Friday, March 22, 2019

Overnight Versus Day Performance in SPY: What It Might Mean For Your Trading

Note the blue and red lines in the chart above.  If you were to just look at those, you would conclude that they are totally separate instruments.  Trend is different.  The volatilities of the time series are different.  And yet, they represent a single market:  the SPY ETF of U.S. stocks.  The blue line represents cumulative price changes during the overnight (from each day's close to the next day's open) and the red line represents cumulative price changes during the day session (each day's open to the same day's close).  

What can we infer from these time series?

Much of the overall upward trend in stocks has been expressed during overnight and pre-market hours in response to overseas buying and buying in response to pre-opening data releases.  Day traders have not participated in the general upward drift of stocks over the past 15 months.

Flows from overseas impacted by the returns from international markets are markedly different from flows dominated by U.S. participation.  The series is dominated by the trade during the last quarter of 2018, when U.S. participants bailed out of stocks relative to non-U.S. participants.  Much of the rebound so far in 2019 has been those U.S. participants jumping back into stocks.

Swing trading has been difficult because these time series are independent.  We cannot assume continuity from day periods to overnight periods.  The correlation between price behavior during the day and during the overnight has been -.03.  For this same reason, investors managing risk very tightly can easily get stopped out when trading in one period fails to follow through with the action of the previous period.  

I will hazard yet another perspective:  Recent trading in U.S. stocks has been dominated by the herd behavior of equity and macro funds.  Those funds, spooked by seeming Fed tightening, began selling in 2018 and then accelerated their selling to retain profits for the fiscal year.  When the Fed emphasized "patience" in its rate and balance sheet policies, those funds were underinvested and needed to gross up their exposures to generate performance for the new year.  

Interestingly, we're starting to see divergences in behavior among sectors, with banks, industrials, and small caps underperforming.  That may be an initial indication that the herd might be behaving in less herd-like ways going forward.  At some point, the fundamentals of individual companies and industries will begin to matter once again.


Monday, March 18, 2019

Making Sense of This Stock Market

I've been hearing from many confused traders who have underperformed the overall market during this run from the December lows.  The common refrain is that they are waiting for a pullback to enter the trend--or they are looking for the start of a larger move to the downside.  I heard this late in January, then in February, and now in March.  Aren't we due for a substantial correction?

Let's get a little perspective.  Above I've charted one of my favorite indicators, the cumulative NYSE TICK (red line), versus SPY (blue line).  The cumulative TICK takes the average five minute reading of upticks versus downticks for all NYSE stocks and adds the value for the current five-minute period to the running total.  It thus works similar to an advance-decline line, but is much more sensitive to short-term strength and weakness.

Note how the cumulative TICK line topped out well before the overall market peak last year.  This led me to question the viability of the rising market.   Indeed, the market--and the cumulative measure--fell precipitously during the fourth quarter of 2018.  Then, however, with the dramatic turnaround in Fed policy, we saw a dramatic move higher in stocks--and in the cumulative TICK measure.  As I pointed out earlier this month, this kind of strength is typical of bull market momentum, not a market getting ready to roll over.  Very recently, we've seen some breadth divergences with fewer stocks making fresh one- and three-month highs, but until we see a meaningful expansion of short-term new lows and a sustained turn in the TICK measure, it's difficult to make a case for more than normal pullbacks.

One of the problems that I'm seeing is that traders committed themselves to a bear view late in 2018 and have been fighting the recent rising tide ever since.  That getting locked into a view is a classic case of ego-based trading, where being "right" becomes more important than following the market.  In the recent Forbes article, I summarize fascinating research dealing with dark and light sides of our personalities and their impact on our trading performance.  (Check out the links at the end of the article, which lead you to a free online test that allows you to get feedback on your own light and dark traits!)  An important implication of this perspective is that we need to channel our ego needs in constructive ways so that they don't color our trading.  We don't trade well by making market calls.  We trade well by sensitively following what markets are actually doing.


Thursday, March 14, 2019

From Discipline to Self Discipline

In his book 59 Lessons: Working With the World's Elite Coaches, Athletes, and Special Forces, Fergus Connolly makes a very interesting distinction between discipline and self-discipline.

He points to elite special forces troops.  When they begin their training as soldiers, they are expected to do what they are told.  When their commanding officers give an order, they follow that order.  That is discipline.

When that soldier gets to the point of special forces training, however, the situation is different.  The challenges faced by special forces operators are complex and ever-changing.  They can't possibly rely upon commands from a superior.  They have to think for themselves.  As Connolly observes,

"...especially as conflict has become much more unconventional, a need has arisen to develop independent operators who can think and act with ingenuity in highly unpredictable situations...there is no such thing as external discipline with elite performers, only self-discipline...Discipline is what you do at the behest of someone else, while self-discipline is when you do it on your own initiative." (p. 184).

So how does this relate to trading?

Many traders look for recurring patterns in markets ("setups") to guide their entries.  Examples would include breakouts from ranges, gaps on news or earnings reports, moving average crossovers, etc.  Acting on those setups with fidelity is discipline.  Traders are doing what they've been taught.

What happens, however, once the trade has been placed?  Very quickly the flows of buyers and sellers create a fluid, complex situation not unlike that faced by the special forces operator.  Now there are no mechanical setups to act upon.  The trader has to think independently about whether to add to positions, scale out, hold for targets, stop out, etc.  Responding to those fluctuating conditions requires self-discipline.

I have been impressed in recent years at how many traders generate good ideas and enter positions at good levels.  They simply cannot weather the price path once the positions are on.  Very often, when we review where they stopped out of positions, we find that the trades ultimately worked out and hit planned targets.  The problem was not discipline in finding and entering trades.  The problem was the self-discipline required to navigate the trade.

Not every good, disciplined soldier can function as an elite special forces operator.  The ability to follow instructions is not the same thing as developing principles and guidelines for navigating fluid, complex, uncertain situations.  Discipline is all about "if A, then B".  Self-discipline is more about envisioning multiple what-if scenarios and knowing how to respond to each.  The disciplined trader takes the break out trade.  The elite trader tracks order flow and the flow of buying and selling from the point of breakout and flips the position if those breakout flows are not sustained.

A great deal of trader education emphasizes discipline.  Success in financial markets, however, requires self-discipline.  The training of traders should look more like the training of elite performers who operate in fluid situations and less like the training of grunts in basic training.

Further Reading:


Sunday, March 10, 2019

Trading With a Flexible Bias

In the most recent post, I outlined some of the risks of becoming wedded to trading plans and thus trading with a bias that prevents us from adapting to how the market is actually trading.  By coincidence, Steve Spencer of SMB posted this excellent video that provides a practical example of how he traded his plan in the stock $NIO.  He entered the trading day with a view/bias, was stopped out of most of his position, but quickly identified criteria that would get him back in the trade.  Sure enough, after spiking higher and taking him out, $NIO went back into its range and gave Steve a profitable opportunity to act upon that original plan.

By being very aware of key price levels, Steve was able to determine whether the stock was ready to make the move he anticipated.  When $NIO moved to morning highs, Steve lost the trade, but not the idea behind the trade.  This allowed him to trade flexibly within his bias or plan.  The discipline was not stubborn adherence to the original idea, but knowing the price levels for acting upon the idea.

I notice many successful short-term traders making use of the idea of key price levels.  What they are doing is identifying prices at which other traders act in concert, highlighting levels from which we can potentially expect supply/demand imbalance.  There are many tools available for identifying such price levels, including:

Market Profile - Effective in identifying impulsive moves out of value areas, starting potential trends;

Market Delta - Effective in visualizing volume coming into a market, hitting bids or lifting offers, starting potential impulsive moves;

Bookmap - This is an order flow tool that I'm starting to explore.  It creates a chart of historical order flow, highlighting price levels where large traders lurk.

I also recommend following Steve Spencer.  Over the years, I've come to appreciate his effective trade planning.

As the quote from Eisenhower suggests, the important thing is not the plan, but the planning process.  None of us can predict price paths perfectly.  At any time we can get stopped out of a trade.  The skilled trader has criteria set out for determining when the idea is wrong--and for determining when the idea is still valid to re-enter the trade.  

Great trading is trading with flexible plans.

Further Reading:


Wednesday, March 06, 2019

The Perils of Trading Your Plan

We commonly hear the advice that traders should "stick to their plans" and that planning and remaining true to plans is the epitome of discipline and the key to success.

It ain't necessarily so.

Let's take an analogy:

If I meet with a person for the first time in a counseling session, I don't go into the session with a treatment plan.  That would be crazy.  Rather, I listen to what the person says, look for patterns in the issues they present, and then come up with an idea of what might be going on.  I'll run that by the individual and, together, we'll develop a plan for addressing those problems.  Very often the plan will be grounded in the kind of helping that research has found to be useful for the issues presented.

If I were to start the session with a plan for intervention, the therapy would be doomed from the outset.  I would be imposing my views and understandings on this other person without listening to what is actually going on.

Surprisingly, many traders go into a day or week with their plans firmly cemented.  They don't wait to listen to the market and detect themes.  They decide that the next move will be up or down and they place trades accordingly.  

Folks, that is not trading a plan.  It is trading a bias.  If you don't listen to the market and instead impose your own view of what *should* happen in price action, you are not sticking to a plan.  You're sticking to your bias.

A true plan, whether for medical patients, counseling clients, or markets, outlines different possibilities for different presenting challenges.  It's really a decision tree, which you navigate by collecting information.  A treatment plan comes from a thorough history taking and diagnosis.  A trading plan similarly comes from an examination of history and a "diagnosis" of how buyers and sellers are behaving in the here and now.

The key skill is listening with an open mind.  When we focus on formulating our plan, we're consulting ourselves, not the market.  There's a lot to be said for coming into the trading day or week with hypotheses, not conclusions.

Further Reading:


Sunday, March 03, 2019

New Bull Market: Who Dis?

Yeah, that first ring must have really confused Alexander...!

Meanwhile, we keep ringing up higher highs on rallies and higher price lows on corrections.  We also continue to see the number of stocks registering short-term new highs expand.  This past week, for example, well over 1000 issues made fresh one- and three-month new highs, the strongest figures in quite a while.  New three-month lows have been consistently below 100.  

Even so, wannabe bears continue to talk about how we're overdue for a correction, how global economies are stalling, how trade wars will derail us, etc. etc., all the while missing what has been happening the last two months.

Who dis?

OK, so that's water under the bridge.  What can we typically expect in a year in which January and February start strong?

It turns out that Ryan Worch of Worch Capital has addressed this very issue in a post that pulls together a good amount of analysis.  He finds that early momentum during a year tends to continue over the following ten months.  There are corrections to be sure, but the vast majority of occasions have been higher by year end.

One possible reason that might be relevant to the current market is that the bull move of 2019 has been global.  Worch cites the work of Charlie Bilello, who finds that, out of 48 country-based ETFs, only two are showing negative returns thus far during 2019.  With central banks seemingly on hold globally, investors have been emboldened to own yield, own stocks, etc.  Bearing this out, my cumulative measure of NYSE stocks trading on upticks versus downticks has been relentless in making new highs.

As Bilello points out, however, every time is different.  None of us have seen this movie before, and that calls for a degree of humility.  Could war erupt or vicious trade wars?  Could we see major disruptions in a messy Brexit?  Of course.  Just as the Fed's turnaround at the end of the year turned equity markets around, surprise events could put us in reverse.

All that being said, momentum markets tend to correct more in time than price, as bulls late to the party look to add on any dips.  So far that's been the case.  Too, when we have pulled back, there have been enough bears that we see evidence of hedging in the put-call data and in the elevation of implied volatilities relative to realized vol.

At the moment, VIX has come down and we're not seeing the same level of hedging as earlier in the rally, so it may take more corrective action to shake out those late bulls and suck in the hopeful bears.  I have to say, however, that the number of traders I speak to who hold the view that we're moving to all-time new highs in a fresh bull market is close to zero.

Who dis?

Further Reading:


Thursday, February 28, 2019

Taking the Risk of Accountability

SMB recently published top trading tweets from their prop desk.  There are good ideas there, but one jumped out at me.  It encouraged traders to post their report cards daily, not just their P/L.  Sharing P/L each day can be humbling, but sharing your report card is something different.  The report card includes everything we've done well and also the mistakes we've made.  If we've traded poorly from a process vantage point, it will show up dramatically on the report card, even if P/L is relatively flat.  Sharing our process grades makes us extra-accountable.  It's taking a risk.

It's very interesting:  one thing I've found predictive of a trader's success is the amount of detail they share with me in meetings.  Some traders are really upset about not doing well and provide exhaustive detail to track down what they might be doing wrong.  They have very specific goals and very detailed ways of tracking their progress on those.  They come to meetings with me with prepared questions and topics to discuss.  Very often, they have materials to share with me prepared as well.

Other traders breeze in and don't have a specific agenda.  They talk about what's going right and wrong in a very general sense, but there is no particular urgency in their presentation.  Their goals are broad; they are not tracked on a systematic basis.  Many times, they will use time with me to complain about market conditions, not to truly discuss their trading.

Bottom line is that some traders take real psychological risks when they meet with mentors or coaches.  The kimono is wide open.  Other traders stay comfortable.  They take few risks; they avoid uncomfortable realities.

If you can't take risk when you meet with team members, how will you effectively take risk when market conditions line up?

Comfort is the enemy of change.  The big risk is staying stuck in the status quo.

Further Reading:


Sunday, February 24, 2019

Primary and Secondary Problems in Trading

In this post, we'll explore a very important concept:  the difference between primary and secondary psychological challenges and why that difference makes an important difference in our trading.

