Monday, June 29, 2015

Money Flows and Other Views for the Market Week

*  Above we see the SPY ETF (blue line) plotted against the money flows into the SPY ETF.  Note that we've seen prolonged outflows from SPY since the start of the year.  That has corresponded with a period of prolonged sector rotation.  Year-to-date, for example, the healthcare sector is up over 13% and consumer goods shares are up 6.6%, while materials stocks are down 1.7%, conglomerates are down 5.3% and utilities are down 8%.  (Data from FinViz).  Interestingly, flows have recently turned higher in SPY, even as we're seeing turmoil abroad.  With uncertainty in China and Europe, I'm open to the thesis that U.S. stocks could become an increasing safe haven both because of relative growth and relative yield.  If that's the case, those money flows should grow and the SPY chart would start to look quite different.

*  If there's a theme that has run through this blog and the books I've written, it's that we develop, not by changing who we are, but by understanding our strengths and leveraging those.  If you want to become a better trader, study the hell out of your best trading.

*  BIS notes that we're less prepared for future financial crises, with rates running out of room to the downside.   

Great post from Ryan Detrick on how data lookback periods can be manipulated to give either bearish or bullish forecasts.

*  Most hated stocks and other top views for the week from Abnormal Returns.

Top quant links from Quantocracy, including the derivation of a promising losing streak indicator.

*  SMB Trading on why it can be a problem to bump up your risk-taking too quickly.

Have a great start to the week!


Sunday, June 28, 2015

Solving Your Trading Problems by Finding Your Trading Solutions

In a recent blog for Forbes, I described the essence of a solution-focused approach to trading:  studying your own successes.  As da Vinci's quote suggests, it's not just dry, academic study, but study with desire:  the desire to know what makes you the best you can be.

Here's an interesting observation:  

When I ask traders to tell me what they do wrong in their trading to make them lose money, most can name a variety of mistakes they make.  They talk about chasing trades and getting in at bad levels; they describe sizing positions too large or small; etc.  When I ask traders to tell me what they do best in their trading that leads them to make money, most offer vague generalizations or simply say that they don't make the losing mistakes.

Even more to the point, if I ask most traders to map out a detailed flow chart of their best trading, starting with the gathering of information and generation of ideas to the structuring of trades, management of risk, and the trader's own self-management, in the vast majority of cases it would be a difficult task.  The result would be a sparse flow chart. 

Now imagine that I give that same exercise to an executive at a successful company.  You can rest assured that there would be no problem generating a flow chart describing how raw materials are assembled into a product; how the product is packaged and delivered; how the product is marketed; how sales are tracked; how product changes are made; etc.  

The idiot trader has no sense of process.  It's all seat of the pants and randomness.  The enlightened idiot trader talks about "following my process", but cannot produce a detailed flow chart of what they do and why they do it.  That is because, for the enlightened idiot, process is merely a code word for engaging in some general routines.

Successful businesses don't "follow their process."  Successful businesses understand that they have many interlocking processes, and their quality management tracks both those processes and their successful coordination.  

An important question:  If you started a business in your community and managed it with the same rigor as you apply to your trading, how successful would that business be?   

Consider the expert baseball pitcher watching game films.  He will focus on the mechanics of each phase of his delivery.  He will study his pitch selection and the execution of each kind of pitch.  He will examine his pitching accuracy and the factors responsible for achieving good and poor location.  He will study the best way of pitching to specific batters and exploiting their weaknesses and avoiding their strengths.  That is study with desire:  the desire to dig and dig and dig and understand the drivers of superlative performance.

The idiot trader keeps no journal and has no structure to his or her reflection.  The enlightened idiot trader keeps a journal and writes down all of his or her mistakes and frustrations, but never transforms those observations into concrete goals, plans, and commitments for change.  An expert business knows its best practices, turns those into robust processes, and tracks them religiously.  

