(This is the fifth post in a series covering innovative technical measures that I track during the trading day. Prior posts in the series are linked below.)
Traders are familiar with tracking the number of stocks making 52-week new highs and lows as a way of gauging the breadth of market strength and weakness. If a market is getting stronger, we should see an expansion of shares making new highs and vice versa. If that doesn't occur, it may be the case that what we're seeing is more sector rotation than true trending. Above we see an adaptation of the new highs/lows concept for active traders. Here we're looking at the number of stocks across all exchanges that are making fresh new highs minus those making fresh lows for that trading day only. (Raw data from e-Signal). Because new highs and lows are defined over the course of the day session only, the statistic is a sensitive measure of intraday strength and weakness. The chart above depicts the trading session for Friday, December 30, 2016. Note how we started the day with new lows swamping new highs. We had some drying up of new lows vs. highs early in the morning, leading to a bounce and a brief period in which new highs outnumbered lows. This number quickly returned negative, however, and stayed that way for the great majority of the trading session. In a trending market, we'll see new highs outnumber new lows throughout the day session or vice versa. Imagine a cumulative line of new highs minus lows throughout the day; this would trend during trend days. If we see a mixed number of new highs and lows, we're much more likely to be in a rangebound, rotational environment. The broad excess of new lows over highs early in the trading session was a useful early tell to trade the session in a mode of selling bounces.
Many traders will observe a trading psychology problem, such as undersizing positions or overtrading, and will then lay out a goal for the next day to not make the same mistake. If you fast forward several months, you commonly find that they're still making those mistakes, still setting those goals. What's going wrong? Noticing a problem is necessary to solving it, but not sufficient. We need to address the factors that are causing and/or triggering the problem. That requires real reflection. Very often, when we experience a psychological challenge in trading, there is a problematic situation that brings an emotional response, which in turn triggers a poor trading behavior. So, for instance, we might have a situation in which we exit a trade only to see it move further in our intended direction. That situation can trigger feelings of frustration and internal dialogue of self-criticism, which then trigger taking a marginal trade to make up for the initial situation. The problem is not just taking the marginal trade; the problem lies with the entire sequence. When we chart the situations, thoughts, and emotions leading to episodes of poor trading, we become increasingly aware of our own patterns. Very often, it's a handful of triggering situations that lead us to make our behavioral mistakes in markets. Once we clearly recognize those situations, we become sensitive to them in real time and can catch them before they have their triggering effect. Psychology journals can be remarkably effective tools for building this awareness, as we jot down situations in one column; our thoughts and feelings in the next column; and the poor trading practices triggered by those thoughts and feelings in a third column. By becoming better and better at observing our patterns, we position ourselves to add a fourth column in real time, which is how we can channel our thoughts and feelings constructively. Goal setting is excellent, but cannot take the place of understanding why problems are occurring in the first place. Many, many trading problems are situation- and state-dependent. They occur in particular contexts. If we can master those situations and mentally rehearse constructive ways of dealing with them, we can address much of our worst trading before actually placing any orders.
This is the fourth post in the series describing market indicators that I follow during the day. (Here are posts one, two, and three). Above we see a five-minute bar chart for the percentage of NYSE stocks trading above their volume weighted moving averages (VWAPs) for that day's trade. The chart is taken from yesterday's market on 12/28/16 (raw data and chart from e-Signal). This is a quick and handy reference measure, as it helps differentiate trend days from range ones. On trend days such as yesterday, the great majority of shares will stay above or below their respective VWAPs. For instance, yesterday saw most stocks trading below their VWAPs early in the morning. We had a bounce and tried to get over 50% of stocks trading above their average prices, but could not sustain that. For the remainder of the day, the majority of stocks stayed beneath their average prices--a good tell for a downside trend day. Conversely, on range days, we'll see sector rotation and a good number of stocks will trade above their VWAPs and a good number will trade below. That keeps the overall measure around 50%. A nice check on the statistic is looking at the sector ETFs and identifying how many are trading above and below their day's opening price. When we have a trend day, the great majority of sectors will either be above their opening price or below. On range days with sector rotation, we're more likely to see some sectors up from their open, others down. Half the battle of daytrading is figuring out day structure as early in the session as possible. The VWAP is a convenient measure of value as established over the course of the day's auction. How we trade relative to that value criterion gives us a good sense for whether the market is sustaining strength or weakness or whether we have a mixed picture and likely range conditions. Further Reading: Using Breadth to Track Market Strength
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This is the third post in my indicator series. The first took a look at tracking moment to moment buying and selling pressure in stocks; the second extended the look at demand and supply to a slightly wider time frame. Here we take an even larger perspective to view a sensitive measure of market breadth: the number of stocks making new three-month highs minus the number making fresh three-month lows across all listed stocks (red line). (Raw data from the Barchart site). I find the one-month and three-month breadth numbers more sensitive to shifts in market strength and weakness than the traditional 52-week figures. Strength versus weakness in the high/low numbers tells us whether the broad market is gaining or losing strength as the index moves higher or lower. Early in market cycles, we'll see breadth expand as the index makes new highs; breadth will contract as the index makes fresh lows. As cycles mature, we begin to see sector rotation and breadth no longer track the directional movement of the index. Thus, for example, we'll see situations like the left side of the chart, in which bounces in breadth cannot produce fresh index highs and then new lows in the index occur on improved breadth. Those breadth divergences, coming late in market cycles, are worth tracking for potential reversal moves. Notice there are other times, such as following the recent U.S. election, in which breadth moves sharply higher as stocks rally. This is typical of the early phases of market cycles and is generally followed by further momentum. The state of market breadth thus helps us distinguish periods in which we want to trade momentum patterns versus value ones. Whereas the uptick/downtick stats give us a short-term picture of demand and supply, the daily breadth stats are helpful in viewing the market's larger picture. Some of the best trading opportunities arise when short- and longer-term pictures align. Further Reading: Tracking Breadth Across Market Cycles
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This is the second in a series of posts that takes a look at the indicators I commonly track in my trading. The first post looked at upticks vs. downticks among all listed stocks on a minute to minute basis as a way of tracking evolving demand and supply in the overall market. That is very helpful for detecting intraday patterns in which buying or selling accelerates or dries up, leading to breakout moves and reversals. Above we see a simple extension of the indicator, in which we track a 10-minute moving average of the upticks and downticks measure. The high, low, and close in net ticks for each minute is tracked over a moving ten-minute window. With that smoothing, we can more readily look at demand and supply patterns over a swing time frame. Notice how, in the first half of the chart, the net buying was restrained and could not lift SPY to fresh price highs. When this occurs and sellers eventually emerge, many of those buyers are forced to cover, contributed to a selloff. Conversely, on the right side of the chart, notice how SPY has been making successively higher lows at periods of net selling. Sellers are no longer able to move the market lower and, toward the end of the week, had to cover, contributing to a pop higher in SPY. Because of low volumes during this holiday period, both the buying and selling numbers have been relatively restrained. A shift in the balance of buying vs. selling when volume finally comes into the market will provide an excellent tell for the next directional move in stocks. Further Reading: Finding the Strengths in Our Trading Weaknesses
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Each of us has a dark side to our personality that has the potential to undercut our trading. Much of trading psychology is devoted to minimizing our vulnerabilities--steering clear of that dark side--and pushing ourselves to do the right things. But what if our dark sides contain energy and passion? What if our greatest vulnerabilities in trading come, not from weaknesses, but from strengths that we fail to channel properly? The disciplined trader becomes rigid and unable to adapt to shifting markets. The aggressive trader easily crosses the line from confidence to overconfidence. The risk-aware trader finds it difficult to pounce on great trades with size and settles for returns that fall short of their potential. In each case, a strength--taken to an extreme--becomes a weakness. If that is the case, much of trading psychology is misguided. The idea is not to push ourselves to stay in the light and steer clear of our dark sides, but to recognize that our worst trading comes from the misuse of our strengths. When we try to steer clear of our vulnerabilities we cannot maximize the best of who we are: the vulnerabilities and strengths spring from the same source. My current article in Forbes lays out an end-of-year exercise that can keep us strengths-focused in a constructive manner. Our worst trading comes from our greatest talents. Once we can identify and embrace the strengths that underlie our performance shortcomings, we place ourselves in a situation in which we can become more flexible in the expression of our greatest qualities. There are few ideas in trading psychology that I view as potential game changers. This is one of them. Happy holidays!
