Monday, June 04, 2018

A Trading Psychology Lesson in Real Time

Here's a trading psychology lesson from my own trading today.  Twice today I had positions that went my way, only to reverse:  one for a loss, one for a scratch.  Since those were trades that normally work well for me, I began digging into the reasons they didn't work out.

My first hypothesis, always, is that I have missed something in the market.  I don't automatically attribute my losses to psychological factors.  These were trades that have worked very well for me in the last two weeks and something felt different today.  I trust that sense of "something different".

To provide some background, I tend to enter trades actively (I'll pay the market price) and exit passively (I'll work an order to exit).  The exit is a function of the expectable move in a particular holding period.  In my case, the holding period is 60,000 ES contracts traded.  I know from my research that, over a 60,000 contract horizon, we can expect moves of a given size.

Today, the two trades I had that didn't work out came close to my targets, but failed.  Yes, that could be due to chance, but maybe something else was at work...

Notice the ES and SPY volume for today's session.  According to my stats, the SPY volume in the afternoon was running at about half the expectable level for that time of day.  On normal days, we might get 60,000 contracts traded in 25 minutes' time.  Today it took more than an hour.  Everything slowed down.  

Except for my expectations.

In other words, per the above quote, my internal relations (my expectations) did not adjust to the the external relations (the volume and volatility of the market).  I placed my take-profit exits at one level and that level didn't get hit in the time frame expected.  That is because I was calibrating by chronological time when I know to calibrate in volume time.  Had I let the trades run for the hour rather than a 20-ish minute time horizon, I would have made money on both.

To use an analogy, the music on the dance floor slowed way down and I was still in my faster dancing mode.  I needed to adjust to the pace of the music, not my accustomed pace.  Institutional participants really moved away from the market today, and it traded a helluva lot more like a 10 VIX market than the 15 VIX we've seen recently.  I didn't adjust, and that becomes my job tomorrow:  to be prepared if relative volume comes in low once again.  

Folks, this is real trading psychology from real time trading.  Not the pronouncements of some self-appointed guru who tells you to control your emotions, listen to your emotions, keep yourself mindful, trade your plan, etc, etc.  Market participation changes daily, and the balance of buyers and sellers changes daily.  Our job is to recognize and adjust.  Sure I can calm myself and trade with confidence.  If I don't recognize how the market is behaving differently right here, right now, however, I'll simply lose money calmly and confidently.

When markets change faster than we adapt, bad things happen to P/L.  Our job is to adjust our internal expectations to the external realities of the market.

Further Reading: