Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - Making Sense of the Market's Split Personality

Most recent Forbes post - Could the Stock Market Crash?  Lessons From Market History

Most recent podcast:  Trading Psychology Perspectives with J.C. Parets

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 nearly 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 services to individual traders.  I do, however, welcome questions about the ideas in this blog.  You can email me at the address on my bio and contact page.  I'm also available via Twitter (@steenbab), where I'll continue to link new posts and articles.

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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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Sunday, January 20, 2019

Making Sense of the Market's Split Personality

December was pretty much straight down in the stock market, with accompanying weakness in other assets, such as oil and high yield bonds.  January has been pretty much straight up, with reversals in all those asset classes.  How can we make sense of this "schizophrenic" market behavior?

An excellent blog post from David Moenning on the NAAIM site offers worthwhile perspective.  When Fed Chair Powell indicated continued shrinkage of the balance sheet and the possibility of future rate hikes, the market sold off hard that very afternoon and didn't look back.  The weakness was broad:  on December 24th, we registered 50 stocks making fresh one-month highs and 3158 hitting new one-month lows.  On that day, among the SPX stocks, we saw fewer than 5% of all shares trading above their 3, 5, 10, 20, 50, and 100-day moving averages.

In other words, pretty much everything was down.

Fast forward to Friday's close, January 18th.  Over 90% of SPX shares are trading above their 3, 5, 10, and 20-day moving averages.  A total of 1916 stocks across all exchanges registered fresh one-month highs against 67 new one-month lows.

In other words, pretty much everything is up.

Moenning, in his post, traces this reversal to the Fed's walking back their earlier "hawkishness", as they indicated flexibility in navigating the rate and balance sheet paths going forward.  Their hawkish stance was a game changer for institutional investors and led to a broad risk off.  Their flexible stance was an equal game changer and led to broad risk on.

What does this tell us?  Several things, I believe:

1)  Any effort to foretell the market's path with technical indicators, chart patterns, and wave structures is inherently limited in value.  We cannot operate with a crystal ball when game-changing events are occurring in real time.  Flexibility in managing money is just as important as "conviction".

2)  Monetary policy is a major driver of asset pricing.  This is the message from Ray Dalio's recent work.  The Fed is walking a narrow bridge in normalizing rates and not adding fuel to a strong economy versus pulling away the punch bowl and risking weakness.  The Fed has told us they don't want to fall off either side of the bridge, so we can expect balancing messaging at market extremes, as Chairman Powell and Co. seek Dalio's "beautiful deleveraging".

3)   Investors are behaving as a herd.  For over 90% of stocks to be above their 20-day moving averages, all sectors have to be bought.  Ditto when fewer than 5% were above their moving averages.  Everyone is singing from the same hymnbook.  This makes short-term breadth measures and short-term measures of upticks versus downticks handy in trading with the market's momentum.  It also means that fighting the herd is a losing proposition.

Of course, this, too, shall pass.  At some point valuations will matter and we'll see diverging behavior among stocks and assets.  So far, however, it appears that momentum is the upcoming starting pitcher.

Further Reading:


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Wednesday, January 16, 2019

Awakening Your Talent

I'll be writing much more on this topic in my upcoming book on trading and spirituality.  Here is an important perspective:

When we access our strengths--what we do best--we gain access to what we call the "zone" or the flow state.  In that state, we tap into parts of ourselves that are relatively submerged during normal, day-to-day life.  

In a very important sense, when we are in sync with our talents, we become different people.  I couldn't agree more with Market Wizard Ed Seykota when he pointed out that great traders have absorbed their talent:  "They don't have the talent--the talent has them."

Good traders have talent--and skill and motivation and discipline.  But great is a different beast.  It's when the talent drives everything and the performer becomes a channel for his or her strengths.  When the talents have us, we are transformed.  Success depends upon our ability to effect that transformation: to go from the good to the great.

The key is structuring our work so that we are continually tapping into our greatest strengths and what is most meaningful to us.  

We recently got to see a good example of this when Courtney Hadwin, a painfully shy and awkward 13-year old singer who placed sixth in America's Got Talent returned at age 14, wrote her own song, and competed in the Champions show.  She explains, "When I sing, I become a different person."  She "gets into the music", moves her body, and accesses wholly different aspects of herself.

If you're trading in your normal state of consciousness, you have not awakened your talent.  That doesn't win singing competitions and it doesn't win in markets.