This is the first post in a series in which I illustrate indicators that I follow in trading the SPX stock index. I have illustrated with the SPY ETF (blue line), but the same principles hold with the ES futures, which is what I trade. The chart above represents 1-minute data points for Friday, December 23rd. The red line represents moment to moment upticks versus downticks for all listed stocks, not just those included in the SPX or NYSE universe. (Raw data from e-Signal). When the red line moves above zero, we have more stocks trading on upticks than downticks. When it is below zero, we have more stocks trading on downticks. This makes the measure an unusually sensitive barometer of buying and selling interest across all stocks. Several patterns set up during the day (all times EST): 1) We had a burst of buying a little after the 10 AM hour, yet SPY was unable to make fresh session highs. This divergence occurs when buyers are no longer able to propel stocks higher. As sellers come in, those buyers have to stop out and that creates a short-term down move. 2) Notice how we made session lows a little after the 11 AM hour on good selling pressure. We tested those lows around 1 PM, but observe how we had less selling pressure. As stocks tried to make new lows, selling dried up. This often precedes a rally, as sellers are forced to stop out once buying steps in. 3) Note how upticks outnumbered downticks significantly for most the afternoon session. With selling drying up, buyers remained in control for most the session. A cumulative line of the US TICK measure is a handy way to view the trend of buying vs selling. The cumulative line was in a continuous uptrend from about 1 PM forward. This is just one indicator that I track on a moment to moment basis during the trading day. The idea is to quickly identify turns in buying versus selling sentiment. I find little need to make reference to chart patterns or traditional technical measures when a direct index of buying and selling activity is readily available. Over the course of many days, you see patterns appear and reappear. It is sensitivity to those patterns--and the ability to relate patterns to one another in real time--that enables the trader to grasp the meaning and significance of market movement. Further Reading: Using Upticks and Downticks to Identify Trend Days in the Market
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In trading, doing nothing is often the most difficult doing. A bias toward activity gives us an illusory sense of control, when in fact we often exercise the greatest control when we are not doing. Not trading enables us to see the market unfold in its own time, in its own way. After a while, we perceive meaning in the action: new buying or selling leads to a break out of a range and a new trend; the failure of buyers or sellers to generate new lows leads to a move back into a range. We are best equipped to perceive the meaning of market activity when we are not burdened with our own position, our own views. A flat position makes for an open mind. Can you imagine a psychologist who started gabbing away from the very start of a session with a client? That would most likely be an ineffective (and obnoxious) shrink. No, the skilled psychologist begins by saying little. The skilled psychologist listens and asks questions and listens some more. Eventually a pattern emerges: the person's experience begins to make sense. Once a psychologist and client can identify a pattern that sets up in a variety of life situations, they have the opportunity to intervene in that pattern, interrupt it, and redirect it. It's impossible to take meaningful action unless there is meaning that you perceive, guiding your action. That requires listening before acting. It's the same for physicians. No doctor begins an office visit by offering medications and procedures. Instead, the physician listens to the patient's symptoms, takes a history, conducts a physical, and runs tests before contemplating any action. No diagnosis, no treatment: it's necessary to perceive meaningful patterns in symptoms and test results before conducting any kind of intervention. Understanding precedes effective action.
The skilled actor recognizes that not doing anything opens the door to conveying mood and feeling. Clint Eastwood conveys a great deal with a single facial expression. Not doing permits a different kind of doing. Too many traders act before they truly understand: they are more interested in trading than in making sense of markets. Markets tell a story. We can apprehend their meaning, if only we stop doing and start listening.
We change through challenges. If we're not challenged, we're static. Challenges push us past our perceived boundaries. The mastery of challenges builds confidence. What challenges are you tackling today and this week in your trading? What challenges are you tackling today and this week in your personal life? How are you going to ensure that you're getting better from week to week?
It's not enough to set goals. We have to embrace and pursue challenges to continuously move ourselves forward.
Good market observers offer knowledge; great ones impart wisdom. I'd put Peter Brandt in that latter category. His Factor Commentary contains plenty of knowledge, tracking technical patterns across macro markets, but almost always comes across with heavy doses of wisdom. So it was recently when he wrote about his end-of-year practice of halving his positions in the last two weeks of December and tightening stops on the rest. Might he miss some market action as a result? Yes, he points out: that is precisely why he's stepping back during the quiet period. He recognizes that compulsive trading is dangerous trading. By stepping back from trading, he is controlling any compulsive tendencies and not allowing them to control him. Peter writes in his recent commentary, "I have to always guard against my inner compulsive self...The decision [to get out of the market] has everything to do with gaining emotional distance from the process of market speculation in preparation for a new year." Notice that Peter's strength is his self-awareness, not any Zen capacity to eliminate any and all negative emotion. His ability to observe himself enables him to stay in control; not trading is a strategy that helps his trading! The broad idea here is that many weaknesses represent strengths taken too far. The passion for trading can turn into compulsive trading. Confidence can turn into overconfidence. Risk prudence can turn into risk aversion. Every strength has a dark side at the point at which it is overused. Creativity helps me generate unique and promising trade ideas. Taken too far, creativity gets me tinkering with processes and losing discipline. Look deeply into a trading weakness and you'll often find a strength to be harnessed. Self-awareness helps us achieve that harnessing. Further Reading: Trading With Self-Awareness
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How many traders engage in practice? How many traders actually plan their practices to get optimal benefit from them? When a coach like Bob Knight reviews a game's performance, he's looking for what to emphasize in coming practice. He might then watch film of the coming opponent and tweak his practice plans. Every practice is designed to correct past mistakes and prepare for the next team's vulnerabilities. What is a trader's practice? For the active trader, it's studying the previous day's trading, replaying markets, identifying best and worst trades, and cementing lessons learned. It's also seeing how the coming day is setting up across markets and in premarket trade, developing what-if scenarios for trade ideas, and rehearsing the day's goals. By the end of the week, the prepared trader has five days of experience. The trader who is not practicing has one day of experience repeated five times. Your preparation creates your trading psychology. Confidence cannot be created out of thin air; it has to be earned, with effort as the price we pay. Can you imagine members of a basketball team preparing for the next day by simply writing in journals? If the effort of preparation is far lower than the effort required by performance, you will not be mentally prepared. Boot camp is extra tough to prepare for the toughness of the battlefield. Effective preparation is your boot camp. Further Reading: Becoming a Peak Performing Trader
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The Greatest was right. The mountains ahead can inspire us; it's the pebbles in our shoes that can irritate us and keep us from the climb. What are your pebbles? What are the petty concerns and irritations that drain you of energy and keep you from tapping into the bigger picture of your life? There's a technique in psychology called experience sampling. You set an alarm to go off at random intervals through the day and then write in a journal everything you're thinking about, doing, and feeling when the alarm goes off. Experience sampling is a great way to identify the psychological patterns in your life, both the ones that enhance your life and the ones that detract. Very often, the sampling reveals that we spend inordinate amounts of time and energy on those pebbles: the frustrations of the moment that mean relatively little in the grand scheme of things. I recently created a positive pattern in my daily routine in which I began taking a small aspirin each day along with my morning vitamin pill. Every time I took the aspirin tablet, I mentally rehearsed a key priority for that day. Doing that day after day made the pattern automatic: I now routinely associate taking the pills with connecting to that day's priorities.
Imagine extending the exercise such that, every time you catch yourself getting caught up in negative, frustrated, petty concerns you immediately take several deep breaths, focus on something in your life that you're immensely grateful for, and channel your attention toward an activity that will enhance you and others right then and there. Day after day, pairing the concern over a pebble with a worthy mountain climb would keep you from draining your energy and indeed would help give you inspiration.
Fretting about a missed opportunity, beating yourself up over a losing trade, hashing and rehashing arguments and differences with others, comparing ourselves with others: there are many potential pebbles in our shoes. How much difference it could make if we used the pebbles as triggers for enacting the best within us. Perhaps the best way to deal with a negative pattern is not to fight it, but turn it into an ally. Further Reading: Optimism and Trading Performance
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I love the idea of success as peace of mind. It's being able to look yourself in the mirror and know that you've done the best you can, that you're not perfect, but that you're continually learning and improving. Some traders trade to not lose and so they never really win. Other traders cannot accept the wins they achieve and have to keep trading and keep trading until they eventually lose. Neither group achieves the peace of mind that comes from focusing on the process of development rather than the recent outcome of performance. Thanks to a savvy trader for passing along this Harvard Business Review article on goal-setting. The article makes clear that the way in which we set goals greatly impacts the probability of our success and the mindset we're likely to come away with. For example, research suggests that 41% of items on people's to-do lists never get done. The average professional has 150 tasks to accomplish at any one time. It's difficult to reach a point of peace of mind when you're continually trying to keep up with expanding demands.
The article stresses the importance of keeping goal-setting flexible and doable. Flexible means revising goals at intervals: for example, setting monthly goals rather than annual ones. Doable means that both the number of goals and their difficulty be set in such a way as to set us up for success rather than frustration. Many big goals can be broken down into a sequence of smaller ones that create an ongoing sense of progress and momentum.
One exercise I recently discussed with traders is to define each day one thing in two categories that will be accomplished to make the day a productive, successful one. Those categories include your most important goal for your trading and your most important goal for your personal life. The trading goal is taken from your most recent performance and involves either building on a recent strength/success or correcting a recent mistake or shortcoming. The personal goal involves building into your day some activity that generates happiness, fulfillment, energy, and/or closeness to others.
So each day, you're exercising some function to become better in your work and to become better as a person. Over time, the accumulation of small goals creates large changes. The idea is to make each day a win, regardless of the P/L of the moment. That creates peace of mind, and peace of mind frees us up to trade with open minds.
How many times have you looked back on a market day and wondered how you could have possibly missed opportunities that presented themselves? I'm not sure this is always because of hindsight bias. Sometimes we miss opportunities because we're not in the right mindset for processing the new information markets are providing. Here are a few elements that can impair our ability to read markets in real time: * Fatigue - This can result from lack of sleep, poor quality sleep, draining of concentration during extended focus, lack of exercise, and poor nutrition; * Stress - This can result from the negative self-talk that accompanies losses and mistakes, as well as from pressures we feel about our finances, relationships, and other important areas of life;
* Cognitive Inflexibility - This can result from becoming so locked into a particular view that we do not actively seek out new and different information, do not look on multiple time frames, and do not look at all relevant market information. Think about your daily routines. How well do they provide energy and concentration, and to what degree do they contribute to fatigue? How do your daily routines channel your focus constructively, and to what degree to they add stress? How well do your routines keep you open minded and fresh in thought, and to what degree do they lock you into stale views? A great deal of trading skill comes from pattern recognition and openness to signals from the head and gut. Many traders attempt to read markets while engaging in routines that effectively shut their eyes. I strongly suspect there is a great deal we can do to turn our minds and bodies into ever-better signal processors. This form of market preparation may be every bit as important as what we do to generate ideas and trades: the key to improving our trading performance lies in our mastery of daily routines. Further Reading: Trading and Information Processing
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A topic that has arisen in recent conversations with traders is the importance of focusing on what has been making you money and sizing up those trades, rather than taking many kinds of trades throughout the day or week and watering down your edge. So often, the difference between profitability and unprofitability is eliminating marginal trades and trading more confidently with our core strengths. Perhaps most damaging in taking those marginal trades is that we don't accumulate those small wins that allow us to go after larger ones. It's difficult to build confidence when oscillating between winning on good trades and throwing money away on so-so ones. A great way of focusing is writing down every component of your best trades. That comes from studying your winners over a representative period of time. How does the market or instrument set up for your best trades? How do you make your best entries? How do you optimally size positions? How do you know whether or not to get bigger or smaller in the trade as it unfolds? When, where, and why do you stop out or take profits? When you write something down and read it and reread it daily, you cement it in your mind. As I stress in the recent book, you turn your best practices into robust processes. But they are *your* processes, derived from *your* success; not something handed down by a would-be guru. When your best practices become so automatic that they are a fundamental part of who you are and what you do, then you are ready to test out other trading with modest risk and find other rabbits worth chasing. Many traders have the ability to win and indeed would be winners if they grounded themselves in their best practices. Instead, they lose focus--often out of frustration--and chase one rabbit after another, catching nothing in the end. A major turn in trading psychology is getting to the point where losing increases your focus, rather than erodes it. Further Reading: Building Your Trading With a Solution Focus
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Bertrand Russell had a point. A good part of wisdom is knowing what you don't know and being self-aware with respect to your flaws. Here is an interesting observation. Some traders I work with choose to share their journals with me daily. In the great majority of cases, they are among the top performers. It is quite rare that struggling traders keep a routine journal and, if they do, choose to share it. Perhaps this is the reason: the best traders sustain self-awareness. They know they have flaws and they want to be aware of those flaws, so that they can minimize those. They are also aware of their strengths and seek to stay grounded in those. Traders lacking self-awareness can't be aware of flaws and so unwittingly repeat those. They attempt to maintain confidence by overlooking vulnerabilities, not by sustaining awareness of those. A self-aware trader can describe in detail his or her trading process. A self-aware trader also has a process for working on himself or herself. Humility and awareness of limitations become strengths when they are tied to a drive for self-improvement. Further Reading: Evaluating Yourself as a Trader
