Positive Trading Psychology - I: Flourishing

 

In the next several posts, I will outline an approach to trading psychology based upon recent research in the field of "positive psychology".  I believe this can be a game-changer for many traders and trading teams.

To use the analogy of positive psychology's founding researcher, Dr. Martin Seligman, the goal of positive psychology is not to go from -5 to 0, but to go from +2 to +5.  This means that feeling good and performing well is not enough.  We are meant to "flourish" by amplifying what is already positive.  According to Dr. Seligman's research, there are five dimensions of flourishing, known by their acronym PERMA:

1)  Positive Emotion

2)  Engagement

3)  Relationships

4)  Meaning

5)  Accomplishments

As the Positive Psychology site explains, flourishing is not something we have or don't have.  Rather, it's a process that can wax and wane at various points in our lives.

Think about what this means:  We think about trading processes, and we might even follow personal processes regarding what/how we eat, our sleep and exercise, etc.  How many of us, however, explicitly follow processes of flourishing in how we approach markets?  Consider a simple PERMA review for traders:

1)  Are your reviews and research efforts generating positive emotion, by focusing on opportunities, learning, and insights?

2)  Are you constructively engaged with markets?  With other traders?  With learning?  Are you focused and operating in a "flow state", or are you distracted and jumping from screen to screen and idea to idea?

3)  Who is mentoring you and how are you learning?  Who are you mentoring and how are you improving them and cementing your ideas?  What are you doing to nourish your friendships and personal relationships, and how are they nourishing you?  If there is no nourishing, there can be no flourishing.

4)  What is meaningful to you in your trading beyond short-term P/L?  What in markets captures your interests and passions and helps you find unique opportunity?  What is meaningful in your life outside of trading that keeps you emotionally and spiritually nourished?

5)  What have you accomplished recently and how can you build upon it?  What have you learned from the accomplishments of others?  How are you celebrating your accomplishments and who are you celebrating with?  How are your achievements in all areas of life keeping you energized and focused?

We develop a flourishing life by focusing on flourishing each day.  Each day is a miniature lifetime.  We are born in the morning and by nighttime we lose energy and lie down to rest.  In between, our challenge is to live the most meaningful and successful life possible.  It's great to cope and correct our mistakes, but the key question is:  How can we flourish today and be all that we're capable of being?  One hint:  a large, recent research review finds that mind-body applications of positive psychology are especially effective.  Maximizing our daily, physical well-being may be the best way to flourish emotionally and in our trading.

Further Reading:

What is Your Emotional P/L?

A Flourishing Assessment 

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Investing in Your Trading Psychology

 

There is a very important difference between acting on desire and acting on commitment, as anyone in a successful long-term romantic relationship can attest.  If a relationship is only about desire, it quickly burns out and fails when circumstances call for commitment.  Successful relationships translate desire into commitment:  it is because someone is incredibly emotionally special to me that I am committed to them.

Many traders begin with a desire for market success, but never get to the point of commitment to the practices and processes that lead to ongoing profitability.  They love trading, but are not in love with markets.  As a result, they never put the time into truly understanding markets and their dynamics, which is a vital component of trading success.

In a recent Economic Times article, Anupam Nagar reviews ideas from my books and stresses the importance of achieving trading success by building upon one's strengths.  It is not enough to correct one's mistakes; a true edge in financial markets requires that we find *our* edge in those markets.  It is not enough to mimic the trading style and edges of others.  Our mission is to figure out what *we* see uniquely in markets and then translate that it into durable trading practices.  

For that reason, a successful approach to trading psychology requires an investment in ourselves.  We need to figure out what we see uniquely and distinctively in markets and then invest in that.  Success lies at the intersection between our particular strengths and the patterns that exist in markets.

There's an old saying that, "If you meet the Buddha on the road, kill him".  The idea is that the genuine Buddha is not a guru who knows all the answers.  The path to genuine enlightenment is found within, not in following someone else.  We can never find our own, personal conviction in ideas peddled by others.  If we find the market guru, we're meant to "kill" them.  

That takes time, and it takes an open mind.  In recent years, I've developed quite a personal interest in the topic of rotation within equity markets and how to trace that through breadth and relative strength statistics.  Many markets are not bull markets (investing more capital in stocks) or bear markets (pulling more capital from stocks), but rather are rotational.  In those rotational markets, money comes out of sectors that are not in favor and go into stocks that promise better earnings and returns.  For example, in an environment of economic growth, money might go into technology and consumer discretionary shares and out of more defensive sectors.  From this perspective, asking whether we are bearish or bullish on stocks is the wrong question.  Rather, the challenge is to find where there is relative strength and relative weakness and profit from both.

When we pursue what fascinates us, we make unique discoveries and find our particular edge.  It is when we see things clearly that we can take the kind of risk that leads to meaningful returns.  What I like about a training program such as that at SMB Capital is that there is exposure to many team leaders and mentors.  They recognize that there is no genuine conviction to be found by mimicking the trading of others.  As Garrett Drinon observes, the challenge is to identify what *we* see clearly in markets and then put on the appropriate risk.

We learn from others, then make that learning our own.  

So, so many market Buddhas out there.  

Kill them.