As the Forbes article emphasizes, an exclusive focus on what you do wrong will, over time, help you internalize the identity of a wrongdoer.  In studying your successes and turning those into solutions that anchor best practices, you reinforce an inner sense of achievement.  There are no lifetime accomplishments that do not begin with daily achievements.  Many, many times the answers to our trading problems lie in what we're doing when those problems are not occurring.  The first step in becoming a better trader is understanding how we currently trade when we trade at our best.

Further Reading:  Solution-Focused Performance

Saturday, June 27, 2015

Role Modeling: The Power of the Mirror Principle

Think of parenting.  Think of apprenticeships in the trades.  Think of training to be a professional in medicine.  All are developmental processes, and all facilitate development through a combination of teaching and role modeling.  Development occurs through learning, but learning is internalized through role modeling.  This is the flaw of many "education" efforts in trading.  They attempt to facilitate the development of the trader by teaching.  That creates an informed person, but it doesn't create a successful trader.  The latter requires role modeling--an internalization of what has been taught.

A model in mathematics or physics is an approximation of the reality we're trying to understand and predict.  A scientific theory, at the end of the day, is a model of reality.  A role model is our theory of the reality we hope to achieve; it is a model of our desired reality.  In studying a role model, immersing ourselves in the model, and imitating the model, we make that desired reality part of our reality.

The mirror principle suggests that we internalize our life experience.  Who we spend time with, where we spend our time, and how we spend our time all become parts of our internal worlds.  We see ourselves in life's mirrors, and our day to day activities comprise our mirrors.  Look at what you're doing in your life; look at who you're spending time with:  that's what will be inside your head, and that's what will drive your heart.

When we seek role models, we seek to replace ordinary life mirrors with positive, inspiring ones.  If you're not focused on heroes and heroines, you will not experience yourself as heroic.  If your mirrors don't reflect greatness, you will not experience yourself greatly.  There is no superlative achievement in the absence of extraordinary mirrors.  

Who are the role models that bring out the heroic in you?  For whom are you a role model?  If you understand the mirror principle, you will recognize that serving as a role model for others is the best way of consistently accessing the best within you.

Further Reading:  Living In Tomorrow By Fighting For It Today

Monday, June 22, 2015

Appreciative Inquiry and More Views to Kick Off the Market Week

*  Above we see the number of stocks listed on the NYSE that are giving buy signals minus sell signals for the ADX indicator (raw data from Stock Charts).  The number of buy signals correlate with the number of sell signals by -.52.  That's significant to be sure, as we'd expect, but is far from a perfect negative correlation.  Indeed, when we look at buy signals vs. sell signals independently, it's the number of buy signals that ends up having the greatest relevance for short-term price movement.  Specifically, when the number of buy signals is in its lowest quartile, the next two days in SPY average a healthy gain of +.46%.  All other occasions average a next two-day loss of -.07%.  It's been when we've had the least strength that swing returns have been most favorable.  Summing buy and sell signals across technical systems for all stocks has been a useful way of tracking strength and weakness in the broad stock market.

What is appreciative inquiry and why is it crucial to your development as a trader?

The complicated world of social security payouts.  Consistently excellent perspectives from The Mathematical Investor.

*  A simple portfolio that has ridden recent trends quite well and other excellent perspectives from Abnormal Returns.

Applying a moving average trading system to your returns rather than to price itself appears to bring some performance benefits.

Very useful overview of economic data and more from A Dash of Insight. 

Favorite reads from Steve Burns and New Trader U.

Have an excellent week!


Saturday, June 20, 2015

Momentum, Value, and Short-Term Movement in the Stock Market

Above is a plot of an interesting measure that tracks the difference between short term and intermediate term new highs minus new lows for SPX stocks only.  (Raw data from the Index Indicators site).  When that difference is highly positive, it means that there has been a short-term rally from relatively oversold intermediate term conditions.  When that difference is highly negative, it means that there has been a short-term plunge from more overbought conditions.  This measure is another way of capturing what I call a Momentum Curve, which is the relationship between strength and weakness across multiple time frames.  

Since the start of 2014, when the high-low difference has been in its most positive quartile, the next five days in SPX have averaged a gain of +.33%.  When the high-low difference has been in its most negative quartile, the next five days in SPX have averaged a gain of +.47%.  Across the two middle quartiles, when the momentum curve is neither positively or negatively skewed, the next five-day change in SPX has been essentially flat.  

What the momentum curve captures are short-term momentum and value effects in the equity index.  These, in turn, reflect the dynamics of intermediate-term cycles in markets and the interplay of volatility, correlation, and directional price movement.  Knowing where you're at in a market cycle is quite valuable in harvesting momentum (price continuation) and value (price reversal) effects in the market.  Essentially all of the market gains over the past year and a half can be attributed to momentum and value factors. 

Further Reading:  The Psychology of Quantitative Analysis

Wednesday, June 17, 2015

A Quick Look at Sentiment in the Stock Market

I find it interesting--and surprising--that the five-day equity put/call ratio is hovering at its lowest level since the start of 2014.  Amidst concerns about rate hikes and Greece, traders of individual stocks don't seem particularly bearish on their names.  Breadth also continues mixed, as we had 594 stocks across all exchanges make fresh monthly highs and 530 register new monthly lows.

When the five-day equity put/call ratio has been in its highest quartile going back to 2012, the next three days in SPX have averaged a gain of +.55%.  When the five-day ratio has been in its lowest quartile, the next three days have averaged a gain of only +.03%.  In general, we've made the best returns when traders have been most bearish on individual stocks, and that isn't happening at present.

Further Reading:  Reassessing Trading Strengths and Weaknesses

Monday, June 15, 2015

New Perspectives for a Fresh Market Week

*  As shown above, since late April my cumulative measure of buying vs. selling pressure--a version of the cumulative NYSE TICK--has been in a corrective mode.  Overall, we're seeing more stocks trading on downticks than upticks, although the overall SPY price has been relatively unchanged.  Interestingly, this weakness does not show up when computing the TICK statistic for all listed stocks, as small caps have been relatively stronger than large caps.  Even greater relative weakness is evident when computing upticks vs. downticks for Dow stocks only.

Very interesting evidence that a single-minded pursuit of positives in your trading--and in your life--can bring negative results.

Worthwhile reflections on risk from @ivanhoff.

*  Ralph Vince offers very valuable perspectives on position sizing and growing your portfolio.

A look at the psychology behind becoming trapped in consensus thinking.  Tough to produce distinctive results with status quo thought.

*  A wealth of perspectives on personal finance from Abnormal Returns.

Great source of readings consistently at Quantocracy.

Have a great week!


Saturday, June 13, 2015

Changing Your Trading, Changing Your Brain

An excellent article from Alvaro Fernandez takes a look at how cognitive neuroscience and technology are creating an explosion of apps for the brain.  There's an important recognition in this work:  that in changing ourselves, we change our brains.  Nothing in coaching or psychology works--no journaling, no goal-setting, no self-affirmations, no attempts at discipline or self control--unless it results in our rewiring.

If you are trying to change something in your trading, the key question to ask is:  Am I going about this change in a way that is likely to rewire me?  If not, the change won't stick.  Sticking with the same wiring and hoping for different outputs is a formula for frustration.

Cementing a change in trading--or in any other facet of life--requires two things:

1)  A fundamental shift in state of mind and body - The most efficient (if not the most constructive) learning occurs during trauma:  a single event can alter personality in fundamental ways.  Successful change creates positive traumas.

2)  Repetition - Doing new things the same way over time is what turns positive changes into positive habits.  We know we have achieved rewiring when we have cultivated new habits.  If a change is something you are working on, you know you haven't reached rewiring.  It's when changes become habits that they are truly part of us.

Can the change process be radically accelerated through the use of technology?  It's a topic and challenge that I will be exploring over the summer.  During this time, TraderFeed will move to a weekly mode of publication and I look forward to sharing interesting observations and results.  Throughout this time, I will continue writing the Forbes blog.

