Monday, February 19, 2018

A Powerful Technique for Changing Your Trading Psychology

From an evolutionary perspective, it makes sense that we make complex behaviors automatic.  Once we can perform tasks mindlessly, we can direct our mind to more immediate, pressing matters.  This is how we can drive a car and hold a meaningful conversation.  It's also how we can carry out morning routines without effort, allowing us to focus on plans for the day ahead.  Our ability to automatize activity greatly expands our scope of thought and action.

What happens, however, when our automatic routines no longer serve a useful purpose?  They remain as habit patterns and they are the activities, patterns, and behaviors we're most comfortable with.  Many of the problems we face in life today reflect the fact that we're living patterns in the present that, at one time, had an adaptive value.  Now they bring negative consequences.

Consider the trader who hesitates before acting on a signal and, when he acts, does so in small size.  That pattern of behavior was part of prudence during the trader's early learning period.  It guaranteed that he didn't act rashly and impulsively, and it kept losses small.  Now that the trader has learned and is showing profitability, the old prudent behaviors make him risk averse.  Yesterday's solutions, carried forward to a new reality, become today's problems.

To change an old pattern of thought, feeling, or action, we have to be willing to exit our comfort zone.  That means standing outside our patterns and actively viewing them as problems.  At one time in the alcoholic's life, drinking was a means of socializing and a tool for feeling better.  Fast forward to the point of alcohol abuse, and now drinking is bringing negative consequences for work, health, and relationships.  Alcoholics who change view drinking as their problem, their enemy: they take the automatic pattern and use guilt, disgust, and anger to regain choice over how they think and what they do.  Change begins when we view our problems as our problems

One of the most powerful change techniques in psychology is to take a pattern that is interfering with your happiness, fulfillment, and/or success and actively rehearse that pattern in your mind--visualize it, feel it--while you remind yourself of all the ways that it has hurt you.  Literally, you're bringing that pattern to mind--maybe it's overtrading or trading too small--and imagining how many times you've flushed money down the toilet, how many ways this problem has stood in the way of your success.

Can you imagine how angry you would become if someone hijacked your keyboard and screens and started placing random trades, losing you money?  Well, that is happening to you every time your negative thought and behavior patterns hijack your trading psychology.  Getting angry at those patterns is the first step in refusing to identify with them.  It's a way of standing up for the healthy parts of ourselves and saying, "I'm not letting you hijack me!"

Visualizing old ways of thinking, feeling, and acting that now bring us pain and allowing ourselves to fully feel all the disgust, guilt, remorse, and anger associated with the consequences of those patterns completely changes our trading psychology.  We no longer fall into comfortable habits, because we no longer feel comfortable with those habits.  We have turned them into enemies.  That is powerful.

This visualization and reframing is just one example of a broader psychological strategy of mental rehearsal.  There are many other ways to use mental rehearsal to build new, positive habit patterns and to reprogram emotional responses to situations.  This week's Forbes article looks at the science behind mental rehearsal and ways in which we use this method to change our lives.  It's amazing how, when we change our mind about our problems, we truly change our minds.

Further Reading:


Sunday, February 18, 2018

Free Trading Psychology Webinar With

This Thursday, the good folks at will be hosting a presentation where I'll be talking about the best practices of traders who are currently experiencing significant success.  Because I work as a coach at multiple trading firms, I'm able to see who is doing well, who isn't, and what makes the difference.  In this presentation, I'll focus on specific strategies that you can employ to replicate those best practices of best traders.

Here is the link to register for the event.  We'll be meeting up after the market close at 4:30 PM EST on Thursday, and there will be plenty of time for Q&A.  Look forward to seeing you there!


Friday, February 16, 2018

Lessons in Trading and Psychology - 5: Cycles

Many times, traders become frustrated and fall into a negative psychology because they are looking for one thing, while the market is doing something else.  In that sense, frustration gives us information: that we are possibly out of sync with what we are trading.

Above we see the S&P futures (blue line) plotted from February 12th through Friday's close (February 16th).  If we were to create a regression line to best fit this action, we would see a line with a decent fit and a positive slope.  That tells us there is a trend component to how the market is trading over that time horizon.

Notice, however, the trend is far from a smooth upward line.  The red line captures a dominant cycle within the trend, where a 50-bar rate of change is expressed in standard deviation units (left axis).  Each bar captures movement in event time, not chronological time.  In this chart, each bar is drawn when the futures have changed price 500 times.  

