Commodities Gone Wild

The pictures tell more than a thousand words, thanks to the excellent long-term perspectives from Decision Point. I have to hand it to Carl Swenlin: he's maintained a premium site for a number of years, with consistent improvements and unique features. It's one of the subscription services that I gladly pay for year over year.

You can see from the top chart that the U.S. dollar broke long term support and continues to head lower. Meanwhile, note the parabolic moves in gold and commodities overall. One can only surmise that the Fed is so concerned about the banking system and economic collapse that it will do whatever it takes to provide economic stimulus. So far that's not exactly inspiring the stock market with confidence--and it's not lifting financial issues, which are getting close to January lows.

With Treasury rates plummeting--the 2 year rate closed at 1.65%, down from over 5% last June--it's difficult to see what will entice investors to hold U.S. dollars. And that, so far, is creating panic buying among commodity traders and a buyer's strike among equity participants.
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A Bit of Trading Perspective at the End of the Week

* Hard Jobs - I want to thank readers for their comments on the recent post concerning trading as one of the most difficult occupations. Reader Bryan, however, offers a worthwhile perspective. As difficult as trading might be, surely it is more challenging to be an educator or health care worker in an impoverished environment. And surely it is more difficult to live in a society that does not allow private property and where no one is free to voice their views on politics, economics, and world trends: where the entire concept of owning and trading assets is foreign. We are challenged as traders, but make no mistake about it: we are blessed to live in a time when a greater percentage of the world than ever is free to own, trade, and succeed financially.

* Very Promising Tool - The Newsflashr site is an excellent way to track and pull out news headlines. You see the hottest headlines on the home page, and a link cloud displays the most popular news topics. A bar at the top of the page enables searches for specific news, such as business, politics, and sports. Sweet.

* Frustration - I concur with the frustration voiced by Trader Mike in his recent post: the choppiness of trade both day to day and intraday has been wreaking havoc with many traders. I talked with a very good trader yesterday who has experienced considerable challenges trading patterns that aren't following through. I'm finding reversal trades to be the most successful, fading rallies that cannot lift the majority of stocks to new highs and vice versa. A good example occurred yesterday when we were able to get marginal highs in NQ during the AM but not elsewhere. (See Brian's worthwhile observation on QQQQ, focusing not so much on breakout as followthrough; excellent post.) I'm also seeing where trading small and holding through the chop for larger moves is working well, per my recent post.

* Learning From Example - I see Chris Perruna has linked an interview with the Trader Interviews service. I like the interview concept as a way of learning from example; Market Wizards was certainly formative in my own development. Here are interviews conducted by Dave of StockTickr.

* Good Reading - More fine links from Abnormal Returns, including a look at how analyst support is a contrary indicator and the message housing is providing re: recession. See also views from Bill Gross, Jim Rogers, and much more in Kirk's recent links. Excellent post here from The Big Picture questioning earnings forecasts.
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Why Trading Might Be the Most Difficult Job in the World

Reader and trader Don Chase emailed me with a perceptive observation, noting his belief that trading might just be the most difficult job in the world. He asks:

How many guys do you know who can accept being wrong?

How many guys do you know who can be wrong and lose money?

How many guys do you know who can be wrong. lose money and not feel bad?

How many guys do you know who can be wrong, lose money, not feel bad and reverse their position?

How many guys do you know who can be wrong, lose money, not feel bad, and reverse their position quickly?

Don's point is that trading requires an unusual combination of emotional resilience (the ability to tolerate being wrong) and mental flexibility (the ability to use losses as information and quickly change one's position in the markets).

Many people have a need to be right. That makes it difficult to quickly accept losses, and it makes it especially difficult to flip one's views. The best traders don't have a need to be right, and in fact they readily admit that there's many times they're wrong.

There's a different reason why trading might be one of the world's most difficult occupations: the rules of the game are always changing. In most performance activities, from sports to chess, the rules don't change from year to year. Market patterns, however, are continually shifting: trends change, volatility changes, and historical patterns that worked at one time suddenly fail during the next time period (a phenomenon that has recently tripped up several quant funds).

Because markets are ever-changing, success is never assured. Indeed, it's not at all unusual for very successful traders to re-enter a learning curve when market conditions change radically. It takes a very secure person to be able to accept those returns to the learning curve, and it takes a highly conscientious person to keep losses down when market patterns undergo a major shift.

Don has a great point. The average person loves job security; trading offers none. The average person loves success; trading invariably ensures periods of loss. The average person wants to be right; plenty of great traders are wrong half the time. Trading can be a tremendous challenge and a highly rewarding activity, but to get to that point, you have to be emotionally wired differently from the average person.

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Resilience and the Courage of Your Convictions

Resilience and the Uncompromised Life
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Emotions and Trading: Understanding Depression

In my recent post, I talked about a group of emotions related to anxiety and stress and how those affect trading. We also took a look at how risk management can also be a strategy for anxiety management. In this post, we'll begin a look at trading emotions related to depression, including discouragement, loss of confidence, persistent negative thinking, and loss of motivation and drive.

Just as anxiety can be a normal response to perceived threats to our values, the various emotions related to depression can be a perfectly normal response to loss. Feelings of anxiety occur when we fear the loss of something important to us; depressed mood sets in when we're faced with such a loss.

There are diagnosable disorders of anxiety (generalized anxiety disorder, panic disorder, obsessive-compulsive disorder), and there are mood disorders related to depression (major depressive disorder, dysthymia, bipolar disorder). Anxiety and depression are diagnosable when they are persistent and significantly interfere with a person's normal functioning. For example, a significantly anxious person might not be able to leave his home; a significantly depressed person may lack the energy to get out of bed and participate in work and social life.

The majority of people, however, experience moods and feelings related to anxiety and depression at a "subclinical" level. They continue to function in work and relationships, and their moods are often tied to very real threats or losses that they might face in their finances, their jobs, or their marriages.

As social psychologist Jack Brehm has observed, we can think of the depressive emotions as a kind of motivational suppression. When our values are active, they motivate us to action: we are hard-wired to pursue that which we find life-enhancing. It would not be adaptive, however, for us to be motivated to pursue unattainable ends. In the face of loss, therefore, we experience a suppression of motivation--a dampening of our pursuit for what we had valued. It is this dampening that we experience as a depressive feeling. It is perfectly normal, and it is common.

The problem for traders occurs for depressive emotions as for fear-related ones: these emotions are responses to *perceived* threat and loss--not necessarily actual threats and losses. If we perceive that our future as a trader is lost (or if we perceive that there is no way we can make money during a difficult market period), we can respond emotionally and motivationally with suppression. We become discouraged; we lose our drive to persevere; we slip into modes of negative thinking that kill our drive. If we are perfectionistic and perceive *every* trading loss as a failure, then we can wrestle with negative, depressive emotions on a very regular basis--even if the actual, financial losses are minimal.

The cognitive hallmark of anxiety is worry. The cognitive hallmark of depression is negativity. In an auto-immune disease, the body's immune system turns against the body itself, treating the body as a foreign invader. Depression is a kind of emotional immune system, in which we expel goals that are not appropriate or attainable. Depression becomes an auto-immune problem when we turn against entirely proper values and lose our drive to engage in activities that would sustain us. Our negativity toward ourselves dampens our motivation and keeps us mired in problems.

Brehm's basic hypothesis is that emotions are motivationally regulating: they impel us toward valued ends and keep us from pursuing unavailable ideals. If we look at emotions that way, then we can see that boredom and loss of interest are mild forms of depressive emotion. These are adaptive, and they may be providing us with valuable information about our values and their realization in the present.

Other times, however, depressive emotions can interfere with performance in trading--and life. In my next post, we'll take a look at how we might identify when depressive feelings are problematic and how we can shift out of those when we need to.

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Using Emotion to Change Emotion

A Unique Approach to Emotional Self-Regulation
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Heads Up From an Indicator

If you take a look at this post, you'll see my research pertaining to the Cumulative Demand/Supply Index. To quickly recapitulate, Demand is a proprietary measure of the number of NYSE, NASDAQ, and ASE closing above the volatility envelopes surrounding their moving averages. Supply is a measure of the number of stocks closing below their envelopes. When I subtract Supply from Demand and keep a cumulative total, that provides an excellent overbought/oversold indicator. The research referenced above suggests that returns have been subnormal when the cumulative measure is significantly above its 200-day moving average. Returns have been superior when the cumulative index is well below its moving average.

As noted in that earlier post, returns have been particularly weak when we've seen dwindling new highs/lows in the face of an overbought cumulative index. On Tuesday, the index hit its first overbought level since February 13th and February 1st before that. Both of those prior occasions led to selloffs. I notice that new 20-day lows fell on Wednesday from Tuesday's level. I'll be watching those new highs closely; continued deterioration will lead me to expect a return of the cumulative index back to its moving average (as happened in the earlier occasions this month), which generally provides a promising swing trade.
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Investment and Trading Themes Across the Globe

* Mixed Global Picture - Here we see year-to-date returns for the S&P 500 value stocks (IVE); S&P 500 growth stocks (IVW); EAFE value shares (EFV); and EAFE growth issues (EFG). Notice that growth has been underperforming value in the U.S. (observe recent weakness among such stocks as GOOG and AAPL), but not in Europe, Australasia, and the Far East. Returns are negative all around, but while many economies are dealing with double-digit inflation rates, recession seems to be the larger concern in the U.S.--recent commodity spikes notwithstanding. Mr. Bernanke's testimony to Congress later today will be important, given this backdrop.

* Returns Across the Globe - Year-to-date, the S&P 500 (SPY) is down 5.37%. Interestingly, China (FXI) is down 12.31% over that same period. Indeed, a chart of FXI doesn't look so different from a chart of many U.S. growth issues. Japan (EWJ) is down only 3.01% year-to-date; Europe large caps (IEV) are down 6.24%, but Hong Kong is down 13.59%. Meanwhile, Brazil (EWZ) is up 3.92% and Latin America more broadly (ILF) is up 4.12%. As we're seeing with U.S. growth stocks, what had been strong (China, Hong Kong) is now being sold and what had been weak (Japan) is holding up better. Resource rich Brazil is performing far better during this commodity boom than resource consumer China.

* Commodities and Currencies - Over the last ten trading sessions, commodities (DBC) are up a whopping 8.24%. Meanwhile, against the dollar the euro is up 3.29%; the pound is up 2.05%; the Canadian dollar is up 2.16%; the Aussie dollar is up 3.48%; and the yen is down -.43% during that same period. It used to be that you looked to USD/JPY as one indicator of the carry trade; increasingly, given low U.S. rates, USD is behaving as a carry currency. Note how stocks have been strong the last few days as traders have bought EUR/USD.

RELEVANT POST:

How Investment Styles Performed in 2007
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Cross-Talk: Why Good Traders Aren't Boring People

Pierre of the Daytrading Blog in Germany emailed me with a very interesting observation earlier today. He pointed out that most financial websites are written in a very serious manner. "However," he wrote, "I think that goes entirely against the idea of independent trading." He further observes that, "I've never met a boring, successful trader", pointing out that--oddly--"most books and websites are boring".

I stopped short when I read Pierre's post. My experience matches his exactly: It is *very* difficult for me to think of successful traders who are boring as people. To the contrary, many are characters, with idiosyncrasies, unusual interests, and unique views. That's why books such as the Market Wizards series have been so popular: the interviewees are *interesting*, not just informative.

But Pierre's real insight comes when he points out that a boring approach clashes with "the idea of independent trading". His use of the term "independent" is important here. A successful trader has to have an independent mind; otherwise they will simply see markets and trade them like everyone else. Being able to stand apart from the herd, being able to develop fresh ideas and perspectives, looking for opportunities in unusual places: these are skills that are common among very successful traders.

When you have that independence of mind, you tend to be a bit unconventional. And that's why successful traders aren't boring people. They have unique views; they see things differently. True, there's more to trading success than nonconformity. Still, it's difficult to imagine sustaining success if you don't have the ability to question consensus views and maintain confidence in your own, unique perspectives.

RELATED POSTS:

What Makes an Expert?

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Views for a Market Tuesday

* Divergences - We're seeing 10-day price highs for the ES futures as noted by Kirk, but so far we're not getting confirmations from either the NQ or ER2 futures. (See Trader Mike's chart perspective as well). On Monday we had 860 new 20-day highs against 629 new lows. That's weaker than the 900 new highs and 370 new lows registered on the 13th of this month. Looking a bit further out, we had 279 fresh 65-day highs on Monday against 251 lows. On 2/12, we had 291 new 65 day highs and 264 new lows, and back on 2/1 we had 444 new 65-day highs and 158 new lows. I will be watching closely to see if we get follow-through strength expanding new highs beyond these levels. If not, I'll be expecting a return to the heart of the multi-day trading range.

* Momentum - My Demand indicator for Monday ended the day at 162; Supply was 33. That means that five times as many stocks were displaying significant upside momentum as downside momentum. It's not at all unusual to get short-term follow-through strength after such a bullish momentum move. A failure to get that follow-through, especially in light of the above comments re: new highs/lows, would be meaningful.

* Very Perceptive - I've had the recent pleasure of corresponding with Pierre from the popular German daytrading site. He explains in his recent post (my poor translation, sorry):

The interesting thing [at seminars] is that I learned how to categorize my interlocutors extremely fast. If only 1 or 2 questions are placed to me, I can say security with 95% whether I am dealing with a beginner, progressing trader, or an expert. In addition I have the following filter system: 1.) beginners are interested in the entry 2.) progressing traders are interested in the exit 3.) experts are interested in position size (Money management) and Portfolio risk (Risk management). Thus, which interests you in most? Then you know approximately how far in trading you have already progressed (independent of your past performance).

* Market Anomalies - Great post from CXO Advisory on where the most significant market anomalies can be found.

* Bubble Cycle? The Big Picture notes that the business cycle has been replaced by the "bubble cycle", leading to the question of where the next bubble might be. Perhaps we need look no further than commodities; shout out to Kirk's observation that the agriculture ETF (DBA) has hit yet another 52-week high.

* Questioning Pundits - Some wise words from fellow Naperville resident Jeff Miller on maintaining perspective on economic matters.
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Should You Really Trade What You See?

"Trade what you see" is a common mantra among short-term traders who formulate their trade ideas from charts. But do we process information from charts in accurate and non-biased ways?

An interesting set of studies reported in the 2003 Journal of Behavioral Finance suggest that perceptual biases in what we see can skew our trading and investment decisions.

Specifically, when investors see a chart that has a salient high point, they are more likely to want to buy that stock. When the chart depicts a salient low point, they are more apt to sell. In the words of the authors, "expectations about future prices assimilated to extreme past prices."

The authors found that, when a chart contained a highly noticeable high point, traders listed more favorable features of the stock; when the chart depicted a salient low, more negative aspects of the stock were emphasized. Their analyses suggest that charts affect investors by providing them with enhanced access to either positive or negative information about the stock. In other words, our processing of the chart creates a selective bias in retrieval, leading us to view shares in artificially positive or negative ways.

It isn't too far from the authors' finding to a broader psychological hypothesis that *any* highly salient feature of a trading situation may skew information retrieval, perception, and action. For instance, the salient information may be a recent large gain or loss; a dramatic market move; or a piece of news. Trading what we see might be dangerous for the same reason that it is dangerous to trade what we hear or what we feel.

When one facet of a situation becomes highly salient to us, we overweight it in our perception and information processing. Our ability to view the entire situation in perspective is compromised. What is most obvious in a chart--or in our minds--may not be an accurate reflection of underlying supply and demand in a marketplace.

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Perceptual Distortions in the Market

Inside the Trader's Brain

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Become a Part of Dr. Brett's Next Trading Psychology Book

The Web 2.0 idea behind blogging is that knowledge and expertise are distributed. By connecting people and freely sharing insights, all are enriched. I would like to extend this approach to the book that I'm currently writing.

The broad purpose of the book is to show traders specific, practical methods they can use to improve their performance as traders. You can think of it as a "trading coach in a book". My hope is that the book can be published in electronic as well as print forms, so that the ideas could be on the computer--readily accessible--while traders are involved in markets. The electronic book will also contain Web links, including links to all contributors. An appendix will also highlight resources recommended by contributors.

Are you a blogger that would like to share ideas for improving trading? Do you offer a product or service that is specifically designed to assist developing traders? Are you an experienced full-time/professional trader who has personal experiences and methods to share? If so, and if you would like to be featured in the new book, drop me a line at the email address listed in the "About Me" section of the TraderFeed blog. Just give a brief idea of what you'd like to share, and then we can pursue it at your convenience.

After working with many different traders across a variety of settings, I've learned quite a bit since writing the last book on Trader Performance. Some of what I've learned has added to my understanding of the psychology of trading; some involves practical techniques for improving how we trade. Still, a book that synthesizes wisdom and experience from many sources is better than one that approaches its topic from a single angle. I enjoy sharing experience and expertise, but also love learning from the insights of others. My hope is that the new book will be a learning experience for all, as well as an opportunity to showcase the worthy work of others.

Thanks for the interest; it's greatly appreciated. I'll post periodically on the book's progress.

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Alternative Music Interlude

I'm occasionally asked about how I stay productive, in terms of writing, blogging, working with traders, trading, etc. Waking up at 4 AM daily helps, as does eliminating most of the timekillers such as TV and empty socializing. The real secret, however, is music. My most productive times are those in which I'm most connected to the music that speaks to me.

This is a sampling of the alternative music I've been listening to this weekend during my writing and research. It is my major source of inspiration on a day to day basis, so I thought I'd pass a few tunes along:

* Snog - Ballad: "When the working day is done, I refuse to belong to any one. And at night when I try to sleep, I hear the howls of commerce in my dreams."

* Dreamside - Open Your Eyes: "Open your eyes, my love."

* Bruderschaft - Forever: "I will walk this ground forever and stand guard against your name."

* Siouxsie - Into a Swan: "I feel a force I've never felt before...I burst out, I'm transformed."

* Assemblage 23 - Disappoint: "Do you believe in the nobility of suicide? No."

* Arcade Fire - My Body is a Cage: "My body is a cage that keeps me from dancing with the one I love."

* Covenant - Call Our Ships to Port: "A choir full of longing will call our ships to port."

Indicator Update for February 25th

Adjusted Cumulative NYSE TICK - If we look at closing prices for the S&P 500 Index (SPY) over the past five trading sessions, we can see that the index has gone essentially nowhere. When we look at the behavior of the market's largest participants, however, we see underlying selling in the market: a decided downtrend in the Adjusted Cumulative NYSE TICK. That means that we're seeing more hitting of bids than lifting of offers among the broad list of NYSE issues. This is in marked contrast to the NYSE TICK strength that we saw off the January lows. It is difficult to imagine sustaining anything other than sharp, short-covering rallies when selling sentiment remains so dominant.

New Highs/Lows - The story laid out by the NYSE TICK is confirmed by the count of new 20-day highs and lows among NYSE, NASDAQ, and ASE issues. Specifically, new 20-day lows swelled to 1270 on Friday, the highest level since the January lows. If we widen our time frame and examine new 52-week highs and lows, a similar pattern emerges. We had 13 new annual highs among the common stocks of the NYSE and 81 new lows: the most new lows since the January lows. Note, however, that those January 52-week lows numbered 700 (common stocks only), so that the vast majority of shares are above their prior lows. This may be setting us up for divergences on any test of those price lows. Interestingly, after seeing small cap strength following the January lows, we're now seeing relative weakness among smaller issues. Within the S&P 500 universe of large caps, we're seeing 2 new 52-week highs and 11 new lows. Among the S&P 600 small caps, we have 1 new high and 40 new lows. Among S&P 400 mid caps, we have 1 new high and 21 new lows. The latter two readings only are the highest level of new lows since the January bottom.

Momentum - We're currently seeing 38% of NYSE shares trading above their 50-day moving averages and 27% above their 200-day moving averages. Those numbers are essentially the same for the S&P 500 stocks; among S&P 600 small caps, we're seeing 34% above their 50-day moving averages and 21% above their 200-day averages. Among NASDAQ 100 stocks, only 29% are trading above their 50-day averages and 26% above their 200-day averages. There are large differences among sectors: Only 14% of financial stocks are trading above their 200-day averages; 81% of energy stocks are above that benchmark.

Sentiment - We're seeing some significant bearish sentiment in the equity put/call ratio, with put volume exceeding call volume during four of the past ten trading sessions, including Friday's trading. Put volume exceeding call volume has been a characteristic of intermediate term bottoms for the past several years, including the January lows. Interestingly, I am not seeing the expansion of volume on declines or the expansion of traffic on this blog that have also characterized intermediate-term bottoms. So I'd say that there is little panic, as much an absence of bullishness as an excess of fear.

Advance-Decline Lines - The AD Line for common stocks within the NYSE Composite Index continues to hover in a narrow range just above the January lows. The same pattern is present for the AD Line specific to S&P 500 large cap issues; we are very close to breaking the January AD-Line lows among S&P 600 small caps, S&P 400 mid caps, and NASDAQ 100 stocks. The greatest relative strength in AD-Line, far and away, is among the Dow 30 Industrials. These might be serving as a relative safe haven during times of financial insecurity.

All in all, the evidence is suggesting an absence of bullish interest, as observed in the NYSE TICK, the weak new highs/lows, weak momentum, and tepid AD Lines. If this pattern does not change, I will expect a test of the January lows, and will be looking for divergences among the indicators should that test materialize.

RELEVANT POST:

My Previous Indicator Review
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Weekend Sampling of the Blogosphere

* Deterioration - Quick update of my recent overview: Despite a late day surge, we're seeing deterioration among the broad list of NYSE, NASDAQ, and ASE shares. Friday saw a reduction in the number of 20-day highs (383) and an expansion of new lows (1270). Even after the late rise, Demand closed at 52 and Supply finished at 105, which means that twice as many issues closed below their volatility envelopes as above them. The picture continues to be mixed with respect to technical strength: 11 stocks in my basket finished strong, 15 neutral, and 14 weak. I continue to play off strength or weakness in key sectors and stocks--most notably the financial issues--for intraday trading, which has been helpful. Playing off the early distribution of the NYSE TICK was also quite useful Friday.

* Mental Fitness - Just as our daily lives don't provide enough exercise to keep us physically fit, our daily routines do not sufficiently exercise our brains. Interesting post from Sharp Brains.

* Trading Scared - Here's a thought-provoking view from John Forman about how the best trades are hardest to take. I have to say that my experience is different. I find the best setups easy to take, because all the parameters have been researched in advance. For me, the hardest part is sitting through choppiness on the way to a price target. I'm often too quick to take the quick profits. The fat, profitable tails of returns, however, are often what differentiate the winning traders from the losers.

* More Good Links - The difficulties of bailouts and a comparison of TIPS and Treasuries are among the views unearthed by Abnormal Returns. See also the excellent updated links from Trader Mike, including efforts to predict stocks 30 seconds into the future.

* Where the World's Money is Headed - Very interesting post from an excellent site: January's challenges for hedge funds contribute to the convergence of traditional and alternative asset management.

* Value Investment and Earning Growth - This one takes a couple of readings, but it is very, very good: an examination of the limitations of the PEG ratio.

* Which Stocks Rallied - Nice investigation of which stocks did and didn't participate in the late day rally Friday. Gives a worthwhile insight into how fast money flows and, by reverse logic, which stocks traders are most worried about with respect to credit concerns.
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Technical Strength: Stock SectorTrends in a Range Bound Market

* Range Market - The ES futures have been frustrating both bears and bulls, even as they've been offering nice swings for the daytraders. Interestingly, although we saw weakness in Thursday's trade, we had more stocks register new 20-day highs (848) and fewer register new lows (736) than the day prior. Below I'll take a look at where the strength and weakness can be found within the S&P 500 sectors, and a full indicator review will appear this weekend.

* On the Fence - Out of the 40 stocks from eight sectors that I track, 17 qualify as neutral in Technical Strength, an unusually high number. A total of 13 closed with technical strength on Thursday (uptrend) and 10 closed weak (downtrend). I like to track the neutral stocks, because they often tip their hands as to the ultimate direction of a breakout move. The 17 are: DOW, WY, BA, MMM, TWX, DIS, MCD, PG, WMT, JNJ, LLY, AMGN, BAC, JPM, MSFT, INTC, CSCO. Note that four of those names are prominent NASDAQ 100 stocks. That has me tracking the NQ for signs that the market might be getting off its fence.

* Sector Strength and Weakness - Here's how the sectors sort out with respect to Technical Strength and (in parentheses) the percentage of stocks within the sector closing above their 50-day moving averages:

* Materials (XLB): +120 (54%)
* Industrials (XLI): -40 (34%)
* Consumer Discretionary (XLY): +80 (31%)
* Consumer Staples (XLP): -100 (28%)
* Energy (XLE): +200 (72%)
* Health Care (XLV): -180 (29%)
* Financial (XLF): -60 (20%)
* Technology (XLK): -80 (21%)

The sectors most directly connected to the commodities boom are strongest; health care is weak, perhaps in response to the perception that a Democrat may be in the White House next term.

* Not Monolithic - The financial sector is really the wild card here. Some of the stocks that I track (WFC, BAC, JPM) are notably stronger than others (C, AIG, GS, FNM). Overall, I don't like the technical strength picture for the major investment banks, and that's a concern given recent credit fears. All the Fed measures to date, fiscal stimulus, and all the sovereign bank buying have not buoyed these shares, as we can see by the low proportion of XLF stocks trading above their 50-day moving averages (above).

RELEVANT POST:

Most Recent Indicator Update
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Mastering Trading Anxiety With Risk Management

In my recent post, I took a look at the nature and source of anxiety experienced by traders. There are many cognitive and behavioral methods that are quite effective in dampening anxiety, but this post will focus on a different strategy: preventing anxiety from occurring in the first place.

You might be thinking, "How is it possible to prevent anxiety when trading? After all, we can't control what the markets are going to do!"

While it's true that we can't control markets, it's equally the case that we can *always* limit the losses we take in any given trade (or any given week or month). We control the maximum amound we're willing to lose by three means:

1) Defining the maximum size position we're willing to take;

2) Defining the stop point at which we exit the trade;

3) Defining the amount of money we're willing to lose in a particular period of time before we reduce our risk.

The first two rules define our position risk: how much we're willing to lose in the pursuit of a particular gain. The third rule is part of defining our portfolio risk: how much we're willing to draw down in our accounts before we pull back, reassess, and limit further exposure.

Psychologically, the key is to formulate these rules in such a manner that they kick in *before* anxiety overtakes us. Recall that anxiety is a response to perceived threat. Emotionally, we want losses and drawdowns to be normal, non-threatening occurrences. They may be disappointing, but they need not pose threats to our emotional and financial well-being. Properly defined position and portfolio rules for risk management are preventive tools with respect to anxiety and trauma.

Look at it this way: every trader has stop limits for positions and portfolios. You will exit the market either because of the limits imposed by your rules or because of the limits of your pain. Risk management is the best preventive therapy of all.

RELATED POST:

Overcoming Performance Anxiety
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Trading Themes for a London Wednesday

* Global Views - Spending time among the banks on Canary Wharf and the Mayfair funds, there's a palpable difference in view than on Wall St. To some degree, you see it in the difference in content between such publications as the Financial Times and The Economist and U.S. publications such as the Wall St. Journal and Barrons (which is why I subscribe to the former two publications alongside the Journal). The view is more international and connected to emerging markets; it also is more macro in view, linking rates and currencies around the world with equities, commodities, and economic trends. Such insight helps traders figure out what to be trading: which markets have the greatest promise--something useful even for short-term traders. Tracking ETFs is one excellent way to gauge these big picture patterns: check out this ETF overview from Kirk. I also like how Kirk tracks macro themes in his link posts and big picture trading themes in his "best of 2007" posts. The themes tracked by Abnormal Returns also cover international markets and a range of asset classes; see the link to the momentum trading research.

* Bermuda Triangle? - Trader Mike notes a consolidation pattern in the indexes that awaits resolution. I'll post the latest market indicators in my Twitter posts.

* Common Trading Wisdom - So much of common market lore is just plain wrong. That's why historical testing of patterns is important. Yesterday's market gapped up at the open and then closed lower. Common lore calls this a failure and assumes bearish implications. But Quantifiable Edges examines the evidence with a historical eye. Nice to see that Rob has started a newsletter to help traders follow historical patterns.

* Keeping Tabs - This is an interesting post on the importance of keeping track of changes to your trading systems and approaches from the Trade By Trend blog. I think the same logic applies to setups that short-term traders trade. By keeping track of changes you make to your trading--and their results--you're better able to identify the factors that make for enhanced performance.
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Emotions and Trading: Understanding Anxiety

Because trading involves risk taking in an environment of uncertainty, it necessarily engages us emotionally as well as intellectually. In this series of articles, I will review emotions common to trading and their significance for trading performance.

In this and the next post, we’ll take a look at a family of emotional experiences related to anxiety. These include nervousness, tension, stress, fear, and worry. All represent a response to perceived threat. They are part of the “flight or fight” response that enables us to deal with dangerous situations.

No two traders experience anxiety in the same way. For some, it is primarily a cognitive phenomenon in which thoughts become speeded up and worry sets in. For others, the cognitive component is joined with physical manifestations: a speeding of heart rate, tensing of muscles, and increasing of shallow breathing. Sometimes the manifestations of anxiety are primarily physical and not even consciously noticed by the trader. This most often occurs when muscle tension is the main way in which the anxiety is expressed.

Because anxiety represents an adaptive, flight-or-fight behavior pattern that is hard-wired, it prompts us for action. Regional cerebral blood flows engage the motor areas of the brain, bypassing the executive, frontal cortex responsible for our planning, judgment, and rational decision-making. For this reason, we can make decisions under conditions of anxiety that are not ones that we would normally make if we were cool, calm, and deliberate.

Note that anxiety is a response to perceived threat. Such threats may be real, or they may be ones that we create through our (negative) ways of thinking. For instance, two traders with the same account balances may go through a losing month. One views it as a normal drawdown and experiences little fear or tension. The other questions his trading ability and responds with significant anxiety. It is not just reality, but our interpretations of reality, that mediate our flight or fight responses.

The two immediate challenges for traders experiencing anxiety are to become aware of the manifestations and to determine whether threats are primarily real or perceived. Knowing our unique manifestations of anxiety is invaluable in interrupting the flight or fight response and returning ourselves as early as possible to the cognitive state in which we can engage our sound, executive capacities.

Most of us have signature “tells” that reveal our states of nervousness and fear. A characteristic pattern of muscle tension, a typical sequence of negative thoughts, a hollow feeling in the pit of our stomach, shakiness, a surge of worried thought: all of these are common “tells”. Our initial goal is simply to become aware of what we’re feeling as we’re experiencing the emotions. We cannot change something if we are not conscious of it

A good practice is to periodically during the trading day make note of our thoughts, feelings, and physical sensations and correlate those to market behavior at the time and to our trading decisions and outcomes. Over time, you will notice distinctive patterns: certain constellations of thoughts, feelings, and sensations that recur under challenging trading conditions. Once you observe your own anxiety-related patterns and actually see how they’re interfering with decision-making, you’re in a much better place to interrupt and change those patterns. Some ways of altering those patterns will be the topic of the next post in the series.

RELATED POSTS:

Biofeedback for Performance

Brief Therapy Techniques
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Indicator Update for February 18th

* New Highs/Lows - After a spike in new 20-day highs (combined NYSE, NASDAQ, ASE) following the January lows, we've seen a pullback this past week, with lows now exceeding highs. Note that peaks in the new highs minus lows of late have occurred at successively lower price highs. That is what happens in bear markets. If we get further pullbacks in the high/low numbers and can hold the January lows, I would be inclined to take the long side, especially if we also saw oversold readings on the Cumulative Demand/Supply numbers posted recently.

* Momentum - Momentum turned decidedly bearish Thursday and Friday with Demand readings of 40 and 34 and Supply readings of 155 and 115, respectively. Selling sentiment also dominated those two days, with Adjusted Cumulative NYSE TICK readings of -886 and -202. Indeed, five of the last six trading sessions have seen negative daily TICK readings. We're currently seeing 33% of S&P 500 and S&P 600 small cap stocks above their 50-day moving averages. That is off recent peaks of 50%. Only 21% of S&P 500 financial stocks are trading above their 50-day MAs, down from a recent peak of over 60%. As I mentioned earlier, I have difficulty believing we'll successfully sustain a rally without confidence in this sector.

* Advance-Decline Lines - The AD Line specific to NYSE common stocks is hovering just above its January lows; the same is true for the lines specific to S&P 500 large caps and S&P 600 small caps, as well as NASDAQ 100 stocks. A move above the January highs in the AD lines would be a bullish development; the failure to sustain AD strength is concerning for bulls.

* A Subjective Note of Sentiment - As I've indicated in past posts, traffic to this blog has been an unusually sensitive sentiment indicator. It peaked on the day of the January lows and retreated at the recent highs. Interestingly, with the pullback in prices late last week, there was no uptick in traffic. Indeed, readings are more consistent with a relative price topping than a market bottoming as of the close Friday.

In sum, after a strong snap-back rally from the January lows, we're now seeing deterioration in the indicators. I will need to see improvements in the readings before taking the long side for anything other than a short-term trade.

Examining the Distribution of Your Returns

Many traders track their profit/loss statements, but never examine their trading results in greater detail. This is like a baseball pitcher keeping tabs on wins and losses, but never examining statistics (pitches thrown per game, strikes vs. balls throwns, hits vs. outs for left-handed hitters vs. right-handed ones, etc) that capture how well he's really been pitching.

