Above we can see a chart of SPY (blue line) from 2014 to the present. The red line represents what I refer to as Institutional Participation. It is a measure of total upticks and downticks among all NYSE stocks each trading day. Going back to 2012, if we divide daily institutional participation into quartiles, we find significant relationships. Specifically, when participation is in its highest quartile, the next ten days in SPY average a gain of +1.72%. When participation has been in its lowest quartile, the next ten days in SPY have averaged a loss of -.28%.
Let's think about why this might be.
Suppose we measure institutional participation each minute of the trading day. To achieve a high reading, we would have to see a great deal of upticking or a great deal of downticking at that time. In other words, there would have to be broad-based buying or selling among shares--a surge of demand or supply. Such surges are most likely to come from institutions deploying a great deal of capital, buying/selling stocks overall as an asset class, not just accumulating/distributing shares in a particular name or two.
The broad accumulation of stocks is associated with momentum--a continuation of price strength.
The broad distribution of stocks is associated with value--the reversal of price weakness.
When there is little institutional participation, neither momentum nor value motivations to own shares is present. Returns are subnormal.
One of the greatest mistakes I see traders make is focusing on "fundamental" reasons for short-term stock market movement. This leads to frustration, as many market moves seemingly "make no sense". Fundamentals are very relevant to investing, less so to trading. Trading is about gauging market flows, and flows are not best measured by chart patterns or earnings levels. In gauging the buying and selling behavior of institutional participants, we can assess whether flows are waxing or waning--which tells us if momentum or value are likely to be drivers of future price action.
Further Reading: Institutional Participation and When to Exit
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One of the most common emotional challenges faced by traders is frustration. Frustration can cause us to lose our focus. It can lead us to make rash, impulsive decisions. Little wonder that traders hope to trade in a zen mode, completely emotion free.
As long as we care about trading outcomes, however, there can be no emotion-free trading. Nor would freedom from emotion be desirable for traders. The emotional processing of events that can lead to frustration is also what gives us our *feel* for markets. One successful trader I've known for a while uses his emotional reactions to provide him with insight on how other market participants might be feeling in a given situation. For him, emotions are information.
Frustration can also be a motivator. It occurs when we are blocked in our pursuit of goals. When we channel frustration to better understand and overcome obstacles, we've turned frustration into a positive and essential part of success.
Indeed, I would argue that frustration is not a problem for traders and, in fact, is an inevitable trading outcome at times. The problem is what we can call secondary frustration: our frustration with being frustrated. In other words, it's when we make it not OK to feel normal frustration--when we become threatened by frustration and try to push it away--that we're most likely to let it get the better of us. Fully accepting and experiencing a feeling defuses its power and intensity. When we hold ourselves to an unrealistic zen ideal and fail to accept frustration, our feelings redouble: we're now frustrated *and* we're frustrated with being frustrated.
Secondary anxiety is a big part of what keeps panic attacks going. When people become afraid of normal stress and nervousness, their anxiety redoubles. Interestingly, it's the calm acceptance of anxiety that gets us past fear. The same is true for frustration and many seemingly negative emotions. Making ourselves conscious of them and becoming their observer enables us to separate ourselves from what we're feeling and gain control over our state. Identifying with our feelings is the surest way of allowing them to control us.
The emotionally intelligent trader can prepare for frustration, fear, greed, and other seemingly disruptive states. By anticipating them, rehearsing our response to them, and channeling their energy constructively, we turn our experience into a powerful trading asset.
Further Reading: The Basic Cause of Emotional Problems in Trading
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If you click on the graphical display above, you'll see the results of a very simple demonstration using heart rate variability biofeedback. (I used the Heart Math Freeze Framer biofeedback system for the demonstration; the newer version is called em-Wave.)
In the demonstration, I first attempted to enter and stay "in the zone" by regulating my breathing and sustaining focused concentration. Notice the regular sine-wave rhythms in the top display. The finger sensor to the biofeedback unit is picking up a high degree of "coherence" in the variability of my heart beats. This coherence has been associated with greater emotional well being, improved cognitive performance, and enhanced access to intuition.
The bottom left display shows that I am functioning "in the zone" during this period of coherence. Over that period, almost all my scores fall into the green (high) coherence category (bottom right frame). When hooked to the unit, you can see your rhythms, whether you're in the zone, and whether you're scoring in the green area. All of these give you instantaneous feedback to let you know if your self-control efforts are succeeding.
Notice the change in my rhythms (top panel) about midway through the demonstration. At that point, I began talking aloud about financial markets in a stream of consciousness fashion. I was *not* talking about anything stressful, but notice that simply taking my mind off the self-control efforts was sufficient to get me out of the zone (bottom left panel) and put my readings in the red zone.
This is very important, because it suggests that it doesn't take frustrations and losing trades to nudge us out of our zones. Our normal daily routines take us out of our optimal states of consciousness. Once we begin talking, walking, watching screens, etc., we are no longer in that heightened state of focus and self-control that represents our performance zone.
You can see that I was in the zone from the very beginning of the demonstration. It takes me little time to get into the zone, because of years of practice. Note, however, that even this practice was not sufficient to keep me from leaving the zone once I went into the talk-aloud mode. Where the practice has helped is in returning to the zone once I find myself distracted, frustrated, etc. That is useful, but it doesn't address the more basic problem: our daily work routines are incompatible with our optimal performance zone.
If this is the case, taking trading breaks and preceding work days with meditation are helpful, but the real challenge is sustaining the zone while we are making decisions in financial markets. This would require a very different work routine: one in which we are minimally distracted, minimally active, and highly self-controlled in our breathing and focus. Online chat? Switching from screen to screen to see what is moving? Little to none of what we usually do when we're trading keep us in a zone and indeed take us out of our ideal state.
Nor would writing in journals or talking with trading coaches help the situation. Only a change in our trading process and training to sustain the zone in real time would enable us to make decisions from an optimal state. This is truly a frontier of trading psychology.
Further Reading: Heart Rate Variability and Self Control in Trading
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We've all heard about performing "in the zone", that state of being in which we are so absorbed in our activity that we lose self-awareness and awareness of things around us. This has been called the flow state, and it's been linked to creativity and emotional well-being. When we perform in the zone, we operate in a different state of mind and body--an altered state of consciousness. We enter that state as the result of intense, sustained concentration fueled by deep interest.
Therein lies the challenge for traders. What we do to stay in our comfort zones keeps us out of the performance zone. We cannot stay in our usual states of mind and hope to be unusually focused and in flow. Our normal states of mind are not optimal states of mind: we are too distracted, too self-focused, too broadly aware to be deeply aware.
To be sure, those normal states of mind are useful for normal living. Broad awareness and high sensitivity to events around us can be useful when we're driving a car or navigating party conversations. Normal life does not call for immersion and optimal performance, and normal life becomes our norm--what becomes our comfort zone.
We prepare for trading by studying market patterns, and we prepare for trading by writing in journals, creating our plans, and anticipating market scenarios. Rarely, however, do we prepare for trading by preparing our state of awareness. If we don't train ourselves to sustain flow states in our preparation, can we really expect to access them in the heat of market activity?
In coming weeks, I will be revisiting biofeedback as a training tool for preparing the day's trading. The idea is to train ourselves to sustain focused awareness during our market preparation so that we are more likely to achieve that focus during the day's activity. It may be the case that brain training is the best psychological training of all, enabling us to operate in the zone more consistently and for longer periods of time. More to come re: this project.
Further Reading: Three Uses for Biofeedback in Trading
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Markets move higher, markets move lower. The question worth continually posing is, "Is the market getting stronger or weaker?" This is a meaningful question because a market that moves higher can be getting weaker and a market that moves lower can be getting stronger. Perhaps momentum is waning. Perhaps fewer shares are participating in the move. Very, very often markets will get weaker before they put in a top and will get stronger before a bottom is in place. Is the dollar index moving lower? How many dollar crosses are actually participating in that move? Are stocks moving higher? How many sectors are driving the move? Oil is moving higher. Are we seeing a growing number of contracts trading at offer vs. bid price, or are we seeing size starting to hit bids?
Long before the tree falls, the trunk has weakened. Sports teams build rosters before the wins show up on the scorecard. A political candidate loses support with a couple of constituencies before losing the election. We look beneath the surface of events to gauge possible directions and outcomes.
Perhaps we seek a long-term romantic relationship. We are attracted to a person's looks and demeanor, but ultimately we look beneath the surface to determine if the fit is there. Do they share our values? Are they caring, responsible people? Do they complement my strengths or merely compliment them? What looks attractive is not necessarily a good relationship; what doesn't initially grab us can dazzle us with beauty as we look more deeply.
Too often we focus on price action alone, failing to look beneath the surface. Stocks in the U.S. are making new highs, but across the globe buying is failing to generate new highs. We're making new lows on concerns of economic weakness, but commodities are no longer making fresh lows. When we deepen and broaden our perception, we see what isn't immediately apparent. The quarterback who sees the entire field is more likely to make the right decision than the quarterback with tunnel vision.
When we plan a trade and ground ourselves in that plan, we can unwittingly create tunnel vision. When we develop conviction in a view, we can blind ourselves to fresh evidence that contradicts that view. Having multiple lenses by which we can view strength and weakness allows perception to stay fresh.
Below we see a moving average-based measure of breadth among the FTSE 100 stocks. (Raw data from Index Indicators). We can see when breadth strength leads to higher and lower prices and vice versa. We can see most recently that buying activity has barely moved shares higher--a distinct change from action since February. That same shift can be observed among DAX 30 shares and SPX 500 stocks.
But only if we take the time to step back and look at markets afresh, from multiple perspectives.
Further Reading: Creativity is the New Discipline
Consider the above quote.
Note that it is *not* saying that the future belongs to those who believe in their dreams. Rather, the future belongs to those who tap into the beauty of their dreams.
When something is beautiful, we are inspired by it; we're raised to a new level of awareness and feeling. I recall seeing breathtaking icescapes on a boat trip through the Alaskan glacier region; I think of marveling at the beauty of my child as a baby; I love immersing myself in the beauty of music. Beauty is transformative, taking the normal and making it extraordinary.
Dreams without beauty are tasks. They lose their power to motivate. Think of procrastinators: they may very well have dreams, but there is no beauty. Adding something to a to-do list is the surest sign that the activity lacks beauty. No one needs a calendar reminder to ogle their baby, gaze at an icescape, or enjoy a finely crafted work of music.
A great way to kill the soul is to start the day with chores--the knocking of items off a to-do list. When we start a day without beauty, we live the day without inspiration. And then we wonder why we don't generate brilliant ideas or see beneath the surface of market activity. Perception and reasoning become rote when we no longer tap into the beauty of our dreams.
A wise rabbi pointed out to me that observant Jews recite a prayer called the Shema twice daily: in the morning and evening. But the prayer is no mere recitation; it is meant to be a deeply felt emotional connection to the divine. In order to achieve that deeply felt state, there are warm-up prayers, as it were, that evoke inspirational imagery. The deep appreciation of beauty cannot be turned on and off like a light switch. It needs to be cultivated, evoked.
So it is in many faiths. We fast before a major religious event; we hear music and sing at a wedding ceremony. We evoke beauty, because that is what connects us to the power of our deepest beliefs and aspirations.
We often will start a day with physical exercise, recognizing that energizing the body can help energize our day. Rarely, however, will we perform emotional exercise and cultivate the states in which we have greatest drive and resilience. It's great to set goals and organize our day. Unless we connect to the beauty of our dreams, however, we'll be like cars operating on half its engine cylinders. There's a world of difference between setting goals in a journal and immersing ourselves in the beauty of our dreams.
Further Reading: Achieving Our Trading Dreams
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A successful developing trader recently wrote to me about a psychological obstacle in his trading. I'll quote him, so that you can appreciate the problem as he is experiencing it:
"What is the biggest challenge I face after gaining a solid technical knowledge and skill base? I think it's frustration. Most often: 1) frustration of not being able to explain to myself what's going on with the market's price action at a given time; 2) frustration driven by understanding what's going on in the market, but not being able to make an execution because of poor risk/reward and/or absence of proper setup to enter; 3) frustration after making a dumb mistake and/or acting wrong while not in 100% mental shape.
Based on the 3 points above, it seems that part of myself is acting as a perfectionist...while another part of me does not have the confidence that will allow me to be more flawless and move to the next level...
I have developed decent self-observation and can relatively quickly determine when I am not 100%. You know: the tension, the accelerated breathing...that feeling in the stomach...Although I realize in real time that something is off, that same feeling makes me uncomfortable and is also harming my concentration...Let me add that I do not always feel that way when some of the triggers occur, so I would NOT describe it as a critical and uncontrolled situation. But, yes, it is a barrier I am struggling with..."
This situation will be familiar to many active traders: frustration intrudes during the trading process and threatens to interfere with our best decision-making. As the perceptive reader notices, this can even occur when we are relatively self-aware and in touch with that frustration. How can we move past frustration?
The key is recognizing that frustration occurs when we have a need and that need is thwarted. If we eliminate or change the need, the frustration melts away. If I'm a perfectionist, I create many artificial needs. Perhaps I feel a need to be 10 minutes early for every appointment on my calendar. That will create frustration when I am caught in traffic. If I can accept that I will be just on time or even a bit late once in a while, the traffic is no fun, but it's also no threat. Frustration is a function of expectation--and perfectionism creates excessive expectations.
