Saturday, May 19, 2018

Trading Without Expectations

There's a great post from Merritt Black in which a video plays an ambiguous sound.  If you think the sound is going to say "Brainstorm", that's what you hear.  If you think the sound is going to say "Green Needle", then you hear that!  It's the damndest thing..."brainstorm" sounds nothing like "green needle", and yet we can talk ourselves into hearing either one.

How like markets that is, however!  Two people look at the same chart and they come to radically different conclusions.  We come in to a trading day with a particular expectation and, with just a little confirmation bias, we can find the evidence we need to put on the corresponding trade.

It's yet another reason why trading with conviction is so dangerous.  The same conviction that leads us to get large in a trade is the set of entrenched assumptions that shape our perception.  We see what we believe.  We expect what we believe most strongly.  We act on what we expect.

Merritt's post got me thinking about my school days.  I took school seriously--my high school and college GPAs were between 3.8 and 3.9--but it was a certain kind of seriousness.  I would have a test coming up the next day (or a paper to write) and that afternoon I would play baseball or basketball.  I knew that I could pull a late nighter and get through the material, and that's exactly what I did.  When I got to the test (or when I wrote the paper) I honestly can't recall wondering if I would get a good grade or not.  I also can't recall thinking about what the teacher was looking for.  

When I got to a question I didn't know--or if I hit a block in writing the paper--I would put my pen down, relax my mind,  and go with the first thing that came to me.  I didn't think harder; in a sense, I stopped thinking and let the answer come to me.  I knew that I had encountered the information.  It was just a matter of letting it come to the surface.

What I see among many traders--and what I've noticed in my own worst trading--is starting out with a view and then looking for trades that fit that view.  More recently in my trading, I've begun the day with multiple hypotheses and then enter that open minded state to let the market tell me which hypothesis is playing out.  It's like listening to a person from another country:  you focus on picking up on their meaning, not imposing your own.

The last thing a student is supposed to do before a final exam is hit the intermural building and play hoops with the gym rats.  But that's what worked for me.  I had already taken my notes, gone to my classes, and read my book chapters.  By the time I was on the basketball court, all I needed was intensive review, not fresh learning.  When I got to the test, I knew I had done the most intensive review possible.  I didn't have to worry about what the instructor would ask, whether I would get a good grade, etc.

It's all very relevant to trading.  We do our preparation and our intensive review, but we don't let it become our lives.  When we're not sure, we relax the mind and let markets speak to us.  Eventually we'll make sense of it.  The idea is to understand, not to trade.  Perhaps this is why meditation is so helpful to many traders.  It's not only a way to relax and focus; it's also a way to cultivate an open mind.  We can see anything we're primed to see in markets.  The key is getting past that priming.  When we're actively prepared to see everything, we can quickly recognize when one scenario actually plays out.

It's amazing what we can see when we come to markets with acceptance, not expectation.

Further Reading:


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Friday, May 18, 2018

How We Can Accelerate Our Growth As Traders

If I had to mention one factor that accounts for the success of traders, it would be the intensity and consistency of their learning process.  By supercharging our learning process, we can greatly accelerate our growth as traders.

In a recent post, Mike Bellafiore mentioned the importance of developing and working within a "playbook".  Once you have a collection of refined and tested market patterns, you now have a basis for evaluating your trading and working on the recognition and execution of trades related to these patterns.  You also have a basis for examining how these patterns vary in different kinds of markets.  Every day in the market, every trade placed, offers an opportunity for learning--and getting better.

How you structure and implement your practice/learning process will shape your growth as a trader.

On Tuesday, July 24th at the Traders Expo in Chicago, I will conduct a live seminar on strategies for accelerating our growth as traders.  This will be an opportunity for group coaching and individual consultation, as I will be making myself available after the presentation.

One of the things we'll discuss at the workshop are the elements that go into successful learning and practice.  These include ways of reviewing our trading that literally re-view our trading and extract lessons that inform our subsequent decision making.  When we turn every trade into a practical lesson, we greatly accelerate our learning.  When we place more trades than we review and study, *that* is overtrading.

What is the learning P/L of your recent trading?

I look forward to meeting readers at the Chicago event!

Brett


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Wednesday, May 16, 2018

Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part Three: Overcoming Anger and Frustration

In the first post in this series, we took a look at the cognitive behavioral self-help techniques described in the new book by Dr. Seth Gillihan and how we can overcome our tendencies toward procrastination.  The second post in the series examined the fear of missing out (FOMO) in trading and specific techniques for moving past that fear.  This final installment deals with anger and frustration and methods for ensuring that these do not bias our decision-making.

We typically feel frustrated when we are pursuing a goal and find our path blocked.  If we want to reach a destination and we are slowed by traffic, we can respond to the situation with a flight-or-fight response, cursing the situation.  When the situation becomes more personal--if we believe that someone stands in the way of our achieving our goal--the frustration can become anger and even rage.  We most often experience anger if we believe our rights have been violated; that we have been mistreated or wronged.

In the case of trading, our goal is to make money through our ideas and this goal is often thwarted by the adverse behavior of the market.  We are faced with a loss instead of a gain and this can frustrate us.  If we tell ourselves that other market participants are somehow cheating or gaming the system, our frustration can turn to anger.  Once we're worked up in the flight-or-fight mode, we can make subsequent reactive decisions, turning one loss into many more.

