Thursday, August 16, 2018

Changing How We See The World

One of the most important findings in psychology is that people make important changes in their lives when they are in the midst of deep emotional experience.  Simply talking with a coach, counselor, or therapist doesn't in itself lead to profound change.  Rather, it's when we experience things strongly that our existing views of the world are shaken up.  That shake up opens us to new ways to view ourselves, others, markets, and the future.

This is one of the reasons important change can occur when people "hit bottom".  It's when everything has gone wrong and we're in despair that we're willing to make a complete overhaul in what we do.  Therapists refer to this as "corrective emotional experiences."

But it's not just negative experience and setbacks that can help us see and do things differently.  Sometimes powerful positive experiences have the same impact.  One example is the experience of awe:  when we are so inspired by something positive that it becomes a part of us and changes our perspectives going forward.  In a new article, I describe recent research into awe and how experiences of awe literally renew our energy and help us become more successful.

A theme I have never heard expressed in conventional trading psychology is that markets--and participation in markets--can become sources of awe.  That is, they can be awe-inspiring.  When we perceive the vast complexity of markets and so immerse ourselves that we perceive a meaningful pattern, it's as if we're catching a glimpse of the universe.  It's not an ego thing at all, strutting about and proclaiming your "conviction" in an idea.  Rather, it's standing back and absorbing all that is happening and allowing ideas and themes to come to you.

Trading with your ego ultimately depletes our energy, as we take too many P/L dings.  Trading with a sense of openness and awe can give us energy.  It can be inspiring.  And that inspiration and awe can help us change how we see the world--it becomes a *positive* corrective emotional experience.  Many traders become frustrated with markets and fight what is happening.  How different it is to experience markets as awe-some!

Further Reading:


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Saturday, August 11, 2018

From Discipline To Professionalism In Trading

In sports, as in trading, performance often begins as an ego-driven activity.  The boxer is all about knockouts; the basketball player focuses on scoring; the golfer looks to ace each hole.  The novice trader wants to make money, and so trades, trades, and overtrades.  This ego focus is not entirely negative; it's a big part of the initial attraction to the performance arena.  But it is not enough.  When we perform out of ego motivations our personal needs overwhelm the requirements of each performance situation.

Many thanks to Mark Meadows and the Top Step Trader team for posting my recent webinar on trading performance.  One of the key points that I make in that session is that a passion for trading is actually a predictor of failure.  That is because the need to trade comes from that ego place where we need to prove ourselves right and need to make money.

More predictive of success is a passion for markets themselves--and especially the passion to understand what is going on in markets.  When we prioritize understanding, the focus shifts from ourselves to what is happening in front of us.  Sometimes not much is happening.  Good trading in those situations can mean not trading.  Mike Bellafiore recently made this point when describing the development of a trader who developed rules for when to not trade.  Discipline--rule following--takes the place of ego:  it's not about trading, but about trading successfully.

Across performance activities we can see that disciplined performance is a necessary phase of development.  The basketball or football player learns to follow a game plan, not just do what they feel like doing.  The poker player learns to fold when the cards aren't right.  It's common for developing psychologists to learn their craft from manuals that are research-validated and that give them a game plan for helping people with various problems.  Discipline is all about sublimating the ego to sound rules and principles.

Later phases of development find that disciplined rule-following turns into positive habit patterns.  Calling the right plays, making the right moves, becomes second nature.  Through repetition, the rules are internalized.  Discipline is no longer needed to do the right thing.  In this later phase of expertise, we see professionals able to read unique situations and make conscious decisions to veer from rules or modify them to the situation.  Instead of following the therapy manual, a sensitive therapist may reach out to a distraught client and offer support.  Instead of backing off trading in the afternoon hours, the index trader recognizes that relative volume has picked up and finds a great place to go short when buyers can't retrace much of the morning's losses.  A football quarterback learns when to call an audible; a poker player learns when to bluff.

That is what professionalism is all about:  Having so much experience that you not only follow good rules and processes, but you know how to adapt to unique situations as they present themselves.  It takes discipline to become a good trader; it takes expertise to know when to veer from that discipline.  It's all about putting our own needs on a back burner and becoming ever more sensitive to what we are trading.

Further Reading:


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Thursday, August 09, 2018

Trading With Patience

You've no doubt noticed that many markets have slowed down with the summer trade, creating narrow daily ranges and little follow-through on directional moves.  The word I most often encounter in trading journals is "patience".  In slower markets, there may only be occasional opportunities worth pursuing.  That means that a good, disciplined trader is often not trading.

What happens during these patient periods--the times of *not* trading--plays a huge role in trading success and failure.  The successful traders I work with use the down time to work on generating new ideas,building new analytical tools, and reviewing their performance.  The less successful traders cannot abide patience and turn trading into overtrading.  They have to have something to do and so they trade, even when an edge is not apparent.

The best traders turn the patient periods into alternative forms of stimulation.

The worst traders experience patience as boredom and find something to trade.

With the VIX below 11 and my "true volatility" measure (movement per unit of volume) at multi-month lows, I'm finding a lot of movement within ranges and then false breakouts from those ranges.  This makes trading very difficult for a momentum style.  A value-based style--buying short-term oversold and selling overbought conditions that break out of a range--has worked much better--especially when directional moves of the index are not accompanied by similar moves across major sectors.  Buying strength and selling weakness on average fail in the slower environment.

In a future post, I'll be reviewing Larry Connors' forthcoming book Buy the Fear, Sell the Greed.  It's an unusually practical trading book, with each chapter describing a specific source of edge and a backtested way of implementing that edge.  One of his tools is a short-term variation of the RSI measure originally developed by Wells Wilder.  During slow market times, I've been experimenting with the measure to exploit the behavioral biases Larry discusses in the book.  Such research is a great way to turn patient times into productive ones.  

Years ago I did an experiment where I showed people a chart and asked them to predict where the market would go from there.  The charts were identical, but half of the subjects saw a chart with a nice green up bar as the most recent bar and the other half of subjects saw the last bar as a good red, down bar.  Not surprisingly, those seeing the most recent green bar expected the market to rise and vice versa.

It's a great example of recency bias.  We overweight recent experience.  In slow, low volatility markets, there is a worthwhile edge in fading that bias.  That's a great lesson I learned during my patient period of not trading:  markets don't have to trend to provide opportunity.

Further Reading:


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Sunday, August 05, 2018

Trading With Energy

One thing I've noticed among traders is that success breeds optimism and energy and optimism and energy breed success.  It's not difficult to walk onto a trading floor and see who is active, interactive, and inquisitive and who is glumly staring at screens and pacing the floor.

I've written in the past about the ratio of activities that give energy to activities that drain our energy and why it's so important to have a positive balance.  It is very difficult to sustain effort--whether it's concentration in following markets or researching trade ideas--without feeling energized.  This is why quantity and quality of sleep are so important to performance; it's why being in good physical shape is helpful.  It's also why clinging to moment to moment, day to day P/L can be so deadly, draining us of willpower resources.

In a recent article, I set out three keys to thriving in any work we perform, including trading.  The common element among these is positive energy.  When we say something has expired, we mean it is no longer fresh, no longer potent.  When we say we are inspired, we mean that we have gained vitality.  There is a world of difference between expired traders and inspired ones.

So here's a quick self-assessment to identify if you are trading with energy:

1)  Does your morning routine give you energy or rob you of vitality?

2)  Do your conversations and interactions with other traders distract you and interfere with your best trading, or do they inform and inspire your best trading?

3)  When you research trading ideas, do you feel inspired and energized?

4)  Do your trading reviews lead you to constructive, energy-giving goals or do they discourage you?

5)  Does your self-talk move you forward and motivate you, or does it discourage you?

If working for someone who managed you the way you manage yourself would lead you to quit your job, you know you have a problem.  All of us are managers of our lives and careers, and--for better or for worse--we are coaches to our own trading.

Is your self-coaching giving you energy or is it holding you back from your best performance?

Further Reading:


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Tuesday, July 31, 2018

The Importance Of Your Self-Talk During Trading

What goes through your mind during trading hours?

How do you talk to yourself?

All of us coach ourselves via self-talk?  What kind of coach are you?

I recently placed a trade looking for a market bounce.  The bounce was feeble and we began to sell off.  I said to myself, "If the bulls are going to be in control, this shouldn't be happening."  I quickly hit out of my position and reversed it.  The small loss on the long position was more than exceeded by the gain on the sale.

The trade was only possible because I had rehearsed an alternate scenario during my preparation of what to do if the market could not hold key upside levels.  Through that alternate scenario, I was able to react to the market weakness without shock or surprise.  It didn't even feel like a losing trade.  It felt like, "OK, it's time for Scenario B."  

Notice that the self-talk was not about being wrong.  It was not frustrated; it was not discouraged.  A well-thought out trade that doesn't work can provide useful information.  It's tuition for some useful learning.

So it is throughout life.  It's always important to have a Scenario B, and view setbacks as learning lessons.  That means taking the ego out of the trade and viewing everything as information.  It isn't about positive thinking or negative thinking.  It's recognizing that it's not about you.  It's amazing how we can trade with peace of mind when we are market focused and not self-focused.

Further Reading:


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Friday, July 27, 2018

Finding Our Fulfillment

The last blog post emphasized the importance of trading with a sense of inner peace.  That peace comes from taking the ego out of what we are doing.

But there is one other key component to inner peace:  fulfillment.