So what is our trader's need? It's the need to trade, the need to make money. If the market isn't making sense, there's no trade to put on and no money to be made. If the setup isn't there, the trade isn't there and neither are the profits. If a bad trade is placed, the fruits of a good trade are erased and there go profits. That same dynamic can also make it difficult to step away from screens, even though the trader recognizes in real time the signs of frustration. It's not OK to miss opportunity.
Our trader recognizes that there are occasions in which he finds himself thwarted but is not dominated by frustration. Those solution occasions are important to figure out. The capacity to tolerate frustration as an observer and not act on the frustration is true self-control. It is also true self-confidence to recognize that one doesn't always have to trade and make money to be a successful trader. The need to trade and make money, ironically, *feeds* a lack of confidence because it reinforces the notion that we're never good enough, we always have to do more and better.
I suspect those exception situations where the triggers occur but the frustrated trading does not are occasions in which there is a degree of genuine contentment and peace with oneself. That is the antidote to frustration. If you can accept where you're at now and accept that it's OK to not be trading or to make a mistake, you eliminate the expectation that drives the frustration. "I know my best setups, I know how to make money, I'll know what to do when the opportunities present themselves"--that is real confidence. You no longer have to *make* things happen; you have the confidence that, if you do the right things, they will happen over time.
Imagine starting each trading day with a meditation that emphasizes imagery based on peace, contentment, and gratitude for where one is at in trading--and in life. Imagine taking a trading break midday to clear one's head (fatigue is a great breeding ground for frustration) and come back to markets refreshed. Imagine stepping away from the screens each time frustration appears and returning to a few deep, slow breaths and the images from the meditation. Frustrations will always be part of our experience, but they don't have to become drivers of our actions. The capacity to step away from self-demands gives us control and expresses genuine confidence.
Further Reading: Overcoming Frustration in Trading
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Let's think about the views that traders express. Traders look for price movement: a change from one level to another level. That potential movement we could call the numerator; it's what most traders focus upon.
There is another variable, the denominator, that most traders do not focus upon. The denominator is the path between the first and second price levels. It is equally important.
Let's do a thought experiment: I might expect a stock index to move from 2000 to 2100, a 5% move. Let's say the index remained nearly unchanged in value for six months before shooting higher to 2100 in the seventh month. How many traders would have stuck with this trade?
Let's consider a different scenario: The index moves from 2000 to 2100 in one month, but only after having dropped to 1940 in the first week. How many traders would have stuck with this trade?
The point, of course, is that path matters. When we expect a movement, we expect it in a certain time period and we expect the path to the target to have a certain degree of smoothness. Our one concession to path is the establishment of stop levels, but rarely do we think of path as something to investigate in its own right.
Is the path getting smoother or more choppy? Does the market's level of volatility support the likelihood of the desired move in a shorter or longer time period? Is that volatility increasing or waning?
In short, it's easy to focus on what markets will do, but not place enough weight about how that movement is likely to occur. Intellectually, we identify targets and stops, but what impacts us emotionally are paths. It's easy to prepare for the trade and remain unprepared for the path of the trade.
At any time frame, we can identify the amount of net movement between two points (how much price has risen or fallen) as a function of the total movement between two points. Such a measure of trendiness versus choppiness itself waxes and wanes: trendiness is itself a phenomenon that trends. Placing a trade in a low trending environment--and one where trending itself has been declining--is quite different from placing a trade in a high trending environment in which trending is itself trending.
Thinking through the denominator is one way we can deploy capital smarter, deciding when environments are right for our ideas and when environments are more conducive to shorter-term, tactical trading and when they are conducive to longer-term, thematic views.
Further Reading: Why So Many Traders Lose
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Thursday, May 5th
* I will be taking a sabbatical during May and June to work on my next book project, which is the third volume of a textbook and an updating of short-term approaches to behavior change. The blog will be updated on weekends and I'll continue to write the Forbes blog.
* Worthwhile perspective on spotting your best trades from SMB.
* Stocks continued weak yesterday, before bouncing in late and overnight trading. Breadth continued to weaken, with new monthly highs expanding to 382, but fresh monthly lows also expanding to 834. We're seeing particular weakness among Asian stock markets, with the strong currencies weighing on shares there.
* We continue short-term oversold, with roughly 30% of SPX shares closing above their short-term moving averages (see below). The recent inability to rally off these oversold levels is making the current market situation different from what we've seen during the rally off the February lows, as macro weakness weighs on the rally. Payrolls tomorrow will be a major focus.
Wednesday, May 4th
* Looking to find new and useful books, apps, podcasts, and more? Excellent resource: Josh Brown will offer his list on Product Hunt LIVE.
