Friday, July 16, 2021

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER


Contact For Trading Firms and Media:  steenbab at aol dot com

My Twitter Feed:  @steenbab

RADICAL RENEWAL - Free blog book on trading, psychology, spirituality, and leading a fulfilling life

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The Three Minute Trading Coach Videos

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Forbes Articles:


My coaching work applies evidence-based psychological techniques (see my background and my book on the topic) to the improvement of productivity, quality of life, teamwork, leadership, hiring best practices, and creativity/idea generation.  Trading firms, teams, and portfolio managers interested in performance coaching and help with hiring processes can email me at steenbab at aol dot com.  Please note that my work is limited to trading and investment firms, so I cannot provide online advice or coaching services to individual, independent traders


FURTHER RESOURCES




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
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A Simple Strategy For Making Your Trading Better

 
Here is a simple scheme for making yourself better as a trader month by month:

1)  Review your trading for the month.  Keeping statistics on your trading is an excellent way of doing this.  How many winning and losing trades did you have?  What were the average sizes of your winning and losing trades?  How did your largest winning trades compare with your largest losers?  What ideas were responsible for the winning and losing trades?  

2)  Identify the one thing you did best during the month and identify the one thing from the month that you most need to improve.  That means comparing your best and worst trades and/or your best and worst trading days.

3)  In the spirit of FIGS--focused, intensive, goal setting--identify the one thing you'll do each day to do more of what you did best and correct the thing you did worst.  This has to be a daily plan that you will tackle each trading session and that will involve building on your strength and addressing your weakness.

4)  Keep a daily report card of how well you accomplished the two goals set for the week and how you can extend your progress the next day.

5)  Repeat this process, setting new goals, each month.

You are most likely to become consistent in your trading if you are consistent in working on your trading.  The consistency and intensity of your work on yourself will shape your rate of progression.

Further Resources:


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Saturday, July 10, 2021

Learning From Our Best Trades

 

Please note:  I will be discussing this topic in greater length during my Sunday evening podcast with Better System Trader live.  You can use the link to sign up; the session will be held on Sunday, July 11th at 8 PM ET / 7 PM Central.

Since the writing of Trading Psychology 2.0, I have emphasized the importance of studying our best trades to identify "best practices" that are unique to our success.  It is in combining these best practices that we become able to develop "best processes" that make us consistent in our performance.  It's a great example of how our trading psychology follows from our development as traders:  we become confident and consistent as we develop our talent the right ways.

Friday was one of my best days in the market in a while, so I thought I would share a few of the learning lessons reinforced by the day's profitability.

If you click on the chart above (screenshot from Sierra Chart), you can see how Friday morning's trade in the SPX (ES) futures evolved.  We went into the day's session considerably oversold on short and medium time frames, but in an uptrend on longer time frames.  For example, we closed on Thursday with fewer than 50% of SPX stocks closing above their 3, 5, 10, 20, and 50-day moving averages, but over 50% of stocks closing above their 200-day moving averages (data from IndexIndicators.com).  Over the last two years, that has occurred 19 times, with 15 of those occasions closing higher five days later for an average gain of 1.74%.  So we went into the session with possible upside edge.  Interestingly, a pattern I had posted earlier in the week also suggested a multiday  upside edge.  So there's the first best practice:

Best Practice #1:  Only go into a trade with a backtested edge and preferably more than one.

So, did I enter a long position at the close of trading on Thursday?  Not at all.  In the historical sample, there were a few instances of decent sized losing days.  The backtest provides a worthwhile idea, but I want to see the idea playing out before committing my hard-earned capital!  You can see from the above chart that we moved nicely higher in overnight trading, with transactions lifting offers (pink arrow).  That means buyers are aggressive.  With that price strength, we see the short-term moving average cross above the longer-term one on the Ehlers Adaptive Moving Average system (yellow arrow).  This confirms we have moved to an uptrend.  This leads us to a second best practice:

Best Practice #2:  Wait for a good trading idea to turn into a good trade by getting confirmation from price action.