Further Reading:


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Sunday, January 13, 2019

Some Things To Look For In This Market Going Forward

In my recent Forbes article reviewing historical patterns of bear markets, I noted that it was common to see extended bounces even within the context of longer-term declines.  Indeed, we could be seeing just such a bounce in recent markets, which have taken stocks, oil, and high yield bonds meaningfully higher following significant declines.  Speaking with investors and traders, I observe a high level of uncertainty and many questions.  Is the decline over?  Are we beginning a new bull market?  Will we retest the lows?  

Thanks to a savvy trader for pointing out this perspective from The Fat Pitch, who evaluates historical evidence regarding bounces from highly oversold conditions.  See also this useful preview of the coming week from Dash of Insight. In my own trading and investment, I have found it useful to track the relative performance of ETFs as a way of detecting market themes and the unfolding of strength and weakness.  Here are a few ETFs that I view in this relative manner.  Each of the charts is indexed to 100 as of the start of January, 2016 and each looks at the ETF versus SPY:

*  EFA - Here we're looking at stocks outside the U.S., including Europe, the Far East, and Austral-Asia.  Note the ongoing weakness of EFA versus SPY.  Many of the market vulnerability themes (disarray in the E.U.; concern over Italy and debt; concern over China and trade wars) stem from overseas.  Watching the relative performance of EFA helps me walk forward, day by day, to see if those concerns are growing or waning.

  *  HYG - This tracks high yield bonds, which have been weak for a while, but which rallied strongly on the Fed chair's recent reassurances regarding the pace of shrinking the balance sheet.  When high yield bonds decline in price, their yields rise.  That is not necessarily a good thing, as it can mean that the market is pricing in growing odds of default.  When we see high quality bonds (AGG, for example) outperform high yield bonds, it's a sign that smart bond investors perceive risks and seek safety.  Watching the relative performance of HYG is one way of tracking their sentiment going forward.

*  XLF - This familiar ETF tracks the performance of financial stocks within the SPX universe.  In a stable and growing economy, banks should perform well and other financial firms should benefit from loan activity and loan demand.  If we encounter threats to the financial system, such as we saw in 2007-2008 with the housing crisis, then banking and financial stocks should show particular vulnerability relative to the overall stock market.  Lately we've seen relative weakness from the financial sector and a so-so bounce.  I remain concerned about the European banks, which have been unusually weak:  DB and CS are examples.

*  DBC - This ETF tracks commodities and is sensitive to oil prices, which were quite weak and which have rallied nicely in recent sessions.  In a growing global economy, rising production and consumption and increased building lead to an increased appetite for many commodities.  Conversely, economies in recession will tend to consume less and that can lead to declining commodity prices.  Oil and industrial metals are especially valuable to follow in this regard.

Note that overseas equities, high yield bonds, financial stocks, and commodities are all below their 2017 levels in relative terms.  Should we see economic weakness not only overseas but in the U.S. as well, these measures could weaken further.  Conversely, if we retest lows and these measures hold up well in relative terms, I will be open to a more benign thesis.  The key is staying open-minded and letting the evidence speak for itself.  We can't be open to possibilities--and profit from them--if we can't tolerate degrees of market uncertainty.

Further Reading:


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Wednesday, January 09, 2019

How to Make Improvements in Your 2019 Trading

There are several ways that we can make improvements in our trading:

1)  Become a better idea generator; become better at spotting opportunity;

2)  Become a better trader/portfolio manager; become better at implementing ideas as favorable risk/reward opportunities and constructing portfolios of trades;

3)  Become more consistent in drawing upon best practices; become more grounded in personal and professional processes that keep you in peak performance mode;

4)  Become more consistent in recognizing and intercepting your worst practices; become more mindful of triggers and pitfalls that set you up for your worst performances.

In working on any one or all of these, it is important that the efforts are daily.  We internalize what we do.  The idea is to start our changes with motivation, but continue them with positive habits.

Tomorrow (Thursday, Jan. 10th, 4:30 PM EST), Mike Bellafiore and I will join the good folks at Futures.io to present a free webinar on how you can implement these four areas of improvement in your trading.  We are working with developing traders who are making meaningful strides in their trading, so we see what is and isn't working in real time.  Our hope is to leave attendees with specific ideas and strategies that they can use to move their trading forward in 2019.  

Here is the link for webinar registration; we look forward to seeing you there!

Brett
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Monday, January 07, 2019

The Two Ingredients of Trading Success

There are two necessary ingredients of trading success and it sometimes seems as though they are at odds with one another:  prudence and aggressiveness.

Prudence is all about staying in the game with proper risk management, position sizing, and selectivity of trading.

Aggressiveness is all about making the most of the game with proper risk taking, position sizing, and assertiveness of trading.

Depending upon the frequency of your trading, it is good to have a loss limit to constrain the downside each day, week, and/or month.  If that loss limit is set prudently, it will keep you in the game (psychologically and financially) during normal, expectable periods of drawdown.  

Less well appreciated is that the daily/weekly/monthly loss limits should also serve as benchmarks for your profitability.  If a trader has a loss limit of X, he or she should make X or more during that period of time.  Thus, for a developing trader who has a $1000 daily loss limit, we should see in the span of a month occasional daily gains of $1000 or more.  It is that ability to make the daily limit and not lose it too often that provides good risk-adjusted returns:  the ability to make a good amount of money per unit of risk taken.

Many traders lack prudence and trade aggressively, so that their big losing days outnumber their big winning ones.  Eventually this leads to trading stress and possible blow up of the account.

Many other traders trade with prudence but not aggressively, so that they don't have many large losing days and they also don't have many large winning days.  Implicitly, they're trading to not lose.  Eventually this leads to a lot of wasted effort and frustration.

Trading with prudence and aggressiveness means that--during the life of the trade and during preparation for the day/week--you must engage in prudent self-talk and planning and you must engage in aggressive self-talk and planning.  In practice this might mean mentally rehearsing where your trade is wrong and planning a stop out (prudence) and also mentally rehearsing what tells you your trade is right and planning an add to the position.  In practice it might also mean using the information from a losing trade to place an even larger trade in the opposite direction.

The point here is that your planning and your self-talk have to embrace both prudence and aggressiveness if your trading is to integrate these elements.  Many performance fields--from being a fighter pilot to being a chess champion to being a race car driver to being a football quarterback--require the combination of prudence and aggressiveness.  Your trading statistics will tell you how well you are doing with both of these vital trading ingredients.

Further Reading:


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Friday, January 04, 2019

Why Trading With Confidence Doesn't Work

One of the interesting dynamics I've observed during this recent period of market volatility is that many traders see large moves and thus want to make *the* big trade.  They develop a market view and they trade that view doggedly, often ignoring actual price behavior.  

What makes this worse is that it masquerades as "confidence" and "conviction".  In reality, it is ego.  It is us saying we know what the market we do and then digging in and looking for opportunities to express our view, so that we can be right.  The need to be right can blind us to evidence that goes against our ideas--and it can especially blind us to opportunities on the other side of the trade.

We indeed see what we're prepared to see, which is why we should prepare ourselves for a multiplicity of scenarios.  Once we decide we *know* which scenario will unfold, we're no longer prepared to see what could unfold.  And that leads to losses and poor trading decisions.  Feeling strongly about a view is as much a risk factor as a trading virtue.

Further Reading:


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Wednesday, January 02, 2019

Creating New and Better Habits for the New Year

Recently, Mike Bellafiore at SMB Capital has been emphasizing the idea of positive habit formation with his traders.  It's a great focus for the new year:  developing the patterns of thought and behavior that help us achieve our goals.  Here's an excellent video from James Clear, based on his new book, Atomic Habits.  An important point made by the video is that we can transform our experience of ourselves one small behavior at a time, as we internalize whatever it is that we do.  Of course, that can also work in reverse:  when we fall into bad habits, we can internalize the sense of being lazy, unproductive, undisciplined, etc.

Here's an interesting video from Tony Robbins that connects changes in our behavior to changes in our emotional and physical states.  The implication is that we don't have to repeat the common pattern of making new year's resolutions, only to see them fall by the wayside.  We can use our emotional and physical states to trigger the right behaviors and we can change our behaviors to form new and powerful habit patterns.

In the book that I am currently writing, I describe how the great spiritual traditions of the world provide us with powerful tools for changing our states and accessing our strengths.  This has important implications for traders:  the great trades come from the soul, not the ego.  In developing ourselves spiritually, we can find greater success in the material world.  This is because we move beyond ego-based motivations and reactions and more consistently access who we truly are.  

In short, we will not transform our trading by staring at screens, hanging on each tick of profit or loss.  We will not transform our trading by pushing, pushing, pushing to get bigger, bigger, bigger in our trades.  Nor will we transform our trading by focusing on every move that we don't monetize.

Spirituality, too, can become a habit.  Lots of good things can happen when our best practices and greatest strengths become our consistent processes.

