process of learning and deliberate practice.

Can you imagine a basketball or football team where players were expected to keep journals about their performance and meet with a coach once a week to work on improvement?  Of course, it would never work.  Coaches work with performers daily, observing practice sessions and actual competition to offer concrete feedback and work on specific skills.  This is why so many excellent coaches have performed in the areas where they now help others:  it is difficult to give performance feedback if you don't understand the nuances of performance in that specific domain.

One of the great challenges in trading is bringing coaching to a hands-on, real time basis.  A skating coach would never meet with a promising skater in an office and discuss, second-hand, what happened the week before on the ice.  Real coaching takes place on the ice.

I predict the next breakthroughs in trading psychology will occur when coaches and traders are on the desk and not in the consulting office.

Further Reading: Mentorship, Coaching, and Why Traders Fail
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What Value Is There in Trading?

Spending time in medieval villages in Spain provides a unique experience of being immersed in history.  It's one thing to read about what happened in the world; another thing to see the places, touch the buildings, and walk the steps of those who lived that history.

One very enjoyable part of the trip was the opportunity to interview with Ima Sanchis from La Vanguardia, with capable translation assistance from Mr. Sergio Malagon.  That interview should appear in Monday's paper, and I will see about providing a link when it's available.  

Ms. Sanchis asked many good questions, but one that stood out concerned the value of trading.  After all, most people in their work provide specific products or services.  What does a trader provide?

I addressed this issue in this post and in this one.

My reply to Ms. Sanchis is that what I need to do to become a better trader--the capacity to think fast and deeply; the emotional self-control and self-awareness; the ability to adapt to challenging, uncertain situations--are exactly the things I need to do to be a better psychologist, a better husband, and a better parent.

That is the beauty of the performance pursuit:  in honing ourselves, we enhance our life--and the lives of those we touch.  I may not make money every day, but a trading session is only a total loss if it hasn't taught me something that will make me better in all respects.
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Tracking Market Strength and Weakness With Bollinger Bands

I've been playing around with the StockCharts website and so far have been favorably impressed.  The site does a particularly good job of enabling users to create custom stock screenings.  There is also very regular and useful market commentary.

One indicator I'm tracking is the number of NYSE stocks closing each day above their upper Bollinger Bands (red line) and below their lower Bands (green line).  Those data from the past month are charted above, as of yesterday's close vs. SPY.

I generally like to have a few new things to track at all times, with the frank recognition that the majority of technical tools will provide little or no value above and beyond a consideration of past price action.  The Bollinger measure strikes me as a tool with potential in identifying thrusts from breakouts that might be likely to continue and also to identify turning points when fresh price highs or lows are accompanied by divergences in the Bollinger numbers.

You can see, for instance, that--despite recent price strength in SPY--fewer shares have been closing above their upper Bands and the number closing below their lower Bands has percolated higher.  I'll be watching over time to see if there is predictive value in such patterns.

Further Reading:  The Psychology of Quant Analysis
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Employing Proper Leverage in Life and Markets

I'd like to thank @NASTrading for including this blog in his list of Top 10 Websites for traders.  Nat makes a very good point in his post:  the importance of leveraging one's time and effort.  By focusing on reading the sites, research pieces, and information most relevant to you and your trading, you minimize distraction and increase the odds of synthesizing the useful material into promising views.  Nat's list is a great place to start for leveraging web surfing time.

There are other spheres of trading where leveraging efforts is important.  I recently met with a group of traders to discuss best and worst trading practices.  One topic that came up a few times relates to what I call "selectivity":  taking the best trades and avoiding marginal bets.  Many times traders ask about how they can avoid overtrading when they haven't clearly defined proper trading.  What impressed me about the traders I spoke with is that they had made ongoing efforts to review their trading and identify the "setups"--the patterns of price, volume, order flow, etc.--that constituted their best trades.  Once you define the parameters of good trades, you're in a much stronger position to leverage your resources and focus your attention on only the most promising situations.  

