During market hours, it can become easy to so focus on trading that we neglect the person who is doing the trading! Once we lose self-awareness, we can make decisions that we would never make if we were calm and focused. Self-control is easy when we are not facing stressful situations and dealing with fight-or-flight responses. During periods of emotional, cognitive, and physiological arousal, however, our state shifts can take us very far from our initial planning. That is why self-control strategies that can be employed during trading hours are a best practice. Today's self-control methods are illustrated by reader Gus Joury, a short-term trader of crude oil futures. Here are some of the daily practices that aid his trading: "1. I start my day with 15-20 minutes of meditation/mindfulness. I practice breathing meditation and or TM to clear my mind and keep me focused and aware of my emotions before I start trading. During this time, I use the inner balance app with a heart rate variability monitor to measure my performance for that session and I record my score. 2. I go over my checklist to make sure I had a good night's sleep, protein breakfast, and workout. I also rate my physical condition, distraction level, and overall emotional and mental state for trading. 3. Before I start trading, I look at market conditions and rhythms at different time frames to try to evaluate whether the market is tradable, whether it is trending or choppy, etc. This helps me decide which tools and setups to use and whether it is worth trading or not. 4. I start my first trade with small size (1-2 contracts) to test the waters and see if I am in tune with the market and to get a feel for the overall market environment. 5. Once I start with a winning trade, I start increasing my size in the following trade by adding to the winners. I like to start small and if the market goes in my direction, I add to my position using buy/sell stops and then scale out at the first target and second target and then trail my last position with one tick below/above the previous bar low/high to maximize my profits in the trade after having pocketed earlier profits. This strategy makes me less anxious to take profits and helps me hold my position longer with a trailing stop. It gives me good risk management and allows my winners to be much larger than losers.
6. During my trade, if I experience any anxiety or discomfort, I take deep breaths in and out in order to maintain my focus and stick to my plan.
7. After closing my trade, if I feel any anxiety, regret, or discomfort, I take a breathing session break for 5-15 minutes until I clear my mind and refocus. I also do some EFT tapping (emotional freedom techniques) with breathing to release negative energy. I sometimes take a break by walking out of the trading office. 8. Once I hit my daily stop loss, I stop trading. I also stop trading if I lose 50-75% of intraday profits." Notice how Gus combines methods for physical and emotional control, such as the breathing, with methods of money management. He attempts to stay in winning trades, exit losing trades with smallest size, and regulate the losses he can incur on any given trading day. All of these are methods of self-control, and all of them help him stay focused on markets rather than focused on P/L. Money management is an essential part of self management in trading. As I've mentioned in my books, I never want to lose so much money in a day that I cannot have a profitable week; I never want to lose so much in a week that I cannot come back for the month; and I never want a losing month to ensure a losing year. A major aid to optimism and positivity is ensuring that you always have enough dry powder to mount a comeback after a loss. Further Reading: Self Control and Working Memory
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As readers know, the NYSE TICK is one of my favorite market measures, as it gauges upticking versus downticking on a moment-to-moment basis across all NYSE stocks. A while ago, I decided to treat upticks and downticks as separate time series and create distinct measures of buying and selling pressure. What I found was eye-opening: as intermediate-term market cycles top out, we see a distinct withdrawal of buying pressure from the market, as well as diminished selling pressure. As the market tops out, selling pressure exceeds buying pressure, eventually resulting in significant selling extremes at or near cycle lows. Interestingly, buying pressure picks up into and following those lows, as value-oriented, longer-timeframe participants are attracted to the lower share prices. (All raw data from e-Signal). What we're seeing at present is a significant reduction of buying pressure in recent sessions (top chart) and also diminished selling pressure (second chart), but selling pressure beginning to overtake buying (third chart). As volume and realized volatility have been collapsing, buyers have withdrawn from the market relative to sellers. This is occurring even as many broad market averages are at new highs, but the number of shares registering fresh new highs has been well below late 2014 levels (bottom chart; raw data from the Barchart site.) All of this looks more like a topping market rather than one gaining buying interest and expanding its breadth. We need to see a resurgence of buying pressure to sustain the breakout from the late 2014 trading range. Further Reading: Who Has the Upper Hand in the Market?
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A major development in psychology has been the systematic study of positive aspects of human development: happiness, love, creativity, resilience, health, etc. This has given rise to a positive psychology movement that seeks to help people, not by eliminating their weaknesses, but by cultivating their strengths. This positive psychology has the potential to make us better people, as well as more productive and successful traders. In my new Forbes blog, I am writing a practical book on positive psychology one blog post at a time. In that blog book, I plan to highlight important research and practice in positive psychology and how we can make use of those discoveries. I think you'll find, in the first three posts listed below, a view on the application of psychology that is both unique and uniquely promising.
