Coaching Yourself for a Better Trading Psychology

Thanks once again to the good folks at Futures.io, who hosted the recent webinar on techniques for changing your trading psychology.  The recording of that session is now up on YouTube.  I appreciate Mike, Terry, and crew making that available for those who could not attend live.  We had over 250 attendees and many more questions than I had time to answer.  In August, therefore, I'll do another session with Futures.io, but this time with the sole focus of Q&A.  Traders can ask me any question about any trading (or life) problem, and I'll respond with ways I deal with those challenges as a psychologist and coach.  As the time gets closer, I'll post instructions for registering for that session.

In this post, I'd like to elaborate on a point made in the recent webinar:

What traders typically identify as psychological problems in trading are usually the result of an underlying problem and not the problem itself.  Successfully dealing with the issue means identifying and addressing its cause.

This is a very important concept, and it's what distinguishes would-be trading coaches from actual psychologists.  Very often the wannabe coach has a favorite tool or set of techniques for dealing with trader issues.  It's one size fits all.  A psychologist recognizes that the problems people experience can have many causes and first tries to determine where the problem is coming from.  

Let's take a typical example of a trader complaining of lapses in discipline.  The trader trades well for a while, then overtrades and loses more money than is prudent.  The trader asks the coach, "How can I solve this problem?"

It's the wrong question.  The right question is, "Where is this problem coming from?"  It's only after asking that question that we can figure out a possible solution.

Consider the following possible causes of lapses in trading discipline:

*  The trader is trying to focus on screens continually for an extended time and is becoming fatigued, with a resulting loss of willpower;

*  The trader is distracted by problems in his/her personal life, perhaps upset about arguments at home or financial issues;

*  The trader suffers from attention deficit disorder and resulting impulsivity;

*  The trader has become frustrated by recent trading losses, as these trigger past feelings of being a loser;

*  The trader has failed to adapt to a lower volume/lower volatility market and is now trading breakouts/momentum that fail to materialize.

You get the idea.  Loss of discipline is not the problem.  Loss of discipline is the result of a problem, and we have to diagnose that problem to figure out how to address it.  Filling out trading journals and checklists will not help the trader deal with personal issues at home or medical issues regarding ADD.  Working on mindfulness and awareness/control of emotions will not help a trader adapt to a changing market regime or address past psychological conflicts.  All of those techniques are useful in certain situations; none are universal solutions for our trading psychology.

The starting point for identifying causes of our trading psychology challenges is creating a catalogue of instances when those challenges are and aren't occurring.  So, for example, we would note when we are having more trouble with discipline in trading and we would jot down what is occurring at those times:  what's happening in markets, what's going on in our minds, what's happening in our personal lives, etc.  We would also write down occasions when we're faring much better in our discipline and what is going on at those occasions.  As we catalogue instances, we begin to notice patterns and those provide excellent clues as to potential sources of our trading woes.

The most important distinction is between issues that occur solely within the trading context and issues that also occur outside of trading and/or that have occurred in our past.  If we're lacking discipline in our personal lives (perhaps by not paying bills on time, by being easily distracted, by being emotionally upset), that is different from situations where discipline lapses are specific to the trading context.  Very often the connection is an emotional one:  the frustration that triggers the lapse of discipline is a frustration that is being felt in other parts of the trader's life and/or that has been felt during the trader's past.  

Very often, as you catalogue the waxing and waning of problem patterns, you'll see that working with a dedicated trading coach is not the answer.  If the problem is a conflict from your past repeating itself in your trading, a competent counselor or therapist can help with this.  If the problem is an attention deficit that has been present since our youth, this can be addressed medically and perhaps via biofeedback training.  If the problem is adapting to changing market conditions, perhaps what is needed is some mentoring from an experienced trader.

We can coach ourselves for a better trading psychology by paying close attention to the triggers of our trading challenges.  Asking the right questions greatly increases the odds of finding solutions for our trading.

Further Reading:  

Brief Therapy for the Mentally Well

More Therapy for the Mentally Well

Four Triggers for Trading Psychology Problems

A Powerful Change Technique for Our Trading Psychology

The Daily Trading Coach:  101 Techniques for Changing Trading Psychology
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Seven Training Resources For Developing Traders

If you look at successful programs of training, you'll see three elements:

1)  Hearing - Having information taught to you;
2)  Seeing - Seeing skills being performed based on the information being applied;
3)  Doing - Trying out the skills yourself, with ongoing feedback and guidance from a mentor

Think about apprenticeship programs in the trades; the training of military recruits; the medical education of physicians; and the training of elite athletes.  All involve acquisition of knowledge/information; observation of advanced practitioners applying the knowledge; and supervised efforts to apply the knowledge oneself.  In this three-fold process, we make the transition from theory to skill development.

What we're seeing is an increasing number of offerings to developing traders that integrate the hearing, seeing, and doing through a combination of videos, live trading sessions, and active mentoring/teaching.  Back in the day, trader education generally meant someone giving a class on a topic--and that was it!  Obviously that didn't help traders translate theory into practice.

Here are some outlets for more complete training and support of developing traders that I'll list in alphabetical order.  My goal is not to formally review or endorse these, and none knows that I'm writing this article.  Rather, the idea is to point developing traders in a few directions that could prove promising.  If I have missed some excellent comprehensive resources, please feel free to let me know at steenbab at aol dot com.