Further Reading:

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Sunday, December 30, 2018

Navigating Turmoil and Opportunity in Markets

In life we find that periods of turmoil are often the periods of greatest growth and development.  Psychologically, turmoil shakes us up and challenges our assumptions.  That opens us to new experiences and major life changes.  My marriage (going on 35 years strong) came after a period of personal and career turmoil; those taught me what I needed in life.  Similarly, it was the sting of losses I took in markets in the early 1980s that led me to re-evaluate my trading and take a more promising and profitable quantitative direction.  From a spiritual perspective, our task is to find the opportunity in turmoil.

In financial markets, one manifestation of turmoil is volatility.  When we look historically, periods of high volatility have generally corresponded to longer-term opportunity for investors.  The hard part is weathering short-term gyrations in order to participate in that bigger picture.  Secular bear markets (and I am open to the thesis that we may have entered into one in the stock market; see this debt-cycle analysis from Ray Dalio) can last quite a while:  consider how long it took for the market to return to its 1929 and 1972 peaks, for example.  For that reason, the bulk of our family capital is tied up in safe fixed income instruments that can provide a 3+% annual yield during a period that could prove disinflationary and not too friendly to risk asset prices.

Still, it would be foolish to hide under the bed covers and ignore the possible opportunities that can arise from the recent period of volatility.  One site that does a great job of separating signal from noise is A Dash of Insight, which has an excellent post looking at the year ahead.  Jeff Miller makes the important point that today's turmoil provides an opportunity to invest in tomorrow's themes and strong companies; see his list of "timely ideas".  

Yet another valuable resource is the new book The Lifecycle Trade from Boboch; Donnelly; Krull; and Daill.  The authors study IPOs and super growth stocks to identify their common trajectories and ways in which traders and investors can participate in their growth.  The idea is that today's turmoil fertilizes the soil of growth for a new generation of market leaders and promising technologies.  Stocks and industries that maintain their upward paths even during bear market times are candidates for tomorrow's large opportunities.

So that is our challenge during periods of turmoil.  To win the game, we have to stay in the game.  That requires prudence.  But to truly win, we have to use turmoil to find opportunity.  That requires optimism, resilience, and vision.  A solid business plan addresses threats and opportunities...we may be entering a period replete with both.

Further Reading:


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Friday, December 28, 2018

Investing In Your Trading

Margie and I have adopted another rescue cat, so now we're back to four after Mali passed away last year at the ripe old age of 17.  Bringing in a new one requires considerable time and patience.  We start off with the new cat in his own bedroom, with the two of us taking turns sleeping with him, playing with him, feeding him, etc.  Eventually he learns to feel safe and comfortable with us and we start the bonding process.  Gradually we introduce the new one to the other cats and monitor their interactions closely.  By playing with all of them in an open area, we create a non-threatening environment.  As the cats bond, it becomes possible to play with them together.  Just last night, the new boy, Aries, slept in the crook of my arm while Mia slept on top of me.  To put it mildly, I got little sleep!  But there was a lot of purring and it was a big step forward in the bonding of those cats.

The big takeaway is that relationships succeed when we approach them as investments, not as trades.  It is when we focus on short term returns that we fail to put in the time to cultivate depth and cement a future.  As a psychologist, I've spoken with more unhappy couples than I care to count.  The common feature is that each member of the couple is focused on what they are not getting out of the relationship.  No one is losing any sleep building long-term bonds.

So it is with trading.  If we approach our trading as a trade, then it's all about the next trade and the most recent P/L.  Yes, we might keep a perfunctory journal regarding the day's activities, but is that really investing in the future of our trading?  As I'm writing, we've been seeing VIX levels in the stock market in the 30 area, much higher than we saw months ago.  To illustrate the difference, consider that for the month of August, we saw roughly 1000 bars of price action in the ES futures, where each bar represents 500 price changes.  In December thus far, we've had almost 3000 bars.  Each bar averaged a range of .11% in August and almost twice that in December.  In short, we're seeing much more activity, much more volatility:  markets doing a lot more per unit of time.  That takes every bit as much adaptation as bringing a new animal into the home!

Some traders I know step back and make those adaptations.  They are investing in their trading future by learning how to trade different market conditions.  Other traders forge ahead, doing the same things as they've always done, gunning for short-term returns.  They may make money, they may lose money, but they surely don't grow their business.

As we come to the close of the calendar year, it's a good time to reflect on the investments you're making--and need to make--in your trading.  How is December going to make you a better trader in 2019?

Further Reading:


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