I look forward to seeing the book evolve. One great aspect of writing a book via a blog is that the comments, interests, and suggestions of readers can help guide the writing. In that sense, the book becomes self-organizing, reflecting the insights of many--not just the author. Thanks as always for your interest and support. Most of us have an inkling that we are but a fraction of what we are capable of becoming. My hope is that the new blog will be a resource for developing your deepest dreams and highest ideals. Brett
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In trading, as in sports, the game is often won or lost before the competition formally begins. It's the preparation for winning that leads to winning and the failure to prepare that prepares for failure. Coach Bob Knight famously observed that many have the will to win, but not many have the will to prepare to win. Elite performers love the preparation, not just the performance--and that's what enables them to move to ever higher levels of performance. Reader Paul Landry contributes today's best practice: a scenario-based preparation routine. By anticipating a variety of possible market scenarios and how he'd respond to each, Paul helps ensure that he will not be surprised by market developments. It is very difficult to emotionally overreact to situations that we have anticipated and prepared for. In that sense, mental preparation is one of our best tools for emotional self-control. Here's how Paul explains his routine: "I come from a military background. Before an operation, rehearsals are crucial to getting things right before we face decisions in the heat of battle. I find I also need to conduct rehearsals before the trading day. I rehearse seven possible scenarios with four parts for each one. The seven scenarios are: a bullish move that turns into a long trend upward; a bullish move that turns into a short trend upward; a bearish move that turns into a long trend downward; a bearish move that turns into a short trend downward; a return to the mean move where the market reverses; the most likely move that I could experience; and the most dangerous move I could experience. The four parts are: the likelihood of each scenario; what the charts and indicators will show to identify each scenario; what is the likely near term direction for each scenario; and what my reaction should be when faced with each scenario. The rehearsals help me in two ways. First, the decision making is faster and of higher quality because I have been in the situation before. Also, the second-guessing during and after the trade is minimized because the decisions were rehearsed beforehand, when trading stress was minimal." Notice that Paul's preparation routine is really an exercise in open-mindedness. He does not start the market day locked into any one particular scenario. Rather, he rehearses and prepares for all likely situations, staying flexible as markets unfold. During the day's session, certain scenarios will come to the fore and others will not play out, enabling Paul to focus on his preparation for the day's most likely outcomes. My experience with this kind of preparation is that detail is important. It's not just visualizing a situation that is important, but concretely rehearsing the specific steps you would take in that situation. Preparing through multiple modalities is more effective than through a single channel. For example, visualizing a scenario and desired responses; talking out the scenario and responses; and writing them both out are different ways of processing trading plans. Spending more time on the exercise--and drawing upon multiple ways of processing the plans--results in a deeper and more effective preparation.
"What if" planning is essential not only in military actions but in most competitive games and sports, from chess to football. As Paul emphasizes, one cannot count on accurately and thoroughly processing a situation in the heat of battle. Thoroughly planning actions before things heat up is a great way to make sure we trade well, regardless of curve balls the market may toss our way.
A ritual is something we do that has special meaning and that we perform the same way at the same time. A family might have its Thanksgiving meal rituals; most religious services are anchored by rituals; we have rituals for such special events as births, weddings, and funerals. Rituals are more than mere habits--they set time apart to focus us on what is meaningful. When we enter a ritual, we change modes to participate in the significance of the occasion. Today's best practice in trading is developing trading rituals. These are activities that focus us on what is most important in trading. Reader Yvan Byeajee, an active, full-time trader, has written a book called Paradigm Shift that stresses the importance of organization and preparation for trading success. Yvan explains that "The book is essentially a statement of the work ethic that is required to make it in this business. Without it, even the most robust system is doomed to failure. I strongly believe that this applies to almost anything in life." Here is the daily work schedule and rituals laid out by Yvan (all times Pacific): Monday to Friday: 5:30 AM - 5:50 AM: Read my list of positive affirmations. (Positive Expectancy Mind + Positive Expectancy Model = Success) 5:50 AM - 6:30 AM: Breakfast while glancing over market related news 6:30 AM: Market opens. Watch how price action unfolds 8:00 AM: By that time I'm usually done watching the markets. I am out of any daytrades I took for the day. I also placed my orders to open any new swing trading ideas and placed my orders to close any existing ones 8:00 AM - 8:30 AM: I read trading blogs. 8:30 AM - 9:00 AM: I listen to a trading-related podcast. 9:00 AM - 12:00 N: I'm usually out during that time period for a run, followed by a 1-hour yoga session. 12:00 N - 1:00 PM: At that time, I'm back in front of my screen to watch the final hour prior to the market close and I look to close or initiate new positions if there are any. 1:00 PM - 2:00 PM: I update my trading journal and trading log. I also save the charts of the setups I took or exited for later review. 2:00 PM - 3:30 PM: Research and homework for the next trading day (scanning through hundreds of charts, noting possible entries, exits, position sizing, and risk management parameters to minimize decisions during market hours) 9:30 PM - 10:00 PM: Book: Trading related lectures. I will typically read one chapter per day. 10:00 PM - 10:20 PM: Meditation Saturday: 9:30 PM - 10:00 PM: Book: Trading related lectures. One chapter as usual. 10:00 PM - 10:20 PM: Meditation Sunday: 1:00 PM - 2:30 PM - Read journal, logs, and saved charts. The goal is not only to learn something about the market's behavior, but also mine: What I did right, what I did wrong, and where I could have done better. 2:30 PM - 4:00 PM - Backtesting (statistical analysis of previous chart patterns and their occurrences, updating of my positive expectancy model and possible new models.) 9:30 PM - 10:00 PM: Book: Trading related lectures. One chapter. 10:00 PM - 10:20 PM: Meditation Yvan explains, "My best practices have evolved over time to fit my needs at the moment, so new traders should expect theirs to do the same. They should test, modify, and ultimately find something that suits them the best. Once they have set up a task to perform as part of their routine, they should try their best to stick to it and be done with it within the set time frame. Every time we participate in a ritual, we are expressing our beliefs, either verbally or implicitly, so we should be focused on the process, one small step at a time, and the results will take care of themselves." Yvan offers a great example of how he has turned best practices into robust processes. What strikes me most in his schedule is how much time he *doesn't* spend in front of trading screens. I think this is very important. He prepares his trades the night before and conducts extensive homework in the evenings and during weekend hours. That allows him to use active trading hours to simply execute his plans. Such planning and time away from screens prevents overtrading and also enables Yvan to work on himself. Note how he uses reading, affirmations, meditation, and yoga to keep his mind and body in shape. Your schedule and rituals may differ from Yvan's but the important takeaway--as he points out--is the consistency of your activities. It is that consistency that turns a valuable practice into a ritual. I strongly suspect that Yvan's edge in markets comes both from the work he performs daily and weekly and also his ability to turn best practices into daily and weekly rituals. Further Reading: Cultivating Winning Habits
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Stocks moved smartly to new highs in the major averages this past week. Sector rotation was particularly noteworthy, with former leaders utilities and consumer staples--defensive and yield plays--falling behind and more growth-oriented sectors--consumer discretionary and raw materials--showing particular strength. This reflects strength in U.S. economic data and an increased pricing of odds that the Fed will begin to normalize interest rates later this year. The top chart tracks the number of stocks across all exchanges making fresh three-month new highs vs. new lows. (Raw data from the Barchart site). Note that new highs have been growing in recent sessions, but remain below peak levels seen in 2014. This reflects the fact that many sectors, such as financials, energy, consumer staples, and healthcare, have not registered recent new highs. Still, I note that relatively few shares are registering fresh new lows, an indication that buying has been broad-based. Indeed, the bottom chart tracks the Cumulative NYSE TICK--the cumulative upticks vs. downticks for all NYSE stocks--and shows consistent buying interest from institutional players. (Raw data from e-Signal). The second chart from the top is my measure of intermediate term market strength. It is a 10-day moving average of SPX stocks making 5, 20, and 100-day highs vs. lows. (Raw data from Index Indicators). It has risen sharply in recent sessions and is near a momentum peak. Note that it is not at all unusual for this strength measure to top out ahead of price during intermediate-term market cycles, which means that we could see further upside drift even if breadth moderates from here. The second chart from the bottom shows the number of NYSE stocks closing above their upper Bollinger Bands vs. those closing below their lower Bands. (Raw data from Stock Charts). It is very common for this measure to peak ahead of price during intermediate-term market cycles and that's what has happened so far. Note, however, that the Bollinger Balance--the number of stocks closing above vs. below their Bands--has remained consistently positive in recent sessions, reflecting the buying pressure noted above.
So where does that leave us? Here are a few observations:
* We made a momentum low in mid-January, with the lows in very early February drying up. From that point, we have embarked on a new intermediate-term upward cycle, which is approaching a momentum peak;
* Buying pressure has been significant during this most recent upward cycle and should continue to propel prices higher, even after we have made a momentum (breadth) peak for this cycle. We need to see selling pressure from institutions begin to exceed buying pressure before the current cycle is imperiled; * Despite fresh price highs, many sectors are not making new highs thus far and stocks making new highs are below 2014 levels. I believe the current upswing is part of a broad topping formation in stocks and not a fresh bull market leg; a significant expansion of new highs beyond 2014 levels would contradict that view; * In my current base case scenario, we continue to drift higher on upward buying momentum, but ultimately will top out and return to the late 2014 trading range as part of the market's broader topping.
This is a general roadmap; a broad hypothesis rather than a hard and fast conclusion. As always, I will be tracking the market measure and updating that roadmap.
I'm writing this from the library of the Oheka Castle on Long Island. The Gatsby-like stay is part of our 31st wedding anniversary; a special way of commemorating a special event. What I've learned in 31 years of marriage is that relationships don't stay special unless you nurture their specialness. Relationships built on the neediness of each member are so self absorbed that partners cannot truly perceive the specialness of the other. But specialness, once perceived, has to stay visible to stay alive. As I've alluded in a different context, love doesn't die--it has to be killed. And what kills love as much as hate is disuse. Marriages become so routine that they no longer remain special. Hence castles and warm cocktail toasts and snuggling in bed with purring cats you've rescued. It's part of what makes life special--and interesting--and worthwhile. The same lesson holds for careers. Once they become routine, they become jobs. If you're not learning and developing--if you're not challenged and stimulated--you eventually fall out of love with your life's work. You're most likely to thrive in marriage by staying in love. You're most likely to thrive in trading by staying infatuated with markets. It's not enough to love what you do. You have to actively keep that love alive. That's what leads to 31 years of fulfillment. Further Reading: The Spouse of a Trader
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One of my works in progress is tracking the number of NYSE stocks each day that give buy signals and sell signals across different technical indicators. Above are charts for NYSE stocks giving buy vs. sell signals for Bollinger Bands (top chart) and the Commodity Channel Index (bottom chart). (Raw data from the Stock Charts site). As a rule, we see the number of buy signals peak ahead of price during a market cycle and the number of sell signals anticipate a cycle price low. Sell signals for the current cycle peaked in mid-January, with fewer sell signals posted at the late January/early February lows. Buy signals for the current cycle peaked early in February.
One interesting facet of the Bollinger measure is that it is the absence of weakness--and not just the presence of strength--that alerts us to a strong stock market. When the market is ready to turn over, there are typically weak shares and sectors leading the way and that shows up as a relatively elevated number of sell signals for the Bollinger Band measure, even as the index price has been near highs. On the other hand, when very few stocks and sectors are weak, the market often drifts higher, as selling pressure is minimal.
For example, I looked at the period from early May, 2014 (when I first began assembling these data) to the present and broke down the number of sell signals for the Bollinger Band measure in a simple median split. When we had few sell signals, the next five days in SPY rose by an average of +.37%. When we had more sell signals, the next five days in SPY rose by an average of only +.06%. Interestingly, daily sell signals for the Bollinger Band measure correlate only +.07 with the RSI measure and only +.21 with the MACD measure. The absence of sell signals for those latter two indicators has not led to superior returns going forward. Indeed, when we've had few MACD sell signals, the next five days in SPY have averaged a gain of only +.09% vs. +.34% when we've had many sell signals. It appears that separating the number of buy and sell signals and looking within each indicator captures different time frames and different patterns of momentum and reversal. This strikes me as a most promising area of research, particularly when we focus on technical indicators that are not highly correlated. Further Reading: Technical Indicators From the Bottom Up
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Recent market behavior in stocks has been confusing for traders, as we've had a good deal of volatility during 2015, with little ultimate directional movement. VIX has stubbornly stayed above 15 for much of this time, a notable change from most of 2014. Here are three views of breadth in the U.S. stock market that can help us make sense of what has been going on.
The top chart represents all stocks listed on major exchanges and the number making fresh three-month new highs vs. three-month new lows. (Raw data from the Barchart site). You can see that breadth has been waning since the late October and late December market peaks. Breadth has tended to peak ahead of price during intermediate term market cycles. What I believe has helped make recent market action confusing is that the current cycle has been very choppy, but the breadth measure peaked in late December and we're in the process of topping. An implication of this view is that the downside to the current cycle should ultimately break us below the 2015 lows to date. The middle chart represents only stocks from the SPX average and tracks the number making 5, 20, and 100-day highs minus lows each day. (Raw data from the Index Indicators site). This, too, tends to top ahead of price during intermediate-term cycles and hit its recent peak in late December. Notice how new lows did not expand for either the top or middle measures when we made recent early February lows. That set up the current upswing. The bottom chart represents the cumulative number of NYSE stocks closing above their upper Bollinger Bands vs. those closing below their lower bands. It is a running total, like an advance-decline line. (Raw data from the Stock Charts site). That measure has been on the upswing and is consistent with the lack of fresh weakness at the recent market lows. It is one of several factors that has kept me from prematurely shorting the current market. Note, however, how we are well below 2014 highs in this measure. Bottom line is that we are seeing positive breadth, but weakening breadth over time. I continue to view this as part of a larger topping process in stocks. Further Reading: Perspectives on Breadth
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Every year you start with a zero P/L balance. At any time, a rogue event could turn your portfolio and your account upside down. If you don't kill, you don't eat: you're only as good as your latest performance. When you're very good, you'll still lose on roughly half of everything you do. That means you'll have strings of losers and periods of drawdown. Markets will sometimes change faster than you can adapt. You'll question whether your edge in the marketplace is gone. You'll see others whose edges truly have eroded and you'll wonder if you can ever hope to compete with the machines. Little wonder that those who do succeed in the money management world display a good amount of mental toughness. There are tremendous rewards to those who succeed and precious little job security for those who don't. The entire profession is based upon the ability to act in the face of uncertainty and take meaningful risks. How many fields--even in sports--require such daily endurance? An excellent overview article identifies several components to mental toughness: 1) Hope - A strong degree of self-belief; 2) Optimism - A general expectation of favorable outcomes; 3) Perseverance - Consistent pursuit of one's aims in the face of adversity; 4) Resilience - The ability to adapt to challenging situations Mental toughness thus requires the grit described by Angela Duckworth--that ability to keep going when the going keeps getting difficult. Learning to handle smaller pressures and challenges builds the toughness needed to handle the larger ones. Dealing with day to day, week to week setbacks in trading is training for dealing with the inevitable larger setbacks. This can only happen, however, if the elite performer maintains what Emilia Lahti describes as an "action mindset". The Finnish concept of Sisu describes the ability to tap into hidden wellsprings of resources during times of extreme challenge; Lahti describes it as a kind of second wind, in which environmental demands bring out more than we thought we had. It is not enough to endure; fueled by Sisu and in an action mindset, we can find and pursue the opportunity in challenges. I have spoken with many traders who go on winning streaks and then become complacent. They cut back on their rigorous preparation and take more marginal trades. It's as if, instead of a second wind, they lose their wind--or at least their willpower. What if winning is as challenging for the competitor as losing? What if it's not just adversity that challenges us, but any cognitive/emotional state that greatly differs from our norm? Ironically, the trader who experiences win after win after win may be as challenged as the one who experiences a series of losses. That would explain my observation that the best traders double down on their discipline and planning after they have made money. In Lahti's terms, they sustain the action mindset. Their Sisu kicks in, not because they experience extremes of pain, but because they experience extremes of positivity. It is any shift outside our normal experience that taxes us--even shifts that we desire. Most traders have a plan for dealing with drawdowns. How many have a plan for dealing with draw-ups? Maybe, just maybe, sustaining performance after consistent winning requires as much mental toughness as sustaining performance after consistent loss. Perhaps success brings its own adversity. Further Reading: Emotional Resilience in Trading
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When you take a look at a trader's journal, what do you typically see? Many traders use journals to document the mistakes they make, often venting about the problems they are having. In such cases the journals are little more than listings of problems that the trader has encountered. It's the rare journal that takes the next step and turns the identification of problems into the creation of concrete, practical goals. The greatest psychological mistake a trader can make is to stay problem focused. By devoting attention to problems only, traders reinforce the notion that they are beset with problems. It is important to address shortcomings in trading, to be sure, but if all you do is focus on problems, you miss out on the most important part of your development--all the things that you do right! Elite performance is not simply a function of minimizing our weaknesses. It is an outgrowth of our strengths. We become successful by leveraging our talents and skills, not just by making fewer mistakes.
A little while ago, I conducted a review of my winning and losing trades. The best predictor of whether one of my trades was successful surprised me: it was the length of time since I had placed my previous trade. When more time had elapsed between trades, it meant that I had waited for everything in my research to line up. Those tended to be the most profitable occasions. When I carried a pre-existing view to the next trade and did not wait for the view to emerge from the research, the trade was much more likely to fail. Patience was a key, but it was more than patience at work: I trade best when I truly understand what markets are doing. My strength, as both trader and psychologist, is the capacity to understand. I recently began a new blog for Forbes which will focus on specific psychological techniques for identifying and maximizing our strengths. A wealth of research in the field of positive psychology provides us with tools and techniques for leveraging what we do best. Addressing our mistakes and problems is great. We can equally learn from what we do well in markets. Who are we when we are trading well? What are the best practices that lead to our best trades?
When we reverse engineer our wins, we discover a blueprint for ongoing success. I think you'll find the new blog to be a useful toolkit for self-coaching.
* Great podcast insights from Abnormal Returns, including an interview with Howard Lindzon and a look at multidisciplinary thinking with Michael Mauboussin.
When psychologists listen to people in counseling, they not only process what is being said, but also the connections among the various topics. Themes connect the issues we face in life, cutting across relationships, work, and our emotional experience. To an untrained observer, it might seem as though a person is jumping all over the place when he talks about drawdowns in markets, arguments at home, and an ankle injury from running. The psychologist, however, finds common threads linking these. All represent frustrations, all represent real and feared losses, and all impact self esteem, motivation, and mood similarly. Instead of working on three different issues, a person in counseling learns to identify the theme connecting all of these and develops skills for dealing with that theme. Markets also reflect themes, as geopolitical, macroeconomic, and sentiment-related factors drive buying and selling decisions. Just as a therapist listens for shifts in themes in a client's talk, a savvy trader is sensitive to market themes and their waxing and waning. Friday was an interesting day in the market from that vantage point. We had strong economic data and interest rates rose significantly (top chart). The sector that had been leading market strength, utilities, sold off in sympathy with the rate rise. Stocks overall, which had been seeing strong buying interest on my measure of upticks vs. downticks (middle chart), saw significant downticking for the day, as large market participants persistently hit bids. Meanwhile, the market's larger picture of weakening breadth (bottom chart) remained intact. A random blip or a meaningful shift in theme? Expectations of economic strength and the pricing in of Fed hikes sooner rather than later strengthened the U.S. dollar on Friday, but did not benefit stocks. Should stocks and bonds move lower in concert, that would be quite an unwind of the risk parity trade that has worked for a while: the volatility-adjusted position of long bonds and long stocks. One day doesn't make a trend and one thematic shift doesn't necessarily reflect a significant change in a person's life. But when a psychologist perceives a dramatic shift, the ears perk up. Reading markets is not so different from reading people. Further Reading: Social Intelligence and Trading Skill .
We put thought into what we need to get done, but often don't reflect upon the ordering and organization of what we do. Relatively simple changes in our workflow can yield profound benefits in the effectiveness and efficiency of what we do. I recently spoke with a trader who conducted the lion's share of his market review immediately prior to the New York open after a lengthy commute into the city and after numerous conversations on the trading floor upon his arrival. By the time he got around to figuring out what he was doing for the day, he felt a mixture of distraction, fatigue, and time pressure--none of which helped him focus on market opportunity. His reduced concentration early in the day led to silly trading mistakes, which in turn built frustration. Quite simply, his workflow was not setting him up for success. Today's best practice is from reader Rahul Rijhwani who describes the organization of his trading workflow. Here is what he has observed:
"I analyze my stocks only after market hours. During market hours, the focus is only on execution. This way there is a lot of clarity since there is only one task at hand at any given point. Also, there is a sense of calm and clear thought process when analyzing and executing.
To explain the process briefly, when the markets are closed, I open charts in my watchlist, then analyze them and set alerts at important price points based on the trading strategy. Then I calculate the position size and note it in a diary. When the market is open the next day, when price comes close to the point where I have set an alert, there is a beep. I then open the chart, calculate risk/reward, and punch the order if the risk/reward is favorable."
The key takeaway here is that Rahul is using his workflow to separate the process of generating ideas from the process of following markets and executing trades. By preparing his trades in advance, down to the details of price level and sizing, he helps ensure that his trading is controlled and planned and not reactive to the situation of the moment. This enables him to stay clear headed without the need to resort to psychological techniques during the trading session.
Very often the organization of our time helps us stay mentally organized. If I need to be open-minded and creative at one point in the trading day, I will make sure that the preceding activities are not ones that are taxing and stressful. If I need to tackle stressful and detailed work, I will make sure that I do so at times when my concentration and willpower are at high levels. A good workflow can create a rhythm during the day between activities that require energy and those that give energy. Most of all, setting our workflow means that we control our work and it doesn't control us. That is a great psychological benefit. Further Reading: Managing Your Energy Level