So, did I enter a long position on the moving average crossover?  No, I didn't!  Why not?  It was between 2:00 AM and 2:30 AM in the morning and I was sleeping!  Did I get frustrated that I had missed a signal, where the market continued rising afterward?  Not at all.  The backtested edge was over a multiday period, so my default entry mode was to buy the first short-term retracement in the market.  That occurred a little before 6 AM ET (blue arrows).  I entered a first clip of risk on the retracement and then added a second clip on the subsequent rise.  The market was now going my way nicely and I set a stop where I had entered the first clip.  That provided very good reward relative to risk, leading us to the third best practice:

Best Practice #3:  Don't worry about catching highs or lows when you enter.  Focus instead on inflection points that provide superior risk/reward.  

As the stock market opened for the day on Friday, I noticed that advancing stocks were swamping losers by more than 5:1.  The NYSE TICK was skewed toward upticks and, during the first hour of trading, we never saw significant levels of downticks.  In short, buyers were solidly in control.  I knew from my prior research that such strong openings out of oversold conditions often lead to upside trend days, as many short-sellers are stopped out and buyers jump back in.  That gave me confidence to hold the position rather than take quick profits, setting up our fourth best practice.

Best Practice #4:  Adjust your position sizing and holding period to evolving price action.  A backtest and favorable price action will get you into a trade, but it's the subsequent price behavior that gets you to build your size and hold onto the trade.

Notice that I don't start the day looking for "setups".  If there's no solid edge, there's no trading.  And notice that I'm not concerned about "missing" or "chasing":  I'm following the edge in the trade and the evolving market action.  I don't get big in the trade until I see confirming evidence lining up.  Finally, note that I'm not simply generating ideas from chart patterns or "macro" stories that link a limited number of data points.  There's no guarantee that a pattern that has played out in the recent past will play out in the immediate future, but the alternative is to trade in ignorance of market history.  That doesn't strike me as a rational and promising alternative.

Once you've identified your best practices, they can form the basis for a checklist that guides your trading going forward.  Consistent profitability begins with a consistent process.  Correcting mistakes can help us limit the downside, but it's by maximizing our strengths that we find meaningful upside.

Further Resources:



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Friday, July 02, 2021

Asking Good Questions In Your Trading

 
In recent meetings with traders, I've heard a similar question:  When are stocks going to come down?  Those traders have been frustrated by the seeming steady march higher, as time and again, they have tried to sell "overbought" stocks and indexes.

When I hear the same question again and again, I've found it's usually the wrong question.

Here's an example of a good question, which I define as a question coming from a fresh, unexpected perspective:

"Last week, we saw a majority of SPX stocks trading below their 50-day moving averages, according to the Index Indicators site.  After such a correction, what has the market done when we've returned to a situation where over 50% of stocks are trading above their 50-day moving averages?"

Note why this is a good question:  It ignores what the chart looks like and instead defines correction as any period in which the majority of stocks trade below their moving average.  By that definition, a correction has already occurred, even though it looks as though we've simply moved higher.

Good questions often are grounded in what is not obvious.

Well, according to the backtesting function of Index Indicators (see the MarketCharts.com site for even more extensive backtesting), we've had 10 instances over the past two years in which stocks have traded below their 50-day moving averages and then crossed back above.  All 10 instances were profitable 10 days later, by an average of +3.16%.  Indeed, just these 10 instances accounted for well over half of all SPX gains over the two year period.

So far, it's been a good trade.

To be sure, 10 instances does not constitute proof, and one would not build an algorithmic trading system on such limited data.  But I'm not looking for proof or systems; I'm looking for promising hypotheses.  Once I have those and I notice that everything I look at intraday is confirming the hypothesis, I have an idea worth trading.  

Very often, when I have traded poorly, I have not grounded my trading in good questions.

There's no sense working on your "trading psychology" if you're looking at the same charts and trading the same way as everyone else.  Our edge comes from uniqueness of perception and analysis.  That's true in every human endeavor.


Further Reading:



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Friday, June 25, 2021

FIGS: Focused, Intensive Goal Setting

 
Many traders that I work with involve me in their performance reviews.  Sometimes they create weekly reviews, sometimes monthly or quarterly.  Invariably these reviews summarize what they did wrong over this period and how they could improve.  They set lots of goals, but then that's often the last I hear about those goals until the next review period!