For traders, many of the metrics that reveal how well you're trading include the average heat you take on your positions (a nice measure of execution skill); the average sizes of your winning and losing trades; and the the number of winning and losing trades broken down by:

* Time of Day/Day of Week
* Specific Market or Stock/Stock Sector
* Specific Strategy or Setups
* Market Condition (trending up/down, non-trending)
* Size of Position
* Number of Trades

When coaching traders, I also like to look at what I call "contingent returns". How do you trade after a string of winning trades? After a string of losers? You can learn a great deal about emotional resilience, overconfidence, and coping with stress by pulling out those trades that occur after streaks.

One very simple metric that is easily within the grasp of traders is the distribution of returns. If you plot your daily returns (if you're a daytrader) or monthly returns (if you swing trade) over time, you can generate a histogram that is quite informative. You'll be able to see whether your average trades are skewed to the winning or losing side and whether the tails of the distribution are fatter at the profit or loss end. A trend follower often will have more losing trades than winners, but will show fat tails at the winning side over time if he has captured good trends. Very short-term traders I've worked with have relatively balanced distributions at the tails, but simply have more winning trades than losers: their distributions are shifted rightward compared to a normal distribution.

Over time, generating these distributions, you gain a sense for how you trade when you trade well and how you trade when you are off your game. A fattening of tails at the losing end of the histogram might suggest a loss of discipline; a small tail at the winning end might indicate cutting winners too quickly.

It also helps to take a look at the variability of your returns. The standard deviation of your returns represents the width of the histogram and is one way of capturing volatility. Over time, you can see how your current volatility of returns compares with past volatility: Are you putting on enough risk when you're seeing markets well? Are you swinging for the fences when opportunity isn't there? The volatility of your returns reveals your relative risk aversion vs. risk seeking.

Just about every professional trader at hedge funds that I work with knows these metrics for their trading. It's a way of keeping score, and it's a way of keeping on top of your craft. Examining the distribution of your returns and alerting yourself to shifts in the distributions, from my vantage point, is a best practice in trading and an excellent strategy for self-coaching.

RELEVANT POST:

How To Keep a Trading Journal
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Housekeeping Details for the Weekend

With the expansion of my coaching work with investment banks, hedge funds, and proprietary trading firms, I'm now finding myself traveling more frequently and more often outside the U.S. I'll be in the U.K. through Thursday working with traders, so my Twitter entries and blog posts will vary just a bit in frequency and timing. Tomorrow I plan my weekly review of market indicators, many of which support the recent post on money flows.

I'm noticing a dramatic increase in the number of emails I'm getting (my inbox stands at 898) requesting advice, coaching, or counseling about trading and personal issues. I would absolutely love to have the time to respond fully to all of these, but I'm afraid there just aren't enough hours in the day. Wherever possible, I'm happy to refer traders to resources that might be of help. If 3000 visitors come to the blog each day, however, and only 1% of them have questions, comments, or requests for assistance, that means I'm fielding 30 emails a day. Just a few minutes each consumes two or so hours a day. You can see the dilemma.

I very much value the comments to the blog and am happy to answer straightforward questions pertaining to the posts. With my travel schedule, writing needs (new book on the way!), and trading and family obligations, however, I'll have to limit the more extended requests for my time. I apologize for any inconvenience this may bring.

On a separate, but related matter, I'm also getting a number of requests to offer workshops or seminars for traders. As many readers are aware, I have completely withdrawn from the traditional "trader education" circuit, given the abysmal quality and high cost of the presentations. If there is a responsible trading group that would like to sponsor me for a Webinar (free of charge; I am not interested in doing this on a commercial basis), I'll be happy to schedule sessions on such topics as psychological self-help techniques for traders and using Excel to uncover historical market patterns. Last week I did a Webinar session for a software users' group and next week I'll do one for a prop group of traders. The sessions can be archived, they're free, and they don't require travel and time away from trading. That strikes me as a win-win.

Thanks, as always, for your interest and support!

Brett

Money Continues to Flow Out of Stocks

Relative Adjusted Money Flow is a proprietary indicator I use to see if institutional volume is entering or leaving the stock market. Above, you can see the five-day money flows for the 30 Dow Industrial stocks (pink line), plotted against the Dow ETF (DIA; blue line) from November to the present. For a description of how I calculate relative flows, please consult this post. I apologize that I cannot respond to questions about this research.

The money flow figures are relative in that they compare current adjusted flows (dollars flowing in and out of stocks adjusted for the volume traded that day) for the 200-day average flows. Thus, the number to look at is the zero line on the above chart. When the flow numbers are above zero, it means that--relative to the past 200 day average--we're seeing more money flowing into Dow stocks. When we're below zero, it tells us that, relative to the past 200 trading sessions, money is flowing out of Dow issues.

Please note that this is a very labor intensive indicator that measures every trade in every Dow stock each day to determine whether volume is at the current bid vs. offer price. Because large volume is indicative of institutional interest, the money flow figures are quite helpful in determining the buying and selling of the market's largest participants.

As we can see from the chart above, the five-day moving average of flows has been pretty consistently below the zero line and remains there now. While we have had a nice bounce off the January lows, I do not yet see evidence of sustained institutional buying among the large caps that make up the Dow.

RELATED POSTS:

Here is a listing of TraderFeed posts related to money flow

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Ideas at the End of the Week

* Weak Financials - This useful chart from Decision Point shows the ETF for S&P 500 financial stocks (XLF; top panel) and the Advance-Decline line specific to the financial issues. After a bounce in late January, the A-D line is scraping at bear lows and we've seen a pullback among the financials. GS, in particular, has been displaying recent relative weakness. Tough to imagine this market gaining much bullish traction while doubts about this sector continue.

* Trading Psychology Posts in Spanish Language - Many thanks to ElJugo for this post, a lesson on trading psychology.

* More Good Links - Abnormal Returns finds good reads on the shape of the yield curve and other relevant topics.

* Broken Hearts? - These issues were selected as ones most likely to break investors' hearts in Kirk's survey.

* Lack of Bulls - Interesting observations: VIX and More notes record low interest in call options.

* A Long-Term Bull - Chris Perruna offers perspectives from Warren Buffett.

* The Brain Boom- Sharp Brains notes the growing interest in brain training, a field I've long believed has great potential for traders.
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Trading Logic and Trading Edge: Accuracy, Execution, and Position Sizing

I've emphasized elsewhere that every trade is a hypothesis. I find this to be a very useful framework for thinking about the logic of trading.

The specific conceptual schemes we use (technical analysis, reading market depth, historical models, Market Profile, etc.) help us frame our trading ideas. Certain schemes may be more or less helpful in the context of particular markets and time frames; the most important aspect of a conceptual scheme is that it make sense to the user and generate reliable and valid trading decisions.