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You know, sometimes I hear things and shake my head. Then I hear them again and roll my eyes. Finally, I keep hearing them and make a valiant effort to not throw up in my mouth. I mean, really, you don't want to be rude to people, but there's only so much one can endure when platitudes pose as wisdom. Take the virtuous advice that trading success hinges on "following your process." Please. WTF does that mean? Here's a process for you: I drink Turkish coffee every morning and then examine the coffee grounds at the bottom of the cup. If the grounds mostly settle at the top of the cup, it will be a bullish day in stocks and I buy at the open and sell the close. If the grounds settle at the bottom of the cup, it will be a bearish day in the market and I sell the open and cover at the close. If the grounds settle at the left side of the cup, it will be a quiet day and I'll sell volatility. If the grounds settle on the right side of the cup, volatility will expand and I will be a vol buyer. And if the grounds are evenly settled at the bottom of the cup, there's no edge for the day and I'll drink a second cup. Now that *is* a process. But does my trading success hinge on fidelity to my process? Of course not! That's because, in the language of psychometrics, the process is reliable but not valid. It is repeatable but random. Being process driven is necessary, but not sufficient. Before one waxes poetic about following a process, it helps to define a process worth following. Or let's take the platitude that one shouldn't try to predict markets but instead should listen to markets and follow their lead. I don't know what that means. Does it mean that you are supposed to naively extrapolate the last X bars on a chart and blindly assume that they will continue their pattern? Does it mean that you impose expectations of momentum and trend on every market regime? Does it mean that you utterly lack backtesting skills and are bravely turning that into a horse-whispering virtue? Whatever. So here's a great experiment that anyone can conduct. Define a trading system that takes the last X bars and extrapolates from them to the next X bars, buying the X+1 bar open when the extrapolation is positively skewed; selling the X+1 bar open when the extrapolation is negatively skewed; and standing aside when the extrapolation displays no directional bias. That way you'll always have a replicable process *and* you'll be following what the market is telling you. Just as a lark, I tried the experiment with historical data, buying SPX when the percentage of stocks above their five-day moving average was above 50% and selling SPX when the percentage of stocks above their five-day moving average was below 50%. The data were for SPX stocks specifically, going back to 2006, and the holding period was for the next five trading days. Buying strength gave an average five-day return of -.07%--a small loss. Selling weakness gave an average five-day return of -.44%, a considerable loss. The average five-day return over this period was a gain of +.15%. In other words, having a robust process and following the market's lead has ensured losses in both rising and falling market environments. Interesting: the track record of the received wisdom is so poor that it's promising. Further Reading:
Abnormal Returns recently posted a number of thought-provoking links regarding startups and entrepreneurship. One of the articles posted summarized the lessons learned by a Shark Tank winner. She noted something that I have also observed among friends who have started businesses: "Being an entrepreneur is a grind." The failure rate among startups is high. During the early phase of the business, the entrepreneur necessarily fills a number of roles, from research and development to production to sales. It takes an unusual dedication and conviction to pour oneself into an enterprise where success is far from assured. Many times we hear about trading as a business. Not so often do we consider trading as a startup. Each trader is an entrepreneur, seeking superior returns in a crowded business world. Every startup begins with three basics: 1) An idea - A new product or service that has the potential to deliver unique value and profitability;
2) A vision - A way of turning the idea into a living, breathing business; 3) A plan - A blueprint for pursuing the business, bringing on partners, and making the venture successful. It is the power of the vision and deep belief in the idea that fuels the effort needed to get a venture off the ground. It is the power of the plan that grounds the vision and attracts the right human and financial capital to the growing enterprise. So let's look at your trading as a business startup. Here are some questions you might expect from would-be venture capitalist investors: 1) What is the core idea behind your trading business? What makes you unique and distinctive? What will provide your edge in the marketplace? What evidence do you have that you truly offer value? 2) What vision animates your trading business? How are you turning your core ideas into sustainable and scalable processes? How are you making your vision sufficiently compelling that others would want to join your venture or invest in it? 3) What is your business plan? How are you acquiring the resources--information, teamwork, finances--needed to make the business a success? How are you ensuring that you are succeeding at each phase of the business, from researching new opportunities to managing risks to expanding your opportunity sets? Most important of all: Do you work like an entrepreneur? Do you find yourself consumed with the power of an idea and vision? Or is trading your hope for avoiding a life of work? There are those who fill jobs and those who pursue careers. Then there are those who follow a calling. Jobs and careers belong to us, but we belong to our callings. Further Reading: Proactive Personality and Entrepreneurial Success
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Still, I find divergences to be useful observations as a kind of heads up, a yellow caution light. If the broad market indexes are making new highs or new lows and a substantial proportion of shares are not participating, I want to be open to the hypothesis that the move reflects a handful of highly weighted shares within the indexes, not the broad market. This keeps me open to the possibility of reversal, combating any overconfidence bias I may have with respect to the recent market move.
Yesterday gave us a perfect example of the cautionary value of divergences. When we made fresh lows in SPX in the morning, my measure of selling programs showed considerable hitting of bids in my basket of highly liquid large cap names (top chart). These stocks were not only downticking, but doing so at the same moment, revealing an elevated level of basket executions of sell orders.