Thanks, as always, for the interest and support--


Friday, June 12, 2015

A Different Way to Use Traditional Technical Indicators

The above chart depicts a running cumulative total of buy signals minus sell signals for all NYSE stocks for the Wilder Parabolic SAR indicator (raw data from the excellent Stock Charts site).  It has been a useful overbought/oversold measure for the broad stock indexes.  Note how we've bounced off an oversold level recently.

Interestingly, going back to June, 2014 when I began collecting these data, daily buy signals have correlated with daily sell signals by only -.35.  If we just perform a median split of the buy signals, we find that when we have a high number of buy signals, the next five days in SPY average a gain of only +.01%.  When we have had a low number of buy signals, the next five days in SPY have averaged a gain of +.31%.  

I compute similar stats for the Bollinger Band; CCI; ADX; and RSI indicators and find value in tracking buy signals and sell signals, as well as cumulative running totals of their differences.  Treating buy signals and sell signals as distinct variables ends up offering unique value--it's a very different way of making use of traditional technical indicators.

Further Reading:  Tracking Market Strength

Strategies for Improving Your Trading

What can you do here and now to improve your trading?  Here are a few worthwhile perspectives:

*  From Brett:  Stop prioritizing the work you need to get done and start prioritizing the states of mind and body in which you are most productive.

*  From Jory:  Focus your energy and willpower on your most important goals.

*  From Steve:  Understand and accept the reality of losing trades and managing risk.

*  From Adam:  Understand the phase of the market we're in.

Study yourself and the personal factors that are associated with your best trading.  Study your best trades and how you make money.  Study your worst trades and the factors that hurt your trading.  We're most likely to be consistently profitable if we're consistently mindful of our strengths and vulnerabilities.

Further Reading:  Three Positive Performance Principles

Thursday, June 11, 2015

Being a Good Trader and a Good Asset Manager

It is very important to understand the difference between trading and asset management.  Trading takes advantage of short-term dislocations and seeks to make relatively quick returns.  Asset management is a balanced approach to investment, in which the investor seeks long term returns from underlying factors that drive the returns across markets.  

Traders are like skilled poker players at the casino, sizing up their hands, sizing up the other players, and making intelligent bets when odds are favorable.

Asset managers are like casino owners who dedicate resources to a variety of games that appeal to different gamblers.

If you live life like a good trader, you will step aside from noise and pounce on life's opportunities as they present themselves.  

If you live life like a good asset manager, you will identify the factors that drive your happiness, fulfillment, and success and pour your resources into those.

It's a theme I don't hear people talking about:  how you manage your money is how you should be managing your life.

Are you living life like a good trader, identifying and pursuing real opportunities, while standing aside amidst noise?

Are you living life like a good asset manager, balancing your life's assets to achieve a continuous stream of favorable returns?

Too many people live like bad traders and bad investors:  they overtrade and fail to invest.  

The ability to pounce on real opportunity here and now combined with the investment across many areas of opportunity--not a bad formula for running one's finances.  Also not a bad formula for leading one's life.

Further Reading:  Rules for Life and Trading

Wednesday, June 10, 2015

Are We Significantly Oversold In The Stock Market?

Above is a useful short-term measure of whether we are trading in an "overbought" versus "oversold" mode in the U.S. stock market.  The blue line is the cash SPX; the red line is a five-day moving average of the following:

(5-day new highs minus 5-day new lows) + (20-day new highs minus 20-day new lows) + (100-day new highs minus 100-day new lows)

The new highs and new lows are taken from the SPX stock universe only (raw data from the excellent Index Indicators site).  

Going back to 2010, when we've divided the readings into quartiles, the next three days in SPX for the most oversold quartile have averaged a gain of +.58%.  The average three-day change for the other quartiles combined has been +.01%.  Superior returns for oversold market conditions are noteworthy over the next 20-day horizon.