If a core skill of short-term trading is pattern recognition, then success hinges upon a high degree of focus and open-mindedness.  When we lose peace of mind, we lose focus and openness and we trade what we want to see, not what we're actually seeing.

Dr. Gillihan outlines several powerful techniques for moving past frustration and anger, including:

1)  Know your triggers - Typically, there are a limited number of situations that have the power to set us off.  If we are aware of those situations, we can mentally rehearse them and practice calming self-talk.  For example, we can imagine ourselves losing on a trade, feeling frustrated, and then reminding ourselves that any edge in markets is only probabilistic and that losses are part of the game.  This acceptance can help us regroup and generate the next idea.  Self-awareness of triggers can also enable us to step back from trading temporarily when those occur, so that we don't allow frustration to impact our behavior.  One especially powerful technique when a trigger occurs is to remind yourself of the costs of anger and how acting on the trigger has hurt you in the past.  That way, frustrated behavior becomes the problem, not the triggering situation.

2)  Relax and breathe with your anger - If you temporarily lost your faculty of vision, you would not blindly put trades into the market.  The fight or flight response creates emotional blindness, so that you may no longer see yourself or the market clearly.  If you use emotional arousal as a cue to relax and breathe more deeply and regularly, you practice self-control.  Each episode of frustration thus poses an opportunity for you to achieve self mastery.  You can actually engage your competitive instincts and look forward to losses as opportunities to beat anger.  That way, every trade is a winning trade.  You either make money or you build inner strength.

3)  Practice acceptance - It is OK to lose as long as you exercise sound risk management in the sizing and management of your position.  As we recently saw in a post on turning mistakes into trading successes, it is not uncommon for a losing trade to lead you to reassess your view and eventually generate a much better trade idea--often in the opposite direction.  A sound trade that loses can provide useful information.  By accepting the loss as a tuition for learning, we can move past frustration and gain from the lessons learned.  I recently placed a good trade with high odds of taking out a prior market high.  We moved toward the high, stalled, and then started to reverse on higher volume.  I quickly got out of my trade at a small loss and flipped short, accepting that we had likely make the high for the day.  The subsequent down move, trapping the longs, more than made up for the loss on the long position.

We cannot prevent setbacks in life but we can ensure that we use these as sources of learning and development.  Every day can be profitable if we're always using experience to make ourselves better.  Once we realize that setbacks are opportunities, we can actually respond to them with gratitude.  If life is a classroom, our setbacks are our lessons and we can give thanks for the opportunity to grow.


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Monday, May 14, 2018

Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part Two: Overcoming FOMO

In the first post of this three part series, we looked at specific techniques traders can employ to overcome procrastination.  These methods, backed by significant research, can very much help traders approach their work in a more decisive, positive mind frame.

One of the most commonly recognized trading psychology challenges, especially for developing traders, is a fear of missing out on possible opportunity.  That FOMO leads to overtrading, as the fear of missing leads to the taking of marginal trades.  In the work I'm doing with Mike Bellafiore at SMB, combining mentoring and psychological coaching, we have the traders enter all of their trades into a platform that automatically calculates a wealth of statistics:  number of long and short trades taken; number of winning and losing trades; average sizes of winning and losing trades; winning percentage and P/L as a function of time of day; as a function of relative volume; etc.  A common pattern is that win percentage goes down when the number of trades placed increases.  This is often because the additional trades are made from a FOMO mindset.

In the previous post, we looked at Dr. Seth Gillihan's recent self-help book on cognitive behavioral techniques and how those can help with patterns of thought and behavior.  The FOMO mindset is grounded in that F word:  fear.  Techniques that help people with fear and anxiety can be tremendously helpful in overcoming the overtrading that arises from concern over missing trade opportunities.  Here are three especially useful techniques traders can employ on their own:

1)  Mindfulness - Dr. Gillihan points out that our breathing tends to mirror our anxiety when we're getting worked up.  By becoming aware of our breathing, slowing it down, and deepening it, we can place ourselves in a much more calm and focused mindset.  He recommends doing an exercise in which we a) breathe in gently for a count of two; b) breathe out slowly for a count of five; c) pause after exhaling for a count of three; and d) repeat this process for 5-10 minutes.  Notice how this creates a rhythm for your mind and body that counteracts the chaos of anxiety.  What I have found is that if you practice such an exercise daily, you can become proficient in the method and then can just take a few even breaths during trading to re-center yourself.  The focus on breathing keeps you grounded in the present and builds your self-awareness, so that you're less likely to act on impulse.

2)  Reassess the Severity of the Threat - Many times, we get worked up about something that we tell ourselves is a threat, but that actually can do us little harm.  One way of reassessing that I have found to be very helpful is actively telling myself that *of course* I'm going to miss opportunity.  I miss opportunity in every market I don't trade and in every time period (such as overnight) that I don't trade.  No matter how many opportunities I miss, ones always end up appearing later in the day or the next day.  The goal is not to trade every possible opportunity, but to identify the best opportunities and trade those as well as possible.  By reframing the opportunity set and taking the threat out of missing something, I can eliminate FOMO as a motivation.