When all is said and done, however, every directional trade idea boils down to a very simple proposition: "We will hit *this* price before we hit *that* price". In other words, we are placing bets that the stock, futures contract, or ETF will hit a target price level before it hits the level that stops us out and tells us we're wrong.

Viewing trading logic in this simple fashion, we can see three sources of "edge" in trading:

1) We are right more than we're wrong - In other words, we are good at generating promising hypotheses. Here the core skill is anticipating market moves. Our methods for reading supply and demand in the markets are so good that we are accurate in assessing direction.

2) We make more when we're right than when we're wrong for a given position - We may not be right more than we're wrong, but we are good at framing hypotheses with a favorable ratio of reward to risk. That is, we will make more money if we're right than if we're wrong because there is an asymmetry between the loss we'll take if we're stopped out and the gain we'll achieve if we hit our target. Here the core skill is execution: getting into ideas at such good prices that risk/reward is in our favor.

3) We are bigger when we're right than when we're wrong - We may not be right more often than we're wrong, and we may have a relatively even balance of risk/reward. If, however, we are good at recognizing when we're right *as the trade is progressing*, we can then add to our size when we're right and keep size small when we're not. Here the core skill is sizing (position management): adding to winners and keeping losers modest.

When we lay out sources of edge in this manner, it becomes possible to ask: What is your core competency as a trader, and where can you make your greatest improvements?

My experience is that too many beginning traders shoot for number one--trying to be right most the time--when in fact the majority of profitable traders fall into the latter two categories (and often both). Execution and sizing may not offer the ego rewards of being right and outsmarting the market, but they embody a kind of reasoning that is essential to success, regardless of one's market, strategy, or time frame. The implications for self-coaching are profound: This post lays out many of the mistakes traders make as a result of faulty trading logic.
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NYSE TICK: Using Sentiment to Trade Trend Days

I recently began posting intraday setups for daytraders. This pattern is a setup that is common to trend days, as it capitalizes on persistent sentiment extremes.

The top chart is the five-minute ES futures for today's market. The bottom chart is the five-minute NYSE TICK. Note that we see two important lines on the NYSE TICK chart. The first is the horizontal green line, which is the zero level. When the TICK is above this line, we know that more stocks are trading at their offer price than their bid. That tells us that buying sentiment is dominating: traders are sufficiently eager to enter the market that they'll pay up for the privilege.

When the TICK is below the green zero line, it tells us that selling sentiment is dominant. Traders are sufficiently eager to exit the market that they'll settle for taking the bid price.

In a strong, trending market, we'll see the NYSE TICK trade persistently above or below that green line, as buying or selling sentiment remains extreme through the session. It's when we see the TICK oscillate evenly around the green, zero line that we're most likely to trade in a range.

The blue line is a five-minute H-L-C moving average of the NYSE TICK. Notice that, from the very start of the session, the TICK (and the blue line) was predominantly below the green line. Selling sentiment was dominating right out of the gate. With one exception, we could not generate a +500 or greater reading in the TICK most of the morning.

We started the day anticipating weakness from the historical patterns. We opened below the high price from the overnight session. When the sellers began the session hitting bids in force, I waited for the first positive bounce in the NYSE TICK (to make sure it would remain below the overnight high) and then took my short position. A little after 9 AM CT, a market bounce put my position in the red, but sellers again came in before we could break the overnight high. That led me to add to the short position, with the overnight high as my stop.

From there, I stayed short for the remainder of the session, as the moving average of the TICK stayed chronically below the green line for most the day. The idea is that a trend day will close near its lows, so you don't want to get thrown from your good position unless you see a distinctive shift in sentiment. I find the advance-decline line to be helpful here: if declines are swamping advances, the odds are greater that a trend day to the downside is in force.

Many times traders miss a trend day because they didn't get in early and don't want to "chase" markets. The reality is that, as long as sentiment is staying in its trend, there will be plenty of countertrend bounces (or dips) in the TICK that offer fine short-term entries. The key is identifying the trend day early based on persistent sentiment extremes. Rennie Yang's Market Tells service sends out emails based on this very pattern (and indeed he made a good call on today's move); if you have trouble tracking the TICK on your own, that might be a useful aid.

RELEVANT POSTS:

Identifying Sentiment Trends With the NYSE TICK

Trading With the NYSE TICK - Part One

Trading With the NYSE TICK - Part Two

Trading With the NYSE TICK - Part Three
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A Bit of Caution Here and Other Thursday Ideas

* Getting Overbought - Above you see my Cumulative Demand/Supply indicator, which I last updated on Friday and highlighted at the recent market peak. We are very close to that overbought level described in the latter post in which 20-day returns have been subnormal. That provides me with a note of caution, despite several days of strength this week. I also note that we had 900 new 20-day highs on Wednesday, well below the 1728 at the beginning of this month. Finally, we're hearing some cautionary notes from Rennie Yang at Market Tells, who notes subnormal short-term returns after the banking index underperforms the broad market on a rising day, and Jason Goepfert, who observes that three consecutive rising days in a downtrending market leads to poor near-term returns. See also Rob Hanna's excellent site, and his post on this topic. I heartily recommend these sources of historical market patterns.

* Where's the Volume? - Trader Mike looks at the indexes and finds tepid participation in the recent market rise. Trader's Narrative, however, detects some skepticism regarding the recent rally.

* Recession Views - Investments that perform best in recession, sentiment cycles, and Fed pumping money into the banking system: just a few of the timely links offered by Kirk. Thanks to a reader for this piece of perspective from Todd Harrison on what the market is currently pricing in--and what it's not.

* What Credit Markets Are Telling Us - Abnormal Returns offers perspectives on high credit correlations, high risk aversion, and more.
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The Best of TraderFeed: Resources for Becoming Your Own Trading Coach

Dear Readers,

Thanks for all your input into the TraderFeed posts. The goal of all of this is to help traders mentor themselves and further their own development. I've written two books (a third is on the way!) and--at this juncture--over 1300 blog posts and many articles on my personal site. It might seem daunting just to wade through all that material.

To help just a bit, I've linked below all the "best of" TraderFeed posts from 2006 and 2007. That should provide a good introduction to the ideas on trading psychology and trader performance. I hope it will also provide a bit of inspiration and direction as you become a coach to yourself and guide your development as a trader. My best wishes are with you!

Brett

Best Posts

2007, 4th Quarter
2007, 3rd Quarter
2007, 2nd Quarter
2007, 1st Quarter

2006, 4th Quarter
2006, 3rd Quarter
2006, 1st and 2nd Quarters
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Trading Psychology and Trader Performance: Selected Posts From 2007 - Volume Four

Thanks for all the warm feedback about the first three installments in this "best of 2007" series. Here is the final set of links, covering the best posts from the year's fourth quarter. Enjoy!