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Reading for information is a bit different than reading for fresh thinking. Often, when we read a book, we simply absorb the ideas of the author. When we read for fresh thinking, we actively play with those ideas and create new ones. An exercise I've mentioned in the past--and that I've used in writing my books--is reading in parallel. Select a topic of interest and then purchase at least four highly rated, well-reviewed books related to that topic. Skim each book in advance and mark off the sections most relevant to your selected topic. Then take turns reading from those sections of each of the books, freely moving from an idea in one of the books to related ideas from the other books. So, for example, I might read four books on creativity, but will read the sections on "problem finding" (how to arrive at worthwhile questions to ask) from each of the books. Then I might read the sections on brainstorming from each of the books. Rarely will I get through every section of every book. The idea is to create a kind of dialogue among the authors, identifying points of overlap and difference. Very often, the ideas from one book will trigger ideas that have you scouring the other books for elaboration. The mixture of ideas from several books will lead to a thought that is not contained in any of the books. When you read in parallel, it's like being in the room while the authors are conversing. The intersecting of ideas almost always stimulates fresh ways of thinking about (and applying) the topic at hand. The key to reading in parallel is starting with worthwhile books. Curated lists are often a great place to start. Here's a curated list of good books from James Clear. The excellent site Abnormal Returns offers an excellent curated list of articles and podcasts organized by categories. Quantocracy offers a great list of articles relevant to quantitative finance. Barry Ritholtz regularly puts out thought provoking articles of relevance to macro investing. There's a world of great material out there...how you access it can help unearth its greatest value. Further Reading: Emotional Creativity
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Kudos to Adam Grimes for an excellent post on a most important topic: how to find trading ideas. The way I think of this topic is "how to find trading hypotheses". Once we have a hypothesis regarding an edge in financial markets, it remains for us to investigate that hypothesis and test whether or not it truly holds water and in which situations it may and may not be valid. One of the greatest challenges to developing trading ideas is limiting our initial search space. So, for example, we might look to charts for our ideas, or we might look to limited historical periods. Very often, it's our old ideas that limit our ability to uncover new ones. Confirmation bias is a tricky thing: it's difficult to set aside our assumptions and truly look at markets with fresh eyes. It's not enough to simply look at lots of markets and settle on seemingly recurring patterns as foundations for trading. With a large enough sample, we can find patterns that recur simply on a random basis. Does the presence of a pattern necessarily imply a causal efficacy to that pattern? Patterns are only promising to the degree to which they inform our understanding. We need to grasp, not just that a pattern exists, but why it is significant. When scientists notice regularities in nature, they seek to explain those, and they link their tentative explanations--their theories--to predictions that can be tested.
As psychologist Kurt Lewin observed, there is nothing so practical as a good theory. It's when patterns make sense to us in a broader web of understanding that we develop the confidence to trade those patterns. Very, very often traders attempt to trade patterns without developing a deeper sense of understanding their significance. It's difficult to stay in noisy trades when you don't truly understand why you're in that trade to begin with.
Why do sports teams spend hours reviewing game films of games they've just played? They realize that part of preparation is learning from recent performance. Watching a game, stopping the recording, and identifying what was done well and where mistakes were made helps to cement lessons that will be tackled during the coming week's practice. If a basketball team consistently failed to box out the opponent to be in a position to gather rebounds, you can bet that the coach will drill this point home during game review. That week's practices will likely feature plenty of drills involving boxing out. By the next game, the lessons will be literally drilled into the heads of the players. That is how we improve: review, drill, apply. Every performance becomes learning for tomorrow's performances. The true professional, like Michelangelo, is always learning. How much time do you spend in intensive performance review? How much of your reviews find their way into actual practice? How much of your practice guides your next performance? For many traders, it's the practice element that is missing. They are like basketball teams that go from game to game with no drilling, no practice. If teams went straight from watching game film to playing the next game, how much would they truly improve? As I've noted in the past, every elite performer--from the Olympic athlete to the Broadway actress--spends more time in practice than in actual, formal performance. Can we truly hope to become elite trading performers when we're so busy performing that we never practice?
Here's a great routine to further your trading psychology in the year ahead: Each day, give yourself a letter grade in the following areas of psychological well-being: 1) Happiness - Feeling joyful; doing things that are fun; enjoying what you're doing; 2) Satisfaction - Feeling fulfilled; doing things that are meaningful; acting on your deepest values; 3) Energy - Feeling invigorated; doing things that give you energy; getting full rest and physical exercise; 4) Affection - Feeling close to those most important to you; doing things that bring love and closeness; connecting with others you care about. Each day you receive a C grade or below in one of the areas, you set a goal to bring that grade higher the next day by actively scheduling experiences that will bring well-being. Track your day's productivity and the quality of your trading as a function of your daily grades. See first hand how your trading is intertwined with your trading psychology.
Improving your trading psychology is just like improving your trading: it's all a matter of ongoing deliberate practice. Further Reading: Can Successful Trading Be Taught?