*  Crosshairs Trader - David Blair has assembled a comprehensive suite of educational videos and daily watchlists, reviews, and mentoring to help traders apply chart-based setups in real time.  Great way to see how an experienced trader approaches market opportunity.

*  Exceptional Trader - Terry Liberman has assembled a unique coaching resource for traders.  The focus is not on finding trade setups, but rather on building your trading business and figuring out what *your* edge is in markets.  Regular webinars and group as well as individual coaching.  Great way to think through the big picture of your trading.

*  Futures.io - Mike has built a large and active trader community with chat and frequent webinars and downloadable trading tools and resources.  Topics on the discussion threads range from trading journals to the creation of quant tools for trading.  Great way to learn from others.

*  Investors Underground - Nate and team have assembled an active trading community that offers beginning and advanced courses, chat rooms for different strategies, daily watchlists, webinars, and mentoring.  The courses cover a range of topics from chart patterns and setups to scanning for opportunity and reading Level 2 information.  Great way to connect with a variety of mentors and traders in a community.  

*  NewTraderU - Steve Burns explicitly addresses the learning process of new traders with courses on such topics as using moving averages in trading and trading with options.  He also maintains an active blog and has written several ebooks.  Great introduction to trading.

*  OpenTrader - Ziad and Awais offer a comprehensive training program that includes a large number of videos, exercises to drill skills, and live mentoring/coaching.  A unique aspect is the grounding in auction theory and Market Profile.  Great way to approach trading with a well constructed curriculum that moves from theory to practice.

*  SMB-U - Mike and Steve have built SMB's training programs into a successful proprietary trading firm.  Detailed courses integrate video, skill drills, and a real time audio feed to their trading desk.  Topics range from foundation skills to tape reading and options trading.  Their in-house training includes practice trading on a simulator, access to quant tools to improve trading, and daily mentoring.  Great way to learn hands-on.

Interested traders will want to investigate offerings and the cost of those offerings thoroughly before seeking training.  Note that most of these services are offered for active/day traders and especially those in the stock market.  If you do investigate, I think you'll be surprised by the depth of offerings and the degree to which information is supplemented with active opportunities to watch experienced traders in action and try out their methods for yourself.

For those looking for a low overhead start with trading education, check out Adam Grimes' site, which contains a podcast covering relevant trading topics and a free trading course that tackles topics ranging from technical analysis and psychology to quant trading and options. 

Further Reading:  Fake and Real Education in Trading 

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Note:  TraderFeed will move to a weekend basis of publication starting this coming week, but I will repost popular pieces during the week re: topics that seem currently relevant.
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Building Your Trading By Building Your Consistency

Bella makes an excellent point in his recent post:  We improve our trading not only by making improvements during trading hours, but also by building consistency in our lives outside of trading.  It is through such consistency that we build habit patterns.  Those habits reinforce qualities in us that show up in our work.

Just a moment ago, I was starting to write this post when Sofie jumped onto my lap after bringing me her favorite toy, a rubber mouse.  She was purring and clearly wanted to cuddle and play fetch.  So now I have a dilemma:  do I continue with the post or do I pet this formerly homeless cat and toss her mouse for a few rounds of fetch?  Of course it's a no-brainer.  I play with Sofie.  And I would have done the same thing if it had been my little son or daughter coming up to me while I was reading, writing, or working.  People and their needs come first.  That's what makes me a psychologist.  The consistency of acting upon that is a big part of what has helped me be effective when the people I work with have needed attention.

Whatever we do during the non-trading day is training for what we will be like when we're trading.  Everything we do trains us for something.  If we are scattered and disorganized in our personal lives, we are building those qualities and will enact them in our trading.  If we fail to make efforts outside of trading, it won't be surprising if we don't follow through on goals written in our journals.  Bella's point is that we become better traders by enacting the qualities in our personal lives that will make us better in financial markets.  

In small ways, every day, we can be the person we want to become until, one day, it all comes naturally.

Further Reading:  Be The Person You Want To Become
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Trading With a Higher Consciousness

A higher dimension of consciousness occurs when we are self-aware:  when we not only act, but observe ourselves in the process of action.  Some activities are best performed on a routine, automated basis, such as driving a car through familiar territory.  To be continually thinking about how you are driving would interfere with the driving itself.  That is the basis for most performance anxiety.

Other activities are not routine and involve deliberate choice among difficult alternatives.  Driving on very icy roads with very limited visibility is not a routine activity and proceeding on an automated basis could be fatal.  In difficult terrain, you have to think carefully about how you're negotiating each turn, how fast you can afford to go, etc.  That self-awareness helps you govern your actions, and it ultimately helps you address the larger question of whether you *should* continue driving under those conditions.

Active trading is challenging from a consciousness perspective.  On one hand, there are times when the trader needs to be absorbed in market activity, reading patterns as they unfold.  This requires the ability to operate on a routine, automated basis.  Active self-awareness can impair such real time pattern recognition.  On the other hand, self-awareness is required for proper risk management and for those occasions when the trading path becomes icy, with limited visibility.  It is self-awareness that tells us we need to pull back from trading and reassess markets.  We cannot pull back when we're on auto-pilot.