3)  Directing Attention Outward - Dr. Gillihan observes that, when we become fearful, we tend to dwell on worries.  By directing our attention outward, we can break the vicious cycle of worrying, getting anxious, leading to further worrying.  In trading, the outward focus can be a doubling down on one's trading process and rules.  When we have our trading laid out in "playbook" form, with explicit rules, we can ground our decision making in what we do best.  This helps us reframe the fear of missing a move into a fear of trading poorly.  Notice how this approach helps to transform fear into actual opportunity.  Very often, the outward focus leads us to hold off on placing the FOMO trade, helping us find better opportunities to enter and exit.

My experience in trading is that, if I'm feeling FOMO, the odds are good that others are experiencing it as well.  The trade that seems obvious is often not the high percentage trade.  Using FOMO as information that actually makes the trade *less* attractive is a great example of how we can use emotional awareness as a tool for superior decision-making.

Further Reading:  Why FOMO Fails

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Saturday, May 12, 2018

Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part One: Overcoming Procrastination

I recently had the pleasure of joining four accomplished colleagues in the psychotherapy world for a presentation on brief therapy for the American Psychiatric Association's annual meeting.  One of the presenters, Dr. Seth Gillihan, was kind enough to pass along a copy of his recent book, Cognitive Behavioral Therapy Made Simple.  It's a self-help text detailing specific, research-backed techniques for changing patterns of thought and behavior.  

As I read the book, I was struck by how relevant many of the exercises are for traders in financial markets.  In this short series of posts, I will outline several common areas of challenge for traders and techniques for working on those, as outlined in the book.  We will begin with procrastination, the tendency to avoid things that we know we need to do.

Dr. Gillihan points out that many factors can contribute to procrastination, including fear of falling short in our performance and avoidance of discomfort.  One common area of procrastination among traders is putting off the work of preparing for the trading day, whether it's completing a journal or laying out plans for the coming session.  Some of the techniques Dr. Gillihan outlines in the book for overcoming procrastination are:

a)  Using a Calendar - The more specific we are about the work we want to do and when we want to do it, the more likely it is that we'll get the tasks done.  I like scheduling daily activities for the same time each day, turning work routines into positive habit patterns.  Scheduling activities a day ahead and reviewing the coming day's calendar in the evening helps prime us for action.  For unpleasant tasks, I schedule a reward period following the completion of the task.  

b)  Working in Shorter, Uninterrupted Segments - Dr. Gillihan points to what is known as the Pomodoro technique, in which work is broken down into 25 minute segments that are uninterrupted.  This has the natural advantage of making a large workload more doable and it provides mini-breaks for renewing our energy and willpower.  I use the breaks between work segments as mini-rewards, when I can take a snack, play with one of the cats, etc.

c)  Mindfulness - Many times procrastination results from distraction and (negative) thoughts about the future.  We tend to avoid what we anticipate will be uncomfortable.  By bringing our attention and awareness to the present through methods like meditation, we can remove mental clutter and focus on doing one thing at a time.  Very often, breaking through and completing one or two subtasks can lead to momentum and completing a larger project.

d)  Self-Reminders - A powerful technique is to vividly remind ourselves of the negative consequences of behaviors we wish to avoid.  This works well in alcohol treatment, where the mental rehearsal of the negative consequences of drinking helps a person avoid relapse and helps them reach out for support.  Reminding ourselves that procrastination prevents us from being the best traders we can be can become a helpful prod toward action.

Another technique that works well for me is a shift of environment.  When I want to complete a difficult task, such as editing a writing project, I will bring my computer to a Starbucks or the food court of a large grocery store and I commit to not leaving until the work is completed.  In the new environment, there are no other distractions (phone, emails, interruptions from people) and I find it easy to enter into a focused work mode.  Sometimes the environmental shift is as simple as playing music in the background while I work, providing stimulation that doesn't distract.  (I'm listening to JWeihaas as I'm writing this).

Our actions play an important role in shaping our experience of ourselves.  We cannot act as decisive traders if the majority of our time is spent in procrastination mode.  Avoiding any single task may seem to have few consequences.  A pattern of avoidance, however, reduces our productivity and effectiveness.  Ultimately, we are either in control of the time and challenges of life or those control us.  How we approach our efforts daily shapes the mindset that emerges in our trading.  

There is much to be said for using daily calendars as repeated experiences of efficacy.

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Thursday, May 10, 2018

What We Can Learn From Unique Breadth Data

Every day, I update dozens of spreadsheets with market statistics, many of which are not commonly found.  My experience is that unique data contain the most durable edges.  

From the Barchart site, I track the number of stocks across all exchanges that make fresh one-month highs and one-month lows.  Over the past year, when the number of stocks making new highs has been in the top half of its distribution, the next three days in SPY have averaged a gain of .22% versus .06% for the remaining occasions.  When the number of stocks making new lows has been in the bottom half of its distribution (few stocks making fresh monthly lows), the next three days in SPY have averaged a gain of +.23% versus .05% for the other occasions.

