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: