Wednesday, August 31, 2022

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



RADICAL RENEWAL - The new blog book on leading a fulfilling life

---

Most recent blog post - How to Trade With Discipline

Most recent Forbes post - Handicapping the Future of the Markets

Latest Podcasts:  

Trading Psychology and Market Psychology with Daily FX

Ego Trading and Spirituality with Talking TradingPart One, Part Two

Recent YouTube Video:  Six Characteristics of Successful Traders (with SMB Option Group)

Recent Podcast:  New Perspectives in Trading Psychology with John Sinclair and Positive Trends

Recent Podcast:  Tools and Techniques for Minding the Markets with Optimus Futures

Recent podcast:  The Psychology of Performance with SUNY Upstate HealthLink

Recent podcast:  Trading Psychology and Spirituality with BearBullTraders

Recent podcast:  Ego, Trading, and Spirituality with Alpha Mind

Recent webinar:  How to improve your learning curve as a trader (with Bookmap)

Trading, like any great performance field, is an arena in which our self-development is an essential part of honing our craft.  Welcome to TraderFeed, a blog site that now also serves as a repository for over 5000 original articles on trading psychology, trader performance, and trading methods.  Within the extent of my knowledge, this is the largest single source of trading psychology material in the world.

The links on this page will help you navigate the database of posts to find the information most relevant to your development.

My coaching work is limited to trading and investment firms, so I cannot provide online advice or coaching services to individual traders.  I do, however, welcome specific questions about the ideas in this blog.  You can email me at steenbab at aol dot com.  I'm also available via Twitter (@steenbab), where I link new posts and articles.

TRADERFEED TABLE OF CONTENTS











I wish you the best of luck in your development as a trader and in your personal evolution.  In the end, those are one and the same:  paths to becoming who we already are when we are at our best.

Brett
.

Monday, April 06, 2020

How To Trade With Discipline

Here are a few key trading psychology ideas:

*  It is impossible to trade with focus and discipline if we are in states of high emotional arousal.

*  It is impossible to trade with focus and discipline if we are in states of upset and distress.

*  It is impossible to trade with focus and discipline if we are in states of high distraction.

*  It is impossible to trade with focus and discipline if we are fatigued or burned out.

All the above tend to occur when we focus on profits and losses and become emotionally attached to those.  As the Radical Renewal book points out, what we become attached to owns us.  The more we *need* P/L, the more our profits and losses control us.

In every performance domain, developing performers have to focus on process and execution before they worry about winning or losing, doing well or poorly.  The concert pianist has to be focused on the music, not the audience; the golfer has to be focused on the mechanics of the swing; the pitcher has to focus on the batter, not the scoreboard.  

If we want to trade with discipline, we have to be fully focused on the present and doing the right things.  A process mindset doesn't look backward at recent profits and losses; a process mindset doesn't look forward at desired wins or feared losses.  A process mindset is here and now, with full focus.  This is why meditation can be so helpful to traders.  

Imagine being on a bomb squad, and you have to defuse a device that is set to go off in a matter of minutes.  You would calm yourself; you would focus yourself; you would take the time to see where the wires lead and how the bomb is constructed; you would figure out which wires to disconnect when; and then you would slowly, carefully disconnect each connection.  It's all a process.  It's all rule-based, where the rules have become so rehearsed and practiced that they become second nature.

That is how to trade with discipline.


Further Reading:

.

Saturday, April 04, 2020

Tracking Breadth Spreads In The Stock Market

In the recent post, I mentioned how traders who are successful in the current environment have been flexible in their approach to trading and focused on opportunity, not just risk.  Those traders are highly involved in markets, but still taking the time to review their trading, identify what is working and what is not, and research areas of fresh opportunity.  In the volatile environment, they are not just coping; they are innovating.  

Above is something fresh I've been looking at, which I call breadth spreads.  The chart represents the topping of the SPX from the beginning of December, 2019 through the February top.  The red line represents the percentage of stocks above their 100-day moving average in the Standard and Poor's 600 Index of small cap companies minus the percentage of stocks above their 100-day moving average in the Standard and Poor's 500 Index of large caps.  (Data from Index Indicators).   Notice the steadily weakening breadth spread as the large cap index made its all-time highs.  Well before the market tanked, small caps relative to large caps were selling off.  

This is something I'll be researching going forward.  Do breadth spreads of shorter-term moving averages precede shorter-term moves in the market?  Do breadth spreads of other indexes precede important market turning points?  This strikes me as a promising line of inquiry; I'll update findings on the blog.

Meanwhile, FWIW, we're seeing short-term negative breadth spreads show up between small and large cap indexes in the most recent market action.  Let's see how that plays out--

Note:  4/5/20 - I went back to January, 2015 (start of my dataset) and divided the breadth spread into quartiles.  When the spread was highest between the percentage of SP600 and SP500 stocks above their moving averages on a five-day basis (highest quartile), the next five days in SP600 averaged a gain of +.34% and the next five days in SP500 averaged a gain of +.40%.  When the spread was lowest on the five-day basis (lowest quartile), the next five days in SP600 and SP500 respectively were -.065% and -.037%.  

Further Reading:

Friday, April 03, 2020

Three Things I'm Seeing Among Currently Profitable Traders

I'm seeing lots of commonalities among traders who had a very profitable March during volatile markets and uncertain times.  Here are three of the most important:

1)  Relying on Others - I recently wrote about the importance of information flows in trading.  The successful traders are connected to carefully selected information sources and continually updating their views on what they are trading.  Lots of things have been moving quite a bit, and there has been constant news flow.  Traders well connected to peers they trust and respect are adapting quicker, and their teamwork helps sustain a positive attitude.

2)  Flexible, Flexible, Flexible - Yes, the successful traders may have bigger picture views, but they are trading actively and tactically with those in mind.  Almost to a person, the successful traders have reduced holding periods and traded selectively, where they see solid risk/reward.  As the SMB site notes, they have made a quick adaptation to the higher volatility environment, with specific adjustments each day.  They have focused their trading on what they know and do best, and they are actively minimizing distractions.

3)  Mindset - The successful traders view the current markets through the lens of opportunity; the not-so-successful traders are viewing markets through the lens of risk.  To be sure, the successful traders are doing a good job of risk management, partly because of point number two above.  But they approach the day with enthusiasm and recognize that they are living through historic times of opportunity.  This helps them deal with setbacks, because they know that other opportunities will be presenting themselves.

Active, interactive, engaged, constructive:  These are some of the qualities I'm seeing among traders who have been doing quite well in the recent market environment.

Further Reading:

.

Wednesday, April 01, 2020

Trading Process: Information Flow Versus Idea Flow

We often hear about the importance of following a trading process.  This is helpful, but not quite accurate.  Good trading is like good manufacturing; it consists of many processes.  The superior trader is a manager:  one who weaves distinct processes into a seamless whole.  Much of the work of improving our trading comes from examining our intellectual assembly lines and figuring out where we might be experiencing glitches.

One topic I've recently discussed with portfolio management teams is the distinction between information flow and idea flow.  Information flow is the real time processing of new inputs, whether those be breaking news, data releases, or conversations with knowledgeable peers.  Information flow also embraces real time data as to how various markets are moving and what buyers and sellers appear to be doing in those markets.  An important component of team success is high quality information flow from all members.  Having more eyes and ears on more things allows traders to expand their bandwidth and respond more quickly to shifting market conditions.  When teams fall down, it is often because of inadequate information flow or unfiltered flow.  Not all data qualify as information.

Separate from information flow is idea flow.  Trading ideas, as I've noted elsewhere, are the result of a reflective, creative process.  We assemble pieces of information into a larger picture that provides us with a broader perspective on risk/reward.  For example, I may notice that traders are lifting offers among consumer staples stocks but not consumer discretionary ones.  That information could lead me to examine the relative yields of those two groups and the earnings guidance that companies in the two groups are providing.  Out of these investigations, I could develop a thesis that investors are seeking safety, stability, and yield in an uncertain world of zero interest rates.  That could inform my stock picking and, indeed, could have implications for trades in other asset classes.

Observe how different these processes are.  Information flow benefits from broad, fast processing.  Idea flow benefits from deeper, slower reflection.  Good trading requires fast thinking, to use Kahneman's framework, and it requires deeper processing.  The information flow helps us manage positions in real time.  The idea flow provides the source of these ideas.  An important element of teamwork--whether it's individual traders connecting with peers online (I've been sitting in during the online team chats/meetings at SMB, for example) or actual portfolio management teams--is separately evaluating the quality of information flow and idea flow and making sure that we are never relying on stale thinking.

Further Reading:


.

Monday, March 30, 2020

Two Charts That Concern Me Right Now

I encourage readers to take a look at the most recent Forbes article.  I've identified several excellent sources of information for the evolving coronavirus/COVID-19 situation, and I've also linked to excellent sites and services that track quantitative patterns in the markets.  Both of these sources of information can help us navigate risk and reward going forward, so that we focus on what we *know* and don't get carried away with emotional headlines and politicized commentaries in the media.

OK, let's talk about the market.

It indeed appears that we have put in a momentum low in stocks.  On March 16th, across all exchanges, we registered 3421 stocks making fresh 3-month lows against only 11 highs.  (Data from Barchart.com).  When we made a closing price low on the 23rd, we saw 9 new highs against 1272 fresh lows.  That divergence preceded the rally of last week.  If we look only at the Standard and Poor's 500 Index, we see new 52-week highs outnumber new highs by an amazing 437 issues on March 12th.  (Data from Index Indicators).  That spread narrowed to 310 issues at the price low on the 23rd prior to the recent rally.  

That seeming momentum low in stocks has a number of traders looking for (successful) tests of the lows in future price action.  Such a scenario may well unfold, particularly if news regarding the virus (and successful therapeutics) turns positive.  A caveat to that view is that such bottoming processes can take a while.  When we made momentum lows in October, 2008, for example, it wasn't until March of 2009 that we saw price lows.  There is considerable variability from cycle to cycle in the timing between momentum lows and ultimate price lows, with months often intervening between the two.

There are a couple of factors in the current market that have me cautious regarding the future and the scenario of an imminent bottom.  The first is the course of the viral outbreak, as we can see below:

Here we see a chart of COVID-19 cases per day in the U.S. (Data from the COVID Tracking Project and YCharts).  Note that the curve is not flattening and, indeed, seems to be in its exponential rise.  Similarly, new cases in Italy and Spain have been on the increase.  It is not at all clear to me that the social distancing efforts to this point will stop this curve from getting quite scary, with exponential strains on the economy and the healthcare system.

The second chart tracks credit spreads between the highest and lowest rated investment-grade corporate bonds through March 26th.  (Data from Federal Reserve and YCharts).


Note that, even with the stock market rally last week (blue line), the yield spreads between lowest and highest rated investment grade bonds (red line) continued to rise.  Quite simply, the corporate fixed income market is continuing to warn us of possible defaults as part of business failures.  That is not what we want to be seeing in markets anticipating recovery.

The theme of the Forbes article is that we want to be as evidence-based as possible in handicapping the odds of future market moves.  The two charts above are among the variables I'll be tracking going forward to see if we're seeing light at the end of the bear market tunnel or just the headlights of an oncoming train.



Friday, March 27, 2020

A Great Trading Psychology Exercise For This Market

Here's a great use of your time this weekend:

Get sleep.  Get exercise.  Get sunshine.  Get connected with the people who matter to you.  Reach out to help and encourage those you care about.  Reach out to those you love and trust for help and encouragement.  Get your life--your well-being--in order.  