The event time bars adjust our time series for the volatility of the market's price action.  When we have low volatility, we draw fewer bars and vice versa.  Standardizing the market view this way provides us with a more stable time series, and that helps us better assess cycles within the market.  Those cycles tell us when we are relatively overbought or oversold.

In an upward trend, buying the market when we approach a 2 standard deviation cycle trough ends up providing pretty good entry.  Indeed, we can define a trend by the presence of cycle troughs/peaks at successively higher/lower price levels.  Notice also how the frequency of the dominant cycle gives us a window on how "choppy" the market may be--and how changes in the frequency give us a clue as to whether a trend is waxing or waning.

Stocks or instruments displaying greater clarity/consistency of trends and cycles might be the best trading vehicles for a trader.

Looking at price behavior in new ways opens new trading possibilities--and that can expand our psychology, fueling our understanding and sense of mastery.

Further Reading:


Wednesday, February 14, 2018

Lessons in Trading and Psychology - 4: Volatility

When we understand what is going on in the market, it gives us a psychological sense of clarity and control.  Much of our worst, reactive trading occurs when we feel out of control.  Looking closely at how the market is moving can provide us with understanding--and that can be tremendously helpful not only to our trading, but also to our trading psychology.

In hearing from many traders recently, I'm finding that they are having a difficult time adapting to the market's shifting volatility.  With volatility declining--and the volatility of volatility waning--we get choppier market conditions.  With volatility expanding--and greater vol of vol--we see momentum moves.  Many times, traders are zigging when they should be zagging because they are misreading--or *not* reading--market volatility.

Above is a tool I created in about 40 minutes from historical data via the e-Signal platform.  Here we're looking at the volatility (high/low range) in each five minute bar in SPY relative to the average range for that same time bar over the prior five trading sessions.  So, for example, we're seeing how today's 9:30 - 9:35 AM EST bar compares in size to the average 9:30 - 9:35 AM EST bar for the prior five trading sessions.

Note how, from the very start of trading yesterday, we were seeing relative ratios below 1.0.  That means we're getting less movement in each time period than we've seen over the past week of trading.  Very quickly that can alert you to the fact that this is not likely to be a high momentum market.  In the lower volatility environment, moves are less likely to extend and we want to be more selective about taking trades and opportunistic about taking profits.

Note also how it would be easy to create this relative volatility measure for any stock or index you're following.  We typically look closely at price movements and trends; we're less likely to examine how volatility is trending.  Adapting our trading to the market environment allows us to recognize when we should be trading moves and when we should be fading them.  That can eliminate a helluva lot of frustration!

Further Reading:


Saturday, February 10, 2018

Lessons in Trading and Psychology - 3: Identifying Intraday Reversals

OK, so recall what we talked about in the previous post that looked at how we can use volume to understand market movements:  each day in the market offers us one or more important learning lessons.  Our job in reviewing the day is to extract these lessons, so that we can improve our ability to recognize opportunities in real time.

Above we see yesterday's market (SPY) plotted against five minute closing values for the NYSE TICK.  Recall that we visited the $TICK measure in the first lesson post that dealt with changes of market regime over a period of days.  Now we are examining the change of market character that occurred intraday in Friday's market.  Note that the scale for the $TICK values is in standard deviation units, so that we can see how stocks are trading relative to a recent lookback period.

Note how the $TICK line quickly moved below zero during the morning session and largely stayed below zero for most the morning.  This tells us that stocks were persistently trading with weakness (on downticks) throughout those morning hours.  Something interesting happened midday, however.  As we made new lows in SPY, we were seeing much less selling pressure.  Indeed, the final low was preceded by a sizable spurt in buying.  From that final low, we saw a significant spurt in buying and stayed above the zero line for most of the remainder of the day.

In short, we saw in transition from selling pressure to buying pressure, with a waning of selling preceding the upsurge in buying.  The trader seeing this shift in supply/demand was alerted to the likelihood that this was not a trend day to the downside and, indeed, there were many traders leaning short who might need to cover.

Notice also that once we surged above two standard deviations in the $TICK measure (both to the downside in the morning and to the upside during the afternoon), we tended to get follow through of price movement (momentum).  Just noticing these dynamics helps keep a trader on the right side of market movement, knowing when to trade a market move and when to fade it.

Further Reading:


Wednesday, February 07, 2018

Lessons in Trading and Psychology - 2: Volume

Every day the markets teach us lessons in trading and psychology.  Our job is to become good students and learn from these lessons to improve our craft.  In the first post in this series, we took a look at detecting regime changes by assessing shifts in buying and selling pressure.  In this installment, we'll take a look at volume and its significance.

