I'm pleased to announce a free webinar hosted by Journalytix on the topic of "Taking Your Journals--And Your Performance--To The Next Level". The session will be held at 4:30 PM EST on Monday, October 1st. I like what the Journalytix folks have done in creating a next-generation journaling tool. One app connects your daily journal with your key trading statistics, news feed, and event calendar--and it all updates in real time via your data feed. The Monday presentation will focus on how you can use journals and trading stats to more clearly define where you do and don't have edges in your trading. One observation I've made with developing traders is that they will trade multiple patterns/setups and will assume that these have an edge. When they break down their profitability as a function of the strategy traded, however, it often is the case that most of their profits are coming from one or two key types of trading. By using trading stats as an objective performance measure and, from the numbers, defining goals to work on each day/week/month, traders can greatly accelerate their progress. With traders I observe first-hand, for instance, at SMB, I notice distinct improvement among those who religiously keep their stats and generate monthly goals. We really can take control of the pace of our trading progress. I look forward to sharing best journaling practices with you and responding to your questions on Monday. Thanks! Brett
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As we all know, the stock market has been on a tear, recently rising to all time highs. This reflects overall strength in the economy as well as a favorable yield status for the U.S. dollar. As we have made these recent highs several of the measures of strength that I track have lagged. I refer to this as a yellow light, rather than an outright red one, if for no other reason that these divergences can persist for quite a while before they turn into significant price weakness. My general experience has been that, the longer the divergences, the more pronounced the subsequent market decline. This was certainly the case in 2000 and 2008, where market rises became increasingly selective until the overall market dropped. Above is a chart that tracks five minute closing values of SPY (blue) versus a cumulative line of upticks versus downticks among NYSE stocks. (See this post for background). When we have more stocks trading on upticks, that reflects underlying broad buying strength and vice versa. Note how the cumulative TICK has been declining now for a while. This reflects relative weakness among the smallest of the NYSE universe. We see this relative weakness in the recent underperformance of the NASDAQ and Russell indexes as we made the recent highs in SPX. Many sectors within the SPX also failed to make new highs for the year, including XLF, XLE, and XLB. Even more pronounced has been the relative weakness of overseas equity markets, many of which have been in downtrends since January. See, for example, EEM and EFA. Quite simply, stock market strength around the world has waned since January and has begun to wane in the U.S. As a result, the market rally has become increasingly narrow. Indeed, in the last 13 trading sessions, only 4 have seen more stocks across all indexes making new one-month highs versus fresh one-month lows. As I've mentioned in the past, a rising tide lifts all boats. When boats aren't rising, it's worth questioning the tide. Updating market strength and weakness is a way of staying flexible in our expectations and being prepared for multiple market scenarios.
There are some who would have you believe that trading is 80+% a function of your psychology. All you need to do is sustain your mindset and discipline and remove your emotional blocks and you, too, can find the success of Market Wizards. As a psychologist, a psychologist who has worked full-time with traders on trading floors, a psychologist who has consulted to trading firms across different markets and strategies, and as one who has traded himself for decades, I can assure you that there is a helluva lot more to success in markets than maintaining the right psychology. A good way to put it is that the wrong psychology can derail anyone, but the right psychology does not substitute for insight, skill, and experience. Psychology is necessary for success in any performance field--from athletics to trading--but it is not sufficient. One of the most powerful observations I've encountered in my work with traders and portfolio managers is that cognitive skills and development account for as much success in markets as personality variables. Superior traders have superior information processing skills. Show me a good trader, and I will show you someone who--in some way--processes information more effectively and uniquely than his or her less successful counterparts. I was part of a meeting recently in which a money management firm discussed the idea of requiring programming knowledge from all new hires. Years ago, that could never have been a topic for discussion. Now it is a serious proposal. It makes sense. When I look at the traders who have been particularly successful over the past couple of years, the majority are either entirely algorithmic or manage capital with a hybrid, "man-machine" interface. Many make discretionary decisions--aided by signals generated by the machines. Quite simply, machines--used properly--can process more information, more quickly than we can. They can find patterns in multidimensional space that evade our naked eyes--and they can ensure that these patterns are not merely curve-fit. It's not that artificial intelligence (AI) necessarily succeeds by giving us better trades. It is valuable in giving us more hypotheses to consider in framing trade ideas. It identifies patterns that have set up in the most recent past so that we can make an informed judgment as to the potential for those patterns continuing into the immediate future. It vastly expands our cognitive bandwidth. For that reason, AI can help us more quickly adjust to shifting patterns in the instruments and markets that we trade. On Saturday, October 20th, I'll be in San Diego with the folks at Trade Ideas and several experienced market participants to discuss the potential for partnering with machines for better trading. We'll take a look at trading processes, as well as trading psychology, and how those can make the most of increased information bandwidth. The automobile greatly expanded our travel capacity relative to the horse-and-buggy. So, too, in the machine age, can we greatly enhance our decision making with a superior flow of supporting information.
Think of your mind as a finely calibrated instrument that can detect subtle patterns in markets--and in ourselves. In order for this wonderful instrument to function properly, it requires no interference whatsoever. If you place electrodes on a person's head to detect brain waves, the slightest movement of the head can throw the readings off. Similarly, when our minds encounter interference, they no longer can read the subtle cues of conversations--or the subtle patterns of price behavior. Perhaps the greatest trading psychology flaw one can have is the tendency to experience quiet as emptiness. Instead of experiencing quiet as peace, people can experience it as boredom or as a void. So they rush to fill their voids with self-chatter and aimless action. Just watch how quickly we turn to our cell phones when a quiet moment occurs. All that activity trains us in a sense: it trains us to be unable to make full use of our finely calibrated instrument. The most recent Forbes post examines research relevant to the quieting of our minds. One line of research reaches an astounding conclusion: that it is in the quieting of our egos that we gain access to our greatest strengths. I encourage you to check out the post and the research links. If this line of thought is correct, then all the trading patterns/setups and all the self-help techniques designed to instill discipline and remove our blocks are of limited value. If we are not in the right (flow) state to detect subtle patterns, we quite literally will end up trading noise.