Further Reading:

Finding Your Niche In Life and Trading

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My Big Takeaway From The SMB Annual Event

 

It was great getting back to SMB Capital and being part of their first ever annual trading event.  I was especially impressed with the expanded mentoring being offered to developing traders.  This includes virtual "office hours" meetings to discuss trading in real time; intensive step-by-step teaching of successful trades from Lance Breitstein; and detailed modeling of winning options strategies from Seth Freudberg.  It was especially rewarding to see traders I knew as developing professionals who are now successful and offering mentoring to the newbies, including Garrett Drinon, Justin Spero, Carlton Bryan, Jeff Holden, and Max Ganik.  Congrats to Steve Spencer and Mike Bellafiore for their work in building an impressive learning culture. 

My greatest takeaway from the event, however, was the tremendous enthusiasm and interest in learning among the participants.  There was an electricity in the group, as traders were eager to network, learn from each other, and absorb lessons from the presentations.  The experience reminded me that every developing trader is an entrepreneur building a startup business.  It was great to see the drive and sense of quest among these aspiring professionals.

As we become experienced and successful, the challenge is to maintain our spirit of quest.  The longer we do something, the more we have to work to sustain the fire of the startup mode:  learning and doing new things.  That is not only true in our trading, but in our personal lives.  Life is meant to be an adventure.  What I loved at the SMB event was that the traders I knew as beginners had developed a fresh fire in the belly, drawing on their passion for growing talent within the community.  

A few years ago, Margie and I took our first trip to Israel and loved seeing historical and cultural sites.  On our last day, we visited the Holocaust Remembrance Center, Yad Vashem, and there I experienced something that powerfully remains with me to this day.  Seeing the display of all those killed in concentration camps around the world, I (quite uncharacteristically) broke down in tears and felt the very strong sense:  "These are my people".  My equally strong sense was that this is what we mean by God speaking to us:  an intense clarity coming from the soul.  

Since then, understanding that clarity and its significance has become my quest.  I've read easily 150-200 books on religion and spirituality; wrote the blog-based book about the spirituality of trading, Radical Renewal; and recently finished a 450-page manuscript about spiritual development from a Jewish perspective that includes a website and blog.  The next project will be an equally detailed review of Christianity and Islam and the lessons they teach us about spiritual development.  Eventually those lessons will find their way into my work with traders, building on the insight that true clarity and conviction comes from quieting the ego and listening to the soul.

The larger point is that I'm just like those developing traders at SMB.  I've found a mountain to climb and a worthy quest.  And I've learned that what brings us passion is what truly--and sometimes quite literally--speaks to us.  

Thanks to those at SMB who affirmed what is important in life.

Further Reading:  

Radical Renewal:  Tools for Leading a Meaningful Life

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Trading Psychology Links: Finding Your Edge

 

*  Setting just one goal for change and working on it consistently for at least a month:  it doesn't lead to revolutionary change, but it creates the evolutionary change that lasts.

*  Very interesting research from Concretum Research regarding time of day when SPX tends to make intraday highs and lows.  Not too surprising that highs and lows for the day are made when market participants are most active.  This sets up valuable research on relative volume, intraday trends, and probability of trend days.  Would be interesting to see how these stats look for individual stocks, particularly ones with lower institutional participation.

*  Following the observation of Mike Bellafiore, it's so, so, so important to experiment, experiment, experiment when learning trading and see what makes sense, what grabs your interest, and especially what you do well.  Too often, traders are so eager (and needy) to make money that they cut their learning processes short and never develop their strengths.

*  I like Crede Sheehy-Kelly's advice to practice each day being the person you want to become.  Per Ayn Rand, those who fight for tomorrow live in it today.

Have a great week!

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How to Change Your Psychology

 

We internalize what we do consistently.

If we consistently avoid effort, we will internalize lack of initiative.  If we consistently reach out to others with love, we will internalize warmth and caring.  Change begins with doing.  Simply shifting goals or mindsets will not produce lasting change.

Notice how athletes work out in structured routines.  Surgeons learn their craft by following evidence-based procedures and following these faithfully.  Performing artists master their craft through feedback and repetition.  When practice and performance are process-based, something important happens psychologically:  We internalize a sense of discipline and self-control.  Consistency of preparation and practice creates consistency of performance.

To change ourselves psychologically, we can start with just one improvement we wish to make and create a routine for implementing that shift every single day.  If I want to internalize a sense of physical fitness, I can go to the gym daily and challenge my limits in terms of flexibility, aerobics, and strength.  If I want to internalize discipline in my trading, I can use backtests and performance reviews to create rules for when to take trades, where to enter/exit, etc.  Following rules each day leads me to internalize a sense of control.  Pushing my limits each day reinforces a sense of growth and achievement.

Choose one goal and do one thing to achieve that goal daily for a month.  Then take on a second goal for a month, etc. and add that to the first.  Then a third goal, a fourth--and soon you internalize a sense of progress, achievement, and self-control.

We don't change by thinking new things.  We do new things and shift how we think and feel.  

What one thing will you do consistently this week to be your best version of yourself?

Further Reading:

How to Change Your Life

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Trading Psychology Links: Developing Yourself by Developing Your Self

 

*  Every trade plan is an opportunity to work on our psychology, training us to act on opportunity and not react to fear; 

*  Lance Breitstein does a great job of explaining why success in trading requires investment in ourselves;

*  Such a valuable point from Adam Fiske:  What indicators/signals do you track regularly to tell you *not* to trade?

*  Jeff Holden from SMB Capital observes that we need to work on proper bet sizing--and understand the relative degrees of edge we have in trades--before we start betting big;

Have a great finish to the week!

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How to Deal With the Fear of Not Being Right

 

It's one of the great paradoxes of psychology that when we run from something we fear, we are most likely to encounter it.  The important principle here is that we internalize what we do.  When we act on a particular premise, we reinforce that premise in our minds.  Thus, when we run from a feared outcome, we end up reinforcing that fear.

An experienced trader recently reached out to me regarding the fear of not being right when in a trade.  Psychologically, that means we're taking being wrong as a threat.  The threat of being wrong can become so strong in our minds that we take off the position before it has a chance to be right!

Every trade plan is an opportunity to work on our psychology.  When we set a stop loss for a position, we want to use that stop to intensively mentally rehearse what we want to be doing if the order is triggered.  Very often, we can get stopped out of a trade, but nothing happens to invalidate the idea behind the trade.  For example, I might get long a stock on an earnings beat in the premarket.  The stock stalls out and begins to retrace some of its initial gain.  I become so afraid of not being right that I take the position off--only to see the stock roar higher at the NYSE open when large volume hits the tape.  

If I have set a stop on the trade, however, I can--at that time-- mentally rehearse the conditions that would get me back into the position.  Just because a premarket flow took me out of an initial position doesn't mean that the fundamental strength of the company won't support a higher share price.  

So, so often the trade doesn't work out, but the idea--and the work we have put into generating the idea--is still valid.  We lose sight of the good work that goes into a trade when we focus on the fear of not being right.  What makes the trade not right is not the same as what makes the trade idea not right.  It's when we can embrace the possibility of any trade being wrong that we open ourselves up to re-entering positions and profiting from being right.

Further Reading:

How FOMO Can Actually Help Your Trading

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Trading Psychology Links: Finding Our Optimal Performance Mindset

 

The right mindset won't substitute for a rigorously developed edge in the markets, but the wrong one can certainly undo all our training and experience.  Here are some valuable trading psychology perspectives that can help you make the most out of your experience:

*  It's not enough to control our emotions and stick to time-tested processes.  We have to actively develop a positive mindset if we're going to maximize our creativity, productivity, and performance.

*  Akil Stokes offers a diverse trading psychology podcast for developing traders.

*  Valuable trading psychology videos and tweets from Yvan Byeajee.

*  Here are two valuable books on trading psychology:  The Mental Game of Trading by Jared Tendler and Mastering the Mental Game of Trading by Steven Goldstein.

*  This is the focus needed for successful trading.  If we need to make money, markets control us.

Have  a great finish to the week! - Brett

Mastering the Positive Psychology of Trading

 

Working on mastering the psychology of trading is different for beginning/developing traders and for experienced traders.  I have worked with rookies at proprietary trading firms, and I have worked with experienced money managers who guide large teams.  The psychological challenges faced by the two groups are entirely different.  What you need to do to master your trading psychology very much depends upon where you are at in your learning curve.

Here is an analogy that might clarify things.  Freud's revolutionary contribution to psychology can be found in his dictum, "Where id was, there ego shall be".  The id represents our basic, primal instincts: our flight and fight tendencies.  When we are triggered by past, unresolved conflicts, we tend to regress to our instinctual mode.  The purpose of psychotherapy is to help a person process their issues and feelings in the medium of a helping relationship.  This enables them to gain perspective on what is truly a threat in the present versus a leftover response from our past.  The heart of Freud's therapy is that we first confront and resolve our conflicts in the here and now context of the helping relationship.  Once we can begin to constructively handle our issues within therapy, we're ready to tackle them in our day to day lives.  Therapy thus replaces the id with the ego:  we replace our flight/fight triggers with rational thought and planning.

The field that has come to be known as positive psychology takes Freud's work to a new direction.  Instead of working on resolving past conflicts and painful repressed experiences, positive psychology has us identifying and building our unique, distinctive strengths.  For example, I might experience a loss of motivation at work and my performance might suffer.  A traditional therapist might have me explore conflicts about my work and with my colleagues.  Resolving hidden problems in the workplace could help me regain my motivation.  The therapist addressing my situation from the perspective of positive psychology might help me understand the positives that I need in my life and that might be missing on the job.  For example, if one of my basic strengths is intellectual curiosity, I might need to address my situation by changing how I interact with my team at work--or perhaps I need to find different work.

So now we can appreciate the difference in psychology between beginning and advanced traders.  Beginning traders, unaccustomed to ever-changing, volatile markets, find themselves coping with their flight/fight stress responses and the ways in which those color trading decisions.  Experienced traders, on the other hand, find that their greatest challenges occur when they do not adequately cultivate and utilize their strengths.  For example, where the rookie might respond to volatile action in a stock with decisions based on FOMO, the experienced trader might be challenged by finding the best risk/reward expressions of their trade ideas.  

For the experienced trader, a key to trading success is knowing what speaks to you and what you're truly good at.  You cannot play to your strengths if you aren't intimately familiar with what those strengths are.  Working on correcting weaknesses only gets you so far.  Eventually, if you're going to progress from competency to expertise, you need to master your own positive psychology.  

An obstacle I've faced in my own trading is that I simply become bored with following markets and I stop trading.  Creativity and learning are my two greatest strengths, and I lose motivation when I'm not discovering and doing new things.  The common wisdom of trading psychologists is to turn everything you do into reliable, repeatable processes.  That is precisely what bores me.  If trading begins to feel like an assembly line, I start to feel trapped in a rote, routine job.  To keep trading fresh and exciting, I need to do the same thing that I do in my marriage and in my personal life:  find new challenges and new opportunities and always, always devote some portion of my time to innovation.  