Despite this selling activity, the broad list of stocks (all listed U.S. shares) was showing reduced selling pressure (middle chart) as we made new lows. My measure of upticks vs. downticks across all stocks was showing considerably less selling pressure at yesterday's lows relative to the prior recent downturns. That was an indication that intense selling pressure was occurring in a smaller group of large cap names, but not across the broad market. Indeed, my cumulative measure of upticks vs. downticks among all listed shares was hitting new highs yesterday! (All data above from e-Signal). On the bottom chart (data from Barchart), we can see how this divergence played out with respect to stocks making fresh three-month lows. Although we touched price lows intraday yesterday, the number of shares listed on all exchanges did not expand the number of new lows made from the last few days. Again, there was intense selling pressure in the visible large cap group, but a lack of selling impact across the broad market. Keeping tabs on market strength and divergences, I find, helps keep me cognitively flexible. For someone like myself who was short the market going into the day, that flexibility proved to be quite useful. It is very easy to get caught up in the stock market and lose sight that it's actually a market of stocks. Looking at what the components are doing can be very useful in anticipating the movement of the broader market. Further Reading: Views on Breadth
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If markets were perfectly ordered and static, we could discover a trading edge and exploit it for all time by doing the same thing. Because markets are not static, doing the same thing ensures that we will eventually become dinosaurs. Adaptation--the ability to change in response to market environments--is essential to longevity in markets. Traders typically recognize the importance of learning and growing in their work. The need to focus on markets and the wealth of market-relevant information often means that we spend far more time managing positions than managing ourselves. Like a business that is executing well in the present but not preparing for the future, many traders convince themselves that following a routine makes them "process focused." Sadly, they lack a process for innovation and adaptation. So how can traders become better change agents? Here are three processes that can enhance fresh, creative thinking: 1) Process Old Information in New Ways: Write out your thinking in stream of consciousness fashion, not censoring or editing any of your thoughts. Let yourself jump from idea to idea without worrying about whether the connections make sense. If you aren't comfortable with writing, you can talk your stream of consciousness aloud into a recorder. Very often you'll discover new connections and associations that will lead to fresh ideas. Many times talking aloud or committing thoughts to writing helps us become aware of things we know but don't know that we know. It's a great way to bring intuitions to the surface, so that we can act upon them. 2) Process New Information: It is easy to fall victim to tunnel vision. Look at markets other than the ones you're trading: what story are they telling? Look at sectors within the stock market; look across different commodities and currency pairs. Very often we can pick up patterns once we survey the broad range of financial markets. The same principle applies by looking at time frames other than the ones we trade: what looks like a trend at one level of resolution could look quite different when we zoom out and examine the bigger picture. 3) Turn Learning Into a Social Process: I am continually impressed with the bright, creative, and talented traders I meet through the blog and across trading firms in my coaching. There are many, many people we can learn from and many who can benefit from interaction with us. Social media has made interactive learning more readily available than ever. By observing what others do well, we can create models for our future development. We can become better traders by becoming more creative traders, more able to spot opportunities. Many problems of trading psychology occur when our rate of change is slower than that of markets. The answer isn't simply to control our emotions; it's to expand the scope and flexibility of our thinking. Further Reading: Cultivating Emotional Creativity
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So let's take stock of the markets after the first month of the new year, making use of several worthwhile visualizations from the excellent FinViz site. Here are a few themes that pop out: 1) Increase in uncertainty - The rise in VIX has been outstanding. Volumes in stocks have picked up significantly, leading to much greater volatility. SPY daily volume averaged about 109 million shares in 2014. Thus far in 2015, we're averaging about 159 million shares. That rise represents the increased presence of longer time-frame participants acting on global macroeconomic shifts. The rise in gold also reflects investor uncertainty. With rates going to zero and lower around the world, the lack of yield from owning gold goes away as a reason to not be an owner. 2) U.S. dollar strength - With the exception of the Swiss currency (CHF), just about every major currency has been significantly weak with respect to the U.S. dollar. The top chart shows USD as one of the few winning groups on the month. The central bank moves toward easing--in Japan, China, Europe, Canada, and more--combined with talk of a normalization of U.S. rates and an end to QE have created a situation in which the dollar has been king for seven consecutive months. 3) U.S. fixed income strength - With rates around the world going to zero--and even negative--the seemingly paltry returns in the U.S. bond market suddenly become attractive. The uncertainty in stocks also contributes to a safe haven play in rates. Some of the best relative performers among stocks for a period of months have been higher yielding shares, such as utilities and consumer staples shares. In a world where safe guaranteed returns are going away, yield and carry become attractive. 4) General commodity weakness - It's not just crude oil; commodities have been weak across the board, from ags to base metals (copper) to a variety of energy products. The deflation concerns globally have not abated despite central bank actions; weak demand spawns weak commodity prices. The inability of many global stock markets to make new highs when SPX hit its peak this past December speaks to concerns regarding global recession. 5) U.S. stock weakness - This perhaps has been the greatest surprise. The U.S. was supposed to be an island of economic strength amidst the global weakness. With a strong dollar and good relative yield, why wouldn't international investors flock to U.S. equities? A look at the middle and bottom charts shows that growth stocks--consumer discretionary shares and technology names--have been beaten up lately. International companies that depend upon exports are doubly hurt by global recession and the surging dollar. The weakest sector for the month? It's financial shares, not the beaten up energy names. Check out banking names in Canada; a weakening economy combined with increasingly shaky energy loans has created real turmoil in that sector. The dynamics may not be so different in the U.S., as the headwinds from a rising dollar may be more than offsetting any benefits of low gasoline prices to consumers. Bottom line is that we're seeing substantial risk-off dynamics across markets and regions of the world. Stock market breadth has been weakening; volatility has been on the rise. Should stocks weaken significantly and energy sector related weakness and dollar headwinds threaten U.S. growth, we could hear a very different tune from the Fed than has been anticipated of late. Further Reading: The Weak Breadth in Stocks
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Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Teaching Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2018). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.
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