Then, and only then:

Review your trading from the start of this volatile downturn.  Calculate your P/L during this period.  Ask yourself the question:  Did you perform well given the opportunities (and risks) afforded by the market?

Find the one biggest mistake you've made during this period and cement a plan to identify in real time when it is occurring again, so that you can avoid going down that path.  One technique that I've found especially helpful in that regard is creating a simple checklist of all the things you do when you're not trading well, including mindset, market biases, chasing moves, etc.  Before placing any trade, you need to mentally review that checklist and make sure you can honestly check all the boxes to actively identify that you are *not* making those mistakes here and now.  That "to-don't" checklist is a tool to inject mindfulness and self-awareness in your decision-making and actions.

Then find the one thing you've done best during this period.  Find the kind of opportunity you've been best able to identify and exploit.  Examine your best trades and create a list of what you've done well on those.  Those "best practices" can feed a second, "to-do" checklist.  Just as you need to quickly, mindfully review your "to-don'ts", it's important to be aware that you are checking all the boxes of the "to-do's".  These are short checklists and should not take much time to review.  But, repeated over time, those reviews cement in your head what you need to be doing--and not doing--to succeed going forward.

I've studied past markets when we've had major, broad declines.  Those include the markets post 1929, the large bear markets of 1972-1974 and 1976-1982, as well as more recent declines that began in 2000 and 2007.  In the great, great majority of cases, even after there has been a momentum washout of declines, there has been continued volatility and sharp moves in both directions, often as part of bottoming processes.  The bottom line from those studies is that there have been great trading opportunities following those oversold times, not always great investing opportunities.  Finding the patterns that work in these volatile markets, and "playbooking" them, as Mike Bellafiore describes, is helpful in structuring your risk taking.  

We can't change the past, but we *can* learn from it.  The bulk of the opportunity set lies ahead of us.  Let's use the past to prepare for the future!

Further Reading:



.

Wednesday, March 25, 2020

Finding Unique Opportunity In The Current Market

Here's a helpful pattern for developing traders looking for edges in the current market.  It's a great way of looking underneath price charts to see what is actually happening in the marketplace.

The key idea is that time of day matters.  The execution desks of the largest trading firms are most active when they have the greatest liquidity.  Liquidity has been in short supply in recent markets, with thin order books.  That means that at the times of day when large traders most need to move size, they're forced to lift offers and hit bids.  That shows up as quite high or quite low readings in the NYSE TICK, the continuous measure of the number of stocks trading on upticks minus the number trading on downticks.  When we see a very positive distribution of TICK readings during early and late session--the two periods of greatest institutional activity--we know that they are actively buying, and we can use short-term pullbacks to ride those waves.

Above we see the one-minute values of TICK for yesterday's market in the top panel, with a pink line showing the zero level and a green line tracking a 10-period moving average.  (Data from Sierra Chart).  In the bottom panel, we see the SPY ETF.  Note the very positive distribution of TICK values during early morning, even when we have a pullback.  Those pullbacks were meaningful buying opportunities for strength through the day.  (Note how pullbacks in TICK in the first 45 minutes of trading couldn't push SPY to new lows and indeed how we stayed above the open.  We saw similar inability of pullbacks to generate new lows during the 11 AM hour).

By tracking TICK during key periods during the day, we can see if buying or selling is dominating and we can determine if buyers or sellers are becoming more aggressive from minute to minute.  In relatively illiquid markets, it's more difficult for participants to hide their intentions.  That becomes a subtle source of edge for savvy traders.

Further Reading:


.

Monday, March 23, 2020

The Most Powerful Psychological Strategy For Uncertain Times

There is a great deal going on right now that we cannot control:  the spread of the virus, the uncertainty of health, the uncertainty of markets.  This is the first time ever where traders calling me are spending more time discussing their personal challenges and the challenges of their families than discussing markets.