What makes the current time period particularly interesting is that the same indicator constructed for the 600 SP small cap stocks is not showing the degree of oversold reading we're seeing among the large caps.  For example, about 17% of small cap stocks made fresh 20-day lows yesterday, compared with 28% of large caps.  That discrepancy itself, hinting at the breadth of weakness across sectors, is itself useful information.

Further Reading:  Unique Views of Breadth and Strength

Tuesday, June 09, 2015

Trading Performance and Experimentation

*  How far can you go in trading performance by cultivating better information and better tools for decision-making?

*  How far can you go in trading performance by making better use of existing tools and enhancing idea generation and creativity?

*  How far can you go in trading performance by developing better rules for managing risk and reward during the lives of trades?

*  How far can you go in trading performance by maximizing the cognitive, physical, and emotional states optimal for successful research, idea generation, and trade management?

*  How far can you go in trading performance by diligently tracking all of the above and engaging in ongoing deliberate practice and learning?

For traders pursuing world class performance, the above would make an interesting experiment. 

If trading is a business, what is the product?  What is the world class manufacturing process?  Where is quality control?

Achieving different results requires asking different questions...and a willingness to experiment.  

Strictly following your processes will give you the same results.  Continually improving processes requires experimentation...and learning.

Further Reading: Changing Our Selves

Monday, June 08, 2015

Markets, Trading, and Investment: New Views for the New Week

*  We've seen sectors responding very differently to the recent rise in interest rates.  Banking stocks are at highs ($BKX), while real estate shares are at lows (IYR).  Note the rise in microcap stocks (IWC) since early May.  Large cap shares ($XMI), however, have seen recent weakness and are below those early May lows.  I'm watching the degree to which sectors are moving in unison as a way of gauging broader market moves.  If rising tides aren't lifting all boats (and vice versa), I've found it's worth questioning those moves.

Unusually lucid account of the shift from active to passive investment strategies from Abnormal Returns, with particular mention of The Reformed Broker.  Although I must say I have some concerns about how that total bond fund has now become the largest ETF.  The one scenario I don't hear people talking about is a significantly strengthening domestic and global economy creating rising inflation and rates.  That would not be a good environment for long-term bonds.  Note the recent behavior of TLT, for instance.

*  A good perspective on strong versus weak economic data comes from A Dash of Insight.  Note the very interesting economic indicators linked by Jeff Miller, including ones that reflect low odds of an upcoming recession.  Great macro review.

*  As noted by Jeff, here is an unusually interesting timing model that shifts allocations in stages between fixed income and stocks.

*  The relative absence of female money managers is discussed by Abnormal Returns and is the focus of a recent Forbes piece I contributed, which highlights how six of the ten jobs with the greatest discrepancy between incomes of men and women are in the finance industry.

Have a great start to the week!


Sunday, June 07, 2015

Succeeding At Trading By Listening To Smart People

Here are a few random observations about markets, trading, and life inspired by a cool Jackson, WY morning:

1)  At the recent craft beer gathering I hosted, J.C. Parets--to my surprise--made a strongly bullish case for stocks.  I told him in no uncertain terms that I was bearish.  The conversation stuck with me because I listen to smart people.  A healthy degree of self-skepticism is a good thing: the greatest losses come from drinking too deeply from one's Kool-Aid.  J.C. spelled out his bullish case--his challenge was: what sector is breaking down?--and I took that to heart.  Since that time, I've still traded the bear side, but I've been quick to take profits because I haven't seen a wholesale breakdown.  Was I right in my downside leanings?  Yup.  Was J.C. right about underlying strength?  Yup.  On Friday we closed with 541 stocks making fresh monthly highs.  That's the highest number in over two weeks.  We also closed with 754 stocks making fresh monthly lows.  That's the highest number in almost two weeks.  It pays to listen to smart people:  if smart people disagree about the market, perhaps the answer is to trade nimbly.