* Stocks continued their weakness yesterday and in overnight trade today, with notable weakness among small caps contributing to negative breadth. New monthly highs across all exchanges dropped to 304; new lows expanded to 619. VIX once again jumped and closed above 16. Global economic weakness has become a dominant market theme, with falling stocks and rising bonds. Short-term we're oversold, with roughly a third of stocks closing above their 3, 5, and 10-day moving averages; on an intermediate-term basis, I still am not getting oversold readings, but market strength is waning.
* The cumulative indicators measure tracks buy vs. sell signals for all NYSE issues across a variety of technical trading systems, such as Bollinger Bands, CCI, etc. Throughout the rally since February, buy signals have handily outnumbered sell signals. That looks to be changing, given the recent weakness.
* I'm keeping a close eye on commodities, as yet another possible indication of global economic weakness. Specifically, I want to see how commodities are behaving vis a vis a variety of currencies, not just USD.
Tuesday, May 3rd
* Thanks to the Benzinga pre-market prep show for the opportunity to offer a few trading perspectives.
* Unusually thoughtful post from Dash of Insight on the importance of understanding analyses that we read.
* Stocks held above their Friday lows yesterday and rallied to the Friday highs before selling off again in overnight trade. We continue a consolidation mode; new monthly highs rose to 563 and lows dropped to 397. About 50% of SPX shares closed above their 20-day moving averages and 60% above their 50-day averages (Data from Index Indicators). I expect those numbers to reach more oversold levels before the correction has run its course. Note how we have been making lower highs on the breadth measure tracking the percentages of SPX shares above their short-term moving averages.
* Sentiment, as measured by share creation versus redemption for the SPY ETF, has turned more bearish for the past three sessions, with net redemptions. I'm watching that closely.
* We saw buying pressure nicely exceed selling pressure yesterday on the upticks/downticks measure. Thus far, net selling and short-term oversold conditions in the market have become near-term buying opportunities for market participants. My continued leaning is to sell market bounces that fail to take out prior day's highs.
Monday, May 2nd
* The best model for making trading improvements comes from understanding the drivers of your most successful trades. Re-engineering your best trading makes you your own guru.
* We saw a sharp selloff on Friday, with NASDAQ shares taking out their early April lows and new monthly lows outnumbering new highs, 583 to 513. VIX hit 17 during the session before dropping on a late rally. That rally has continued modestly in overnight trading. On a short-term basis, we're oversold, with fewer than 30% of SPX shares trading above their 3- and 5-day moving averages. My intermediate measures, however, are not yet in oversold territory. My leaning is to sell bounces that cannot take out Friday's highs.
* One concern I have about the market is the change of regimes in recent sessions. The weak dollar is buoying commodities but not stocks, and it's growth stocks (SPYG) underperforming value ones (SPYV). Earnings have not been impressive and we seem to be pricing in economic weakness. It's far from clear that the move to negative interest rates has sparked either economic optimism or growth. All that being said, I am treating this as a correction within a larger upward cycle, not as the start of a bear market.
* Note how the realized volatility of VIX (implied vol) has hit low levels at relative market peaks and has peaked at relative market bottoms. We are coming off a very low vol of VIX.
Is there a change you would like to make in your trading? In your trading psychology? In your personal life?
If you're looking to improve yourself, to continually develop as a person, change will become your norm. But how do we make changes, and why do so many of the changes we attempt never stick?
A powerful and radically different perspective on the change process is offered by the recent article on finding your solutions. It emphasizes that change is self-directed evolution. This is a very important concept.
The mistake we make is that we perceive change as doing something new, something different. That leads us to seek change outside of ourselves, through gurus or therapists or experts. Indeed, would-be gurus and shrinks have every incentive to encourage that external focus.
If, however, we start from the premise that we are always making changes--some smaller, some greater--we can begin to learn from our own experience. Change isn't something we need to initiate or motivate ourselves toward. Change happens every day, in the subtle differences through which we develop ideas, make decisions, interact with people, and process information. If we only notice, those subtle differences often make a difference. When we are more effective, it's because we're doing something more effectively. The change we desire is already occurring within us.
Once we realize that we are the source of our own solutions, we can become more intentional about the changes we make and more attentive to their outcomes. In short, we can become better agents of our own evolution.
Is frustration interfering with your trading decisions? Look to those occasions when you don't experience frustration and identify what you're doing differently. Scout for examples of times when you *are* frustrated, but manage to make good decisions. How are you able to do that?
Solutions are found in the exceptions to our problem patterns, not in trying to be someone we're not. If there's a change you're looking to make, don't look to do wholly new and different things. Look to do more of the change you're already enacting when problems aren't occurring. In all of trading psychology, there is no more powerful principle.
Further Reading: Putting Positive Psychology to Work For You
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