I recently wrote on the topic of finding different sources of trading edge.  I also wrote on the topic of developing resilience as a trader.  The two topics are intimately connected--for me, and for many people I work with.  What keeps us going during the inevitable drawdowns is that we're continually learning, continually discovering, continually moving forward.  Doing new things keeps us psychologically fresh.

Earlier today, I began analyzing a new dataset.  I looked at market breadth broken down sector by sector.  Interestingly, over the last few years, when breadth strength in the consumer staples (XLP) sector has greatly exceeded breadth strength among the consumer discretionary stocks (XLY), the next 10 to 20-day returns in the overall market (SPY) have been significantly above average.  This finding has set off a flurry of queries into various sector rotations and how those might act as meaningful measures of market sentiment.  New data, new patterns, new trading opportunities, new motivation and drive, new games to play and win.

We master the positive psychology of trading by drawing consistently upon our own positives and expanding those.  I believe this is the single greatest frontier in the field of trading psychology.  More to come!

Further Reading:

Should High Achieving Traders Seek a Balanced Life?

Therapies for the Mentally Well:  Proven Techniques for Building Your Positive Psychology

Radical Renewal:  Tools for Leading a Meaningful Life

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Trading Psychology Links: Sustaining a Resilient Mindset

 

Resilience is not the absence of stress, but rather the ability to channel stress toward greater performance.  Here are some worthwhile perspectives on resilience in trading:

*  How we learn trading can also be how we learn resilience;

*  Here's an excellent thread from Dr. Steven Goldstein re: how resilience comes from aligning our trading with our personalities;

*  Lance Breitstein passes along nuggets of wisdom from James Clear, emphasizing the importance of peace of mind and inner satisfaction toward resilience and performance.  Here's a great thread from James Clear that captures the importance of persistence;

*  I find that researching edges in markets leads to greater confidence in trade ideas, which leads to greater resilience during the trade.  Here's a nice example of research from Concretum Research;

*  Insightful thread from Richard Moglen on how top traders focus their efforts;

*  Mike Bellafiore from SMB Capital teaches developing traders to recognize patterns in the market and build "playbooks" for trading these--great way to build resilience through intensive training;

*  This TraderFeed post has some worthwhile links to different facets of resilience.

We learn to be resilient by learning from resilient performers--

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How to Overcome Performance Pressure

 

I'm hearing from more traders than usual about their struggles with performance anxiety.  As one successful developing trader put it, the problem tends to happen "on high profile trades that you could say most traders have an eye on".  This is a very good observation.  The higher profile the trade--i.e., the greater the perceived opportunity--the more room there is for performance pressure.  As Epictetus observes, the issue is not the "real problems" about the trades, but rather the "anxieties" about those trades.

Let's look at this from a psychological angle.  The more we perceive--and emphasize--opportunity in a situation, the more room we create for anxiety should we miss out on this opportunity.

Imagine shooting a free throw during a basketball practice.  It's routine, you've done it hundreds and hundreds of times, and you feel no pressure.  Now imagine the situation from my old college team.  You've had a long practice after classes and you're dead tired and want to get home.  The coach announces that players can go take a shower, change, and go home after they have made 10 consecutive free throws.  Now, all of a sudden, there is pressure.  You *really* want to go home, so once you've made six foul shots in a row, you worry that you might miss one and have to return to square one.  Coach, of course, knew that.  This was not simply a practice of free throw shooting, but a practice of performing under pressure.

Now imagine that it's an actual game and the second-half clock is winding down with your team down a point.  You have just been fouled, and you get to shoot a one-and-one.  If you miss the first shot, the odds are good that the opposing team will grab the rebound and run out the clock for the win.  If you make the first shot, you get a second shot that could win the game for your team.  Everything is on the line.  Suddenly, what had been routine in practice feels anything but routine.

This is what is happening for the trader who experiences performance pressure.  It occurs in a "high profile" situation in a volatile market, where the trade could either do very well or very poorly.  Moreover, it's a situation that other traders on the floor are focused on.  Everyone will see if you nail it or mess it up.  If this were an ordinary trade in simulation mode, there would be no pressure and it would be relatively easy to execute.  With more on the line--financially and psychologically--we start to overthink the trade.  That gets us away from what we know how to do naturally.

Very often, performance pressure manifests itself as perfectionism.  We feel that everything is on the line, so we try to do everything perfectly.  The perfect becomes the enemy of the good, as it gets us away from doing what we know how to do naturally.  Like most players, I had a routine for shooting a free throw.  Hold the ball in both hands, look at the rim, bounce the ball three times, look at the rim again, bounce twice, look at the rim, exhale, focus, and shoot.  Same way, every time.  But if I am in a pressured situation, I alter the routine.  I don't exhale.  I aim the ball.  I become self-conscious of my release.  Clang.  The shot bounces off the front rim.

So it is with trading.  We over-focus on the entry, wanting the perfect risk-reward.  Suddenly the market moves in the anticipated way before we get in.  We don't want to chase it, so we hope for a pullback, but it keeps going.  We missed the trade.  Clang.

What my coach realized is that you can't learn to perform under pressure unless you practice under pressure.  That is why military and SWAT teams practice maneuvers under realistic conditions with live fire.  That is why EMT personnel practice rescue methods under observation while being timed.  Practice under pressure turns pressure into routine.  That is how actresses and actors overcome stage fright.  Going on stage again and again in dress rehearsals prepares them for the live performance.

