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? 

Trader10P3: Principle #7 - Teamwork

If performance is a team sport, who is on your team?  How do your teammates make you better, and how do you make them better?  How do you lead and inspire the team toward a dream?

Trader10P3: Principle #6 - Adaptation

How much of your time is explicitly devoted to understanding and adapting to changing market conditions?  If market trends, volatility, and correlations were to shift dramatically in the next week, how would you adapt your trading?

Trader10P3: Principle #5 - Learning Curve

Do your trading results reveal a positively sloped learning curve?  What specific skills have you learned--and do you employ--over the past year that have made you a better trader?

Trader10P3: Principle #4 - Rationality

To what degree is your trading grounded in ideas that are observable and objectively verifiable?  How does your trading process keep you self-aware and as free as possible from emotional and cognitive biases?

Trader10P3: Principle #3 - Well-Being

How much of your day--inside and outside markets--is spent in frustration and how much in the flow state?  To what degree is your work energizing you and to what degree is it leaving you depleted?

Trader10P3: Principle #2 - Talent

What are your distinctive strengths and talents as a trader?  How, specifically, does your approach to trading make the most of them?  How do you make sure you are playing to your strengths each trading day/week?
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Trader10P3: Principle #1 - Deliberate Practice

How much time do you spend each week practicing trading-specific skills, obtaining feedback about your performance, and consciously working on improving your performance?

Further Reading:  10 Principles of Peak Performance

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Ten Principles of Peak Performance for Traders - Trader10P3

I will be on vacation and away from markets and blogging for the next ten days.  During that time, TraderFeed will feature 10 Principles of Peak Performance for Traders (Trader10P3).  Each day, a new principle will be posted as a question for reflection.  Together, the list will make for a thought-provoking score card by which you can assess your performance.

One of the great challenges of trading is that it requires intense and singular concentration on markets, but also an equal focus on one's performance in those markets.  That combination of market awareness and self-awareness enables traders to make the most of their "edges" in markets while also cultivating fresh sources of edge.

It is interesting that very successful traders usually don't achieve monetary success and then walk away from markets.  That is because what drives them is not just the outcome, but also the process:  the ongoing challenges of market mastery and self-mastery.  Even after the money has been made, the game retains its appeal.

If your motivation is primarily to make money, you probably won't get to the point of career success, because the inevitable periods of drawdown will sap whatever drive is present.  When the motivation is mastery, losing periods provide fuel for reflection, learning, and improvement.  

Money is the score card, but the performance engine is love of the game.

Further Reading:  Trading as a Performance Activity
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Four Keys to an Upside Trend Day

For daytraders as well as swing traders, identifying a trend day early in its lifespan can be a profitable strategy.  Here are four things I look for in identifying upward trend days, such as we had on Monday:

1)  The cumulative NYSE TICK on the day stays positive and rising through the session;

2)  The percentage of NYSE stocks trading above their day's VWAP remains above 50% through the session (see chart above);

3)  The number of NYSE stocks making new daily session highs vs. fresh daily session lows remains positive throughout the session;

4)  Major indexes stay above their opening price ranges throughout the session;

Not all of these conditions will fire perfectly on each uptrending occasion, but most of them will.  Note that each of the conditions is measuring an initial thrust upward and then sustained buying pressure with consistent, positive breadth.  The key is recognizing these conditions relatively early in the trading session.  I obtain my data from my e-Signal feed and use historical research to identify the degree of thrust and buying pressure that is most likely to lead to a trending outcome.

Note that the failure to meet the above conditions can also serve as an alert to a potential range day.  Identifying likely day structure as early in the session as possible is a very helpful skill for traders on the day timeframe.

Further Reading:  Identifying Day Structure

Reminder:  9 AM EST Podcast With Michael Covel Today
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When the Stock Index Is Strong and Stocks Are Weak

I recently posted a few observations about how the underperformance of small cap stocks relative to the large caps.  Even more concerning to me has been how stocks making new lows have dominated new highs despite the large cap indexes hovering near their highs.  As the chart above shows, we have consistently seen fresh three-month lows outnumber three-month highs across the broad universe of common stocks.  Indeed, if we just look at the NYSE universe on Friday--a day in which the DJIA touched fresh highs--we see that 69 stocks made 52-week highs and 60 made annual lows.  That is pretty poor breadth.

My leaning is to interpret such divergences bearishly.  Still, with a VIX closing below 13 on Friday, it's far from clear to me that we're in bear territory.  So I decided to investigate.

Specifically, I went back to the start of 1990 and looked at all occasions in which the S&P 500 Index closed within 2% of its 200-day high under the following conditions:  a) VIX < 15; b) new 52-week highs under 100; and c) new 52-week lows over 50.  

My database spit back 38 occasions.  These included dates in:  November/December 1993; October 1994; January through March, 1995; October 1995; June 1996; November/December 2005; April 2006; June 2007; August/September 2013; and November/December 2013.  

That raised my eyebrows.  One advantage of being my age is that I've closely followed or traded all those markets.  Those were not bear markets--and they were not markets on the brink of the bear.

Indeed, looking across the 38 occasions, the next 20 trading sessions averaged a gain of 1.9% and the next 50 sessions averaged a gain of 3.51%, with only a handful of losing instances in each case.

Now, my conclusion is not to jump in with both hands and buy this market.  Rather, the data exercise has accomplished two things:  1) tempered my bearish leaning; and 2) illuminated the kind of market we are in.

I find this to be true of data exercises in general.  They offer a kind of perspective that checks assumptions and biases and can trigger new ideas as well.  The historical perspective is not always the correct perspective, but it often is a fresh one--and there is value in examining one's assumptions critically.

Further Reading:  Top Ten Reasons Traders Lose Discipline
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