Balancing market awareness and absorption with self-awareness and self-observation is one of the trickiest skills traders need to master.  It requires a flexibility of focus, an ability to shift cognitive gears when self-control becomes vital.  One way I've developed this gear shifting is to use losing trades and days as an automatic signal for stepping back and becoming more self-aware.  The losing trades and days may be a sign that markets are changing; they also may signal that we're reading the market improperly.  Losing trades are like seeing some ice on the road and fog in the air...we use the change in conditions to become more aware of how we're driving.

Practicing that gear-shifting--from market focus to self-focus and back again--is a great way to develop a higher consciousness in our trading.  Every step back from the screens can become an opportunity to rehearse gear shifting and build our capacity for flexible performance.

Further Reading:  Sustaining the Flow State
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Techniques for Changing Your Trading Psychology

I look forward to the Futures.io webinar a week from today, when I'll describe three research-backed methods for working on the most common trading psychology challenges.  What will make this session unique is the focus on specific techniques that you can take away and use to coach yourself for challenging trading situations.  I'll also be taking questions from participants and illustrating how the techniques can be adapted for different traders and challenges. 

Hope to see you there!

Brett

Using Cycles to Trade Market Trends

Even in trending markets, we see cyclical behavior.  In a distinct uptrend, we will make cycle lows at successively higher price levels.  In a downtrend, we make cycle highs at successively lower price levels.  Those cyclical movements can provide worthwhile entry areas for those looking to ride longer-term trends.  In other words, we can participate in a trending market by going with the trend for our trade but entering countertrend with the market cycles.  This is different from momentum trading, where we're looking to buy strength and sell weakness on price breakouts.  In a low volatility environment, using momentum to time entries can lead to getting chopped up.  

The chart above depicts cyclical behavior in SPY (blue line) as a function of a moving average of the percentages of stocks in the index trading above various moving averages (data from Index Indicators).  You can see we're in oversold territory on the measure at a higher price low.  This leads me to expect at least a retest of recent highs in the market's bigger picture.  Very good short-term trades can be found when intraday flows line up with this larger market picture.

This is yet another way that we can integrate quantitative and discretionary information in our trading.

Further Reading:   Trading Market Cycles
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Lessons From A Successful Independent Trader

Here's a great post from Bella regarding a small independent trader, J. Park, who has grown his account to $100,000--and what that trader did to achieve his success.  Several lessons jump out from his experience:

1)  He failed many times small before finding success - We see this pattern among a surprising number of the Market Wizards that Jack Schwager interviewed.  It took experiences with failure to finally figure out what produced success.  The success came from perseverance and the ability to learn from failures.

2)  He found multiple mentors - I believe this is key.  Whether its chess, athletics, performing arts, or elite military, we find that successful performers are mentored and trained.  The presence of multiple mentors permits an integration of perspectives that eventually leads one to their own distinct approach.  Interestingly, I have known the mentors mentioned by J. Park, such as @InvestorsLive, @Modern_Rock, @kroyrunner, and @MikeBellafiore, to have mentored other successful traders.  Think of all the stars that have come from basketball coaches John Wooden and Coach K:  good mentors produce good performers.

3)  He focused on process - As he points out, we can't control P/L; we can control our trading process:  what we trade and how we trade it.  The successful trader may be discretionary in their decision making, but will not be random.  Successful trading is rule-governed, where the rules are derived from a clear understanding of who is in the market and what they're doing.

There is a fourth ingredient in success, and it helps explain why many successful money managers started out as active, short-term traders.  Short-term trading creates multiple learning trials.  If you are investing and holding positions for six months to a year or more, how many learning trials do you obtain over the course of a career?  The daytrader has 200+ learning trials every year--more if they are using simulation tools, engaging in review of recordings of their trades, etc.  That intensity of learning trials acts as a kind of cognitive gym, building the decision making and pattern recognition skills of the trader.   

All the learning trials in the world, however, will not lead to a cumulative result if they are pursued haphazardly.  The reason we see mentoring as a key ingredient in success across disciplines is that the right teaching guides learning trials toward optimal development.  Great athletes don't just exercise daily; they perform the right exercises.  That is equally true for developing traders.

Further Reading:  Trading With Focus
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Growing Your Trading By Integrating Quantitative and Discretionary Processes

A developing trader makes progress by mimicking a mentor, an experienced and successful trader.  That developing trader becomes an experienced and successful trader by finding multiple mentors and integrating the wisdom and best practices of each.  If you look at training programs from medicine to the military, you'll find strong mentors and multiple mentors.  We acquire skills and we integrate them: that generates expertise. 

A distinct trend in recent years is using multiple mentors to integrate quantitative approaches to trading with discretionary ones.  A simple example occurred at a firm where I worked, where several of us developed a predictive model for trend days in the stock market.  We examined days that qualified as trend days and days that did not and built a simple model based upon such variables as volume and breadth.  The output from that model was then shared with traders, who integrated the results into their own trading.  So, for example, a trader might focus on stocks most likely to benefit from the trend by looking at volatility, relative strength, etc.  A different trader might use the model output to extend the holding time on a trade that had already hit its first target.