On any time scale, volume correlates very highly with volatility.  During the recent decline, for example, we traded well over 200 million shares in SPY.  During the low volatility push higher prior to the decline, we commonly traded under 100 million shares.  Who are these additional participants?  For the most part, they are value players trying to take advantage of unusually high or low prices; short-term directional traders trying to take advantage of the movement; and longer time frame participants stopping our of positions.  In short, when we see added volume, it means that the proportion of directional traders relative to market makers has increased.  This facilitates market movement.

Conversely, when we see volume dry up, it means that directional traders are not perceiving opportunity in that instrument.  That leads to less movement on all time scales and what short-term traders experience as "choppy".

OK, with that in mind, let's take a look at yesterday's trade in the ES futures depicted above.  A number of traders who sent me their journals made money on the opening drive.  They recognized that we were oversold and that volume was strong at the open, with buying significantly exceeding selling.  The combination of high volume, buying interest from value participants, and short-covering from those leaning the opposite way created a momentum thrust.

An important way we can identify high volume at the open is with the measurement of relative volume.  In relative volume, we take the average volume for each time of day (above we have five-minute time intervals) and see how today's volume from 9:30 AM EST to 9:35 AM EST compares with the average volume at that time of day.  High relative volume tells us we have high participation from directional players.  In the first three five-minute segments of the day yesterday, we had volume between 2 and 4 standard deviations above average.

Note how having the right data helps you make the right adjustment in your trading.  We commonly think of psychology as helping our trading, but approaching trading the right way--with the right information--is a big part of having the right mindset.

Interestingly, a number of the traders who wrote to me and who made money in the early morning move gave back money midday.  Why is that?  

Click on the chart above and you'll see how volume moved meaningfully lower in the midday hours.  By the time we bottomed during the 2 PM EST hour, the average five-minute volume had fallen to about one-fifth of what we saw in the opening periods.  With that waning of volume, we have waning volatility:  no more momentum.  Traders who did not pay enough attention to volume implicitly assumed that we were still in a momentum market.  Every move was taken as a potential breakout--only to reverse due to the lack of participation.  The trader who paid attention to volume was able to adjust expectations and either scalp smaller moves or stand aside altogether.

When we get excited about making money, we often become tunnel-visioned and don't step back to see what volume is doing.

Even worse, when we get excited, we don't step back to observe what is happening on the larger time frame.  Notice how volume is drying up as the sellers are coming in.  We had quite negative NYSE TICK readings during that 2 PM EST period and yet volume was drying up.  Moreover, with all that selling pressure, we couldn't retrace more than about half of the early morning move.  Recognizing that larger pattern set us up for the late day continuation of the upside momentum trade as volume picked back up.

This is how psychology integrates with trading:  The cognitive flexibility to shift between price action and volume and the flexibility to shift from moment-to-moment to the larger time frame complements the ability to track buying and selling pressure and its shifts.  When we become self-focused and P/L focused, we lose that cognitive flexibility.  We no longer trade with perspective.  So much of trading success is using our psychology to detect patterns in the market's psychology.

Further Reading:


Sunday, February 04, 2018

Lessons in Trading and Psychology - 1: Regime Changes

In this series of posts, we'll look at ways of integrating trading psychology and the process of trading.  It is my hope that the series will illustrate the richness of the relationship between trading and psychology--a depth rarely captured in traditional writings on the topic.

Here we see a chart of SPY (blue line; 5 minute values) from December 15th through this past Friday, February 2nd.  In red, we see a 2-hour moving average of NYSE TICK values over that same period.  Recall that this measure captures the number of stocks trading on upticks minus the number trading on downticks at each moment of the trading day.  The symbol is $TICK on the e-Signal platform and most others

Note that for a good part of the first half of the chart, the NYSE TICK values stayed above the zero line.  As SPY moved higher, we saw evidence of buying strength:  more stocks trading on upticks than downticks.  Look, however, what happened in the second half of the chart.  The distribution of TICK values shifted and we now saw more selling pressure than buying pressure--even as SPY moved to all time highs.

In other words, the psychology of the market changed--we shifted from a buying regime to a selling one--well before SPY made its recent correction.  The change in the distribution of TICK values alerted us to market vulnerability.