Here's an idea I've been discussing with a few of the traders at SMB who are increasing their confidence--and their size--in many of their trades: When you have *real* confidence in your trading, you're not threatened by the possibility of being wrong. All of us are fallible, and if we are secure with who we are, we can accept that. True confidence means we have the inner strength to deal with setbacks as well as successes. When we have big confidence in a trade, that is when we want to double down on our planning for the possibility of being wrong. Too often, traders become confident in an idea and stop looking and planning for alternate possibilities. We want to use confidence to trigger our awareness of fallibility, so that we are aggressive in the trade AND aggressive in planning an exit if the trade doesn't work out. The holy grail is to have conviction *and* open-mindedness. We can size up a trade at the same time that we intensively review our exit strategy. Aggressive and nimble...just like the sniper.
I've seen traders succeed in very different markets, over very different time frames, and with very different strategies. Here are common elements I've noticed among the most successful traders: 1) Capacity for Sustained Focus - Quite simply, the successful ones process more information--and sustain the search for unique information--better than their peers. This enables them to see what others do not; 2) Originality and Creativity - I have never met a successful trader who traded in the ways that trading texts describe. There is always something unique to the successful trader, and very often it's looking at unique information or looking at common information in unique ways; 3) Learning From Mentors - There may be completely self-taught genius traders, but the best that I have met have learned from other successful traders. Indeed, it's common for the great trader to have multiple role models and synthesize lessons from each; 4) Emotional Resilience - Some traders bounce back from losses and setbacks better than others. The successful ones actively learn from the setbacks--and then move on. The less successful ones fail to learn from their experience and often fail to move on; 5) Attention to Detail - In football, it's often the blocking and tackling that ultimately wins the game. In basketball, it's running the plays and the defense. Less successful traders focus exclusively on "setups" to get into trades. Successful traders develop rules and processes for sizing and managing positions to maximize reward relative to risk. 6) Always Working on their Game - As Merritt Black at SMB Futures recently noted, the intensity and consistency of the review process is very positively correlated with success. Just as in sports, the successful traders review markets, review their trading. They are studying "game film" to prepare for the next contest. They aren't focused on getting rich; they're focused on getting better. Quite simply, the best traders start with distinctive strengths and then cultivate those through rigorous tracking of performance and learning. There is a winning process long before there are winning outcomes.
A surprising amount of poor trading comes from trading our egos, not from actually trading markets. When we focus on predicting market moves and trading our views with conviction, trading rapidly becomes a game of the ego. When we declare that we have a certain trading "style" and we wait for market conditions to accommodate our style, trading becomes ego-based. When we obsessively watch screens and focus on each move of P/L, trading turns into an ego game. We can use every technique under the sun to instill discipline and overcome emotions, but if we pursue trading through the ego, we will be vulnerable. An analogy I've used in my books is the good dancer on a dance floor. The good dancer doesn't just dance his or her style regardless of the music playing. The good dancer does not start dancing ahead of the music, anticipating the next tune. The good dancer waits for the music to start, catches the beat and tone, and dances accordingly. In my recent trading, I've been taking ego out of the picture. I examine a stable lookback period in the recent market and identify two things: 1) Has there been a dominant trend over that period? 2) Have there been one or more dominant cycles over that period? If I can detect no clear trend or cycles, I don't trade. If there is no trend, but a dominant cycle, I trade the hypothesis that this cycle will continue into the immediate future unless I see clear changes in market volume, volatility, news events, etc. That has me buying prospective cycle lows and selling highs. In that regime, I look like a value trader. If there is a distinct trend, but no clear cycle, I use the first pullbacks/bounces in the NYSE TICK to enter and ride the trend, again unless I see clear evidence of changes in the market's trading. In that regime, I look like a momentum investor. If there is a distinct trend *and* one or more dominant cycles, then I am using the cycles to guide entries and exits in the direction of the trend. In that regime, my execution is counter-trend (value), but the overall idea is trend-based (momentum). We suffer when we expect markets to trade the way *we* want them to trade. There are valuable tools that help us identify cycles and trends. That enables us to enjoy the market's dance music--and profit from it.
We have trading accounts, but how truly accountable are we for those? What percentage of us routinely keeps informative data on our trading results? What percentage of those traders keep regular journals to turn the trading data into actual goals and plans? What percentage of those traders then tracks their goals and plans and holds themselves accountable them going forward? Put it this way: If you pursued greatness in any professional sport, how likely would it be to find success if you worked as hard at that sport as you currently do at your trading? Could it be that the majority of traders fail to find success, not because they trade the wrong "setups" and styles, but because they pursue performance in ways that could not work in any performance field? In an excellent post, Bry Gomez from the Caylum Trading Institute points to a study from the American Society for Training and Development (ASTD) in which the probability of reaching a goal was studied as a function of the level of accountability for that goal. Simply formulating a goal led to a probability of success of 10%. Having a concrete plan for reaching the goal raised the odds of attaining the goal to 50%. Having a specific person to whom you are accountable for the goal--and a specific time set to review performance with that person--led to an achievement rate of 95%. In other words, it's not simply about having good intentions or even having good goals. It's about leveraging the power of human relationships to become fully accountable for achieving those goals. Creating daily report cards of performance and sharing those with peers becomes a best practice that can greatly improve performance, as Mike Bellafiore has observed in the development of traders. We find our potential when we make life a team sport.
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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