Yet another example of integration would be using historical studies of market tendencies to frame trade ideas.  Some of those studies can be found via Quantifiable Edges and from Paststat and from InvesiQuant.  Still more quant resources can be found via the excellent Quantocracy resource.  Market regimes can change and what happened in history may not be mirrored in the near future, but knowing tendencies from well-constructed studies can tell you what markets *usually* do in a given set of circumstances.  Some of the best discretionary trading comes from occasions when markets fail to do what they "should" be doing, as that tells us that idiosyncratic factors and flows are dominating trade.  

The ability to integrate new information and styles into our trading is what keeps us learning, developing, and adapting to changing markets.  It's when we don't integrate that we stagnate.  The most consistent finding I've made as a trading coach is that the best traders find multiple ways to win.  Those traders can be successful in multiple market regimes.

Further Reading:  Identifying Trend Days in the Market
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Three Tools to Improve Our Trading Performance

If we internalize everything that we do such that all that we do acts as training, then it makes sense for us to train as intelligently and purposefully as possible.  Here are three tools for training traders that have the potential to shape our future performance.  (Please note that I have not received any incentives or compensation for mentioning these.  The companies have no clue I'm writing this, which is how I like to keep it).

1)  TradingSim - I've long advocated the use of simulated trading as a way of practicing pattern recognition for active traders.  What makes TradingSim unusual is that it is entirely web-based (no software to download) and the data are included in the subscription.  You can simulate trading any day over the past two years and the simulator will replay that day with any symbols and technical indicators you choose.  You can view multiple charts simultaneously, and you can speed up the replay or advance bar by bar.  You place your trades on screen and the program tracks your P/L and historical performance.  Great way to review the day; great way to practice trading for developing traders--or for experienced traders testing new strategies.  One unusual feature for daytraders is that the biggest moving stocks are displayed, so that you can trade what is moving.  Longer time frame traders can use the simulation to aid their entry and exit execution.

2)  Headspace - Some smart traders I'm working with are using this program and app, which teach meditation and mindfulness.  There is research supporting its use, and a blog addressing various topics related to work on mindfulness.  The platform is web-based and easy to use, with a guide that walks you through meditation exercises, some of which are tailored to particular needs including relationships, performance, and health.  There is a basic foundation sequence for new meditators and also longer, more detailed exercises to build mindfulness for more experienced users.  The app keeps track of your progress and structures your learning, so that Headspace truly becomes a workout routine.  The program will even send calendar reminders to ensure that working on your head is built into your day.  It's a great way to stay actively engaged in meditation work without having to join a class.

3)  BrainHQ - This is quite an unusual program and app that trains specific brain functions, such as memory, attention, and visual tracking.  It's backed by considerable science, and all the exercises are web based so that they can be accessed from any place, any time.  The exercises can be tailored to various levels of difficulty.  The program keeps score and enables you to track your progress.  It calculates your skill level and sets parameters that ensure that you're always challenging yourself at your threshold.  I am not at all proficient at hand-eye coordination tasks, so these are unusually challenging--and frustrating!--for me.  One of the side benefits is that the work on the tasks builds not only attention/focus but frustration tolerance.  If you're interested in cognitive exercise, it puts you through your paces!

What we're seeing is the next generation of tools to build successful traders.  It's one thing to write in a journal and talk with a mentor/coach about trading mindfully or sticking to your best trading rules.  It's another thing to actually work each day on mindfulness and actively practice trading with those rules.  Taken together, these kinds of tools form a kind of performance gym.  Talking to your basketball or football coach doesn't substitute for getting in the gym and engaging in the drills that lead to better conditioning and sharper skills.  Similarly, speaking with a mentor or trading coach can't substitute for hands-on skills building.  These are great ways to build trading-relevant skills without putting your capital at risk.

Further Reading:  Using Metrics to Boost Trading Performance
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Two Big Ideas That Shape Our Development As Traders

Suppose we start our thinking about performance with two big ideas:

1)  Everything we do is training - We are always reinforcing something.  When we avoid effort, we reinforce avoidance.  When we work out, we reinforce strength and conditioning.  When we talk to ourselves negatively, we reinforce a negative self-image and negative behaviors.  When we establish and follow rules, we reinforce self-discipline.  We're always training; it's just that some people train more consciously, intentionally, and purposefully than others.

2)  We use it or we lose it - What we don't actively exercise, atrophies.  If we don't exercise our bodies, we lose muscle tone and muscle mass.  If we don't exercise our minds, we lose creativity and we decline in our cognitive functioning.  If we don't work on self-improvement and the development of our relationships, we remain stagnant--or worse.  What we don't do during our days and weeks is what we will find it more difficult to do in the future.

So now, with those two premises, we can take a hard look at our lifestyle and ask ourselves what we are training and gaining and what we aren't using and losing.  

Today's lifestyle shapes our tomorrow.

There are many synergies that can be found in our lifestyle.  Physical exercise promotes our health and also our cognitive functioning.  Integrating mental and physical exercise, as in engaging in active dance routines, can improve mental and physical functioning better than simply conducting workout routines or mental exercises.  As Alvaro Fernandez notes on the SharpBrains site, our daily activities, including how we eat and what we do for recreation, impact our brain development.  That is important because our number one tool as traders is our brains, our cognitive functioning.  We are either sharpening that tool or allowing it to dull.

So take a look at what you do during the day, during the week.  Is your lifestyle the lifestyle of a peak performer?  We're always training for something: how we live today is what we'll be like tomorrow.