Here is an analogy:  suppose the economy of the U.S. is quite strong in large urban areas of the east and west coasts, but weak everywhere else.  A company's sales continue to rise, but when management looks at the distribution of sales, they see that fewer and fewer regions are holding up the rest.  An alert management would not be high-fiving over record earnings.  They would be reducing production and shifting the product mix to prepare for potential economic downturn.

The psychological takeaway is that we need to drill down and look beneath the market surface and approach each fresh set of data with an open mind.  On the day we made a peak in SPY, we had 599 stocks make fresh three month highs and 199 register new monthly lows.  Two weeks before that, we had almost 900 new three month highs against 135 lows (data from  The open mind respects price action and market strength, but also is alert to cracks beneath the surface.  Then, when price can no longer sustain new highs, volatility increases, and TICK readings become very negative, that alertness allows for a quick transition to the new regime.

You have to have the right information, and you have to have the right mindset of openness.  That is an important way that trading and psychology come together to create success.

Further Reading:


Friday, February 02, 2018

How to Prevent Emotional Trading

Trader Stewie recently pointed out something I've found in my own trading:  trades taken primarily for emotional reasons rarely prove profitable.  A number of the traders I work with email me their trading journals daily.  It's amazing how often the profitable days are relatively simple and easy: the trader has certain ideas that they trade, certain ways of entering those trades with good risk/reward, and certain ways of sizing those trades and managing those positions.  When they are patient and selective and focused, they trade the right ways without a lot of drama and they do well.

Conversely, when markets are moving quickly and others around them are making money and they lose money on their first trades, trading becomes frenzied and frustrated.  Patience and focus go out the window and the trader becomes reactive, chasing moves, trading marginal opportunities.  That generally means entering positions at poor levels and getting stopped out.

Now, yes, there are psychological techniques for becoming aware of our emotional responses, stepping back from them, and refocusing ourselves.  But why do such disruptions occur so frequently for otherwise sane, level-headed people and what can we do to prevent them?

A key to unraveling this challenge is examining the opposite of the trading frenzy:  periods when nothing is occurring in markets.  Action is slow, volatility is low, and things are chopping around.  Is this a nice rest period for traders?  Hell, no!  Boredom ends up becoming as much as a trigger as frustration.  The trader, feeling a press to make money and do something, tries to manufacture opportunity.  Every move to an X minute, X hour, or X day new high or low is seized upon as the start of a trend and the mean reversion stops them out.

The reason the boredom is so difficult to weather is that traders are *needing* some degree of excitement, challenge, and action from their work.  They are trading to meet a set of emotional needs, not just to maximize their reward relative to risk.  Similarly, they may be trading to outperform others out of a competitive need, or they may be trading to fill a missing need for self esteem.  It is those unmet needs that impel the emotional responses and poor trading.

Trading is a great endeavor, but it cannot be burdened with the expectation that it fill our personal emptiness.  Imagine the surgeon who is bored in his life and looks forward to the thrill of cutting when he gets to the operating room.  Is that really the physician who you want to heal you?  The speaker who cares so much about the approval of the audience is the same speaker that suddenly goes blank and freezes up.  Needing the outcome destroys the process of doing.

This is why I am wary of traders who insist that trading is their great passion and who spend so much of their time watching prices.  The successful traders I work with have complete lives that fulfill their passions.  They don't need market action or thrill because they have plenty of stimulation outside of market hours.  They don't need to prove themselves in markets because they experience their worth as spouses, parents, friends, family members, and as spiritual beings.

Prevention is always the best cure.  If emotions interfere with your trading, figure out the unmet needs that trigger those emotions and then figure out how you can begin meeting those needs *outside* of markets.  You will have a calm, focused mind--and you'll be best able to surf the expectable emotional waves--when you have a fulfilling, gratifying life.  

Further Reading:


Saturday, January 27, 2018

When Doing More Means Achieving Less

The research of Ed Diener is spot on:  happiness and fulfillment are not simply states of being, but ongoing life processes.

What I refer to as "personal process" is the life equivalent of a trading process.  A sound trading process consists of activities and procedures that align us with opportunity and optimal performance.  A sound personal process aligns us with our values and strengths, so that we're not only doing things right, but doing the right things.

My template for personal process involves making sure, each day, I am dedicating quality time to:

1)  Engaging in fun activity, and sharing joy and happiness with others;

2)  Engaging in meaningful activity, doing things that have a valuable purpose;

3)  Engaging in stimulating activity, doing things that energize body and mind;

4)  Engaging in connectedness activity, doing things that build significant relationships.

All too often, the reaction to such a template is:  I don't have time for that!  We make busy-ness our business and, day by day, we lose the sense of fun, meaningful purpose, stimulation, and connectedness.  

Many years ago, I was coordinating a student counseling program and had a number of students seeking help.  I did not want students to have to deal with a waiting list, so I moved from 45 minute meeting times to 25 minute sessions.  My counseling office became an assembly line of meetings.  In the 25 minutes, however, we could not go into depth and detail into each student's challenges.  Nor did I have time between meetings to take proper notes and process all that we had discussed.  For the first time that I could recall, I found myself hoping that someone would fail to show for their meeting, just so that I would have time to catch my breath, take my notes, research counseling approaches that could help each student, etc.

In short, the faster pace took away fun, made the work less meaningful, left no time for stimulation, and interfered with the true relationship-building of my work.  In trying to do more, I achieved less. 

Fast forward to today and traders talk with me about their trading.  They raise problems and concerns and usually their answer to the challenges is to do more:  write more in a journal; meet more with other traders; spend more time in preparation; follow more markets and generate more ideas; etc. etc.  They speed up their efforts, they get further from what they love in trading, and eventually the assembly line breaks down.

Imagine decorating your living room.  You acquire attractive furniture and wall hangings and the room looks good.  Then you decide it can look even better and you buy more furniture, display pieces, and pictures for the walls.  At some point, the items clash with one another:  one style of furniture doesn't go with another, one type of decoration does not fit with the style of others.  With each addition to the room, tasteful decoration gives way to chaos and clutter.

So with our trading, so with our lives:  More can bring less.

Sometimes the answer, for traders as for me when I was doing the student counseling, is to do less and focus more on the parts of the work that bring true joy, fulfillment, stimulation, and connectedness.  Those facets of work yield positivity precisely because they draw upon our strengths.  When we focus on what speaks to us, we turn happiness from a transient state into an ongoing process.  That energizes our trading--and our lives.

Further Reading:


Wednesday, January 24, 2018

Truly *Leading* Our Lives

All of us lead lives of one sort or another, but how many of us are truly leading our lives?

When you are a leader, you not only have a vision and direction: you communicate and implement it.  How visionary is your life?  How well you do communicate that to yourself and implement daily?

What isn't well recognized is that true leadership transforms us, cognitively as well as emotionally.  It brings us in more consistent touch with our strengths, with the activities that energize us.

A great exercise is to read this new article on leadership from the perspective of how you lead your life.  It's a view from a Special Operations military commander who has seen leadership up close and under pressure.  It raises a great question for all of us:  How well am I energizing my life?

We push ourselves to move at a faster life pace when instead we should make sure we're traveling the right path.  Truly leading our lives sets us on the right paths.

Key Reading:


Sunday, January 21, 2018

Resources for Developing Your Trading Playbook

Mike Bellafiore makes frequent reference to traders' "playbooks".  For a basketball or football team, a playbook is a set of plays that the team runs in various situations.  The playbook guides practices, so that each team member knows their role in each play and executes it perfectly.  The playbook also provides ways for the team to exploit vulnerabilities in the other team's defense.  Every team has multiple plays in their playbook to find ways of scoring.  Much of the skill of a coach is knowing which plays to call when.

Having worked with developing traders for many years, I've come to appreciate the paths that lead to success and those that fall short.  Successful traders, I find, start with small, focused playbooks and work at becoming proficient in just a few types of trades.  They document their plays in journals, trade them in real time, and review action at the end of the day to see what they might have missed.  Only when they become proficient at a few basic plays do they move on to exploit other ways of making money.

I consistently find that the intensity of the learning process--the cycles of viewing, doing, and reviewing--is associated with greater trader success.  We develop expertise by internalizing what we learn.  In every performance endeavor, the greats spend more time practicing skills and rehearsing performance than in actually performing.

It's common among active traders to think of playbook trades as "setups", as in chart patterns, but this is shortsighted.  A playbook trade consists of several components:

*  A pattern of market behavior that has led to favorable market returns over a defined time horizon;

*  A set of rules for identifying this pattern in real time and entering the trade at a point that provides favorable reward relative to risk;

*  A set of rules for sizing the trade, so that the trader can achieve meaningful returns without running the risk of ruin when, by chance, a series of losing trades occurs;

*  A set of rules for establishing target prices and adding to positions/scaling out of positions/exiting positions;

*  A set of rules for establishing the stocks or instruments best able to exploit the patterns being traded.

When the trader merely views the playbook trade as a set of entry criteria, they leave themselves no guidance for sizing the trade and managing the risk/reward of the position.  How trades are sized and managed is every bit as important as the trade ideas themselves.  When we rehearse playbook trades, we work on all the components of the trade.  That includes what we're trading.  So often, I find that the most successful traders are those that find the best vehicles for trading their playbooks.  At the end of 2017, I saw traders succeed phenomenally trading the crypto-related stocks.  Had they traded exactly the same patterns in the large cap universe, they would have made far less money.

So how does a trader know what should go into his or her playbook?  In every performance domain, from athletics to chess to medicine, we see mentoring as a key resource for development.  We learn what to do and how to do it from people who are already successfully involved as performers.  This is why so many trade occupations are structured as apprenticeships.  Learning by trial and error alone is too inefficient--and costly.

Fortunately, there are many vehicles for apprenticeship, from the training programs at investment banks to junior analyst positions on hedge fund trading desks to the training offered at proprietary trading firms.  Thanks to the online medium, we're seeing quite a few chat rooms serve the developmental function.  Several of these appear below:

The Art of Trading - Education and live trading with Stewie, including a blog site;

Asenna Capital - Training and trading, including chat room, with perspectives from Assad Tannous.

Dan Zanger - Chat room and real time education based upon chart patterns of promising stocks, with tweets by Dan on opportunities they're tracking.

EminiPlayer - Large archive of videos and live chat room with focus on the e-minis and trade planning around Market Profile, hosted by Awais Bokhari.

Investors Underground - A team of traders offer real-time training and support in a chat room format coordinated by Nate Michaud. They sponsor the excellent Traders4ACause events.

SMB Capital - Merritt Black runs a futures based chat room; Seth Freudberg runs a training program for options traders; and SMB holds training classes and events based upon the patterns traded at their prop firm, including a large archive of videos.

There are many other great services out there; check out this review; this post on resources for traders; and this post on technical analysis resources.

Note that each of these services comes at a cost, both of money and time/effort.  Considerable due diligence is needed to ensure that what they are teaching is what you want to learn.  The right sites will role model playbooks and how to trade those.  What you add is the review and practice that helps make those patterns and rules your own.  The best services accelerate your learning curve; none of them can substitute for that learning curve.


Friday, January 19, 2018

When Trading Psychology Is NOT The Problem

I recently spoke with an active trader of the S&P 500 Index market who had been experiencing difficulty in his trading.  He had sought coaching and the coach worked with him on mindfulness strategies to help him tune out market and emotional noise and more clearly implement his ideas.  The trader felt he made good strides in gaining self-awareness, but his profitability still wasn't there.

As part of our conversation, I had the trader present me with his metrics.  We took a look at his number of winning and losing trades and the average sizes of these.  We examined the P/L specific to his long trades and short trades, and we examined profitability as a function of holding period and time of day.  Finally, I took a look at serial correlations in his daily profitability: whether there were distinct patterns of winning/losing periods being followed by winning/losing periods.

Nothing uncovers trading problems better than a hard look at trading metrics.  

Well, it turns out that two metrics stood out:  the average size of losing trades was greater than winners and most the losing trades were on the short side.  Surprise, surprise.

So I walked the trader through a little exercise.  I explained that it only made sense to look for patterns to trade if you were operating in a stable market regime.  That is, if recent market history is unstable, with widely varying means and standard deviations of price changes, then there is no basis for using the past to guide the future.  On the other hand, if you have a stable regime, it's possible that patterns occur during that period that can guide trading decisions in the near future.

I showed the trader how there has indeed been a stable regime since September of 2017 and I illustrated how several variables displayed short-term trading promise in that regime, including the percent of stocks trading above their short-term moving averages and VIX.  When these variables lined up, the next two days in SPY averaged a nice gain of +.41%.  All other occasions displayed an average price change of +.21%.

Wait a minute, I noted!  When the variables line up, you get better near-term returns.  When the variables don't line up, you still have had positive returns during this regime.  In other words, the linear (trend) component of the regime is so strong that the indicators provide some upside  advantage on the short term, but no downside advantage.  In a more cyclical regime, we would see the indicators anticipate both positive *and* negative returns.

Bottom line, I explained, is that, even trading the best indicators I can find, I can't objectively identify any sell signals.  Going short only makes sense if you assume you have a crystal ball and can figure out to the day when the regime will shift.  That has not been a good bet for the trader.