2)  Another smart market observer, @ivanhoff, points out that corrections in bull markets often occur through sector rotation.  It makes sense:  when interest rates turn a corner, some industries and companies will be adversely affected; others will benefit.  High-yielding utility shares have been relatively weak; banking issues have been relatively strong.  We've been correcting, but through rotation.  That's not how bear markets behave.

3)  I find it useful to follow the tweet stream after big data releases and parse the signal and the noise.  @RedDogT3 is another one of those smart guys I listen to.  His focus on bank stocks after the Friday number made lots of sense.

4)  I found happiness in a romantic relationship when I finally got it into my thick skull that what I needed was no drama.  None.  Zero.  All the things I had told myself about moody people being somehow deeper and more complex were hogwash.  Moody people, for me, were tiring.  Even now, I start to read an email or tweet high on the emo scale and I'm reaching for the block button.  A major step in my trading was coming to the same realization.  If I wait for the right things to line up and limit myself to signals with a demonstrated edge, my experience is far more rewarding in the long run than going through the ups and downs of trading less selectively.  Sizing up when you have something very reliable that you know very well:  not a bad formula for relationships and trading.

5)  After a period of trading actively, I had to stop trading altogether from 2010 through last year due to compliance regulations at the hedge fund where I worked.  That was also the period in which I had to step back from blogging.  Since returning to trading, I can say that markets are more difficult than when I left in 2010.  At first I thought it was just me, and that I was rusty from my time away.  But it was more than that.  I see many more sharp market moves on sudden flows that will take prices uncomfortably beyond recent highs or lows.  Maintaining a healthy skepticism on seeming breakout moves has been adaptive.  I have benefited greatly by going with market trends and by patiently waiting for counter-trend moves for entries.  One of the best emotional indicators telling me to stand aside is fear of missing a market move.

Further Reading:  A Theory of Romantic Relationships

Saturday, June 06, 2015

Becoming Better By Building Routines...And By Shattering Them

If you're looking to make changes in your life, you can't live a static life.  Routine is the friend of efficiency and the enemy of change.  Routines are great for turning best practices into best processes.  We need routine to cultivate positive habit patterns.  When we seek change, however, we need to break routine.  Not just tweak small changes around the edges, but shatter routine and engage in wholly new activities and old activities in wholly new ways.

Marriage is a great example.  A good marriage has its routines.  In my household, there's a Saturday morning routine for collecting the garbage and bringing it to the dump; routines for feeding our cats; routines for keeping the house organized; and even a morning routine for preparing coffee and breakfast.  Life runs smoothly because of those routines--and that allows us to focus on life's not-so-routine challenges.  But if a marriage becomes nothing more than a collection of routines, a great deal is lost.  The romance that brings people together thrives on fresh, shared experiences.  People stop feeling special to one another if they don't engage in activities that are special.

Hence this week's trip to Jackson, WY, the Grand Teton mountains (above, top), and Yellowstone National Park (above, bottom).  Off the beaten path, you see beautiful things--and amazing things happen to you, like stumbling across that elk who decided to hang out near where our car was parked.  Nothing is quite so special as sharing special experiences.

It's very relevant to trading.  The routines of trading are what enable us to process market information efficiently and stick to what we do best.  If you identify a best practice in your trading, the best thing you can do is transform it into a robust habit pattern.  A definition of good trading could be:  doing automatically what you would ideally do by choice.

But if all there is to trading is routines, we're poorly positioned to adapt to changes in markets.  McDonald's succeeds as a company by making hamburgers the same way at each store, ensuring quality and uniformity of experience for customers.  But McDonald's cannot afford to do the same thing in perpetuity.  It's the new menu items and fresh store designs that enable successful restaurants to stay successful.  It's the reworking of old trading processes and the addition of new ones that enable traders to stay profitable when markets go from trending and non-volatile to volatile and choppy.

Trading success comes from molding ourselves and continued success requires periodic breaking of the molds.  I have met many traders who began their careers with a romance with markets and gradually have become stale.  A job becomes a career becomes a calling when we become married to our life's work.  Too often we work on cementing the routines of our careers, only to stop generating the fresh experiences that sustain our passion.