Further Reading:  Human Performance as a Lifestyle
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Exercising Our Brains for Trading Success

I'm increasingly convinced that cognitive factors, and not just personality ones, differentiate the best traders from the rest.  It's not surprising that my recent post on a cognitive view of trading psychology has been the most widely read TraderFeed post in many months.  Trading psychology has long focused on emotions as the most important focus in trading performance.  The cognitive view says that it is how we process information that enables us to see patterns, understand relationships, and quickly act upon them.  Personality and emotional factors can certainly impact our information processing, but all the self-help techniques in the world won't help us if we're not wired for the kinds of trading we undertake.

Can we train the brain for trading success?  In other words, is it possible to systematically exercise and build those functions that enable us to perceive signals in noisy environments?

I believe the answer is yes, and I will go one step further by proposing that an important element that differentiates successful traders from less successful ones is the quality of their screen time when they are following markets.  The successful traders actively exercise the cognitive functions relevant to their trading while they are preparing for the day, while they are tracking markets, and while they are trading.  Their routines act as a kind of mind gym, building such functions as the capacity for focus, speed of pattern recognition, and the ability to translate perception into action.  The successful trader's daily routine is an excellent cognitive workout.

The less successful trader might look at the very same markets and patterns, but gets a shitty workout.  Their focus is often divided among online chatting, watching markets, taking breaks, speaking with traders, and reviewing their P/L.  They never engage in any single cognitive activity for long enough--or with enough intensity--to get a proper workout.  As a result, the less successful trader does not develop cognitively in the way that the successful trader does.  The successful trader becomes a better information processor simply because they are spending more time--and especially more quality time--in the activities that build perception, concentration, and decision-making.

I'm currently evaluating a brain exercise system called brainHQ, which has been supported by a range of published research.  That research suggests that regular exercise of brain functions can improve our processing speed, memory, attention span, and more.  I find it quite possible that programs for training traders will increasingly turn to brain fitness tools as a way of helping developing traders become more cognitively fit for trading.  How many aspiring athletes would star on the field if they never utilized tools to develop their strength and aerobic conditioning?  How many traders can we expect to find success if they're not actively exercising their brains for the right kind of decision-making?

Further Reading:  Training Our Brains For Trading Success
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Trading With Peace of Mind

Looking backward at what we did right or wrong and looking forward at what could go right or wrong: both are distractions that keep us from being fully focused on what markets are doing here and now.  To be focused in the here and now, we have to achieve a degree of peace internally.  That means placing both past and future into a perspective that does not color our perception of the present.  It's when we're overconfident or underconfident, excited or frustrated, that we're performance focused and no longer fully market focused.

So how do we learn to keep ourselves centered in the present?  It turns out that three short-term approaches to psychotherapy are particularly helpful as sources of change techniques for those seeking peak performance.  Those approaches are behavioral methods, cognitive methods, and solution-focused methods.  On March 23rd at 4:30 PM EST, I will be offering a webinar for the folks at Futures.io that walks traders through how to use these research-tested techniques in real time to deal with such issues as regret, fear, and frustration.

I recently met with a developing trader at SMB who has achieved a startling degree of success thus far in 2017.  He trades actively every day, so he has enough trades under his belt in the year to demonstrate that his success is more than random luck.  What he's done that has worked well is:

*  Learn from an accomplished mentor on the trading desk;
*  Keep score on his trading and quickly figure out what he is doing right and wrong so that he can make constant improvements;
*  Work, work, work on his mindset so that he is as clear-headed and receptive to market patterns as possible.

It is through the use of meditation and other methods--as preparation and in real time--that he has accomplished the work on his mindset so that he can be fully focused on the learning.  A major step forward has been the internalization of constructive self-talk.  If he misses a trade or if he takes a loss, he speaks to himself the way a coach would speak to him.  His internal voice moves him forward; it doesn't keep him chained to the past or caught up in the future.

All of us have that constructive internal voice.  We demonstrate that in the close family relationships, friendships, and romantic relationships that we've developed.  Once we can speak to ourselves in ways that we would speak to those we care about, we place past and future in perspective and free ourselves to be fully focused on the present.  In most cases, it's not a matter of learning new skills.  It's a matter of learning to apply the skills that we already have.

Hope to see you at the webinar!

Further Reading:  A Powerful Technique for Changing Your Trading Psychology
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The Challenge of Changing Market Regimes

In the post on when technical analysis works and when it doesn't, I proposed that markets move in and out of periods of stability.  During stable periods, we have relative uniform participation in the market and those participants are doing relatively uniform things in terms of buying and selling.  A technical analysis indicator that "works" during such a stable period will tend to continue working as long as that uniformity continues.  Once we see a different level of participation (volume) in the market and/or once the distribution of buying and selling among participants shifts, then new patterns emerge.  The technical patterns that had been reliable no longer are such going forward.

This alternation of stability and change occurs at all time frames for markets.  It is a major reason why trading is so difficult, and why it is more difficult than many other performance domains.  The football field does not occasionally change its dimensions; nor do the rules of football shift part way into a game.  The equivalent of those things happens daily in financial markets.

The ability to rapidly detect and adapt to regime shifts is a characteristic we see among successful traders and money managers.  This is as much a cognitive set of skills as a set of personality strengths.

Above we see SPY going back to the start of 2015 (blue line).  The red line is a cycle measure derived from the proportion of stocks trading above various moving averages.  It acts as an overbought/oversold measure.  Note the change in the distribution of the cycle measure from early 2016 forward.  It was at that time that we saw a corrective period end and a bull market leg begin.  The market still cycles (we are in a corrective phase currently), but the dimensions of those cycles are greatly different in an uptrend than in a flat/corrective market.

A major challenge for daytraders is that markets will change regimes during the trading day, with greatest participation early and late in the day and different levels of buying and selling at those times.  This is also true for portfolio managers, many of whom develop fundamentally-based ideas that are meant to play out over periods of time in which markets are likely to change their patterns.  The trader who displays "good timing" is one that is sensitive to regime shifts.  If we think of technical indicators more as barometers than as crystal balls, they can be helpful in sensitizing us to the emergence of new regimes.

Further Reading:  Finding Good Trades
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Three Dimensions of Focus That Power Trading Success

I recently offered a cognitive perspective on trading performance that emphasizes perception and skills in processing information as key determinants of success.  Many traders who struggle with their performance look to their emotions and personalities to improve their results, when in fact they are inputting and processing market-related information in inconsistent and ineffective ways.  Very often this is the result of a lack of solid mentoring.  It is through work with experienced mentors that we learn what to look for and what to do with that information.  That is how medical students learn at the bedside and how soldiers learn in the field.

For shorter-term traders--those for whom timing is an important component of performance--the quality of focus is crucial to successful pattern recognition.  Three focus elements are especially important:

1)  Intensity of Focus - The effective trader is immersed in market activity.  The less effective trader is distracted and hence not immersed.  The less effective trader may be distracted by looking at too many (random) things; they also may distracted by thinking about P/L while trying to read markets.  It is in the latter situation that personality and emotional issues interact with information processing to derail performance.  When traders become self-focused rather than market focused, perhaps out of a fear of losing or a concern over making money, they no longer remain receptive to market patterns.  This results in missed opportunities and the forcing of trades when opportunity is not present.

2)  Flexibility of Focus - The effective trader can shift focus quickly and often without losing intensity.  This is a very important skill.  Think of the painter who has to paint each brushstroke carefully to achieve the right effect, but then who must stand back from the composition to make sure that each element of the painting is in proper perspective and proportion.  Traders often have to focus on immediate price and volume behavior to see what is happening now, but it is in flexibly looking at larger time frames and how other stocks or assets are trading that a bigger picture appreciation of a trade's potential will emerge.  The less effective trader may focus intensely, but rigidly.  They see the trees, but miss the forest--or vice versa.

3)  Sustainability of Focus - We know from the research on willpower that our ability to sustain effortful processing is limited.  We become fatigued after a time and, with fatigue, we lose concentration.  Many trading problems with lack of discipline owe their genesis, not to underlying personality/emotional issues, but to weak concentration muscles.  The successful trader is able to sustain an intense, flexible focus for a considerable period and is good at quickly renewing willpower and concentration.  I worked with traders in Chicago who traded on a very short-term basis (several minute holding times) all day long, focusing on moment to moment shifts in order flow.  Their ability to stay absorbed for lengthy periods was a key ingredient in their success.  Those who lacked that ability moved to longer time frames and holding periods, where it was easier to trade intermittently, with breaks to renew concentration.

I've never met a successful short-term trader who did not accumulate significant screen time.  At one level the screen time was practice in identifying market patterns.  At another level, the screen time was exercise for focus muscles, helping build strength, flexibility, and endurance.  In Chicago, we played with a program that replayed market activity at half-speed and double-speed.  Half speed was great for learning patterns and seeing how they emerged.  Double speed was great for sustaining focus when things are coming at you quickly.  After practice sessions at double speed, normal market activity felt like half speed, enabling traders to pick up patterns readily.  We develop our cognitive performance by pushing our cognitive boundaries.

Further Reading:  The Importance of Trading With Focus
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Readings to Expand Our Trading Horizons

That's the beauty of gathering informed perspectives from across the financial world:  we gain perspective by standing apart from our own views.  Here are some great readings I've recently come across:

*  Investment advice from the world's greatest stock picker and what it means for the financial world.  This is very relevant for the retirement money you don't trade and put at day-to-day risk in markets but yet hope to build.

*  Why momentum is the premier anomaly in stock pricing and other great perspectives from Abnormal Returns.

*  An eye-opening assessment of why smart-beta strategies might not be so intelligent.  Note the interesting conclusion about complex market strategies.

*  Top trading articles from Steve Burns, including one on the highs we get from making money in markets.

*  A hard look at whether we can we trust academic research published in finance.  While the world is crowing over how quantitative approaches have taken over the world, the truth is that the ones making money are the ones that are methodologically sound.

*  Trading outcomes are just as much a result of cognitive skill as personality traits.  A different view with big implications for identifying talented traders.

Have a great start to the trading week!

Brett
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Is Your Trading Truly Your Path?

Sometimes the best answers come from the toughest questions.

Is trading truly your gift?  Does the pursuit of trading truly provide you with meaning and purpose?  Are you doing the kind of trading that expresses your greatest strengths and provides you with ongoing fulfillment?