From the Index Indicators site, I track the percentage of SPX stocks closing above their five-day moving averages.  Over the past year, when that percentage has been above 70, the next five days in SPY have averaged a gain of .46%, with 79% of occasions profitable.  When the percentage has been below 30, the next five days in SPY have averaged a loss of -.13%.

When we see broad market strength, has that led to further strength (momentum), or has it led to weakness (reversal)?  Knowing the regime we're in can help us frame worthwhile hypotheses about market behavior.  Those become good trades when we see short-term flows lining up with those ideas.  

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Tuesday, May 08, 2018

What Is Happening At Each Price Level In The Market?

I just learned that my podcast with Two Blokes Trading is now available for listening on their site.  Among the many topics that we covered was the challenging issue of adapting to changing flows from day to day.

In my post about three things to focus on each day in the market, one of the things I mention is especially relevant to this issue of adapting to market behavior.  What is happening at each price level in the market?  In other words, it's not enough to simply know who is in the market and what they are doing.  We also benefit from knowing the prices at which traders are aggressively buying or selling.

How can be do this?

One tremendously valuable tool is Market Profile, where we can visualize the amount of volume traded at each price level through the day.  This tells us where the market is establishing value and how trader activity builds or dries up as we depart from value areas.  That is great information as we make sense of whether moves away from value are likely to continue (momentum) or die out (revert).

Above, I've drawn a different kind of chart to illustrate how we can assess what is going on at various price levels in the market.  The blue line represents the ES market during NY market hours on May 7th.  Note that time is not on the X-axis.  Rather, we're looking at the market in one-minute intervals from the lowest price registered during the day's session to the highest price.  The red lines are the average high-low-close levels for the one-minute level of upticks versus downticks for all stocks.

So what we're seeing is the net buying pressure (upticking) versus selling pressure (downticking) at each price level touched during the day.  What we can see is that for most price levels and through most the day we saw net buying interest.  There was not a very high level of buying pressure (readings above +500), but there was very little net selling pressure.  When we retreated late in the day and touched the day's lows, however, this occurred with solid selling pressure, with readings below -500.  

That provides useful context for the coming day's session.  If we should move higher, I will look to see if buying levels increase from what we saw the day before.  If we test the day's lows, I will look to see if selling pressure is increasing or drying up relative to day previous levels.  In other words, I'm looking to see if new buyers or sellers are entering the market and, at each price, I have a reference point to tell me how much buying/selling is additional and how much falls short of previous day's levels.  

As I am writing this during the premarket session the next day, we have dipped below yesterday's lows.  Should we continue at or near those lows, I will be looking carefully minute by minute for uptick/downtick readings to see if the fresh weakness is attracting selling.  I will also be looking carefully at each minute's volume relative to yesterday (and relative to typical volume for that minute) to determine if participation is increasing or decreasing.

The big takeaway is that trading psychology is not only about *our* psychology.  We can read the unfolding psychology of the marketplace by assessing the minute to minute behavior of market participants.

Further Reading:  Who Is Controlling The Market?
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Friday, May 04, 2018

Turning Trading Mistakes Into Trading Successes

In an excellent post, Merritt Black, who coordinates the mentoring program for SMB Futures, illustrates how a trade that did not work out led to an especially good trade.  There are many worthwhile takeaways from this post.

First, if you look at Merritt's screenshots (he demonstrates trading ideas in a live chat), you can see that he is using Market Profile concepts (graphic displays of the accumulation of volume at key price areas) to identify key zones in which the market is establishing value.  The morning session had traded lower, we consolidated in a range at lower price levels, and then we failed to take out the upper part of that range.  That led to a good trade idea in which a trader could risk a move above that range to benefit from another leg down in the market.

The market indeed does move to a new low for the day and then promptly rallies hard back into what was the consolidation range.  We could not sustain the downside and now we're testing the upper end of that earlier range.  That leads to a long trade, as bears are trapped, which turns out to be the day's best trade.

Here are some worthy takeaways:

1)  Notice how Merritt uses volume-at-price to create objective measures of where the market is setting value over a given time horizon.  This provides a context for market moves, as we can determine where the market is breaking to new levels of value and where the market is returning to a value range.  This context is very helpful in framing risk/reward for trade ideas.

2)  Merritt's first idea, where he went short, made tremendous sense, but ultimately did not play out.  That could have been a source of frustration, but instead it provided valuable information.  The bears could not maintain the move down and that set up a trap to the upside.  By accepting the "mistake"--the trade that did not work out--as information, Merritt was able to formulate an even better trade in the opposite direction.  

3)  When trades are formulated well, they can still fail to work out.  Not all good ideas manifest themselves as winning trades.  That means that risk management is paramount.  If Merritt had risked too much on the initial breakdown trade, he never could have meaningfully exploited the reversal trade that followed.

There is, however, one larger takeaway.  Every day of trading provides a day's worth of review and learning.  Many people trade the markets daily; not many rigorously review each day's trade.  There is a reason sports teams watch videos of their games--and the games of their opponents.  In reviewing past performance, we learn key lessons for tomorrow's performance.  To paraphrase Coach Bob Knight, many people have the will to win.  It's the will to prepare to win that defines the ultimate victors.