One of the important distinctions that we find in the research on positive psychology is the distinction between happiness and fulfillment.  Happiness comes from doing things that are fun.  Fulfillment comes from doing things that speak to our values.  The research suggests that these are relatively independent dimensions.  Sometimes doing meaningful things is not a lot of fun in the here and now.  Many things that are fun may not be meaningful.

Quite a few life problems occur when we pursue fun without pursuing fulfillment.  Then our success ends up, in the larger picture, feeling like a failure.

Trading problems occur when we pursue trading as a source of fun and stimulation rather than as a career that can provide fulfillment.  The overfocus on P/L is typically a focus on seeking happiness and avoiding unhappiness.  It's in developing, following, and refining good processes that we can find fulfillment.  

When we have plenty of sources of enjoyment in our lives outside trading, we don't need trading for entertainment and stimulation value.  Many, many trading problems occur because we're trying to get personal needs met through markets.  Markets can't always be fun, and they don't always generate fulfillment.  Working on having a positive life--one that is happy, stimulating, and fulfilling--is a great way of taking the emotional burden off our trading and allowing us to deal with opportunity (or lack of opportunity) as objectively as possible.

Further Reading:


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Tuesday, July 24, 2018

Finding Your Peace, Finding Your Success

I'm writing this from the Chicago Traders Expo a couple of hours before my presentation.  One of the topics I'll be covering in my talk is developing ourselves spiritually as a way of furthering our life success--in relationships, in trading, and in careers.

Indeed, my next book will be on the topic of renewing our lives through cultivating our spiritual development.  That book is being written on a blog platform, which means it will be totally multimedia, totally accessible anywhere in the world where there is an online connection, and totally free.  Best of all, the book will enable readers to make comments and share ideas and experiences, which then become part of the book--along with my responses!  That way, the book becomes a dynamic entity:  it will be continually revised and expanded.

The book format is a nice example of what entrepreneurs have always known:  opportunity comes from doing new things--and old things in new ways.

In the ego mode, I want to write a best seller, make lots of royalties, and become a constant figure on the talk circuit.  Good enough is not good enough:  I want more.  In the spiritual mode, we find what most speaks to us.  Getting to that spiritual mode requires finding our peace and letting opportunity present itself to us.

As I will be discussing at the Expo, so much of trading psychology boils down to getting ego out of the way, finding an inner peace and quiet, and processing markets with an open, receptive mind.  I know from my own trading how easy it is to latch onto *my* view of the market and impose that view with a trade, only to have the market show me otherwise.  Looking back, I can only shake my head at how the market's behavior made perfect sense--but I was blinded to that sense.

It's great to have a passion for trading, to work hard at trading, and to follow markets intensively.  But all too often, those activities are ego-driven.  Everything becomes about P/L.  Market ups and downs become our ups and downs.

We'll never find our peace by succeeding at trading.  Succeeding at trading requires finding our peace, because that's the only way we'll be sufficiently open-minded to truly understand what markets are doing.  Finding fulfillment in our lives outside of trading is a wonderful path toward bringing peace to our trading.

Further Reading:


Sunday, July 22, 2018

Where Are Edges To Be Found In The Current Stock Market?

I decided to take a stroll through my database and update views on where opportunity in the stock market has been residing since 2016.  That provides a lookback period long enough to detect meaningful patterns and recent enough to be relevant to current market conditions.  Here a few observations:

*  Sentiment matters:  When the equity put/call ratio has been in its highest quartile, the next ten day return in SPY has been +.96%.  That is almost four times the return when the ratio has been in its lowest quartile, +.25%.

*  Overbought/Oversold matters:  Let's consider the percentage of stocks in the Standard and Poor's 500 Index that have been above their 200 day moving average.  When that percentage has been in its lowest quartile, the next ten days in SPY have averaged a gain of +1.32%.  When the percentage has been in its highest quartile, the next ten days in SPY have averaged a loss of -.04%. (Data from the Index Indicators site).

*  Volatility matters:  When VIX has been in its lowest quartile, the next ten days in SPY have averaged a gain of +.69%.  When VIX has been in its highest quartile, the next ten days in SPY have averaged a gain of +1.02%.  When VIX has been in its middle two quartiles, the next ten days in SPY have averaged a gain of +.39%.

*  Context matters:  When the percentage of stocks above their five-day moving averages is low and the percentage above their 100-day averages is also low, the next ten days in SPY average a gain of 1.00%.  When the percentage of stocks above their five-day moving averages is low and the percentage above their 100-day averages is high, the next ten days in SPY average a gain of +.38%.

Now these are observations only; they no doubt overlap to some degree and I don't pretend that, by themselves, they provide systematic trading ideas.  What is needed is some framework for accounting for these observations.  My straightforward framework is as follows:  the market has been largely trending higher (note how rarely we see negative average returns) and, within that trend, there have been meaningful cycles of 10-20 day duration that capture extremes of volatility, sentiment, and directional movement.

What this means is that traders with a habitually bearish bias have tended to underperform the opportunity set, and traders with a short-term time horizon (holding periods of intraday or swing periods) have also underperformed the opportunity set.  My sense is that a great number of market participants are overleveraged:  they have small account sizes relative to the returns they want/need to generate.  This leads them to take good-sized positions relative to the amount they can afford to lose, which inevitably leads them to manage their positions on shorter and less optimal time frames.  In actual practice, many traders simply don't have the ability to take heat on holding periods of even 10-20 days, even though they may pride themselves on trading "macro" ideas.

My experience is also that traders are very keen to look for trends and trade directional momentum and lack the tools and frameworks to think about cycles and directional reversals.

In short, there do seem to be edges in the marketplace, but they're not found by doing what the crowd is doing.  The key is not playing the game better, but figuring out the right game to be playing.

Further Reading:  


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Thursday, July 19, 2018

A Subtle Strategy for Becoming a Better Trader

If there is one common element I've observed among very successful traders it's that they have superior personal networks.  They cultivate sources of information; they take on role models; they hang out with people they admire.  In all, they spend time with people who make them better.

This can become our online strategy as well.  We can become caught up in noise and bickering online--or we can surround ourselves with inspiration and information.

But how do we know where the great sources of online information can be found?

One simple but effective strategy is to find the people who post ideas online and do so with a passion.  They post regularly, and they post over periods of years.  They do so because the ideas speak to them.  Their passion has become a purpose--and very often it anchors their profession.

Once you find a few such sites, you can then see who those people link to and whose work *they* admire.  The odds are good that purposeful, passionate people hang out with--and link to--others of their kind.  Before you know it, you can develop a network simply by following the links of those who post with purpose.

What an amazing resource hidden amidst the noise.

Here is my recent article, highlighting four of my favorite purposeful online participants.  Follow their links and you'll learn a great deal.

And if you have your own favorite online participants, feel free to email me with their links and I can add those links to future posts.  It's a great way to build each other's networks and support people doing great work.

Further Reading:


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Sunday, July 15, 2018

An Investment View of Trading

Imagine living your life jumping from one activity to another based upon what looked good at the time.  There would be no constraints; you could pursue anything at any time.  

At first blush that might seem like heaven, until you realize that, cumulatively, you would accomplish nothing.  You might have fun, but would your life be meaningful?  After a while, all the activities begin to feel the same.  Life wouldn't feel complete without some sense of purpose.  In pursuing what is meaningful, we postpone things that might be fun at the moment.  We invest ourselves in some greater set of goals.

A full life is one in which we derive both happiness and fulfillment.  We do some things for here and now fun and some longer-term things to achieve meaningful goals.  We know we have hit a sweet spot in life when we find enjoyable ways of pursuing our life purposes.

That means, in life, we are both shorter-term traders and longer-term investors.  Activities we get into and out of day by day are trades.  Goals that we seek over time are our investments.  The sum is our life portfolio, and we hope that all its components produce unique, positive returns.  When we find happiness in our fulfilling activities, the result is an unusually high level of well-being.

So it is with our financial lives.  There is trading for immediate gains, and there is investing for longer-term returns.  One pursues short-term opportunities; the other seeks longer-term growth.  Increasingly, I see a sweet spot of performance among those who find trades that align with a longer-term view.  When a portion of a portfolio can earn investment returns over time and another portion can benefit from the price path over this period, the total, risk-adjusted return can be handsome.  For that to happen, the shorter-term trading must be aligned with the bigger picture view.  

In life and in trading, there is much to be said for diversification across time frames--and the alignment of shorter and longer term pursuits.

I recently enjoyed the commentary on the week ahead from A Dash of Insight.  I won't steal Jeff's punch lines, but suffice it to say that he summarizes a wealth of economic data with conclusions that I just don't hear from the majority of traders.  The big picture he perceives in multiple data sets and multiple analysts has meaningful conclusions for those trying to trade stocks, stock sectors, and the overall market.

See also the recent perspectives from The Fat Pitch site, which looks at one data source after another to get a sense for the probabilities of impending recession.  There are important big picture market implications from this information that can inform trading *and* investment.

As a back of envelope calculation, I looked at the percentage returns from SPY each day since 2016, broken down by overnight change (yesterday's close to today's open) and day change (today's open to today's close).  The returns over the two time segments were pretty equivalent.  In other words, roughly half of all the recent bull market has not been available to the pure day trader.

There is an important message in that.

Further Reading:  


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Friday, July 13, 2018

Making Sense of Choppy Markets

A psychologist learns to listen to people.  Sometimes what they say is straightforward.  Other times, a person will jump from topic to topic in seemingly unrelated ways.  The psychologist knows that, at those times, what doesn't make seeming logical sense makes a psycho-logical sense.  Maybe the person first talks about an overbearing boss at work, then talks about not feeling well, then talks about a friend who has been distant lately.  Underlying all of these is a feeling state, a sense of discouragement and frustration.  It's that state that is the theme, not the particulars.  One has to see beyond the concrete details to appreciate the underlying theme.

Sometimes markets trade in uniform, coherent ways that we call trends.  Other times, markets move up and down in seemingly random ways.  We call those markets choppy and see them as difficult or even impossible to trade.  But what if markets, like people, make their own sense during the times when they seemingly flit from up to down and back again?

The "choppy", range-bound market may be one that is trading with a dominant cycle.  It may be trading non-directionally, but continuing relative strength versus overseas shares.  It may be in a range itself, hiding relative movements of individual market sectors.  Perhaps growth stocks are strong and value shares are weak.  Natural resource stocks are strong, rate-sensitive issues are weak.  Large caps are weak, small caps are strong.  Very often, beneath the "choppy" chart are real themes that can be traded.

But we have to listen and look beneath the surface.  Like the psychologist, we have to be sensitive to themes behind what seemingly doesn't make sense.  

Many, many times we develop a narrative--a view--and then become frustrated when the markets don't follow our story.  Can you imagine a psychologist operating that way?

If we can take our egos out of the picture--our desires to make the big market calls--we can open ourselves to what markets are really doing and trade accordingly.  It all begins with a simple question, "What is the theme here?"

Further Readings:


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Sunday, July 08, 2018

The Power of Why

I'll be speaking on Tuesday, July 24th at the Traders Expo event in Chicago, and one of the things I'll be covering is how we really know we have an edge in markets.  I'll also share with the group some of the edges I am currently pursuing in my own trading.

In a broad sense, there are two forms of knowing:

*  Predicting - Being able to anticipate future events;

*  Understanding - Being able to explain events.

We can predict without understanding.  We know to anticipate changes in weather without being able to explain the chain of events by which these occur.

We can understand without being able to make specific predictions.  We might understand reasons for a market's behavior without being able to predict when and how the market will move.

This is a bit of a simplification, but a good deal of what we call technical analysis seeks prediction.  A good amount of fundamental analysis seeks understanding.

The vulnerability of much technical analysis is that it finds patterns that appear to be correlated with price changes, but cannot explain the nature of that relationshipAs the video explains, if we look at enough patterns, we can find something that appears to be predictive.  Indeed, with a large enough search space (thanks to powerful computing), we can find things that work in sample and out of sample that still are random!

The principle that makes sense here is that we don't *truly* have an edge unless we can clearly explain why this edge is present.  Prediction without understanding is a frail basis for risking our hard-earned money.  

If we can explain the basis for a predictive relationship, we possess true understanding.  Real conviction and confidence in trading comes from understanding the basis for what you're doing.  

A person with a purpose in life has a "why"--a considered set of reasons for doing what they're doing.  That person is most likely to travel in a coherent direction.  Without a "why", we wander through life.  That's the difference between having a year of experience versus one day of experience repeated 365 times.

So, too, with trading.

Trading psychology is much easier when we have a genuine "why" underlying our actions.  Too many people are pursuing trading because they can't figure out another way to work independently and make enough money to support themselves.  This is understandable, but invariably ends badly.  People setting themselves up as gurus are all too willing to exploit the desire to make a living from trading.  A great question to ask about any idea advanced by a guru is, "Why?"  If you--and they--can't truly explain why an idea works, how do you know you actually have an edge and not just another pattern fit to market data?

Further Reading:


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Thursday, July 05, 2018

Why Do So Many People Pursue Trading?

I recently received an email from someone interested in trading for a living.  The person knew little about markets other than reading a few books and following some traders online.  He only had a small amount of money to open an account, but indicated a passionate desire to turn this into a living.

Seriously, WTF?

Why is this going on?  Why do so many pursue a living from markets when there is clear evidence that the great majority never succeed?

Consider these results from Gallup organization polls:

Polling finds that in the UK, 14% of people indicate that they strongly agree with the statement that they have enough growth opportunities in their work.  That number is 21% in France; 19% in Spain; 33% in Germany.

Another poll finds that GDP has been rising in India, but only 3% of the population describe themselves as "thriving".

A poll of healthcare workers finds that 6% report themselves as "thriving" in measures of well-being.

Surveys consistently find that 30-35% of American workers feel "engaged" in their work.

Most people don't have the capital, connections, or experience to start their own businesses.  They look at the jobs out there and talk with people working and don't exactly feel inspired by what they see and hear.

Perhaps, just perhaps, people seek trading--against all odds, against all common sense--because the pursuit of a remotely possible winning life feels preferable to assured misery.  It's the same reason refugees defy all odds on the high seas in hopes of a better home, a better life.  What many aspiring traders need is not false hopes, but genuine, viable alternatives to the traditional "opportunities" out there.

Further Reading:  


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Wednesday, July 04, 2018

Why Empathy Matters In Markets And In Life

Shoutout to vlogger Meir Kay, who produced an outstanding video that captures the relationship between anger and empathy.  

There's an important psychological lesson here.  

Frustration is a form of anger.  It occurs when we have a goal and something prevents us from reaching that goal.  We develop an idea, place a trade based on that idea, and then a burst of volume comes into the market and moves our position against us.  Our hopes for profit are dashed with the reality of a loss.

We can voice frustration at the market or at the traders who are "obviously manipulating" the market.  We can become frustrated with ourselves and beat ourselves up over how stupid we were to place the trade.  Regardless of the object of our frustration, once we become angry, we enter fight/flight mode and stop processing the world objectively.

The good trader will catch themselves at that moment and take a step back, slow down, calm themselves, and return to their trading.

The great trader, however, will do something quite different.

Remember that markets are always speaking to us.  They tell us where participants are finding value, where participation is waxing and waning, and when participation is dominated by buyers or sellers.  The great trader is like a great listener in a conversation.  That requires empathy: the ability to not just see, but feel what other market participants are doing.

Suppose you bring up a topic in a conversation with someone you care about and they quickly change the subject and start talking about something else.  You can become frustrated, filled with a sense of injustice over being "cut off", or you can step back and say to yourself, "That's interesting...my friend doesn't normally change topics like that.  This must be very important."  That empathy makes you a better listener.  Going with the conversational flow will bring you closer to your friend.

If you have formulated a great idea for a trade and the market changes the topic on you, perhaps there is an important message there.  Doubling down on your listening skills and drawing upon your empathy opens the possibility of profiting from this new information.  It's yet another way that developing ourselves as traders is not so different from developing ourselves as human beings.  When we replace anger with empathy, frustration with listening, we make new connections and profit from those--in markets and in life.

Further Reading:


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Sunday, July 01, 2018

How To Achieve Your Life Goals

In pursuing your life goals, imagine that you are the leader of your own team.  In other words, consider that what you achieve in life will be a function of teamwork, not just your individual talent and effort.  

That perspective raises interesting questions.  Who is currently on your team?  How well are you working with them to achieve your goals and theirs?  What is missing from your team?  How would you add to your team to enrich everyone?

My latest article introduces the notion of life as a team sport and identifies three specific factors that make teams work.  This is true for sports teams and teams in workplaces.  It also applies, however, to our personal lives and, yes, our efforts as traders.  Who is on a team, what they bring to each other, and how they interact with one another very much determines the odds of success.

I've thought long and hard about the very successful traders I've known.  To a person, they go out of their way to maintain contact with insightful and talented market participants--and very often they build formal teams to assist with the tasks of generating ideas, managing positions and risk, and staying on top of developments that impact markets.  Whether through informal networks or formal teams, successful traders get that way by expanding their bandwidth.  To paraphrase the Michael Jordan quote above, talent wins trades, but teamwork and intelligence make for winning trading careers.

As the previously mentioned article emphasizes, there is much, much more to effective teamwork than simply touching base with people who you think can help you.  I would go so far to say that people often fail at their work for the same reasons they often fail at their marriages: they select the wrong teammates; they don't fully embrace the give and take of being part of a team; and they don't sustain a vision of how everyone can make each other better.

Your life is an enterprise, and you are its leader.  The lives of those who matter to you also represent enterprises and you are part of their teams.  You're not just an individual; you're also part of an interconnected network.  When you improve the network, everyone improves.

Further Reading:


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Friday, June 29, 2018

What Are The Patterns In Your Trading?

Trading is based upon the notion of recurring patterns in markets.  These could be patterns of price behavior, patterns of response to world or economic events, or patterns that occur in the relationships among markets.  A common trading pitfall is perceiving patterns where none truly exist.  We can become anchored to recent occurrences and assume that these will recur.  We can overemphasize dramatic market occasions, such as large drops in prices, and look for similar "setups" going forward.  If we look at enough patterns, something by chance will appear to be significant.  Not all "overfitting" is performed by quants.

Just as there can be patterns--and false patterns--in markets, these can also exist in our trading.  One daytrader I worked with had flat results over several months.  When we dissected the P/L, it turned out that certain hours of the trading day (early morning) were consistently profitable.  Other hours were losers.  The patterns being traded, which involved momentum, were more likely to occur during periods of higher liquidity.

I also met with a portfolio manager who was having trouble making money.  When we examined his returns, it turned out that newly initiated positions were getting stopped out for losses unusually often.  This was because, in a lower volatility market, he was waiting for strength before going long and waiting for weakness before selling.  He kept stops tight and thus was whipsawed when the short-term price movement failed to extend.