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Good markets, bad ones: the one thing we can be certain of is that "this, too, shall pass." Trends and ranges don't last forever. Periods of flat and narrow activity are replaced by volatile directional moves and vice versa. When I wrote my most recent book, I sought to explain a puzzling finding in my observations of traders: Those who were most obsessed with standardizing their trading processes and trading with discipline were the ones showing the worst returns! That flew in the face of common wisdom. When I looked at the traders performing the best, what I saw were very nimble participants who could change their views and approaches to markets quickly as conditions changed. When I codified my observations in the book into an ABCD scheme, you can see which came first: * Adapt to changing markets * Build on your strengths * Cultivate creativity * Develop best practices and processes The challenging issue, of course, is *when* to adapt and how quickly situations will change. Is today trading like yesterday? Can we expect wholly new patterns to emerge or a continuation of the ones we've been seeing? Do I stick with what has worked in my recent trading or take each day as it comes? A concept that I find very helpful in this regard is the notion of stable distributions. A stable distribution is one in which the means and standard deviations from one portion of a time series do not significantly differ from those of another portion. If I flip a fair coin 1000 times and then flip it another 1000 times, the distribution of outcomes will be very similar. That's a stable distribution. An interesting application of standard technical measures is using them to gauge the stability of the market's behavior. For instance, I can look at the distribution of upticks and downticks over a past period and compare that with the market's most recent distribution. That is very helpful in identifying whether new participants entering and leaving the market are making a meaningful difference in price behavior. If the distribution of upticks and downticks is remaining stable, we can have greater confidence that the near-term future will look like the most recent past. When the number of stocks registering fresh 52-week highs recently soared to levels not seen in many, many months, the distribution was suddenly not stable. Assuming that the future would be like the past would have been hazardous to one's wealth. Most recently, I've received quite a few questions about when this bull move will come to an end. One thing I watch from day to day is the number of NYSE stocks moving into, above, and below their respective Ichimoku Clouds. (Raw data from Stock Charts). I've collected those data for over a year, so I have a reasonable sense for when distributions are relatively stable and unstable. The clouds are like Bollinger Bands. If we don't have many stocks moving above their upper extremes, below their lower extremes, or moving from current extremes back into their clouds, the odds are pretty good that nothing major has changed for the market. If a market is going to reverse course, we generally see advance notice from the strongest and weakest sectors, which make their moves first. That shows up in the cloud data. On Friday, we had a total of 156 NYSE stocks change their cloud status. That is in the lowest quartile of readings over the past year. The market had been strong on Wednesday and Thursday and it would have been easy to want to sell an "overbought" market on Friday, but in fact stocks were not changing their distributions. That is very helpful information for traders deciding to trade vs. fade most recent market moves. The wise trader approaches market action as a Bayesian, constantly looking at the most recent activity and determining whether it falls into the pattern of the recent past or meaningfully diverges. The market situation will always change--eventually. A key to successful trading is figuring out whether we are in a stable trading period or one of transition. Further Reading: Creativity and Innovation in Trading
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High intensity interval training (HIIT) is an approach to exercise that replaces extended workout routines with shorter, more intense periods of activity that alternate with periods of slowing down. The graphic above depicts one approach to HIIT; this article outlines several common protocols. HIIT is related to super slow approaches to strength conditioning, which emphasize the value of fewer repetitions performed slowly and carried out to the point of failure. The idea is that the body achieves maximum adaptive response when it is challenged intensively for short periods of time. This makes exercise time-effective as well as effective for aerobic conditioning and strength-building.
Interesting from a peak performance perspective is the psychological impact of HIIT. Viewed as psychological training, HIIT can be seen as a system for routinely challenging one's limits. Imagine starting every day by testing your limits and extending those. Day after day, we become accustomed to extraordinary effort and we improve our capacity to sustain effort. After all, when we push our limits with super slow activity and high intensity effort, we also have to sustain a high degree of focus and cognitive intensity. As I wrote about the preparation routine of legendary wrestler and coach Dan Gable, his workout routine included intense visualization as well as physical effort. His training extended to mind and body.
And what about training for traditional performance fields, from athletics to the performing arts to trading? Would such training benefit from high intensity routines? Would traders learn markets better if their learning did not take place in a classroom, but instead in an environment of intense simulation? If we don't systematically test our limits, can we truly hope to extend them? If we don't train for extraordinary effort, can we expect to summon our best in moments of challenge? High intensity interval training may pose benefits across many domains, as a framework for self-development.
I've found that there are two modes of trading. One mode is going into sessions with the answers you've researched. You've investigated information that is predictive and you look to enter positions that exploit those predictions. The second mode of trading is to go into sessions with questions. You view the market as an auction process and you look to see how the auction is setting up: whether buyers or sellers are dominating. The first kind of trader is like a musician who has studied a piece of music, interpreted it, practiced it, and now is performing the piece at a recital. The second kind of trader practices all sorts of music and then comes to the recital prepared to improvise based upon what the other musicians are playing. Think about standard tournament chess and think about speed chess. If you only have a limited amount of time to make all your moves in a game, you spend your time in real-time pattern recognition, not deep strategy. In the most widely read blog piece I've written, I sketched out the three questions most important to understanding markets. That's relevant to trading like a speed chess player. In the posts from yesterday and the day before, I identified ways of looking at market strength and weakness that can help anticipate future market direction. That's relevant to developing answers and trading a particular edge or set of probabilities.
Imagine a chess player who switches between standard tournament chess mode, carefully analyzing the board and planning moves, to speed chess mode, quickly responding to the pattern of movement on the board. Such a player would probably engage both modes poorly. The speed mode would interfere with executing the strategy and the strategizing would interfere with the feel needed for pattern recognition.
My hypothesis is that don't necessarily fail because of emotional issues, and they don't necessarily fail because they lack information or experience. They fail for epistemological reasons. They vacillate in their approaches to markets and never fully exploit any. They play too many games and so never become truly proficient at any one. Successful traders trade the way they're wired, and that requires the self-awareness to know how you're wired and the self-acceptance to ground yourself in that. Further Reading: Trading and Information Processing
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A trend day is basically a day with momentum on the day time frame. The buyers or sellers so dominate the market activity that the other side backs off for the remainder of the session. That is what we saw in yesterday's trade: once we broke to new highs with significant uptick readings, the buyers remained in control for the session. I find it useful to track the distribution of NYSE TICK readings during the trading day to identify when we have made significant shifts in buying/selling and when we are extended within a relatively static range. That shift of distribution often makes the difference between trading strength or weakness versus fading it. The momentum principle is true on longer time frames as well. Yesterday's post took a look at the absence of market weakness as an indication of potential future market strength. Now let's look at the presence of market strength, such as we saw in yesterday's session. Does that tend to lead to future weakness as an overbought signal, or does it tend to yield further gains as part of momentum?
If we track the number of NYSE stocks closing above their individual Bollinger Bands and those closing below, we find that 412 closed above their bands. That is a huge number; one of the highest since I began aggregating these data in 2014. For comparison, since 2014, the median number of stocks closing above their bands each day has been 62 with a standard deviation of 69. We've had 48 occasions over that period in which more than 200 stocks have closed above their upper bands in a trading session. Five sessions later, the average price change in SPY has been a loss of -.13%, compared with an average gain of +.15% for the remainder of the sample. When we look 20 days out, however, the average gain in SPY after the strong session has been +.96% versus an average gain of +.49% for the remainder of the sample. While it's been normal to have some near-term pullback after extreme strength, it's also been common for the strength to resume. The market spends much of its time trading in a range. During that range trade, by definition the moves higher and lower lack the momentum to be sustained. The best trading strategy is to recognize the loss of momentum and fade the strength or weakness. Once we expand buying or selling, however, we can get the breakouts from ranges in which strength or weakness leads to further strength or weakness. We lose flexibility when we identify ourselves as range (mean reversion) traders or trend (momentum) traders. One of the great challenges of trading markets lies in recognizing shifts in buying and selling regimes. Further Reading: Tracking Institutional Participation in the Market
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Above we see a cumulative running total of the number of NYSE stocks closing above their upper Bollinger Bands minus the number closing below their lower bands. (Data from the Stock Charts site). This is an interesting measure, because it tells us how many issues are distinctively strong versus weak. The slope of the cumulative line is as important as the direction, as it gives us a sense for the breadth of market strength or weakness. Note the anemic bounce in the cumulative line since the election lows. This reflects the very mixed breadth of the market rise--some sectors quite strong, others distinctively weak. Still, the line has been consistently rising, reflecting relatively little weakness among stocks. For example, the past two days we've seen 95 and 103 stocks close above their respective bands, but only 5 and 9 stocks close below their lower bands. In general, to get a sustained market decline, we need to see not just a reduction in market strength, but an expansion of weakness.
The absence of weakness very often is a useful predictor of future market strength. For example, when the number of stocks below their Bollinger Bands has been in its lowest quartile since 2004 (little weakness), the next 20 days in SPY average a gain of +.95%. When the number of stocks below their bands has been in their highest quartile (great weakness), the next 20 days have averaged a gain of +.70%. All other occasions have averaged a 20-day gain of only +.21%. It's a nice example of how so much in the way of market returns comes from the relative extremes of momentum and value. Further Reading: Momentum, Value, and Short-Term Market Movement
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Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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