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Monday, April 30, 2018

Trading in the Flow State: Cultivating Perceptual Creativity

I've received a number of questions about my recent post on achieving unusually strong focus in trading and the Forbes article on which that post was based.  I had outlined an unusual experience in which I used a meditation routine while tracking the ES market and then perceived the market action, not only unusually clearly, but in a very different way from my norm.  It wasn't that I was simply seeing things better or even slower (which was the case).  I was seeing the market differently.  The closest I can come to describing the experience was that I was perceiving moment to moment shifts in volatility apart from any ideas about directional price movement.  Instead of seeing price, I was *seeing* how volume was or wasn't moving price.

I placed many trades in this mode, happily capturing small swings in the market and not thinking about PL or anything about my trading.  It definitely felt like a "flow" experience, and more than a bit unsettling.

We know that stress impacts performance, but rarely do we see how we perceive and perform completely free from stress, distraction, and the interference of self-talk.  I've focused in the past on emotional creativity--the ability to adapt to situations with new responses--and I do believe that's important in changing our behavioral patterns.  What I experienced with the meditation, however, was something different.  It was perceptual creativity.  I literally saw the market differently.

Perceptual creativity is something we more usually associate with art.  A skilled artist sees their subject in a fresh way and captures that vision through the paint brush (painter) or through movement (dancer).  It is odd to think of trading as akin to art, but it may well be that it's the trader who sees what others do not is able to generate ideas and trades that others cannot see.

My hypothesis is twofold:

1)  We generate unusually high degrees of focus when we enhance one sensory modality at the expense of others.  This is the common element in various meditation practices, as well as hypnosis.  We enter a different zone when we shut off certain sensory modalities and concentrate on one.

2)  In those very high states of focus, we achieve altered states of awareness that enable us to perceive the world around us differently.

A good example of this are isolation tanks in which people float in salt water that is kept at body temperature.  There is no light, no sound, and no sensation, as you can't really feel your body when surrounded by salt water of the same temperature.  In that environment of sensory isolation, it is possible to achieve unusual focus and peace of mind.  Interestingly, when I've stepped out of the tank, the world has *looked* different to me...more vivid...more alive.  I feel separate from the world but experience a sense of awe in observing the world.  That is altered, creative perception.

It is the depth of the focus experience (which correlates with the duration of the meditation/hypnosis/isolation routine) that leads to the unusual state shift.  It is eye-opening to experience, first hand, that emptying the mind leads not to the poverty of loneliness, but the richness of solitude.  I strongly suspect that the intensification of focus within relationships (think of having a special dinner with one you love) is an important component of intimacy and connectedness.  In a state of mental clutter, we don't truly connect with others; note how, even in a world of social media and online connectedness, a significant number of people feel lonely.  Perceptual and emotional creativity keep relationships alive and renewed, and perhaps they also keep our trading fresh and adaptive.

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Saturday, April 28, 2018

Adjusting Your Trading Focus

My most recent Forbes article relates an unusual trading experience that I had last week.  I greatly reduced the number of things I watched on my screens and adapted a meditation routine I have long used to tracking the ES market.  

This was contrary to my usual trading in a few respects.  I was not working with any preconceived ideas about market direction (although I had reviewed all my research in advance) and I was not looking for trade "setups".  My sole focus was focus.  I immersed myself in market behavior the way I would immerse myself in the behavior of a distressed client I was speaking with in my work as a psychologist.

What I can relate (and the Forbes piece details) is that the extreme level of focus completely changed my trading.  I picked up on patterns I had not even considered in advance.  It was the most unusual and powerful trading experience I have had in years.  It was also the most profitable in years.

There aren't many experiences I would describe as "life-changing", but this one comes awfully close.  As a result, I have committed myself this year to literally relearn trading, with the central component being the creative perception and pattern recognition that come from enhanced focus.

It is ironic that we fill our heads with more and different things to track in markets: various indicators, time frames, charts, chats, and so forth.  It was only when I thoroughly emptied my head that I was actually able to *see* what was happening.

I am all too aware that this sounds hopelessly mystical and subjective.  If I didn't have the experience of doing my best work as a psychologist when I have been most highly focused on people, I probably wouldn't have believed what happened with trading under focus.  It may well be that controlling emotions, enhancing discipline, and all the things traditional trading psychology talk about are effective only insofar as they improve our focus.  By working directly on techniques to enhance our focus, we may best access our ability to process noisy market data.

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Wednesday, April 25, 2018

Why Relative Volume Matters for Your Trading

Above is a two-day chart for Monday and Tuesday's SPY trade.  A number of traders I spoke with missed the market drop, fearful of "chasing" prices when they had been reversing.

The key identification in Tuesday's trade is the rising relative volume to the downside.  Recall that relative volume tracks the volume for each time period (in this chart I'm using five minute periods) and compares it to the average volume for that same time period.  So, for example, a relative volume reading of 0.5 means that we're only doing half the normal volume for that specific time of day.  A reading of 2.0 means that we're doing twice the normal volume.

Notice how, as Tuesday moved forward, relative volume expanded well above 1.0, particularly on market selling.  This started to occur well before we saw the waterfall decline in the afternoon.  The increased relative volume told us that participation was increasing to the downside.  This participation represents directional participants who move size and thus can lead to momentum and trending moves in the market.