There is tremendous benefit in dissecting your returns as a trader.  Yes, we can overinterpret and perceive patterns that do not exist.  Many times, however, there are rational explanations for why the returns are patterned.  Perhaps we're trading differently after having made versus lost money.  Perhaps we're trading differently as a function of market conditions.  Perhaps we're trading differently as a function of how we have prepared for the day or week.

I find it again and again:  Successful traders spend significant time not trading, studying their markets, and studying their performance.  Successful sports teams review game films to prepare for the next contest.  What is your review process, and how rigorous is it?

Further Reading:


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Tuesday, June 26, 2018

What We Should Focus On In Our Trading

Here's an important principle:  Your attention operates like a magnifying glass.  We program ourselves with our attention.  What we focus upon, grows within us.  

This is why our self-talk is so important.  If we focus upon our shortcomings and berate ourselves for our mistakes, that is what we internalize.  We recognize this with parenting.  We realize that if we were to focus on every flaw in a child, we would damage their self-esteem.  As I mentioned in a post a while back, we are what we eat--and we're always eating life experience.  Our experiences are what we internalize.  Ultimately they define who were are.

In trading, if we focus on rules and best practices, we make those our own.  As young children, we had to be taught rules of proper behavior, such as thanking people who do good things for us.  Now, as adults, we don't need to consult the rule or motivate ourselves to follow it.  We naturally feel gratitude for good deeds and offer thanks.  The trader who makes rules about risk management or about what constitutes opportunity consistently focuses on those rules and eventually they become internalized principles.  They are no longer simply things to do; they are part of us.

Merritt Black recently reviewed the Principles from Farnam Street and applied those to trading.  One of those principles is that "principles outlive tactics".  A tactic is something we do in response to a particular situation.  A principle is something that guides us across all situations.

Here's a great experiment:  Quickly, write down the principles that guide your trading.  Only give yourself a couple of minutes for the exercise.

If you can't enunciate your principles quickly, they are not an automatic part of you.  It's when principles are front and center that they form the backbone of trading process.  That can only happen when we focus on principles and keep them conscious.

What a great practice for developing traders:  Writing principles on a card and consulting them before trading for preparation, during trading for execution, and after trading for review.  After a month of such repetition, we become more consistent because we become more principled.

Further Reading:  


Sunday, June 24, 2018

Renewing Ourselves, Renewing Our Selves

A while ago, I wrote in an article that, "Perhaps the greatest mistake in managing our lives is to treat energy and willpower as finite resources."  It is partly for that reason that a major theme in the book I'm currently writing is renewal.  All of us lived new and fresh lives as children growing up.  The challenge of adulthood is to re-new and rediscover that early sense of adventure and excitement.

One of life's great paradoxes is that we need routine to efficiently navigate through life--think how exhausted we would be if we had to approach each task as if it were our first time--but it is precisely that immersion in routine that makes life feel, well, routine.  Renewal requires new-ness, the exiting of routine to partake in what we find enjoyable, meaningful, and energy-giving.

In the new book I describe a "principle of alternation" that helps us recharge:  By arranging daily activities so that we draw upon different strengths, we rest one set of functions while exercising others.  For example, I might alternate trading time with time spent helping people as a psychologist and then turn to immersing myself in family activity and finish the day reading a new book and listening to favorite music.  The energy from each of these activities stimulates the next ones.  We become like batteries continually connected to a power source: we don't run down.  

That is an important part of living a truly diversified life.  When we alternate activities that draw upon the best of us, energy and willpower are no longer finite resources.  We spend much of our days facing the sunshine.  That not only brightens our perspective, but lights our path. 

Further Reading:


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Friday, June 22, 2018

Why Goal Setting Often Doesn't Work

I work with many diligent traders who review their performance regularly, see what they need to improve, set goals for the next time period, and then move forward.  It's a great process, but it misses one thing: vision.  Rarely do goals in and of themselves truly motivate us to go beyond what we believe to be possible.  That takes a vision that captures our imagination, challenges us, and becomes an overarching priority.  Goals can help us implement our vision, but goals without a clear animating vision are little more than to-do lists.

In my latest Forbes article, I outline three strategies for getting to that all-important next level of performance.  It turns out that the environment we create for our performance, the ways in which we pursue performance, and who we work with on our performance make all the difference in the world. But notice in the article that two of the performers I cite choose truly audacious goals driven by a vision.  They seek something big.  They seek something meaningful.

Without vision, we are blind.  Without a vision of extraordinary achievement, we will always function within ordinary expectations.  The three strategies I outline are effective precisely because they align our goal-seeking with our vision.