For example, because volume correlates so highly with market movement, I will not place daytrades unless volume hits a threshold level.  If the market is slow, it's apt to be noisy and limited in opportunity, so I stand aside.  Other traders might leverage their efforts with different criteria:  this is where stock screening can be useful.  Many of the best portfolio managers I speak with will only take a trade if they can clearly define a particular ratio of reward to risk.  That enables them to be patient in their entry execution until the risk/reward threshold is reached.

But the value of leverage goes even further in life:  

*  Doubling down on your time with the people who enrich your experience emotionally and intellectually and minimizing time with people who sap your energy or resent your success;

*  Maximizing quality time outside of markets to build your relationships, strengthen yourself physically, extend your learning, and rejuvenate yourself spiritually and minimizing low quality time that is not productive in any of these regards;

*  Focusing activity toward the most important personal and life goals and minimizing activity that keeps you busy but doesn't move you forward.

In life, as in markets, we can "overtrade".  We pursue marginal courses of action and thereby dilute our most promising efforts.  By knowing what moves us forward as people, we can leverage our best personal "setups" for success. 

Further Reading:  Overtrading and Unrealistic Expectations
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Finding Trades When Sentiment is Stretched

One of the things I'm noticing in the recent stock market is the importance of sentiment.  When put/call ratios are high, the market is much more likely to rise/bounce than when those ratios are low.

For example, since 2012, suppose you combine the equity put/call ratio with the put/call ratio for stock indexes.  When that measure has been below .80 on a one-day basis, the next five days in SPY have averaged a gain of .05%.  When the measure has been above .80, the next five days in SPY have averaged a gain of .51%.  Indeed, when the equity put/call ratio by itself has been above 1.0, the next five days in SPY have averaged a solid gain of .90%. 

If you can figure out which way the herd is leaning, you can often find a good trade by identifying occasions in which committed traders will need to run for exits when their positions retrace.  I find Market Delta especially helpful in that regard, as the persistent lifting of offers or hitting of bids provides clues to the bullish or bearish execution behavior of traders.  What makes such trades unique is that you are not so much trading a particular stock or market as trading the behaviors of traders themselves.    

A number of other indicators I follow are summarized in this archive post.  When I return from my overseas work with traders, I will post some of the indicators I've found most useful recently.
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Building Upon Your Signature Strengths: What Are You Good At?

Postings this week and next will be a bit more spotty, owing to a much anticipated trip to work with traders in Madrid.  Many thanks to Francisca Serrano and Sergio Malagon for their help in organizing the event. 

One of the topics of my presentation will be an interactive exercise designed to help traders identify their distinctive strengths.  Recent posts have dealt with the importance of a process orientation to trading, but how can traders structure their processes to maximize the odds of success?  My experience--and the findings of Schwager in the Market Wizards books--is that successful traders differ significantly in their approaches to markets.  Some are shorter-term; others are longer-term.  Some are more fundamentally grounded; others trade off price and volume data.  

It is not the presence of any *specific* process that distinguishes successful market participants.  Rather, each has found a way to engage markets that makes specific use of his or her emotional, cognitive, and interpersonal strengths.  Nowhere is this more evident than in the information processing approaches of traders.  The processes of traders with distinctive intuitive strengths are different from those of traders who are highly analytical.  Extroverted traders often work well in teams and process information interactively.  Introverted traders are more self-reflective and analysis-driven.  Many short-term traders focus on pattern recognition; many long-term investors seek causal relationships. 

A crucial question for peak performance is:  What are you really good at?  If you're going to succeed as a trader, it will because you've found a way to take signature strengths and apply them to financial markets.  It's hard to imagine anyone could be distinctively strong in their market performance if they are not drawing upon their own distinctive talents and skills.

So here's a useful exercise:  Draw a series of sine waves with regular peaks and valleys.  For each of the peaks, identify one of your distinctive life successes outside of trading and write down the strengths that made those successes possible.  Make sure you identify at least 10 peak experiences and at least 10 core strengths.

Then, for each of the valleys, identify one of your distinctive life failures or setbacks outside of trading and write down the vulnerability that made those setbacks possible.  Again, make sure you identify at least 10 setbacks and vulnerabilities.

