Sunday, August 19, 2007

The Mindset of a Winning Trader and Other Ideas to Start the Week

* How a Winner Thinks - I'm sure you remember Trader C from the trading coach project that I posted to the blog. Well, he updated me today on his performance. Here's the opening to his email:

Just wanted to give you an update of the week. I attached my updated spreadsheet in which I have now incorporated all my e mini data for the year. I hit new equity highs again and I'm having a decent month, however this week was extremely tough for me as I think it was for everyone. Even though I have made new p and l highs, I am not too happy with my performance as of late.

That opening spoke volumes to me. Here we've had some of our most volatile and challenging trading of late and he's hitting new equity highs--and he's still looking to work on his game. Instead of becoming overconfident, he's keeping himself focused on the process of trading. That's a quality I've seen time and again, but only among very successful traders.

* Trying to Make a Bottom - On Friday, we had our first positive daily NYSE TICK reading in seven sessions, and it was the strongest reading since the decline began. A chart of the cumulative NYSE TICK is displayed on the Weblog, along with an update of the 20 day new highs/lows and the Cumulative Demand/Supply Index. I will be watching closely this week to see if we can sustain buying interest, as manifested in a positive TICK distribution. When markets bottom from very oversold conditions, we tend to see sustained high TICK readings over multiple days, indicating a broad-based perception among institutions that valuations have become attractive. Friday was a start, but it's the follow through that's key--as we saw after the strong rise (and poor subsequent follow through) on 8/8.

* Who Controls the Stock Market? - In case you've wondered why I make such a big deal out of assessing what the institutions are doing, take a look at the facts of life laid out in stark detail by BZB Trader. Look at how much volume is attributable to the retail trader and how much to program trading (both index arb and other program trade). When you consider the high correlation between volume and volatility, you can see what makes the market move: participation by institutional traders (banks, hedge funds, large locals, mutual funds, etc). Great reality check from BZB; thanks.

* Who is Bullish and Who is Bearish? - Great overview of what smart and dumb money have been doing of late from Trader's Narrative. Note the panicky pulling of money out of the market among fund investors and inflows into bills and bonds. Important tell.

* Perspectives on the Market Turbulence - Some excellent links once again offered from Abnormal Returns, including questions about the Fed's willingness to reduce the fed funds rate.

* Transaction Costs Matter - Here's a great research summary from CXO Advisory that looks at momentum trading strategies and how they're impacted by the cost of transactions.

* Interesting Brokerage Concept - FOLIOfn enables investors to buy and sell portfolios of stocks for monthly membership fees that cover the costs of defined levels of activity for one or more portfolios. They offer "ready-to-go", predefined portfolios, or investors can create their own, including fixed income portfolios.

Lots of good stuff in the blogosphere. I'll have more links shortly!