Further Reading:


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Tuesday, June 19, 2018

Overcoming Pessimism And Negativity

Colin Wilson's insight is that we approach life as a spectator, not realizing that we are the ones in the control room.  We experience pessimism when we believe we have little control over the important outcomes in our lives.  If you examine successful people, you find they structure their time in ways that give them that sense of control.  This is one reason living by goals and plans is so important.  Only dead things go with the flow.  Our job is to guide our lives.  That means being in the control room.

Wilson also recognized that we tap a small portion of our potentials.  This is partly because we tend to lead constricted lives.  Think of our emotional states and how rarely we experience true unbridled joy, profound fulfillment, or even deep and heartfelt regret.  Consider our physical states and how rarely we operate in modes that could bring us to our second wind.  Reflect upon our intellectual states and how rarely we truly challenge ourselves with new ideas and challenges.

Constriction of life lays the groundwork for pessimism.  It is difficult to remain negative if we experience varied emotional, physical, and intellectual lives.

Will you ever reach your true potential if you are planning, reviewing, and working on your trading while leading an unexamined, constricted life? If each day is an opportunity to stretch ourselves emotionally, physically, and intellectually, each day becomes an adventure--a journey into unexplored territory.  Pessimism most often results when life is routine and we no longer experience fresh, shining vistas.

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Sunday, June 17, 2018

Winning By Minimizing Your Trading

The previous post highlighted distraction as a major source of trading problems.  We have limited capacity for high-quality, focused concentration, and that shows up as limitations of willpower.  Too often, we lose discipline in trading, not because we lack emotional control, but because we encounter limits to our capacity to sustain intentional action.

This helps explain why overtrading is so deadly.  Trading requires mental capital, and after a while our cognitive bank account runs dry.  When we overtrade, we almost guarantee that we will trade with suboptimal focus.  Indeed, that's not a bad definition of overtrading:  when our trading activity exceeds the capacity of our willpower.

An interesting corollary of the last post, however, is that perhaps we should *minimize* trading decisions and maximize the efficiency and depth of our information processing.  What if we only traded when we had complete focus?  How would that impact our results?  Our trading psychology?

But, wait, here's an additional dimension to our challenge:

We can trade within the capacity of our willpower, but what if we need further willpower for the rest of our life outside of trading?  I can tell you from personal experience that trading a full day in active decision-making mode leaves me pretty much like mush for the remainder of the day.  Yes, I can perform routines and carry out normal social activity, but my capacity to sustain meaningful effort after a day of hard trading is severely limited.  

That's not a great outcome for someone who has responsibilities outside of trading.  If you hope to raise a family, deal with personal and relationship challenges, sustain physical fitness and optimal nutrition, expand yourself intellectually, and maintain a research program to adapt to markets and develop new sources of edge, you'll need to summon focus and willpower when you shut down the screens.

It's no coincidence that the majority of active daytraders I've worked with are single males.  They are "passionate" about trading and expend their mental energy on placing trades and managing positions, but surprisingly often achieve relatively little off the trading floor.  That is not a sustainable way to live life.

The bottom line is that most of us should be trading less.  Much less.  Activity born of true passion *gives* us energy.  If you're finding yourself drained by the work of trading, you are probably shortchanging the rest of your life and jeopardizing your returns with the overtrading that results from lack of focus.

Not many gurus in the industry have a vested interest in telling you to trade less.  Not brokerage houses, not trading coaches looking for your business, not prop firms that charge commissions from your activity or make hidden returns from selling your order flow, not hedge funds that seek nice returns but tolerate little downside, not firms that want to sell you trading software or advisory services, not "education" providers that promise the latest, greatest trading strategies, not vendors who will sell you whiz-bang overfit trading systems.  They all benefit from you trading.  Sadly, their livelihood depends on your overtrading.

With the idea that less can be more, I've constructed a trading approach that specifically minimizes trading decisions.  It's really a framework for active asset management.  Using ETFs with minimal management fees, I created a volatility-weighted portfolio consisting of fixed income, equity, and commodity returns.  The specific ETFs were selected to minimize correlations among positions, maximize yield/dividend (carry), and maximize liquidity.  I then studied the historical performance of the portfolio and identified the few times in a year when it would have been highly beneficial to institute a tactical hedge.  The resulting quant model provides an on-off signal for an SPX hedge using three variables (time, breadth, volatility).

So that's it.  Most the time, the portfolio does what it does, benefiting from asset strength and making a nice carry return during flat periods.  Once in a while, when markets become turbulent and fragmented, the tac hedge kicks in and buffers the overall equity beta.  The result is a framework for minimizing trading, but using trading insight for improving active investing.  Less commissions, less wear and tear; more time for family, travel, community involvement, and other productive endeavors like book writing.

When I mentioned this framework to a few active traders, they responded with horror.  It makes trading totally boring!!

Right.  

No excitement.  No drama.  No gurus to follow or workshops to attend.  No FOMO.  Just diversification, portfolio construction, and informed hedging.

That's an important edge in itself.

Further Reading:


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