What you'll generally find is that it is difficult to identify 10 truly distinct strengths or vulnerabilities:  the same ones tend to recur throughout life experience.  One way you can see that clearly is to do the exercise a second time, but this time let the peaks represent your best trading experiences (and the strengths that contributed to them) and let the valleys consist of your worst trading experiences (and the contributing vulnerabilities).  The odds are good that the lists will be similar for the two sets of sine waves.

What that means is that success is highly dependent upon playing to our strengths and avoiding our vulnerabilities.  Indeed, the best processes are those that leverage what we do well and minimize what we don't.  Many, many times traders do not reach their potential because they never come to a deep appreciation for their most basic strengths and weaknesses.  It is at the intersection of market knowledge and self-knowledge that traders can find their greatest success.

Further Reading:  Lessons From a Successful Trader
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Accelerating the Learning Curve - Part Two: Creating Learning Processes

The first post in this series highlighted the role of reflection in learning.  But how can we achieve such reflection and sustain it over time?  I have spoken with many traders who start journals and drop them, only to pick them back up when trading becomes difficult.  Clearly that is a suboptimal learning process.

Worthwhile research from Staats and Upton suggests that manufacturing firms are not the only ones that can benefit from lean processes.  Even in knowledge fields, simple and direct processes that are grounded in objective observation can yield meaningful improvements.  Key to their findings is the recognition that effective process changes must be implemented at the lowest possible level of the organization.  If you want to manage inventory better, you need robust processes that can be set into motion by those doing the receiving and stocking of merchandise.  Similarly, for the individual trader, effective processes must be conducted from the front lines:  as part of routine daily preparation for trading, not as part of an abstract, high-level quarterly review.

The problem with much trade journaling is that it is long on observations, short on process.  It is one thing to observe that you are not being sufficiently patient in your trade selection; quite another thing to define and implement a repeatable process of trade selectivity.  When Spear and Bowen studied the Toyota Production System, they found that a key to its success was the combination of open experimentation and rigorous implementation and measurement.  In other words, workers were encouraged to generate creative solutions, but then each proposed solution was tightly controlled as a variable to objectively determine its value.  This rigorous creativity turns lessons into processes.  

From this vantage point, reflection is necessary but not sufficient for the acquisition of expertise.  Backing creative reflections must be rigorous applications of one's conclusions.  If we think of traders as engaged in a Profit Production System, then mapping each step of the trading process, identifying where problems occur, brainstorming improvements, and rigorously testing those makes considerable sense.  What I have found among successful traders is that each *has* such a production system, though in many cases those systems are as much implicit as explicit.  Not infrequently, good coaching consists of helping traders follow their own (implicit) production systems.

As suggested earlier, many efforts to learn trading fall short because the absence of integrated mentorship and coaching means that learning itself is not part of a production system.  To maximize learning in any performance domain, there must be routine observation and reflection, structured efforts at improvement, and scorekeeping to determine whether those efforts truly resulted in improvement.  Once learning becomes a process rather than an occasional event, adapting to changing markets occurs far more naturally, in real time.

Consider two traders:  One trades daily, makes notes in a journal, and occasionally sets goals based on those notes.  The other also trades daily, but actively makes use of a trading platform that allows for market replay to review the trading day bar by bar and examine what went right and wrong.  That platform also summarizes performance statistics, so that there are objective measures of improvement--and need for improvement:  number of winning vs. losing trades; average profit per winning trade and loss per losing trade; average drawdowns; time spent in winning vs. losing trades; etc.  Which trader, over time, is more likely to experience a supercharged learning curve?  Which is more likely to take the hard lessons of trading and use those to define and refine robust learning and trading processes?

There are trading platforms out there that can serve as useful learning platforms.  Ones that come to mind include Ninja Trader, TradeStation, MultiCharts, and TradingTechnologies.  I reviewed Ninja Trader back in 2009 and will take a fresh look later this month.  And, of course, if you know of other trading resources that facilitate learning, by all means feel free to mention those in comments to this post.