Here is the strategy I'm finding most effective for staying emotionally grounded and constructively focused:  Reaching out and helping others.

The underlying principle is this:  We cannot feel helpless if we're actively helping.  The antidote to uncertainty is to take on projects with certain rewards.

I recently went shopping at a department store and was surprised to find more of the things I needed on the shelves than I expected.  I asked the checkout clerk if I could quickly run to my car and get extra bags and she said of course.  She seemed quite upbeat and happy, which was nice to see.  When I came home to unpack my bags, I discovered to my surprise that she had slipped into my bag an extra four-pack of toilet paper.  It was a little thing, but it meant a lot--and I expressed my appreciation.

Similarly, I've noticed how traders are making more use of teamwork than ever before, particularly now that many are trading from home.  They are using the teams not just to share ideas through the day, but to actively help each other review performance, set goals, and stay on track with those goals.  It reminds me of the Navy SEALs and their ethic of leaving no one behind.  It's tough to feel sorry for ourselves when we're reaching out to others.  Who can you make sure isn't left behind:  in your circle of friends, in your family, in your neighborhood? 

In my own work, I've opened my calendar to early morning and evening calls, as well as calls on weekends.  I have resumed doing talks (online!) for trading communities and trading firms.  Social distance does not have to mean social isolation!  Some of the best helping I've been doing is simply letting people know what is working in this new environment:  what is working in trading and what is working in people's personal lives.  There's a lot to be said for just staying constructively focused!  

It's a psychological reality:  In giving, we become wealthy.  Who can you reach out to and create a buddy system to reach that next level of trading success?  Who might benefit from your ideas and what you're doing that is proving successful?  Stay safe, stay well, but stay engaged.  Challenges can overwhelm us, or they can bring out the best in us--

Further Reading:

.

Friday, March 20, 2020

Making the Most of These Challenging Times

Here are some important ideas I'm sharing with the traders I'm meeting with (in virtual mode!):

*  I see where California is going into stay at home mode, and I expect other states to follow.  This, on top of shortages at grocery stores and fears regarding health, is proving stressful for traders and their families.  This recent Forbes article outlines very specific strategies I'm seeing traders engage in to make the most of this period of "social distancing".  It especially addresses the issue of how to stay in a peak performance mindset even when we're dealing with unique stresses and changes in our work routines.

*  I am working with traders who are doing incredibly well in these volatile markets.  Videos from SMB are outlining some of what these traders are doing.  A key has been staying short-term and nimble, seeing opportunity on both sides of the market and not getting locked into opinions, and taking profits opportunistically.  Trading "move to move" and following the shifts in buying and selling on an intraday basis has been quite useful.

*  I am hopeful about efforts being made to develop a drug to control coronavirus symptoms and efforts to develop a vaccine.  The people I speak with who are far more on top of the science of the virus than I will ever be suggest that these efforts could take a while and, indeed, we're not doing enough to separate people and prevent mass viral spread.  The fight against the virus could be a longer-term warlike endeavor, with ongoing social impacts and impacts on markets.  Particularly if illness is widespread and helps further disrupt supply chains, being prepared by having medications, food, and supplies on hand will be super important.  This is an issue of prudent preparation, not "hoarding".  Please take the time to read this.

*  What to watch:  The excellent SentimenTrader service notes that the RSI for corporate bonds is at an all-time low.  (See HYG).  That means we're pricing in an increasing set of odds of defaults and possible bankruptcies.  Note that the same dynamic is hitting municipal bonds (MUB).  People I speak with are keeping their eyes on these markets for signs that things are improving or getting worse.

*  Twitter has been an amazing resource during this time, both for following markets and for following informed commentary and research on the virus.  I am retweeting articles and comments that I find particularly enlightening.  I do not watch television networks or follow politicized commentary.  Not helpful at this time.

Stay safe and stay together even when we're not physically together!!

Reading:

.