If the answer to these questions is ultimately no, then all the work on your trading and your psychology will not be helpful.  You'll be another person racing up a ladder that's leaning against the wrong building.

If something plays to our strengths and is deeply meaningful to us, it should be intrinsically rewarding.  The work itself should not be a constant struggle.

I recently shared with a trader that I went through a period as a psychologist when my work was intrinsically frustrating.  I was working in a community clinic and was assigned clients from the local court system.  Some of those referrals were of men who had committed physical and sexual abuse against young children.  The courts referred the men for therapy to help them with their problems.  I was not at all helpful as a therapist.  Every bone in my body wanted to see these offenders in jail, not in my office, and certainly not in our community.  I recognized that this was not an especially helpful or caring attitude, but it was (and remains) very strongly ingrained in me via my life experiences.

For a time, I tried to overcome my emotional wiring and then I realized I was doing no one a favor.  I refocused my professional work on the young, high functioning populations that gave me my greatest fulfillment and moved on to student counseling at an Ivy League university.  It was the best career move I could have made.

The work we're meant to be doing shouldn't always be laborious!  Yes, it takes effort to build a business, paint a masterpiece, or achieve a scientific breakthrough.  But if it's the right work for you, the work itself brings joy and energy.  When we're doing the wrong things, it drains us of energy.  I was miserable coming into the clinic office, knowing I'd be meeting with people who were going through the motions of fulfilling a court mandate. 

Now, people sometimes ask me how I'm able to sustain work with traders, an active family life, a daily blog, the trading of markets, and the writing of multiple books.  How do I get up each morning around 4 AM and sustain work into the evening?  It's not because I'm Superman.  It's because the work doesn't feel like work to me.  It is what I'm meant to be doing.  It keeps me interested, keeps me energized--even when it's hard work.

If you've been working, working, working on your trading and finding more frustration than fulfillment, consider the possibility that the kind of trading you're pursuing is not the path you're meant to be treading.  Perhaps a different approach to markets, perhaps a different focus within finance, perhaps a broader involvement in the business world will speak to you and bring the best out in you.

I know, I know, it feels like admitting defeat to let go, but it can be the first step toward a much larger victory.  I was a couple years into a romantic relationship when it finally hit me that I was spending much more time working on the relationship than enjoying it.  You shouldn't have to work at loving someone and being compatible with them!  Letting go and ending that relationship was painful, but it was the right decision.  She found a happy marriage and family life, and I recently celebrated my 33rd anniversary with my soulmate and our very loved family.

That's what your career should be:  your soulmate.  Your source of joy and fulfillment.  Your source of energy and inspiration.  Don't settle for less.

Further Reading:  Trading Coaches as Whores
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The Real Way to Develop Trading Expertise

When developing traders want to improve their learning of markets, one of the first strategies they turn to is keeping a journal.  They write down what they did right and wrong, and they might make note of goals for the next trading day or week.  That is all well and good, especially when today's observations translate into tomorrow's goals and tomorrow's goals frame the next day's concrete plan of action.  But is this kind of journaling sufficient to supercharge a trader's learning curve?

I think not.

Think about the developing basketball player.  He or she does not simply play in a game, shower up, and then write observations and goals in a journal.  If that were the extent of preparation, fans could hardly expect to see improvement from game to game.  Rather, the player spends considerable time with the coach reviewing the game in detail, with a focus on game film.  The player uses the film to watch his or her performance and observe improvements that need to be made.  Then, in practice sessions, those desired improvements become the focus of both the player's and the coach's attention.

In other words, the basketball player does not wait until the next game to make needed improvements and work on goals.  The player is working on those areas during multiple practice sessions so that the improvements have already been made by the time the next game begins.

That is what supercharges learning.

Above you can see one of the products of my current performance experiment.  It's a single screen that captures the information that is most crucial to my decision making:  volume (participation in the market); buying/selling activity (upticks/downticks); and key price levels at which participation and buying/selling are occurring.  Watching the evolution of these variables during the day is key to finding points at which buying/selling expand/dry up, points that provide good risk/reward for short-term trades.

But where the experiment begins is after the session close.  That's when I return to the chart and advance it bar by bar and review my thought processes as the day progresses.  That slow motion review allows me to observe what I missed during the day session and replay it and replay it until it is cemented in my mind.  The review also enables me to pick up on setups that recur during stable market regimes.  This is a way of building a trader's cognitive development, sharpening the trader's perception, and finding opportunities in different market conditions, all of which are every bit as important as working on our emotions. 

Look at the greats in any sport.  They spend much more time practicing and honing their craft than actually performing.  There's a lesson in that.

Further Reading:  Patterns of Efficiency in the Market 
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Using Trading Metrics to Get to the Next Level of Performance

The hallmark of performance improvement is keeping score with relevant metrics.  If a baseball pitcher is working on performance, the metrics might be hits and runs allowed; number of walks given up; percentages of balls and strikes thrown; success at getting outs with right vs. left-handed hitters; etc.  Then the metrics can get more detailed.  How does performance vary with men on base vs. no men on base?  How does performance vary during early vs. middle vs. late innings?  How does performance vary when throwing breaking balls vs. fast balls?

By slicing and dicing performance data, we can gain a valuable window on strengths and weaknesses and areas to target for improvement.  Of course, the data must be collected over a sufficient time that we see meaningful trends and differences, not just random changes.  During any week, a pitcher may do better or worse in a category simply because of normal variation in performance.  It is over time that we see important distinctions emerge.