The big takeaway is that if the patterns you're trading don't fit the patterns existing in the marketplace, you are not going to make money.  All the emotional awareness, discipline, mindfulness, and motivation in the world won't make a losing strategy win.  We are much too quick to assume that trading problems are psychological in nature and much too slow to truly drill down into the metrics and the markets and see if our strategies make sense.

Imposing your trading "style" on markets regardless of regime can be hazardous to your wealth.  Assuming that all you need to do to make money is double down on your "style" and work on your mindset only compounds the problem.  Sometimes markets are not stable; sometimes markets are stable, but display no predictive patterns within their regime.  Does it really make sense to actively trade during those occasions?  A passion for markets is best channeled through a clarity of vision.


Sunday, January 14, 2018

One Easy Way to Enhance Your Market Vision

I've spent some time this morning reviewing websites and Twitter feeds that are market related.  There are some really good things out there, and there are some really bad ones.

The broadest generalization I can make is that the awful sites are ego based.  They focus on the calls made by the guru, the services offered by the expert, etc.  Generally there are one or two pet ideas that are offered as the solution to trading and, of course, the writer just happens to be the go-to person for those key skills.

The valuable sites are truly idea based.  They don't just make market calls; they illustrate reasoning that goes behind the views.  A good word for these sites is that they are evidence-based.  They educate and illuminate.  They are not primarily pitching the writer.

Consider the Market Anthropology site.  You don't have to go too far into your reading to find interesting perspectives on interest rates and the big moves in a few asset classes.

Or how about Jeff Miller's Dash of Insight site, with well-documented perspectives on market sentiment and changes in economic conditions?

Take a look at Chris Ciovacco's site and its insights on market valuation and taking an evidence-based approach to charts and market views.

Note that these are not the most trafficked Twitter feeds and trading sites.  The most trafficked restaurants are fast-food joints, not gourmet eateries; shopping mall retailers, not designer boutiques.  Those who seek quality are generally not part of the traffic jams.

Which sets up a great way to enhance your market vision!

Find Market Anthropology, Jeff Miller, and Chris Ciovacco (or your favorite source of ideas) on Twitter or StockTwits and then look up their followers.  See who follows quality people who are relevant to your trading--and you're likely to discover quality people relevant to your trading!  The chances are good that, in tapping into the networks of people you respect and admire, you'll discover others who are worthy--and who can feel your head.

Imagine adding just two fresh sources a week from the networks of people you respect.  Over the course of a year, you will have greatly enhanced your vision.  Building the right network online is a great way of cultivating a rich cognitive network--and that's a great way of finding the creative ideas that go beyond consensus views.


Friday, January 12, 2018

When Your Passion Becomes Your Poison

A while back, I asked the question:  Does your trading psychology have a dark side?

It's an important question.  So many times, it's not our weaknesses that trip us up, but the misdirection of our strengths.

Consider the motivated, eager, passionate trader.  He becomes so pumped up that he pounces on the first "setup" or idea to come his way, only to lose meaningful money minutes and hinder his subsequent efforts.  That very passion has become his poison.  Enthusiasm, taken to an extreme and not directed, breeds impulsivity and overtrading.

The risk prudent trader can become risk averse.

The active trader can become overactive and distracted.

The competitive trader can become frustrated and unfocused.

The creative trader can flit from one idea to another, one system to another, never developing expertise.

The disciplined trader can become rigid and unable to adapt to a change in the market.

In all these cases, strengths can become vulnerabilities.

This helps explain why so many common approaches to trading psychology don't work.  When we try to reduce or eliminate our problems, we find it difficult to stick to those efforts because those problems spring from our strengths!  We naturally gravitate toward what we do well and what speaks to us, so it's not surprising that we find ourselves repeating problems despite advice to the contrary.

So how do we use our strengths and ensure we don't abuse them?  The key principle to keep in mind is that we best channel our strengths by cultivating their opposing, balancing qualities--and then integrating the two.  The more we draw upon a single strength, the more we need to develop a balancing strength.  A good example would be the aggressive trader.  He or she reaches a new level of development by blending patience with aggression.  The blending of the balancing strength--patience--with the original strength creates a new, higher-level capacity.  The potentially crazed warrior becomes a self-controlled, lethal sniper.

Yet another example of using a balancing quality to channel a strength would be for the introverted, analytical researcher to develop a social network and identify when positioning runs counter to tested models.  The blending of the research focus and the ability to read sentiment creates an entirely new opportunity set, where it becomes possible to take advantage of situations where the crowd leans the wrong way.