There are three big problems with the goal-setting of many (and perhaps most) traders:

1)  Too Many Goals - By setting a large number of goals, traders have difficulties prioritizing the changes they want to make, and they find it difficult to give each of the goals proper attention.  As a result, they chronically feel as though they are falling short in achieving their goals and lose motivation.  Goals should move us forward, not discourage us!

2)  Vague Goals - A trader may set a goal of trading with greater discipline, so that they stop overtrading.  Great!  How are they going to do that?  How will they monitor performance to know that they're making progress?  A vague goal is only a good intention; it's not likely to energize or shape performance.  My experience is that vague goals get the least follow-through.

3)  Goals Lacking Vision - The best goals are tied to a vision of what is possible.  We want goals to bring out the best in us.  We want goals to excite and challenge us.  Many of the goals set by traders are prioritized to-do lists.  That turns the pursuit of goals into chores, robbing us of energy and enthusiasm.  If there's no emotion and excitement associated with our goals, we're unlikely to put forth our best efforts toward change.

In short, we don't see things as they are; we see them as *we* are.  Our moods and energy level help shape our perceptions and actions.  If we are overloaded with too many goals, vague goals, and goals not tied to an inspiring vision of the future, we are likely to lose our passion for markets and trading.  

Consider the radically different alternative of FIGS:  Focused, Intensive Goal Setting.  What if, at any given time, we worked on one goal and one goal only.  Suppose we worked on it every single day and made it the focus on each day's efforts.  And suppose we made it an emotionally intensive goal, where we actively rehearse and *feel* the consequences of not reaching the goal and the joy and benefits of making progress on the goal.  Suppose we grow--as people and as traders--by working one goal at a time in FIGS fashion, rather than by creating laundry lists of changes that are "shoulds" rather than "musts".

We see FIGS at work among people who work on their recovery from drug and alcohol dependence and addiction.  At some point, they "hit bottom" and make recovery their number one life priority.  They attend AA meetings every day, connect with a sponsor who helps them through rough patches, and work on their sobriety one day at a time.  What makes such change efforts powerful is the emotional commitment to reaching goals.  After someone has hit bottom, they *hate* their old habits and ways.  They never want to go back to the consequences they created for themselves and others.  Their goals are focused, but also intensive, because the goals aren't mere items on a list or in a journal.  The goals carry emotional intensity.

We don't change because we want to.  We change because we must:  we *need* to.  Without urgency, we don't sustain change efforts and simply relapse into old ways.  When goal setting is focused and intensive, we more readily create the conditions of urgency that help us see ourselves and others in new ways.  

FIGS starts with a simple question: What changes do you need to make?


Further Reading:




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Saturday, June 19, 2021

Finding Better Edges In Your Trading

 
I thought I would do something different with this blog and actually chronicle the development of new edges in my trading.  I'll post my successes and failures and learning lessons, with an eye toward trading psychology and also the psychology of the things I'm trading.

One lesson that I've learned from working with the traders at SMB Capital is that their success is as much about *what* they trade as *how* they trade.  Both are quite important, of course, but if one is trading directionally and the stock, index, or asset being traded simply isn't moving, there won't be a lot of opportunity.  During this recent period of "meme trading", I've also noticed that very high levels of movement are not necessarily very high opportunities for profit.  We don't just want things that move; we also need them to move in meaningful and predictable ways.

When we trade suboptimal trading vehicles, it has the same potential impact on our results as utilizing suboptimal trading methods.  Both lead to significant missed opportunities.

One tool that I will be employing in finding superior opportunity is the Market Charts site.  Long time readers know that I have made use of the Index Indicators site to identify promising breadth patterns in the overall market.  The Market Charts site is a much expanded version of Index Indicators, tracking more indicators, multiple indicators, and a variety of stocks and ETFs.  I respect Mo's work and so view this as a worthwhile platform to begin finding fresh sources of edge.  (Please note:  I have no commercial interest in these sites; as always, I only share resources that I have found to be useful and promising).

Please note the recent blog post on innovating in our trading.  An important theme from that post is that innovation begins by asking different and better questions.  I will be looking to the Market Charts platform to first generate better hypotheses and only then to come up with superior trade ideas.  For example, might it be possible to generate long/short trades and portfolios by finding related stocks that have greater and lesser edge?  By being long the stock with good upside edge and short the stock without such an edge and weighting the pair for relative volatility, one could make money whether the overall market goes up or down, as long as the edge plays out.  In other words, does the presence of a historical edge predict *relative* performance?  

Good trade ideas come from good questions.

Much more to come!

Brett


Further Resources:

Three Minute Trading Coach:  Drama Creates Trauma

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Monday, June 14, 2021

How To Innovate In Your Trading

 

Very little has been written in trading psychology about innovation.  And yet, wherever I've encountered traders and portfolio managers with longstanding track records of success, I've seen evidence of innovation.  The innovator is the one who asks really good questions, really original questions.  The innovator is the one who sees changes in market behavior and wants to figure out what that's all about and how to take advantage of it.  

When we become completely P/L focused, there's little bandwidth left for innovation.  Superior trading requires an absorption in markets; superior good idea generation requires getting away from screens and seeing a bigger picture.

On a recent trip to Nashville, I had plenty of time away from screens and started asking simple questions, but questions I hadn't asked before.  For instance, I wondered if the best predictors of what happens in a given equity market index (such as SPX) might come from stocks outside that index (such as Russell 2000) or subsets of that index (such as the Dow).  In other words, do certain groups of stocks tend to lead momentum moves, trending moves, or reversal moves in a given index?  Oddly enough, I had always looked for data generated by an index to anticipate moves in that index.  But what if that's just playing the same game as everyone else?

Early days and we'll see what the research brings, but it's promising so far.  For example, it turns out that strength in the average RSI of small cap stocks is strongly correlated with future short-term strength in the SPX, accounting for almost all of the gains in SPY for the past two years.  Who knew?

But the great psychological benefit of innovation is that it leads to curiosity and discovery and fascination.  It rekindles our interest in markets when we could otherwise be ground down by choppy trading conditions and lackluster P/L.  Finding a new edge feels like becoming a new trader all over again, with all the new enthusiasm and excitement.  Come to think of it, that's also what leads to keeping relationships new and that's what leads to keeping life fresh and interesting.  When we innovate, look at new things, try new things, and learn new things, we are reborn--and that *gives* us energy.

Further Reading:



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Wednesday, June 02, 2021

How We Sabotage Our Trading

 

Above you can see the floor of my office, where well over 30 books are in various stages of being read--simultaneously!  My technique for writing is to read and read and read different authors on a given topic and eventually something jumps out at me as an integrating idea.  It's really no different from looking at charts and market information from different time frames and suddenly picking up on a directional move in the making.  Analyzing, analyzing, analyzing: that takes focus.  The creativity comes from the synthesizing:  putting it together into a coherent picture.

One of the main topics of my reading is meditation.  It turns out that there are *many* different forms of meditation, many of which are quite unlike our common conception of the Eastern practice.  As I explain in the recent Forbes article, the most important function of meditation is to build focus and amplify our experience.  The problem is that the great majority of people who try meditation don't pursue it long enough to achieve that amplification.

The way in which we often sabotage our trading is through our automatic, negative thought patterns.  As the cognitive therapists emphasize, we typically learn negative habits of thinking, where automatic thoughts take over.  These can be self-critical thoughts, repetitive thoughts of being a victim, worry thoughts, etc.  What is not well appreciated is that such automatic thinking is meditation in reverse.  When we focus on our negative thoughts, we internalize negativity.  Ironically, we end up using our magnifying glass to accentuate the very thinking that sabotages us:  in trading, and in life.

We internalize what we focus on and that shapes who we become.  That can uplift us or it can sabotage us--

Further Reading:

Why We Fail To Reach Our Potential

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Friday, May 28, 2021

Three Steps To Avoid Trading On Tilt

 
I hear many traders early in their development wrestling with issues of emotional, reactive trading.  Here are three practical steps that can help traders avoid going on "tilt":

1)  Plan Your Losses - Big expectations lead to big frustrations.  Every trade should be accompanied by a very specific idea of what would tell you you're wrong and how much you're willing to lose on the trade.  It's when losses surprise us and become too large that they're likely to create disruptions in our mindset.  Your goal should be to lose well, in the right way.  Focusing only on how much you want/need to make sets up surprise and frustration.