So let's conclude with a few questions:  If an airline maintained its aircraft with processes as rigorous as your trading processes, would you feel comfortable flying?  If a surgeon practiced surgery with processes as robust as your trading processes, would you want him/her in the ER operating on you?  If an automobile ran as reliably as your trading, would you purchase it?   

The sober truth is that most traders do not lack profitability because of lack of emotional control or an absence of discipline.  They lack profitability because they have not yet developed a production system that reliably generates profits.

Further Reading:  The Value of Trading Metrics
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Accelerating the Learning Curve - Part One: Reflection and Performance

Thanks to a sharp portfolio manager for pointing out this recent study on the role of reflection in learning.  The implications for the training of traders are significant.

The authors find that, "the automatic, unconscious process of learning by 'doing' becomes more effective if deliberately coupled with the controlled, conscious attempt at learning by 'thinking'" (p. 6).  "In particular," they note, "we find that individuals perform significantly better on subsequent tasks when they think about what they learned from the task they completed." (p. 5).

Reflecting on one's learning--a staple of those who make rigorous use of trading journals--appears to help abstract and cement lessons derived from practice.  Putting hours in front of a screen observing and trading will not necessarily generate maximum and learning and expertise unless there is also a processing of that experience.  It is that processing that makes sense of the experience and frames future experience.  

This helps to explain why mentorship and coaching are so important to learning in performance fields.  There is the playing of the game, but there is also the watching of the game film after the game--and the use of game film observations to guide the next week's practice.  Game film is the catalyst for turning doing into thinking and ultimately learning.

There is another important takeaway from the authors' research, however.  Reflection provides emotional as well as cognitive benefits.  Their study found that reflection resulted in higher levels of self-efficacy.  When people reflect on their performance, they feel more capable of achieving and reaching goals.  It is as if cognitive mastery imparts a personal sense of mastery.

This invites an interesting hypothesis:  Effective reflection on successful experience might be particularly effective by keeping self-efficacy high and sustaining the flow state in which performers stay immersed in their craft.  Such a hypothesis supports a solution-focused approach to coaching and mentorship. 

Can traders guide their processes of reflection in the service of self-coaching?  That will be the topic of my next post in this series.

Further Reading:  Making Peak Performance a Lifestyle
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Finding and Transcending Trading Mentors

The recent post on mentorship and coaching emphasized the importance of both role modeling and skill building in developing elite performance.  

A perusal of StockTwits uncovers a variety of experienced traders who have offered guidance to others.  A few that come to mind are Brian Shannon of AlphaTrends, David Blair of CrosshairsTrader, Steve Spencer and Mike Bellafiore of SMB, Jim Dalton of J. Dalton Trading,  Terry Liberman of WindoTrader, and Charles Kirk of The Kirk Report.  If there are others you recommend who offer mentorship either formally/commercially or informally, please feel free to make suggestions via comments to this post.

Charles Kirk recently posted an article that emphasized the need to eliminate hero worship from trading.  He makes excellent points:  independence of thought is essential to trading success.  It is difficult to stick with an idea if it is not genuinely *your* idea.

One of the great transformations that occurs during mentorship and coaching is the transition from hero worship to a stage of greater independence.  Budding artists begin by copying the masters but, as they master elements of their craft, they experiment and discover their own "voice".  Similarly, a new quarterback on the football field will start out starry eyed in worship of a legendary coach, but eventually will have the confidence to call an audible and change the planned play.

A child misses something in development if he or she doesn't have parents who are heroes.  That child also misses something if he or she does not evolve beyond hero worship.  It's the hero worship that facilitates an early internalization of attitudes and skills.  It's emotional and intellectual independence that allows one to cultivate new attitudes and skills.

If you read the biographies of successful traders, you'll find that most were mentored by successful traders--and yet none ended up as clones of their mentors.  Who among experienced traders hasn't been inspired by one or more of the Market Wizards captured by Jack Schwager?  But in markets, as in Oz, Wizards look quite different from the other side of the curtain.  In recognizing the limitations of our heroes, we take the next steps in finding our greatness.