The steadily rising relative volume tells us that we're picking up participation as we're going lower.  Selling is by no means drying up.  That is a market where you can afford to "chase" prices lower.

Simple tools like relative volume are very helpful for identifying opportunity in the market.  If volume is shrinking, it's unlikely that moves will extend.  Breakouts from ranges with increasing relative volume suggest that traders are indeed accepting new levels of value.

Who is in the market is a key ingredient in how you should trade.

Further Reading:

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Sunday, April 22, 2018

A Deeper Look at Emotions and Trading

On Wednesday morning, 8 AM EST, I'll be doing a webinar with the good folks at Two Blokes Trading.  Brandon sent me very good trading psychology questions that we'll be addressing during the session.  (By the way, check out the excellent podcasts on their site.)

One question I particularly liked asked, "As a retail trader, what is the most effective way to emotionally detach yourself from a trade? Is this even a good thing to try and do?"

Here is my answer--it's a little tricky:

To be successful, you *have* to be emotionally detached from your trade.  To be successful, you *have* to be emotionally connected to the market.

Let's explore:

To the degree you are attached to something, that thing owns you.  That is why we have to be so very careful with our attachments.  Two people are attached in a good marriage and, yes, they own each other.  Something is lost of me if I do not have my partner.

Any trade, however, is merely a probabilistic bet.  Would I attach myself to a relationship if my wife was faithful 75% of the time?  Of course not.  I have to stay detached from my trades and their outcomes because I know that there will always be occasions when the odds fail to play out.  I own my trades--I take ownership for them--but I cannot allow them to own me.

That is very different from staying emotionally attached to the market itself.  That emotional attachment is similar to empathy:  you're not just observing market activity, but *feeling* it.  As a psychologist, I have to be fully attuned to the person I'm working with.  I can't be distracted with thoughts about myself, how much money I'm making from my sessions, etc.  In that emotionally attuned state, I can pick up on subtle shifts in tone of voice and shifts of topic that tell me what's going on with the other person.

Similarly, when we are emotionally open to markets and focused on them, we can identify subtle shifts of buying and selling that alert us to opportunities.  That attachment to the market is vital to pattern recognition.  When we lack that degree of emotional connection, we become tone-deaf to the market's communications.  Later, we look back on poor trading decisions and wonder what we were thinking.

Emotionally detached from our trades and emotionally focused on the market--that is not an easy balance.  The common element is that we remove our egos from trading.  To the degree that you're wedded to an outcome, you can't be fully immersed in the process.


Further Reading:

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Wednesday, April 18, 2018

Creating Your Own Trading Culture

Interesting research that I summarized in a recent article finds that the single most powerful factors determining the success of romantic relationships are acts of kindness and giving.  Conversely, relationships that end poorly are characterized by sarcasm, contempt, and negativity.  When we give, we encourage gratitude in others, and that gratitude leads others to then also engage in acts of generosity.  

What is less appreciated is that this same dynamic plays itself out in the trading world.

Within the trading teams I've worked with at SMB, for example, results are dramatically better when team leaders coach junior traders and when those developing traders support the trading of their mentors.  "Each one teach one" is a virtual mantra for successful teams:  everyone provides value to one another.  Conversely, the poorest results I've seen at trading firms are achieved when developing traders are left to their own devices to "figure it out".  No giving and no receiving means a slower turning of idea wheels and a more tortured learning curve.

I see this dynamic among individual traders as well.  The successful ones cultivate networks of peers to share ideas and encourage one another.  It is not by coincidence, for example, that the Investors Underground live chatroom is also instrumental in Traders4ACause, a group that uses trading education as an opportunity to "give back".  When traders operate in a culture of giving, they are inspired to also be givers.  Everyone wins.

Here's a great metric for your trading:  Who are you making better and how well are you doing it?  In giving value, you attract the right people and that, in turn, provides you with more and better resources.  Some of the best ways of working on our trading is to contribute to the trading of others.  Some of the best ways of working on ourselves--enhancing our health, well-being, and success--is contributing to others.

Further Reading:

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Sunday, April 15, 2018

Trading Noisy Markets With A Quiet Mind

In a recent video, Don Miller talks about the perils of information overload--something traders weary of headline-driven moves can appreciate.  The single most common theme I'm hearing from traders is getting "chopped up" by irregular market behavior.  Consider this:  if we add up the average true ranges for the past 14 trading sessions, SPY has moved 29%--even as it has closed flat over that period.  Lots of movement, little direction.

What I find during these periods is that many traders, frustrated by the lack of good moves in what they look at, start looking at more and more things, trying to find the next catalyst, the next trades.  They create their own information overload by failing to filter information.  To put it succinctly, as markets get noisier, their thought processes also get noisier.  More frantic looking for ideas, more frantic stopping out of trades, more frustrated self-talk.  

Here's a psychological principle you can count on:  As conditions become more challenging and dangerous, peak performers respond with increasing mental quiet and focus.  That is what happens in the emergency room; that is what happens in the fourth quarter of a playoff game; that's what happens on the 18th hole of a close golf tournament.