As traders, we can create dress rehearsals in imagery--vividly imagining pressured situations and visualizing in detail how we want to respond.  Again and again, we walk ourselves through pressured situations and the repetition makes the pressure familiar.  We can't be stressed out by something we're very familiar with.  We can also create our own dress rehearsals by trading challenging situations in simulation mode and making ourselves accountable for the outcomes.  Imagine, for example, working in simulation mode and not being allowed to trade live for the next session unless the simulated trades were executed well.  

We learn to perform under pressure by building pressure into our practice.  No psychological self-help methods will work if we're not making use of them in the actual heat of battle.  If our practice is comfortable, we set ourselves up for performance anxiety when the game becomes uncomfortable.

Further Reading:

Performance Anxiety:  The Most Common Problem Traders Face

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Where Does Trading Edge Come From?

 

It's been interesting returning from my sabbatical and rejoining the online world of trading.  So much noise, so much noise, and yet there are gems out there.  Kudos to the sharing of original research from Concretum Research.  It is a joy to find social media posts that share ideas and address our highest aspirations to understand and master complex realities.

There is an important relationship between trading edge and trading psychology.  Let's explore.

Consider three sources of trading edge:

1)  Directional Movement - We find patterns and relationships in markets that lead to the directional trading of an asset.  An example would be a breakout move that results from a news catalyst.

2)  Relative Movement - We find patterns and relationships in the movement of one asset relative to another one.  An example would be the relative value trading of rates, where we might expect the yield curve to steepen due to inflationary pressures in the economy.

3)  Absolute Movement - We find patterns and relationships in the volatility of assets.  An example would be an options trade that makes money if markets stay in a relatively quiet range after a volatile period accompanied by high options skew.

A rough analogy would be the different ways of scoring of a basketball team.  Against a man-to-man defense, there may be opportunities to drive the lanes and exploit the inside game.  Against a two-three zone defense, there may be opportunities to move the ball on the perimeter and utilize cross-court passes for the outside game.  Against a slower defense, there may be opportunities for long passes and fast breaks for layups.  The point is that no successful team has a single way to win.  They understand the environment in which they're operating and then run the plays that exploit that particular situation.

So it is in trading.  There are times when markets are rotational and relative movement can be exploited.  There are trending periods that call for directional trading.  There are also noisy and quiet periods that lend themselves to edges in volatility space.  A great number of trading opportunities occur when environments change and participants are caught playing the old game rather than changing their offensive alignments.

Great traders, like great sports teams, have multiple ways of winning under varying conditions and circumstances.  When traders lack adaptability and trade limited sources of edge, they find that what worked in one period of time suddenly does not work now.  That leads to frustration, and that can lead to subsequent poor trading.

The problem, however, is *not* primarily one of trading psychology.  The disruption of psychology is the result of the problem, not the primary cause.  It is the limited, inflexible trading edge that makes us vulnerable to changing markets and variable performance.  Expanding what Mike Bellafiore calls our playbooks--our sources of edge in different market conditions--is one of the most powerful ways in which we can fortify our trading mindset.

Further Reading:

Trading Psychology 2.0 and the Importance of Creativity in Trading

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Three Best Practices of Successful Traders

 

With this post, I'll be taking an extended sabbatical in order to complete my next book and related projects.  I thought a worthy final post would summarize the best practices of traders who have experienced success in 2023, with the aim of improving yourself and your trading processes in 2024.

Best Practice #1:  Moving From Reactive Trading to Planned Trading

Very often, the psychological challenges that traders face occur because they are making trading decisions in the heat of the moment, when they are most likely to be stressed and impulsive.  Successful traders have intensively studied their most successful trading and know what they do best.  They then turn their best practices into trading rules, so that they know exactly what kinds of opportunities to look for in markets, how to express those opportunities, how to size the positions and manage them, etc.  The beauty of knowing what you do best and how you do it is that you can then mentally rehearse the right actions as part of preparation for the day.  Biofeedback and visualization methods can be helpful in that mental rehearsal.  Keeping the right kind of trading journal also helps greatly in focusing on your learning lessons.  Knowing your best trading also enables you to stand apart from markets when opportunity isn't present.  The best traders I work with patiently wait for their opportunity and don't feel a need to trade.  They are like the baseball batter who knows the pitcher well and is willing to wait for a good pitch in the strike zone.

Best Practice #2:  Drawing Upon Your Strengths     

Here is a short personality quiz designed to identify your strengths.  Here is a way of interpreting the results.  The successful traders I've worked with know who they are, what they're good at, and what excites and challenges them.  They also are aware of their flaws and can leverage those into strengths.  Because they find ways of trading that leverage their strengths and are meaningful to them, they have no problem staying engaged in markets during challenging times.  They also draw upon their strengths outside of their involvement in markets, so that their personal activities are an ongoing source of fulfillment.  The right work-life balance isn't just spending time in activities outside of trading; it's making use of the best of you in relationships and in personal pursuits.  The number one occupational hazard for full-time traders is burnout.  When we don't achieve work-life balance based on what is meaningful to us, we lose work efficiency and we become less creative.  I've often advised traders to always make sure they have passions in life that are greater than their passion for trading.  If your only strength is trading, that becomes a vulnerability.