Further Reading:  The Heroic Dimensions of Trading
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Mentorship, Coaching, and Why Traders Fail

How do people develop in high-performance fields?

If you look at training programs, you'll generally find two components:  mentorship and coaching.

Mentorship is teaching and role-modeling the right attitudes, behaviors, and skills.  Coaching is helping trainees practice and internalize those skills.

Many times in training programs, upper level trainees serve as coaches, while senior professionals offer broader mentorship.  For example, in medical school, an attending physician might explain and demonstrate a surgical skill, but it will be a resident who will actually supervise the student's practice of that skill and deliver needed feedback and guidance.

"Each one teach one" is a motto of medical education.  The experienced physicians mentor; the advanced trainees coach--everyone is both teacher and learner.

Each one teach one also occurs in the military.  Officers offer leadership and mentoring to trainees, but it's the seasoned veteran soldiers and drill sergeants who coach the skills and oversee performance.  Similarly, senior players on a team (and assistant coaches) will help rookies build skills, while the head coach serves as mentor.

Of course, mentors can coach and coaches can mentor.  The iconic basketball coaches in college, for example, lead and teach.  Rarely, however, can training programs get away with having a single person as coach and mentor.  The demands of deliberate practice are sufficiently intensive that assistant coaches and support from senior players become necessary.

With that division of labor, it is crucial to mentorship and coaching in performance fields that both are daily and both are integrated.  Combined, the two result in professionalization.  A trainee becomes a professional by internalizing the lessons of mentors through guided practice and coaching.  When I trained to become a psychologist, I had classroom teachers and advisers (mentors) and I had clinical supervisors who reviewed recordings of my therapy sessions with me (coaches).  The learning was far more than absorbing facts and figures:  it was cultivating a set of attitudes, ethics, behaviors, and skills.

I could take a class at a local college, but no one would pretend that I am undergoing training in a performance field.  Indeed, I could take a series of classes at school and learn plenty of facts and figures and never develop as a performance professional.  It is the integration of mentorship and coaching in the service of skill development that separates performance training from simple education.

In the trading arena, mentorship and coaching have notably existed within investment banks.  Indeed, several banks, have been well-known for their efforts in training and mentoring.  It has not been unusual to see graduates of the good bank training programs go on to become successful mentors themselves within banks and hedge funds.  With Volker Rule/Dodd Frank restrictions on the trading activities of banks, however, it's difficult to imagine that banks will be in forefront of future training efforts for traders.

Coaching and mentorship does occur between hedge fund portfolio managers and their assistants, but rarely is this organized and programmatic.  It is quite unusual to find a dedicated Tiger cubs-style effort at funds, especially when it's been relatively easy up to now to recruit the promising professionals fleeing reduced opportunity sets at the banks.

At the proprietary trading and retail level, too often mentorship and coaching are subsumed under the umbrella of "trading education".  But courses in technical analysis and the like are no more training than those courses at the local college.  Without intensive, integrated mentorship and coaching, no amount of education can provide performance training.  Few trading firms possess the resources to develop ongoing, programmatic efforts at mentorship and even fewer can integrate hands-on, daily coaching with the learning from mentors.

Consider the sobering issue of the high failure rate among individual traders and investors.  Might that failure rate simply be a function of trying to succeed in a performance field without the requisite performance training?  After all, would we expect someone to perform at the Olympics if they have not been systematically mentored and coached?  Would we expect positive outcomes from a surgeon who did not undergo a rigorous program of mentorship and skill-based coaching?

With banks and their training efforts less at the trading forefront, there is a tremendous opportunity for the right financial organizations to develop the next generation of trading talent.  Such an effort, I suspect, would have to begin with the recognition that mentorship and coaching are themselves performance domains that can be cultivated within trading firms.  Many times they are occurring on their own, informally at various desks.  Learning from the successful efforts and leveraging those lessons is a first step toward building a self-renewing performance culture that grows profits by growing talent.