2)  Take Breaks - After large gains and large losses, it's easy for P/L to get in our heads.  Always take a break after a large trade, clear your head, and assess the opportunity set with fresh eyes.  It is just as important to reset after big wins as big losses.  Both can lead to taking trades for the wrong reasons.  Quick meditation exercises to increase calm and focus can be *very* helpful.

3)  Keep Trading Size Moderate And Consistent - Too much size creates unusual P/L volatility and that leads to emotional volatility.  Your goal is to be consistently profitable and then grow your size while you retain your consistency.  If you *need* to be profitable, that creates undue performance pressure and emotional distraction.  Drama = distraction.  You want no drama in your trading.

The greatest edge of all in trading is self-awareness.  Frustration happens to us all.  The goal is not to trade without emotion, but to be so aware of our emotions that we know when to step back from the screens.

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Further Resources:

Three Minute Trading Coach:  Taking Breaks

Three Minute Trading Coach:  Taking Your Emotional Temperature

Three Minute Trading Coach:  Shifting Your Trading Psychology

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Sunday, May 23, 2021

Short-Term Trading With The NYSE TICK - Part Three

 
The first post in this series and the second post took a look at the NYSE TICK and its relationship to price action as a way of identifying:  a) whether buyers or sellers are dominating the market and b) the degree to which their buying or selling activity is actually able to move the market directionally.  A valuable short-term edge sets up when buyers or sellers cannot move the market meaningfully higher or lower and then become trapped, setting up a move in the opposite direction.  

If you click on the chart above, you'll see a different TICK statistic, the NQ TICK, which assesses buying and selling activity (upticks vs. downticks) for the NQ100 stocks.  (Friday, 5/21; chart from Sierra Chart).  The horizontal yellow line represents the zero level for the NQ TICK and the white line is a short-term moving average of the one-minute TICK values.  At the bottom of the chart, we see the QQQ ETF.  Notice the blue arrows showing areas where there is net buying among the NQ stocks that cannot move price higher.  These become candidates for selling, as buyers are trapped and have to exit their positions.  These same patterns also show up for the TICK covering the Russell 2000 stocks.

Recall that the TICK measures the short-term psychology of market participants.  A different source of edge emerges when we place the different TICK measures next to one another.  We can see if there is uniform strength or weakness across the SPX, NQ, and Russell stocks.  If so, we have a nice tell for a trending market.  Conversely, if we see that one TICK measure is noticeably stronger or weaker than the others, we have a great tell for sector rotation.  And suppose we get a significant expansion or contraction of TICK extremes across the various measures.  That's a sensitive tell for changes in market participation, which often leads to changing market conditions.

There is a world of valuable information available to traders beyond simple barcharts, trendlines, and support/resistance levels.  There is little value focusing on trading psychology if you don't have a trading edge.  Many trading edges come from understanding the psychology of the marketplace itself.


Further Reading:


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Wednesday, May 19, 2021

Short-Term Trading With The NYSE TICK - Part Two

 
In the first post in this series, we took a look at the NYSE TICK and how it measures the moment to moment sentiment in the overall market.  We also took a look at a pattern with edge, where buying pressure in the market cannot take prices higher.  Eventually, those buyers are forced out of their positions when sellers come in and that takes the market lower.  That pattern played out nicely in yesterday afternoon's market, which we see depicted above.  My cycle work was looking toppy and I tried to enter short positions in the market three times in the morning only to get stopped out with small losses.  Then I saw the TICK pattern play out in the afternoon and left the short position to run, more than making up for the losses, particularly given the overnight action.  One takeaway is that our best trades occur when the longer time frame picture and the shorter term market behavior line up.  It pays to be patient and wait for that alignment.

In the chart above, the yellow horizontal line represents the zero TICK level and the blue arrows show where net buying (where the moving average line of TICK is above zero) cannot produce price highs.  The longer that pattern plays out, on average, the more longs are trapped and end up needing to cover, creating a meaningful move to the downside, which we see play out with the very negative TICK readings late in the afternoon.  A good idea doesn't become a good trade unless we see traders trapped going the wrong way and needing to exit positions.

In the third post in this series, we'll look at the TICK in a different configuration and how it can provide upside edge.

Further Reading:


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