Best Practice #3: Creativity   

The greatest weakness of traders overall is that they are looking at the same markets, processing the same information, and trading from the same charts and ideas as others.  There is very little original in their thinking or trading.  They are like the business owner who sets up a shop to compete with surrounding businesses, but who copies what they do.  If you don't do different and distinctive things in markets, you won't achieve different and distinctive results.  This is a topic I address in the Trading Psychology 2.0 book and that I've also tackled in the blog here and here.  As the book emphasizes, there are specific techniques and processes we can learn to become better and more differentiated idea generators.  The key is to look at new information and integrate information in new ways.  Teamwork--networking with others who have backgrounds and skills different from us--is a valuable practice that can help us expand our horizons.  In my own trading, I have found the best results by focusing on data that others don't look at, from high-frequency measures of buying and selling to patterns of breadth across time frames among equity sectors.    

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I hope this helps you coach yourself to greater success.  As further resources, please check out this series of articles on trading psychology techniques (links to all articles at the bottom of the post); this post on best practices; and this post on learning from our best trades.  If there is a specific trading psychology topic you are interested in, there's a good likelihood you can find something by doing a search for "TraderFeed topic".  So, for instance, a search for "TraderFeed trading discipline" yields relevant posts.  If you are interested in a collection of self-help techniques for your trading psychology, The Daily Trading Coach book might be most helpful.  Best of luck for a happy, healthy, and prosperous 2024!  

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Can This Market Rally Continue?

 

The U.S. stock market has rallied sharply off its late October lows, bringing us to fresh highs in several large cap indexes.  On Thursday we saw particular breadth strength with over 2500 stocks across the major indexes registering fresh monthly highs and over 1700 making new three-month highs.  At the same time, only 188 and 86 stocks hit new one- and three-month lows.  Thanks to the dovish shift by the Federal Reserve and a dramatic turn lower in interest rates, the buying was broad, lifting both small and large cap shares.  When we see large moves across asset classes--fixed income, currencies, equities--we know that something fundamental is afoot among macro investors.  But what comes next?  After such broad strength, do we see further upside momentum or reversal?  Let's take a look at recent market history.

As I have indicated in the past, strength (as measured by the number of shares making fresh new highs) and weakness (as measured by new lows) need to be considered as relatively independent variables.  To be sure, the two are related--since 2016 (almost 2000 market days), the correlation between 1 month new highs and lows is -.54 and between 3 month new highs and lows is -.46.  What this means is that only about 25% of the variance in new lows is accounted for by the number of new highs and vice versa.  (All data from Barchart.com).

When we examine the historical data since 2016, we can see the importance of considering strength and weakness separately.  For instance, we've only had 24 days in that time where three-month new highs exceeded 1000.  Over the next 10 trading sessions, SPY averaged a loss of -.11%, compared with  +.23% for the remainder of the sample.  Over the next 50 trading sessions, however, SPY gained an average of +3.81%, well more than the average gain of +2.39% for the remainder of the sample.  Indeed, when we have had an explosion of new highs, the market was up 21 times, down only 3 over the next 50 days.  Over the next 10 days, it was up 11 times, down 13.

Conversely, when three-month new lows are below 100 (N = 475), returns have been superior over the next 20 trading sessions, averaging a gain of +1.99% vs. an average gain of +.59% for the remainder of the sample.  In other words, when new highs are high, we have seen momentum over a longer time horizon; when new lows have been low, we see shorter-term upside momentum.  When new highs are high *and* new lows are low, the pattern has been similar to that for elevated new highs:  weak returns over the next ten trading sessions; superior returns over a 50-day horizon.

No doubt, forward news on inflation and growth will impact rates markets and that, in turn, could move stocks.  During rising trending/momentum markets, I have found it to be helpful to look for short-term oversold points in the market (points during which the majority of stocks close below their 3 and/or 5 day moving averages) that occur at higher price lows.  Those dips are opportunities to participate in the broader trend and also create logical spots to stop out if the uptrend is broken.  At least for now, markets are treating the Fed news as a game changer.  Recent historical evidence suggests that the rising tide lifting all boats often continues, though not necessarily in the short run.

Further Reading:

Using Emotion to Change Emotion

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Establishing Targets For Our Trades

 

Recently, I've heard from a number of traders regarding the challenge of establishing effective targets for their trades.  What has been happening in most of these situations is that a trade will go the trader's way and be profitable.  That leads the trader to hope for further gains and sometimes even add to the position.  At that point, the trade reverses and leaves the trader with no gain or even a loss.  The frustration caused by such "choppy" market conditions can then fuel subsequent poor decisions and excessive losses.

This is one of those situations in which the best psychological strategy is also the best trading strategy.  It is imperative to study the markets and instruments you're trading and identify clearly how far moves are likely to go in various regimes of volume and volatility.  If you're trading a stock index, such as the SPY ETF or the ES futures, the market VIX will be highly correlated with the average size of moves on any time frame.  Similarly, the volume of the instrument will be quite correlated with the size of market moves.  If SPY is trading an average of, say, 70 million shares per day, you can do very basic research and recognize that daily moves of much more than 1% will be difficult to achieve with such volume.  For a day trader, if today's volume is not significantly greater than recent volume and you get a breakout move of over half a percent in a 12 VIX market, you know that the conditional probability of the move going much further in your favor is pretty low.  If the VIX was greater than 20 and volume was exceeding 100 million shares, you'd be on firmer ground holding for further gains.