What have you learned this week, and how will you use that lesson to make yourself a very different trader?

What new trading approaches have you generated this year, and how are you using those to sustain your learning and enthusiasm for markets?

There is a world of difference between the person with five years of experience and the person who repeats a year's experience five times.

Further Reading:  Changing the Viewing by Changing the Doing

Friday, June 05, 2015

Making Noise In Markets By Finding Silence Within

The quieter we become, the more we can hear.  It is difficult listening to markets when we are generating an internal racket.  A recent post from Bruce Bower discusses the topic of filtering out noise and making better trading decisions.  I'm not surprised that SMB readers selected it as one of the most important issues they face.  When traders manage risk and track markets on very short time frames, the internal dialogue easily goes into hyperdrive.  During active trading mode, there is relatively little time for reflecting and quieting the mind.  A deadly situation sets up when aggressive, competitive traders feel the need to trade more, thereby ramping up their internal noise.

We cannot master markets if we fail to master our minds.  The state of our trading relies on the state of our consciousness.  This is why work on my own trading increasingly focuses on brain training.  If markets can change their behavior faster than I can shift mindsets, I will be behind the curve.  We can train our minds not only to get into certain states--relaxed ones, focused ones, positive ones, quiet ones--but also to move flexibly among states.  None of that is possible if we're glued to screens, amped up on each market move, immersed in fight-or-flight mode rather than calm deliberation mode.

Here is one thing I've learned from my personal trading experiment:  If I do not spend five times as much time generating the trade idea as actually trading it, my results suffer.  The best trades come from situations in which multiple factors line up.  To detect that lining up, I need to update my factor measures (breadth, volatility, momentum, sentiment, and correlation), and I need to step back from these measures to see the larger picture in which they are lining up.  There is analysis, there is synthesis--and all of that is time away from actively trading and following what is happening on the screen.

If you want to get away from market noise, a great first step is to know what constitutes signal and spend quality, focused, relaxed time on that.

Further Reading:  Trading and Mindfulness

Thursday, June 04, 2015

Trading Emotionally With Intelligence

An excellent recent article outlines some of the qualities shared by people who demonstrate a high degree of emotional intelligence.  Emotional intelligence refers to our ability to understand our feelings and make use of them in constructive ways. As the graphic depicts, that requires a high degree of self-awareness (knowing what you feel) and the self-management capacity to channel feelings in constructive ways.  Emotional intelligence also includes social awareness of the feelings of others and the ability to make use of that information constructively in relationships.

I've consistently found that the best trades emerge from situations in which the head and gut are aligned.  That means that one is both analytical and intuitive:  you know something is right and you feel it lining up.  Many of my worst trades have occurred when I relied on an analysis to trade a market and have not had a strong feel for the trade.  I've also lost money going with feelings and flying in the face of patterns I've carefully researched.  When intelligence and emotional intelligence come together, an idea makes deep sense.  That is what provides traders with the confidence to hold positions through choppy conditions.  It's a great example of how performance hinges upon some of our softer strengths.

Cultivating emotional intelligence begins with work on awareness.  We can respond constructively to our experience if we're not mindful of that experience.  We are always in a relationship with markets--what are we feeling in that relationship?  How might that be related to what others are feeling?  How have those feelings helped or hurt my performance recently?  How do I feel when I'm trading at my best?  At my worst?  Structuring a journal to observe emotions and identify what we can learn from them is a great way to build self-awareness.

Emotional intelligence begins with the insight that our experience provides information.  It's another brain processing the world for us.  The emotionally intelligent trader learns from that information.  Many good trades come from watching the reactions of other traders.