Notice in these examples, by cultivating a balancing strength and integrating it with a strength and passion we already possess, we create something new.  We create opportunity.  Strengths only have a dark side when they are overutilized and unbalanced.  Cultivating balancing strengths can literally take our game--personally and professionally--to new levels.


Saturday, January 06, 2018

How to Get the Most From Your Trading Practice

An excellent post from NewTraderU and written by Colibri Trader explains how 10,000 hours of practice typically goes into the creation of expertise.  As the post makes clear, there is a world of difference between repeated experience and practice.  Practice, in the sense of deliberate practice, means that we actively reflect on our experience, examine where we've fallen short, and then institute efforts at improvement.  The trader who trades for a month and merely jots notes in a journal is repeating one day of trading 22 times over.  The trader who makes daily efforts at improvement, using trading results as feedback to guide future efforts, compounds learning 22 times over.

This is how expertise is created.  We learn with each practice session, feed that information to the next practice session, and continually make incremental improvements.  If we simply target our one biggest mistake each day and figure out why it occurred and how we can prevent the occurrence going forward, we turn trading into a series of performance drills.  Practice can make perfect when we perfect the process of practicing.

One of the reasons the report card has become a major tool in trader development is that it anchors the process of deliberate practice.  When we grade ourselves on aspects of trading that matter, we create a framework for reflecting on performance and systematically pursuing improvement.  When we share the report card within a community of traders, the practice of others provides lessons for us.

In the spirit of my recent New Year's goal of using the blog to highlight the good work being done in the trading community, allow me to add one thought to the post from Steve and Colibri.

The worst, as well as the best, trading is the result of practice.

When we trade poorly and then go over and over and over our mistakes, blame ourselves for them, become frustrated with them, talk incessantly about them, and vent about them in our journals, we are engaging in a kind of reverse deliberate practice.  Just as reviewing our trading constructively can aid our development, reviewing our trading destructively actively builds and reinforces our worst habits.  

This reverse practice effect explains many downward trading spirals.  We ultimately live out the image of ourselves that is reinforced in our thoughts, feelings, and actions.  Everything we do--from how we talk to ourselves to what we read to who we associate with--is a mirror, reflecting an image of ourselves.  Successful people create positive, constructive mirrors and thereby internalize that positivity and constructive attitude.  Unsuccessful people often practice just as hard as the successful ones, but with all the wrong mirrors.  

Take a look at your trading practice.  Reflect on how you end up feeling after a day or week of trading.  You're most likely practicing something.  Are you practicing the right things, and is your practice the kind of practice that will make perfect?


Monday, January 01, 2018

How You Make a Change is as Important as the Change You Make

One of my 2018 initiatives is to find good trading websites, blog posts, podcasts, etc.; highlight those as resources for readers; and hopefully add a few nuggets of wisdom and experience along the way.

So let's start with SMB's training blog, which captures many of the lessons that prop firm has learned in the course of growing successful traders.  This one is easy for me to highlight, because I've been working with many of those traders and have witnessed their development first hand.

In his recent post, Mike Bellafiore explains that the greatest spark for trader development in 2017 has been keeping report cards of performance.  The report card has been a daily routine that has anchored review of performance, goal setting, and efforts at improvement.  It's been a great way for traders to become more accountable to themselves.

Interestingly, Nate Michaud from the Investors Underground training network also cites the report card as a major contributor to performance in 2017.  My own observation is that it's not just the report card that furthers learning, but sharing the report cards within teams or trading communities.  This is a very important idea.  When everyone shares their grades, lessons learned, goals, and plans, each trader's learning expands exponentially.  This is called social learning.  We develop, in part, by learning from the experience of others.  This gives us multiple role models.

In one case, it has been particularly effective when the team leader has shared his report cards with all team members.  That way, the feedback that Mike and I provide goes out to the team, not just the trader.  Before long, all the team members began sharing their report cards in this fashion.  The static report card now became dynamic dialogues about improvement--every single day.

At Investors Underground and especially at their Traders4ACause conferences, shared report cards can anchor group-wide education.  It's nice to give back each year, but when traders share their learning each day and fuel each other's development, they are giving back every single day.  Before long, that giving reinforces traders' experiences of themselves:  they see themselves as possessing true value to give, not merely as empty vessels to be filled.

The big idea here is that how you implement a change in your trading is every bit as important as the change you're making.  A report card is great, but it's how you put it into practice--creating dynamic, social learning--that makes it a true difference maker in your trading.