One thing I found very helpful in my own trading is to know what my anticipated holding period is for a trade and to know, precisely, how much directional movement can be expected during that period across different segments of the market day.  An expected holding period of an hour would lead to larger moves in stocks during early morning hours, for example, than at midday.  By studying the size of market moves for given holding periods, levels of volume and volatility, and for time of day, I can set rational, reasonable targets for profits.  That makes the exit process automatic, and it avoids the major pitfall of making execution decisions in the heat of battle.

The key is making trading planned and not reactive.  Once you have a plan, you can mentally rehearse it and base your exit on a reasonable goal, not a wish.  Trading becomes emotional when we act on hopes and fears and not hard information.  The trade exit should take into account what the market is typically giving you; expecting more is perfectionism and a setup for frustration.

Further Reading:

A Simple Strategy for Making Your Trading Better

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Where I See Opportunity: In The Market And In Ourselves

Note:  This post is a summary of the webinar I held with traders this past Monday.

I've been involved in trading the U.S. stock market since 1977.  My professional work with traders began in 2003 and continues to this day.  So I've seen my share of markets, and I've seen quite a bit in terms of what goes into trading success.

What I find noteworthy in recent markets is the degree to which more and more money is being put to work, seeking relatively short-term advantages in the marketplace.  Quite a few of the hedge funds and money management firms around the world have greatly increased their assets under management.  They have also expanded operations across markets and across geographic regions.  When I started my performance coaching, it was common that funds specialized in specific strategies and consisted of solo portfolio managers, sometimes aided by assistants.  Now, we find many funds trading multiple strategies ("multistrat") with large teams.  This means that each team acts as a miniature fund, building diversified portfolios.  Back in the day, my work was largely limited to traders in NY and London; now it's truly global.

At the same time that trading organizations have exploded, their tolerance of risk has gone down.  Back in the day, a manager could lose up to 20% in a year before being stopped out.  Now it's not unusual for that number to be 5-10%.  What happens in practice is that risk managers don't want to see their teams stopped out, so they reduce risk taking well before the downside limits are threatened.  Once a trader goes down a few percent, their allowable risk is often cut.  So, for instance, if my capital is cut in half when I go down 5%, I now have to make 10% on the new capital base just to break even.  That is daunting, so--in reality--no one wants to go down more than a very few percent. 

Over the years, I've seen the same dynamic among day traders and proprietary trading firms that largely engage in short-term trading.  They do not typically have large capital bases and thus need to manage risk tightly.  Historically, they've made their money by leveraging capital, further ensuring that risk had to be carefully managed.  As day trading has grown, especially since the period of the "meme stocks", we find more and more participants chasing moves, but with limited capacity for loss     

The net impact of these developments is that we have very crowded markets jumping in on moves and needing to bail out when the moves don't work out.  If a trend seems to be under way, there is a lot of "chasing" of the perceived opportunity, and when the trend reverses, there can be equally significant abandonment of the positions.  On balance, this has created choppier markets.  To the degree that this choppiness is a function of more and more capital managed more and more tightly, I expect this choppiness to continue.

So where does the spirituality of trading fit into all this?

My research has found that, at turning points in the market, we see clear shifts in the breadth of market moves, as well as changes in relative strength.  This occurred in late October, when heavy selling brought us over 1900 fresh one-month lows and over 1600 three-month lows among NYSE stocks.  For the next few days, we moved still lower--by about 2%--and yet fewer stocks registered new lows.  Indeed, we began to see relative strength emerging in a few sectors of the market.  That led to a burst of buying (and short covering!) and, by November 2nd, we suddenly had new highs outnumbering new lows.  This created a momentum move that now has taken us to new highs in a few parts of the market.  

(Interestingly, as we've moved higher the last few days, breadth has stalled out and we're seeing shifts in relative strength among sectors.  I'm watching the market closely for the possibility of reversal).

With the crowding of market participants and limits on allowable losses, the two trades that set up most clearly are momentum moves (the crowd chases a move) and reversal moves (there is initial bailing out of previously popular ideas).  The breadth and relative strength measures that I track daily--for the market as a whole and sector by sector--can be found on Barchart.com; StockCharts.com and MarketCharts.com.  Backtesting of momentum and reversal moves can be found via SentimenTrader.com and QuantifiableEdges.com.  Creating a database of market and sector breadth has been invaluable in detecting when there is momentum and when moves are stalling. 

As I stressed in the online book, Radical Renewal, our greatest trading problems occur when our egos take control of our market activity.  We impose *our* views on markets, and we trade--not because of distinctive opportunity--but because we *need* to be active and make money.  Once our egos are in control of what we do, we become poor listeners to what markets are actually doing.  As a psychologist, if I am filled with my own preoccupations while I'm speaking with a client in therapy, the odds are good I won't be very helpful to that person.  I need to listen to them and act based on deep understanding.  So it is with markets.

What I refer to as the spirituality of trading is putting ego aside and training ourselves to be sensitive listeners.  If we can master that in markets, it will be great training for our personal and work relationships.  The right trading makes us better as people.  The goal is to trade selectively, from the soul--not reactively, from the ego.

Thanks for your interest--

Brett

Further Reading:

Best Practices of Successful Traders

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Building Yourself By Building Your Trading

 

The common view in trading psychology is that we can work on ourselves and that will help us better weather the ups and downs, risks and rewards, of markets.  Certainly that is true:  as I describe in The Daily Trading Coach book, there are many research-backed techniques in psychology that provide tools for handling stress, uncertainty, overconfidence, and negativity.