As a psychologist, if I meet with someone who talks seriously about suicide, I become laser focused on the conversation.  I'm processing every word carefully, filtering my internal noise, because every word matters.  When I was a rookie, learning therapy in grad school, the mention of suicide would make me frantic, searching for the right things to say and do.  

The key difference is that, under stress, experienced performers double down on observing and listening.  They become more quiet, more focused.  Just like the sniper.  Just like the surgeon.

The rookie performer never enters "the zone" because attention and thought are frantically jumbled, flitting from market to market, from self to market to P/L and back to self.  This past week, I noticed a great trade in which the market (ES futures) was stretched to the upside and could not sustain further buying at the NY open.  I was focused on the market's behavior second by second, seeing buyers and sellers interact and watching the price behavior of the market's sectors.  It soon struck me that the buying was exhausted and that selling was taking over.  That led to a great trade.

We like to talk about "idea generation", but the reality is that the idea came to me; the only thing I generated was an open minded state of enhanced focus.  How different that is from when I enter the day with a fixed opinion about the market's direction and completely miss how the market is actually trading!

The problem is not a noisy market; it's making the market's noise our own.  It's amazing what can come to us when we focus and filter...all performance training is a training of the capacity to act decisively when we are in the zone.

Further Reading:


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Thursday, April 12, 2018

Preventing Trading Stress From Becoming Trading Distress

All true performance activities bring stress.  That is because true performers care about winning.  There may be external pressures to win, but for the best, there are always internal pressures.  Elite performance demands that we push the envelope and attempt to perform at our best.  That demand--that stress--can be a great motivator.  

Stress in itself is not a negative.  It is an inherent part of any activity in which near-term outcomes truly matter.  

Sometimes it is important in life to minimize stress, particularly in areas that aren't central our most important life activities and goals.  For example, when I fly for work or vacations, I select the flights that have the best on-time percentage to their destinations.  That greatly minimizes the probability of delayed or canceled flights.  Margie and I recently found a two-year certificate of deposit with a yield very close to the yield on 10-year Treasuries.  For our savings, that's good enough.  We don't want to have to be concerned with price movement for that portion of our money.

Reducing sources of stress in more peripheral areas of life helps us stay focused on the most central areas of life.

It is in the central areas that we experience the need to do well and the demands of performance.  That is why it can be stressful to be a parent, a trader, or an entrepreneur.  Many retired people lose those central areas of life and experience few performance demands.  That is not necessarily a blissful life.  Happiness--doing fun things--is not enough for many people.  We also need fulfillment, and challenge is one important source of fulfillment.

How we handle stress determines whether it will be a motivator or a source of dis-stress.  

A great way to turn stress into distress is to make performance activities our only or main source of fulfillment.  Then we have much more than PnL on the line.  Our entire sense of self can feel jeopardized.  Often, it's not the trading that is stressing us out.  It's our investing our sense of worth in our trading results.  If you can experience yourself as a successful, fulfilled person even when your PnL is not moving higher, you know you are well diversified emotionally.  If you can't experience yourself positively during times of drawdown or flat performance, no tweaking of your trading will address that underlying vulnerability.

We can perform well when trading is important to us and when that importance pushes us to continually learn, adapt, and improve.  We can perform quite poorly when trading is all-important and outcomes control our sense of self.  A great way of reducing trading stress is to improve fulfillment outside of trading.

Further Readings:


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Sunday, April 08, 2018

Making the Most of Your Internal Dialogue

A recent post suggested that our trading success is highly dependent upon our ability to leverage our information processing strengths.  One of our most basic modes of processing information is our internal dialogue:  the self-talk that we engage in throughout our waking hours.  It turns out that the quality of our internal dialogue is a critical element of our information processing.  It's only rarely, however, that we work on improving our self-talk.

Now, on the surface, it makes little sense that we talk with ourselves.  Why write ourselves memos and calendar reminders?  Why review plans in our heads or comment to ourselves, "Good job!" or "What were you thinking?"  How is it that we interact with ourselves as we would interact with others?

The answer is that we possess at least two information processing systems.  One is a fast, reactive system that helps us respond to situations in real time; the other is a slower, deliberate system that enables us to see larger pictures and plan for those.  Both are necessary for dealing with the real world.  We want to be able to plan a strategy for a football game, but we want to react quickly to changing conditions on the field.  Coordinating our two "brains" is a key element in performance success.

Imagine being in a self-driving vehicle.  It reacts to obstacles and traffic changes faster than we could.  There's only one problem.  It doesn't know where to go.  We have to program the destination information.  We have to align the fast, reactive mode with a bigger picture.  When we talk to ourselves, we program our GPS; our slower, deliberate, rational mind communicates with our quicker, reactive, pattern-recognizing mind.

Trading journals are a form of internal dialogue.  Our overt self-talk during the trading days is a form of internal dialogue.  Step back for a moment and think about you talk to yourself during the trading day.  How well are you programming your GPS?

A key piece of progress for many traders is turning their pre-market preparation into active, effective internal dialogue.  That is a major factor in transforming good intentions into concrete, actionable plans.  Imagine planning for the day by reviewing recent market behavior, dominant market themes, news events: out of those you generate a view that you will trade if you see it playing out.