* Here are some steps you can take toward becoming your own trading coach; keys to emotional resilience as a trader; so important: finding your own voice as a trader; a unique coaching perspective; here are three predictors of coaching success; keys to coaching yourself successfully.

* A key question for traders: How do you *know* you have an edge? Also, here's a few things to consider before attempting to trade for your living.

* What distinguishes the best traders: cognitive development; the important role of self-confidence in performance; the important role of self-efficacy;

* Ten trading rules that have served me well over the years; six positive trading behaviors that make for a good report card; solution patterns worth enacting;

* The underappreciated role of regret in trading; four major problem patterns traders face; here are some of the stresses that traders face and a post on how we can prepare for those stresses; how psychological burnout affects traders; understanding anxiety and how it affects trading;

* Very important post on how people make changes; how we experience ourselves affects our success; and our behavioral premises shape our experiences of ourselves;

* The trader as warrior;

* Seven mental traps for traders;

* What to do when you encounter meaningful drawdowns;

* The role of the brain in trading performance
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Trade Setups for Daytrading: Opening Range Breakout

A number of readers have emailed me, indicating an interest in trade setups for daytraders. This will start a series of posts on the topic, illustrating some patterns I've found useful. These are not mechanical systems trades at all. Rather, they are patterns that I look for in assessing short-term market movement.

The chart above shows the first hour of trading today; clicking the chart will provide a clearer image. The candlesticks are the S&P 500 Index (SPY); the bars represent the NYSE TICK. The chart was taken from my Real Tick screen.

The pattern is an opening range breakout. I'm looking for the breakout to occur in the direction of the larger market trend. Thus, we're looking for a continuation trade, not a reversal. An ideal setup occurs when the market is oversold on an intermediate-term basis, but has shown recent strength (previous day stronger than the one before it).

I use three gauges to determine whether the market is stronger or weaker at the larger time frame:

A) If new 20-day highs from the day before exceed new 20 day highs from two days ago and we close in the upper end of the day's range, I look for a breakout to the upside. If new 20-day lows exceed new 20-day lows from two days ago and we close in the lower end of the day's range, I look for a breakout to the downside.

B) If Demand exceeds Supply for the previous trading session, I look for a breakout to the upside. If Supply exceeds Demand, I look for a downside breakout. (I post the Demand/Supply figures, as well as 20-day highs and lows, in my Twitter comments every morning).

C) If the overnight action keeps the market above the average trading price from the day session previous, I look for a breakout to the upside. If the overnight action keeps the market below the average trading price from the prior day session, I look for a breakout to the downside.

Based on this morning's trade, we had:

A) More new highs Monday than Friday, but also more new lows;

B) Demand exceeded Supply on Monday;

C) Preopening action was strong and we opened well above the average trading price from Monday.

Accordingly, I was looking for an upside breakout (i.e., I was looking to go with strength early in the day's trade).

Once we establish the trend at the larger time frame, we watch and wait for the first 10-15 minutes of trading. Typically we'll see the market swing up and down in a range as traders attempt to establish value. We'll also see the NYSE TICK swing in a range as stocks open by either transacting at their offer prices or at their bids.

You'll see that the opening action had the market drifting lower with weakness in the TICK, but no extreme negative readings. Advancing stocks led decliners handily, as we opened well above Monday's close.

The TICK is the first to break out of its opening range, as a burst of buying meets the early weakness. This buying moves prices nicely higher. Very shortly thereafter, we get another pullback in the TICK, but this time price stays above its prior low. This is our first indication that stocks are not responding to selling sentiment. We're getting a higher price low at successive lows in the TICK.

Soon after that, SPY breaks decisively above its opening range. That opening range breakout (ORB) tells us that the buyers have taken early control. We want to wait for pullbacks in the TICK to enter in the direction of the overall (upward) trend. If we make new price lows on successive dips in the TICK, we exit the trade. That keeps risk down.

As I've indicated in prior posts, I tend to use price benchmarks (prior day's high or low price; pivot-point support and resistance; average trading price from the prior day) as targets. As long as we are seeing higher price lows on successive pullbacks in TICK, it makes sense to keep at least a portion of the position on until the target is reached.

In this particular case, because we opened above the prior day's range and at a multi-day high, I did not have a target beyond the R2 level from the prior trading session. I used a pragmatic criterion based upon the size of the recent trading ranges, with the assumption that the early morning lows were going to be the day's lows.

I like to take profits on a portion of the position when we get a burst of TICK and price movement in the direction of the trade. I'll then wait for a pullback in the TICK to reassess re-entry. In general, if the market gives me a quick 3+ point gain in the ES, I want to bank some of it--that's part of my emotional trade management.

The opening range is the market's initial equilibrium. A strong break outside that range is a clue that a short-term trend is forming. By limiting trades to the trend at the larger time frame, we can develop some high percentage trades that way and start the day in the green.

RELATED POST:

Pivot Point Targets
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The Greatest Mistake Traders Make

To err is human; to continue to err is the greatest mistake traders make.

Any individual trade can make money or lose money. If you're in a drawdown mode over time, however, at least one of the following problems is present:

1) You're Off Your Game - Not trading well, taking bad trades, failing to take good ones, not managing money and risk well.

2) You're Wrong - You're trading well (i.e., following rules and good trading practices), but you've just misread the market.

Either way, you need to recalibrate. First you need to answer the question, "Is it me, or is it the market?" Then you need to figure out how to get back on your game or you need to reassess the markets and find opportunity.

To recalibrate, it is necessary to step back from trading. The greatest mistake traders make is not making mistakes--we're all fallible, and we're all going to lose money at various points in time. No, the greatest mistake is to *continue* making mistakes.

When we don't step back from trading and recalibrate, we take the magic of compounding and turn it against ourselves.

Some of the best active traders I know routinely take a midday break and review their morning trading. They generate charts of their day's P/L, review markets, and basically start their day fresh whether they're up money or down. Very often they'll use that break to set a goal for the afternoon that corrects any problem they noticed in the morning.

(BTW, check out the clever post from Trembling Hand Trader, who generates charts of his own trading performance and then applies technical analysis to those. Just seeing if your recent trading is in an uptrend, downtrend, or range and examining the volatility of your returns will tell you a lot about how you're doing and help you begin the recalibration).

The same idea applies to trading at the end of a day. Reviewing how markets behaved and how you performed--along the lines of the performance idea I linked yesterday--provides you with a sense of how well you're understanding markets and how well you're capitalizing on that understanding.

Professional football and basketball teams know that they need to take a time out when the game isn't going their way. It's a chance to regroup, alter strategy, correct mistakes, and just catch a breath. Similarly, we take the first step toward changing performance by interrupting our performing and entering into a reflective mode.

We set the stage for some of our best trading once we've stopped trading. It's not enough to think about markets. We also have to think about our thinking.

RELATED POST:

Coaching Yourself for Success
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