Further Reading:  Self-Coaching
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Making Fear Your Friend

In life, as in the gym, there is no such thing as comfortable change.  Change requires moving beyond one's comfort zone and challenging one's limits.  With those challenges comes uncertainty, fear, and anxiety.  What makes us most comfortable--most free of fear--is precisely what keeps us from changing.  As the saying goes, if you change nothing, nothing will change.  The comfortable life is the static life.

The implications of this view are profound.  We think of anxiety and fear as negative emotions.  We focus on limiting, eradicating, or coping with those feelings.  As the quote above suggests, however, anxiety and fear yield energy.  That flight or fight response aroused by an anxiety-producing situation can disorganize us--or it can propel us to challenge our limits.  A great deal of performance success consists of making a friend of fear: using it to motivate and energize fresh responses to challenge. 

Are you afraid of taking a loss?  Afraid of growing your sizing and risk-taking?  Afraid of expanding into new trading instruments or approaches?  Afraid of looking foolish by going against consensus thinking?  

Consider the possibility that fear is pointing the way toward your growth.  Fear is giving you the energy to take appropriate losses, grow your trading, expand your universe, and exercise your independent thought.  If fear is your friend, pointing the way toward your growth, perhaps your deepest confidence will come from seeing--first hand--that you truly can master what you're afraid of.  

Every fear is an opportunity for mastery.

Successfully facing anxieties yields ever higher levels of security.

The trader who totally controls emotions is the trader in his or her comfort zone, not the trader who is growing and adapting.  Anxiety is a problem waiting for a solution.  It is comfort we should fear.

Further Reading:  Becoming Solution Focused
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Stretching the Mind

Having spent a week in Alaska amidst glaciers and all sorts of wildlife, I have a renewed appreciation for the mind-stretching value of new experience.  Here are a few mind-stretching links to start off this shortened holiday week:

*  Useful list of top financial blogs and other top ideas from Abnormal Returns;

*  Sobering post on the average performance of individual investors;

*  Valuable guidelines for distinguishing substance from bull;

*  Asking the right questions about market breadth and divergences;

*  Useful insights traders tend to forget;

*  Great post on what traders can learn from Navy SEALs; 

*  Quite a variety of valuable quotes and perspectives on markets at Trading Wisdoms;

*  30 quotable quotes on markets;

*  More wisdom from famous investors.
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Volume and Volatility: Why Many Traders Have Not Been Making Money Lately

Here's an update of a 2009 post, showing how daily volatility in the S&P 500 Index varies as a function of daily volume.  Specifically, we're looking at daily true range in percentile terms as a function of hundreds of millions of shares in SPY.  What we can see is that, as volume comes out of a market, movement also becomes less.  Since 2012, we've had 155 days in which daily volume in SPY has been under 100 million shares.  The market has moved over 1% on a true range basis on only 11 of those days--about 7% of the time.  When volume has been between 100 and 150 million shares, we've had 1+% days on 104 out of 283 occasions--over one third of the time.  When volume has exceeded 150 million shares, 140 out of 162 occasions--over 86%--move by more than 1%.

With VIX below 12 and recent volume at the bottom of the above range, we're seeing little average daily movement in stocks.  Only 5 out of 17 days in May so far have displayed a true range exceeding 1%.  What commonly happens to traders in such an environment is that they will attempt to construct trades with superior reward-to-risk ratios and implicitly set their profit targets too high.  If their entry execution is good, the market will initially move their way, only to stall out and reverse before hitting the intended target.  Hence the frustration many traders feel in a low vol environment:  trades that used to go their way for a profit now fizzle out and have to be stopped for no gain or a small loss.

It feels to a trader as if his or her style is no longer working.  But that isn't precisely correct:  the trading style may be working fine, but yielding less.  The problem is not with the trading method, but with the trading expectations.  The market continues to move some fraction of a true range each time unit; it's just that the range is shrinking in a lower volume environment.  The lower the volume and volatility, the more the trading becomes opportunistic:  make it, take it.  Markets won't move much, so when they move your way, you have to be thinking about taking profits.  The wrong strategy is scaling into trades once there is price confirmation; by the time there is price confirmation, the market is ready to reverse (just as you're sized largest).