That is well and good, but now imagine going an extra step and generating *multiple* scenarios and laying out plans for each.  Then, as you walk through the new day, you update each scenario and flexibly move to the ones that are displaying higher odds of playing out.  That gives you more ways to win.

But now take it a further step and imagine not just writing out the multiple scenarios, but actively talking them aloud with a peer trader, responding to feedback about the scenarios, and listening to your subsequent dialogue.  Still further, imagine taking your scenarios and actively *talking to yourself aloud* about those, saying to yourself, "Brett, if you see X occur, you need to be doing Y.  If you see A occur, you need to shift your thinking to B...etc".  Imagine talking to yourself with real feeling about those plans, the way a coach on the sidelines would talk to you.  

We retain information better when we encounter it multiple times.  We retain information better when we encounter it in multiple, different ways.  We think it, write it, discuss it, talk it to ourselves with feeling--all of these help the programming of our GPS.  

The speed and quality of self-talk is something I see among successful traders:  they are very good at programming themselves and quickly changing their programs.  This is something I'll be discussing in detail during Wednesday's free webinar.

Further Reading:


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Thursday, April 05, 2018

How You Learn Determines How Much You'll Earn

So now the secret of my working with traders gets out...it's the Brooklyn Brown Ale after the market close!

Mike Bellafiore at SMB recently released a video about our upcoming free webinar on maximizing your learning process as a trader.  The webinar is hosted by Wealth365 and will be held this coming Wednesday (April 11th) at 5:00 PM Eastern time.  Mike's video captures a number of the topics we'll be covering; here is the link to register for the event.

What I find in working with traders is that their progress--and, specifically, their ability to adapt to changing market conditions--are highly dependent upon the quality of their learning processes.  In a nutshell, traders often do not process market-relevant information in a manner that is consistent with their cognitive strengths.  This holds back their learning, and that holds back their profitability.

I first encountered this dynamic when I ran a counseling service for medical students in Syracuse.  Many students sought the service because of "academic stress":  they were not doing well in their courses and were worried about failing courses, not getting a good residency, etc.

The traditional approach to helping these students was to provide "stress management" techniques.  These were helpful in managing the symptoms, I found, but did not address the cause of the problems.  The medical students were good students--they got into med school for a reason--but they had very distinctive and different learning strengths.  

Some students were great at taking notes and learning from those.  Others learned best in groups, discussing the material.  Still others had to rework the lectures and readings and create their own charts and diagrams to assimilate the information.

And the students who performed best had multiple ways of processing the information from lectures and clinical rounds.  Encountering the information in many modalities--hearing it, writing it, discussing it, visualizing it--helped the students retain the information.  Just as important, processing the information in multiple ways allowed them to better access the information when it was tested in different ways:  through multiple choice questions, essay questions, clinical presentations, etc.

This is key; please pay attention:  Because each market day is different, it tests us in different ways.  Sometimes it asks a multiple choice question; sometimes it asks for a lengthy essay.  If we only process information in one way, we will only be prepared if markets pull for information in that particular way.  We lose flexibility.  It is in active, varied processing that we learn faster, deeper, and more flexibly.

This idea, which we don't typically encounter in the trading psychology world, is a total game changer.  It's not just about trading your plan, listening to your emotions, staying focused, etc.  Those are all necessary for success, but not sufficient.  If you're not immersing yourself in market information in ways that are aligned with your cognitive processing strengths, you will always be underprepared relative to your potential.  

In my segment of the webinar, I will discuss specific strategies for improving our processing of market information and supercharging our learning.  Look forward to seeing you there!

Brett

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Tuesday, April 03, 2018

Winning and Losing Mindsets in Trading

What I've found is that there are major mindset differences among developing traders that play an important role in their eventual success or failure.  Here are several of the mindsets that I see among those who find success in markets:

1)  They are market-focused, not self-focused - The successful traders focus on markets, opportunities, and ways of exploiting those opportunities.  They dig for ideas and they love the digging.  The less successful traders focus on themselves, their P/L, what they did right and wrong, etc.  In their self-focus, they are not fully immersed in markets and learning.  They are all about outcomes and not the processes needed to generate those outcomes.

2)  They are positively focused, not negatively focused - The successful traders learn from winning trades and learn from trades they missed.  When they're losing money, they're still actively learning and taking away positive lessons.  The less successful traders talk a great deal about how markets aren't giving them opportunity, are choppy, are difficult, etc.  We tend to pour ourselves into what we enjoy.  Part of what makes developing traders successful is having fun at what they're doing and thereby immersing themselves in the growth process.

3)  They are open-minded and flexible, not rigid - There is no single formula for trading success, but there is a formula for trading failure.  The failed traders are fixed in their views and their approaches.  They never adapt.  They are perma-bears or perma-bulls.  They look at things the same way regardless of market conditions.  The successful traders are quick to shift from one area of opportunity to others as conditions change.  They actively process the information that would tell them their view is wrong and can promptly exit or even flip their positions.  

You know the kind of people who go online and argue and shout and spew venom at whatever political figure, cause, TV show, sports team, or person they don't like?  *That* is who makes a shitty trader.  A drama mindset cannot be a disciplined, focused mindset, and it's ultimately not a constructive mindset.  A winning mindset is all about generating light, not heat.

Further Reading:


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