It is common for performers to have blind spots in their self assessments.  A simple example would be driving skill.  The great majority of drivers rate themselves as better than average when we know that, statistically, that can't be the case.  If we had on-board computers calculating things like speed, braking time, closeness to other vehicles, etc., we could more accurately detect who was driving well and who wasn't.  Indeed, the metrics would detect areas to focus upon to improve driving that the driver might not be aware of at all.

So it is with trading.  We write in journals and we assess our performance, but rarely do we take a hard look at actual performance data.  Very often, if we don't measure it, we can't manage--and improve--it.  Here are a few examples of traders I've recently worked with who have used metrics to get to the next level of performance:

*  A diligent trader measured confidence level in each trade taken based upon the evidence in favor of that trade idea.  The trader then tracked the hit rate on high confidence trades versus others.  When he saw that the high confidence trades actually had a greater likelihood of being profitable, he began sizing those larger and making more money;

*  A wise portfolio manager went back to previous trades and calculated the P/L on those trades if the entries had been made at the end of the trading day rather than when they had actually been made, during the day.  The profitability of the trades improved markedly simply by entering on an end of day basis.  When entering during the day, the trader tended to buy strength and sell weakness out of a fear of missing the move, creating poor trade location and diminished reward-to-risk.

*  A motivated trader working on becoming better at generating ideas kept track of the correlation of his P/L with his hedge fund overall, with the markets he was trading, and with hedge fund industry statistics.  Over time, he saw a reduced correlation as he traded some unique strategies and expressed views in more unique ways.

*  A concerned trader working on discipline and taking better trades calculated her hit rate on trades (percentage of winning vs. losing trades), and also compared the average size of winning vs. losing trades.  We additionally calculated forward P/L after runs of recent winning and losing trades.  All of these helped to measure whether she was becoming more selective in her trading, whether she was engaging in sound risk management, and whether she was avoiding overconfidence and underconfidence after winning and losing periods.

Almost any trading goal that we can set can be measured with the right metrics.  We may feel we're getting nowhere or we may delude ourselves that we're making progress, but over time the numbers will tell us where we truly stand.  Focusing on improving our metrics is a great way of improving our trading processes and not becoming overly focused on short-term P/L.

What are you working on right now and how are you measuring and recording it?

Further Reading:  Using Metrics to Discover Your Trading Psychology
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Reading the Market's Psychology

One of the first things I look at in a market chart is whether the large candlestick bars are dominantly green or red.  That is, when we have range extension, does that tend to be to the upside or downside?

Let's think about that.  Range extension denotes volatility over the time period and volatility is highly correlated with volume.  When we see large bars, those are periods of higher volatility and volume.  If large participants are moving the market higher, we should see more large green bars than red ones and vice versa.  It's a quick way of gauging the psychology of the market--which way large, active players are leaning.

Of course, we can formalize that idea by creating a rolling correlation between volume and price change.  Above we see SPY (blue line) and the rolling two-hour correlation between five minute price change for SPY and five minute volume (red line).  This behaves as a kind of "overbought/oversold" measure, telling us when volume has been pushing stocks higher or lower.  Notice, for instance, how volume was decidedly on the sell side on February 28th and then decidedly on the buy side with yesterday's sharp rally.  Seeing that shift was an important tell for detecting the market's psychology.

Notice also how Tuesday's volume to the downside could not push SPY prices to new lows.  We had selling activity, but the selling could not move price significantly (i.e., it could not break the market's trend).  That is an example of the idea of inefficiency, as noted in the earlier blog post.  We want to know, not only if the active and large traders are leaning one way or another, but how much their leaning can ultimately impact price.  We're getting plenty of selling periods in the recent market, per the chart above.  What creates the uptrend is the relative inability of sellers to move markets meaningfully.  The selling, in other words, is inefficient relative to the buying.

Our job as traders is to read and follow the market's psychology, not impose our own psychology (our bullishness or bearishness) onto the market.  That means that the skilled trader displays emotional intelligence: intelligence in reading the psychology of the market and being sensitive to that psychology.  Much bad trading is not simply the result of the trader's emotional state, but of the trader's preoccupation with what they think *should* happen as opposed to what is actually happening.

Emotional tone deafness doesn't work any better in markets than in relationships--and for much the same reason.

Further Reading:  Calculating the Power Measure in Excel
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Finding Star Trades When the Market Seems Dark

Thanks to Bella at SMB for the posts on key takeaways and inspirations from my recent seminar at Traders Expo.  I think Bella has gotten it right:  those are key points worth taking away.  I strongly recommend reviewing his posts.

I'd like to underscore the point about first understanding the regime we're trading in and only then figuring out which setups are associated with positive expected returns.  Here is a recent post on the topic.  

If the regime has not changed, the patterns that have shown up recently should replay themselves in the immediate future.  The recent regime has told us loudly and clearly to buy dips.  That regime will eventually change, but it is not helpful to try to front run that change when there is no current evidence that the regime has shifted.

The astronomer does not fret that the sky is dark.  That permits a gaze at the stars.

This has been a totally neglected topic within technical analysis and trading psychology.

Further Reading:  Finding Opportunity in the Current Market

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