Further Reading:  Developing Emotional Creativity

Wednesday, June 03, 2015

Changing Our Minds By Training Our Brains

Very important data suggest that we are able to change our thoughts, feelings, and behavior by directly working on making brain changes.  Because of the brain's plasticity, exercise of particular brain functions stimulates growth in the relevant brain regions.  A good example of this was recently reported in The Wall Street Journal, as evidence accumulates that we can treat depression by training the brain. 

We usually think of talk counseling, therapy, and coaching as being activities that influence our social and emotional functioning directly.  Fascinating research finds, however, that successful talk therapies make important brain modifications.  For example, when counseling is effective for clients with anxiety disorders, imaging studies find brain changes that help explain the change

Might it be the case that we can make changes in thoughts, feelings, and performance far more efficiently by intensively training the brain rather than the usual regimen of writing journals, setting goals, and talking to others?  Traditional professionals, from psychiatrists and psychologists to counselors and coaches, have little incentive to pursue this track; their training--and their reimbursement--comes from dispensing medications and talk.

Those medications and talk therapies indeed have been shown to be effective; I am not arguing against those.  Rather, I'm suggesting that people might be able to make very profound changes surprisingly quickly by targeting brain functions for intensive training.

Greater trading discipline and more consistent performance?  Greater emotional control and improved focus?  Enhanced cognitive flexibility and creativity?  Improved willpower and ability to sustain the quest for goals?

What if there were a cognitive equivalent of CrossFit that could train all of these?

Before there are enlightening answers, there are promising questions.

Further Reading:  Three Applications of Biofeedback

Tuesday, June 02, 2015

The Surprising Reason For Many Trading Failures

Our cognitive, social, and personality strengths are gateways to our emotional well-being and life satisfaction.  When we exercise our strengths, we're most likely to find our work and relationships to be fulfilling.  Unfulfilling situations, very often, are those that frustrate our deepest values and competencies.

Many people pursue trading careers when, in fact, those careers are not well suited to their strengths.  They look for the right trading styles and setups and seek to make changes in their psyches when what they need is work that is aligned with the best of who they are.

If you're not succeeding at trading despite your best efforts, looking at alternatives is not an admission of failure.  It could be the first step toward your success.  If these are some of your strengths, trading may well not be your best career option:

*  People skills and interests
*  Spiritual values and interests
*  Creative skills and interests, especially of an aesthetic nature
*  Mechanical skills and interests
*  Helping skills and interests

Many people need a reasonable degree of career and financial security to function at their best.  Trading rarely offers these.  Many people also perform best in highly social, intellectual, or creative environments.  Many trading settings do not maximize these factors.

Sometimes, what looks like self-sabotaging behavior in trading is simply people acting on unfulfilled needs.  The trader who needs variety and creativity breaks trading rules.  It is his or her strengths--not their weaknesses--that cause them to lose discipline.

Your trading problems may be caused by the best of who you are, not the worst.

No one really talks about that.

Further Reading:  Building Strengths

Monday, June 01, 2015

Sector Rotation and Other Views to Start the Week

The above chart from FinViz nicely illustrates that returns from U.S. stocks over the last six months have highly depended upon the sectors you've been invested in.  While it doesn't seem as though the overall averages have moved very far in recent months, there is considerable sector rotation below the surface.  Interest-rate sensitive shares, commodity-related stocks, and shares of international companies adversely impacted by a strong U.S. dollar have been among the laggards.  Healthcare and growth-related shares have been relative leaders.

Directly training the brain may be the most efficient and effective way to make and sustain changes in our trading psychology.  This is an area of tremendous promise.

*  In that vein, it appears that neurofeedback--monitoring and controlling one's brain waves--can be useful in attention training. It's an area I'll be personally exploring in coming months.

Promising frontier markets and other interesting podcasts from the week from Abnormal Returns.

*  Traders are drawn to the hard competition of markets, but it's softer traits that seem to account for trading success.

Three-part interview with Steve Spencer of SMB on trading success.

Why momentum works in trading systems: an interview with Gary Antonacci.

Eye-opening charts from Meb Faber, including a look at current margin debt.

Have a great start to the week!