This is why I find real-time monitoring of volume to be essential when trading the day timeframe.  How much participation is coming into or out of the market will determine how far a market will move for or against me.  Setting stops and price targets at the inception of the trade is important.  Equally important is monitoring volume and volatility during the trade and adjusting those price levels accordingly.  

Automobile traffic shows the reverse pattern:  as the volume of traffic increases on a given road, average speeds will decrease.  Traffic can move 65 miles per hour on an open highway, but might crawl at 15 mph during rush hour.  Drivers learn to adjust their speed to fit the volume of traffic.  It's a good lesson for traders as well.

Further Reading:  Is There Opportunity in the Market?
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Setting the Right Goals: What is Your Something?

During the time I was in Alaska, I posted what I called Trader10P3:  Ten Principles of Peak Performance for Traders.  The principles were presented with questions, as I view the ideas as more than mere abstractions.  Potentially, they offer a framework for self-assessment:  Am I doing what I need to be doing not only to achieve success, but to maintain and extend it?

Goal-setting, in and of itself, does not make one a peak performer, as so many broken New Year's vows attest.  Goals need to direct effort, energize efforts, and structure efforts so that regular feedback can guide improvement.  Goals also need to be salient:  if they're not in your trading journal, they probably aren't occupying mindshare.

As Tony Robbins has pointed out, goals also need to be potent:  they must bring out the best in us.  Many times, goal-setting fails because it does not inspire.  Entries in journals about "I need to be more patient and wait for my trade" are well and good, but are they really specific enough to guide tomorrow's actions?  Will such goals have us springing out of bed eager to face the day, or are they more like a parent's admonitions to eat your veggies?

Think of it this way:  If you aspire to make a consistent living from trading, you are aspiring to be world-class.  Research suggests that the vast majority of market participants do not earn enough to overcome their trading overhead.  Even fewer sustain such earning power.  If you hope to make trading your career, you are hoping to be a world-class performer.

But you cannot be world-class at performance unless you are world-class as something specific.  A world-class pitcher needs world-class pitches or pitch placement.  A world-class basketball player needs to be a world-class scorer, rebounder, or defender.  Being good at a lot of things doesn't necessarily make you great at anything.  To be world-class, you've got to be great.

We can think about potent goals as greatness goals:  goals that bring out world-class performance.  It is one thing to frame a goal as "I need to be more patient"; quite another thing to embrace the goal of becoming world-class in entry execution.  Impotent goals chide; potent goals challenge and inspire.

So now, review the Trader10P3 and ask yourself where you will be world class:

*  In mastering the learning of new skills;
*  In applying specific talents to the trading of markets;
*  In self-mastery and the consistency of a performance mindset;
*  In research and development of fresh trading approaches;
*  In your continuous improvement of trading processes;
*  In your ability to adapt to changing markets;
*  In your ability to collaborate and learn with and from others;
*  In filtering and prioritizing your commitments, so that you internalize experiences that build you;
*  In sustaining activities that give energy and build productivity, rather than deplete you;
*  In maintaining creativity and fresh perspectives on trades and trading.

What makes any meaningful performance domain challenging--and noble--is that good enough is not good enough.  

World-class performers can't possibly be great at everything, but they have to be great at something.

What is your something?
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Trader10P3: Principle #10 - Creativity

What new directions in your trading have you pursued in the past year?  What activities do you engage in each week to produce new ideas, methods, and perspectives?  If growth occurs only when we push beyond our comfort zones, how are you pushing yours right now?

Trader10P3: Principle #9 - Energy

Willpower is a limited resource.  How do you focus and renew your energies?  How much result do you see from the effort you expend each day?  If everything in life is use-it-or-lose-it, what are you using and what are you losing?

Trader10P3: Principle #8 - Mirror

Who are the people in your daily life?  What are the activities that dominate your daily life?  What experience of yourself is reflected to you through your interactions with those people and your participation in those activities?