A complementary perspective, not as well appreciated, is that by working on our trading, we end up developing our strengths and building our capacity for leading meaningful and purposeful lives.  Indeed, how we work on our trading helps shape our ability to achieve our life's goals.  For example, in cultivating our creativity as traders--training ourselves to perceive opportunities that others typically miss--we become more creative in guiding our lives, from our relationships to our careers.

This raises the important question;  What is the purpose of your trading?  How can our trading provide us with a life P/L and not only financial rewards?  The short answer to this question is that, like a good gymnasium, successful trading pushes us to develop strengths that we don't currently make use of.  Every day, every week in trading challenges us to broaden and build who we are.

Monday's webinar has filled up; I will likely hold another one in the not too distant future.  For those who could not make the webinar, the next TraderFeed post will summarize the main points of the session, as well as topics raised in discussion.  Thanks for your interest!

Brett        

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Developing Spirituality Through Our Trading - Free Webinar

 

Radical Renewal is an online book written in blog format.  Each blog post is a chapter, covering a topic we rarely consider:  the spirituality of trading.  About a year ago, I wrote a popular post on "Evidence-Based Spirituality", detailing how spiritual practices have been found to boost our emotional and physical well-being.  Still, the concept of trading spirituality almost seems like an oxymoron.  After all, isn't trading about making money?!

We know that emotions can get in the way of trading, but why do rational people suddenly face problems like "tilt" when they are immersed in markets?

The answer that Radical Renewal proposes is that problematic trading comes from the ego.  Successful trading comes from the soul.

So what is the soul?  How can we develop our soul-fullness?  How can we make trading a renewing, fulfilling activity and not an activity that takes over our lives and depletes us?  What does recent research evidence tell us about how we can live lives of fulfillment and meaning?

On Monday, November 27th at 4:15 PM ET after the NYSE close, I will host a free online webinar on the topic of trading spirituality.  We will look very specifically at ways in which we can develop spiritually through our work in financial markets.  Signup info will be following...stay tuned.

A few questions to leave you with:  

*  What are you doing in your trading right now that is making you a better person?  

*  How does your trading benefit your personal relationships?

*  What is so meaningful in your trading processes that you can feel fulfilled even during inevitable periods of drawdown?

I look forward to seeing you soon--

Brett

Best Practices in Trading Psychology: Consistency, Innovation, and Balance

 

Traders I've observed over the years who have achieved consistent success display three important qualities:

1)  They trade with repeatable processes, so that their trades are planned and not reactive.  They have clear, structured ways of generating ideas, and they have clear structured ways of finding optimal expressions of their ideas; sizing positions based on those expressions; and managing the risk of those trades.  What we do repeatedly becomes relatively automatic:  it becomes part of us.  A great way to minimize emotional, reactive trading is to follow trading practices that are well-defined.  If we can capture what we do as a set of rules, we have the makings of a checklist that can guide our decision-making in the heat of the moment.  A huge part of developing as a trader is finding coaches/mentors who can guide you in the discovery of the trading processes best suited for you.  What are your personality strengths?  Your cognitive strengths?  Those will help determine how you generate ideas and manage the trades based on those.  Ideally, the rules and practices that comprise your planned trading are derived from your trading successes, not simply borrowed from others.  

2)  They are always finding new ways to win.  Consider a basketball team.  They practice a range of offensive plays and defensive alignments.  They might run the ball against one opponent; they might move from a zone defense to man-to-man for another.  A big part of coaching is helping a team adapt what they do best to exploit the opponent's vulnerabilities.  Similarly, markets are ever-changing and the drivers of market behavior shift over time.  The best traders evolve.  The goal is not simply to find a trade an "edge", but to exploit ever-changing edges in dynamic markets.  The best traders will explore and research, just like any successful company that conducts R&D to meet the needs of a changing marketplace.  Successful traders will push the comfort zone and look for advantages over time frames, markets, and strategies that are unfamiliar.  If we're not challenging and scaring ourselves periodically, we're not growing.  

3)  They achieve a balance between work and life.  Over the years, I've seen many successful traders burn out.  Their burnout is not necessarily limited to their trading; they sometimes blow up in their relationships or in their physical health.  It's romantic to think about work as our passion and being involved day and night in our quest for success, but that is not what makes for a sustained, successful career.  The goal is to find a lifestyle that sustains energy and passion over time.  That lifestyle typically includes activities for physical well-being and the emotional well-being of relationships.  It is not clear to me that we can sustain our love for markets and trading if we cannot sustain love in our lives.  It is not clear that we can sustain our energy and passion for trading if we cannot sustain physical energy in our lives.  An Olympic athlete knows the importance of staying in peak conditioning as part of training and preparing for success.  Each of us needs to find the peak conditioning in our lives that can sustain our best efforts in markets.

Approaching our trading in the right way is the best way to cultivate a positive trading psychology.  It's not that you'll magically trade better if you're in a better frame of mind.  Rather, you'll be in your optimal mindset when you approach trading the right way.  

Develop routines based on your strengths.  Push the boundaries in finding fresh opportunity.  Live a full life that maximizes your energy and mindset.  Identify what you do that is truly great and build upon that.  You are not meant for a life of mediocrity.  Have the vision to dream and the practical sense to pursue that dream, step by step.

Further Reading:

Greatness in Life and Trading

What is Your Path to Greatness?

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