A good place to start would be anxiety.  Suppose we experience panic symptoms where, out of the clear blue, we suddenly feel very high levels of anxiety.  Panic can be very scary for people because the anxiety seemingly makes no sense.  We can be resting in bed or walking on a street and suddenly experience overwhelming feelings of dread and fear.

Panic disorder would be considered a primary problem in our example.  It's treatable with cognitive-behavioral therapy and medication in a relatively short period of time.

Let's say, however, that we become so afraid of our panic symptoms that we stop doing normal activities.  The last time we had a meltdown was in a shopping mall, so now we'll avoid groups of people or public places.  Maybe the panic attacks have been when I've been alone, so now I try to avoid situations where I'm by myself.  Or maybe I feel as though I'm going crazy--there's something wrong with me--so I lose confidence in developing relationships and begin to feel lonely and depressed.

All of these are examples of secondary problems.  The fear of open places (agoraphobia) or the depressed feelings are the result of how I respond to the primary problem.  How I think and react to my problem can create entirely new problems.  That can make our situations seem quite complicated.

As Shakespeare's quote suggests, how we think about things creates our reality.  If we respond negatively to a primary problem, the odds are good we'll create a new, secondary problem.

Let's take an example from the trading world:

A young man I worked with was losing money in trading, largely by trading too often, sizing individual trades too large, and taking trades when not much was going on in the market.  As his losses mounted, he became frustrated and discouraged and stopped putting as much time and effort into his preparation.  His frustration spilled over to his relationship with his girlfriend and they were now talking about splitting up.  Nothing seemed to be going right in his life.  He was feeling pretty down when I met with him.  In fact, he had met with a trading mentor/coach, who encouraged him to calm himself, trade more patiently, and stick to his trading plans, but none of that seemed to help.

It turns out that the young trader's primary problem was attention deficit disorder (ADD).  The very thing that attracted him to markets--the stimulation and risk-taking--was the thing that got in the way of his staying focused in his trading.  The lack of focus led to impulsive trades and eventual losses, which then created secondary problems in his relationship and in his mood.

The trader addressed the primary problem through medication and with biofeedback exercises that train the mind for focus and this enabled him to trade in a disciplined manner.  He began to make money, felt better about his situation, and addressed the problems with his girlfriend by helping her understand what had been going on for him.  We worked on alternate ways of dealing with frustration, including ways of constructively engaging the relationship during times when trading didn't go well.  Had we not addressed the primary problem, however, no amount of "trading psychology" advice or techniques would have helped him.

Very often, what look like primary problems in trading--such as loss of discipline--are in fact secondary consequences of other, less recognized difficulties.  How we think about the actual primary problems creates the negativity and frustration that leads to the secondary overtrading, FOMO, etc.  The challenge facing us is to identify the problem underneath our poor trading.  

I recently suggested that a major primary problem affecting traders is using trading to meet psychological needs for which trading was never designed.  If we come to markets with self-esteem concerns; unmet needs for recognition; an inner sense of failure from previous efforts at achievement; or a lack of excitement and purpose in life, those primary problems will burden our attempts at trading with an open mind.  "It is amazing how much easier it is to tackle trading challenges, " I wrote, "when trading is not burdened with needs it was never meant to fill."

Take it to the bank:  people who trade out of unmet needs need to trade.

That is a common primary problem, and one that deserves priority.

Further Reading:


Wednesday, February 20, 2019

Using Your Body To Program Your Mind

One of the most common questions I get from traders is how to tune out thoughts and feelings that can sway our decision making.  Some of the common steps traders take to keep away fear, greed, and frustration include focusing exercises (including meditation) before the start of the trading day and taking breaks during the trading day to clear one's head.  What is interesting, however, is that, despite these steps, many traders continue to struggle with impulsive, reactive trading.

What is going on?

First, let's establish why this is important.  As the quote above suggests, when we quiet our minds, we gain access to our intuitive knowing.  There is nothing mystical about this.  Our pattern recognition represents a non-verbal level of knowing.  We engage in that form of information processing every time we drive a car or read a person in a conversation.  If we are busy talking to ourselves--engaging in inner chatter about missing trades, needing to trade bigger, losing money, etc--we by definition are not in our non-verbal processing mode.  We cover over our intuitive processing with our endless self-talk.  Quieting our minds provides us with access to what we know but don't necessarily know that we know.

So let's say we practice relaxation techniques prior to trading and teach ourselves to focus our attention and calm ourselves.  That way, when we become stressed and go into fight-or-flight mode, we can return to our exercises and regain our composure.

Sounds good, but it doesn't work that way.

The problem is that the state we are in when we are doing our exercises is miles apart from the state we're in when we're experiencing our fear and frustration.  We can't prepare for the heat of battle off the battlefield.  The skills simply don't transfer.  That is why behavioral therapists try to recreate stressful situations through imagery and gradual exposure while engaging in the self-control exercises.  We need to program our minds for when our bodies are going haywire. Otherwise, we perform the exercises fine prior to trading and during our breaks and then fall back into reactive processing when the fight/flight mode is upon us.

A technique that behavioral psychologists have found helpful is known as interoceptive exposure.  What this means is that we simulate the physiological state that is associated with the stress and then learn effective coping methods.  For example, someone with a panic disorder might go round and round in circles making themselves dizzy and lightheaded.  This simulates some of the physical sensations of panic.  In that state, the person practices their coping techniques, so that they can stay calm and centered despite those sensations.  When panicky feelings actually hit, they now are prepared for them and don't become stressed by their own anxiety.

It turns out that many of our problems are not due to initial stress and anxiety reactions, but to our getting stressed out about our stress!  This is known as secondary anxiety.  Through interoceptive exposure, we literally program our minds to stay focused and relaxed during those initial periods of stress.  Then, sure enough, the stress passes without causing us distress.

So how does this relate to trading?

I've recently begun a creative exercise that has been greatly helpful not only in trading but across a number of challenging life situations.  Each morning I do an aerobic workout on my treadmill.  The idea is to keep myself in an elevated, target heart rate zone for a certain period of time.  My Fitbit tracks my progress on that.

The unique part of the exercise is that, while I am working out on the treadmill, I practice my deep, regular breathing and focused imagery.  In other words, I get myself "in the zone" by quieting my mind while I'm sustaining an elevated heartrate.  Through daily practice, I've become quite good at entering that flow state during my time on the treadmill.  A side benefit is that the workout seems to go much quicker, and I more quickly find my second wind.  Once in the flow, I don't really feel fatigue.

The greatest benefit, however, is that the daily repetition literally trains and programs my mind to stay focused and calm--i.e., stay in the zone--while my body is aroused.  That fight or flight state begins with elevated heartrate and a speeding up of physiological functions.  By training ourselves to stay relaxed through the initial arousal, we can make that fight/flight state completely non-threatening.  There is no snowballing into secondary anxiety/stress.  Now, when a stressful event occurs in the market, I very naturally slow my breathing and enter the focused rhythm from the treadmill.  

This turns interoceptive exposure into a peak performance tool.

Most of the problems of trading psychology are state-dependent.  They are triggered by particular states of mind and body.  By training ourselves to engage in our best information processing while we are in the states that trigger us, we gain a level of control over ourselves and our trading that simply is not possible with casual self-help techniques.

Who knew?  Your aerobic workouts could become your best trading psychology workouts!

Further Reading:


Monday, February 18, 2019

The Fallacy Behind Conventional Trading Psychology

We hear it all the time:  trading is mostly a mental game, all you need to do is tame your emotions once you have a winning trading method, etc. etc.

Total and complete bullsh*t.

Yes, of course, if markets were stable and deterministic, then we could just figure out what works and all that would be left is sticking with that.

But markets are not stable.  They change in their patterns, their volatilities and volume, their trends, their correlations within a day and across days.  What works in one environment does not in others.  

And markets are not deterministic.  What drives markets today could be different tomorrow if we get a significant geopolitical event or central bank action.  

The entire reason markets are so difficult to trade--and it's so challenging to make money from them--is that the game is always changing.  We adapt to one regime and make money only to face a different regime and lose that profitability.  That can be frustrating.  That can be bewildering.  That can be discouraging.  But it's the changing markets--and the changes they create for our trading--that stimulate the emotional reactions.  It's not emotions preventing us from making money from fixed, ever-successful trading methods.

Consider an analogy.  Let's say our blood sugar levels rose and fell greatly throughout the day, making us sleepy and lethargic when we were hyperglycemic and shaky and unable to concentrate when we were hypoglycemic.  The swings in our energy and focus throughout the day interfere with our work productivity and we fall behind in our goals.  That becomes frustrating and we start to fear that we'll lose our job.  Then along comes a business guru who tells us if we just master our frustration and fear, we'll be more productive and reach our goals.  He even teaches us some positive thinking and relaxation exercises.

You would consider such a guru to be a complete moron.  You could work on your frustration and fear all day every day and, as long as your blood sugar levels are changing wildly, your work efforts and productivity will be variable.  The emotional fallout is the result of the changing situation, not the cause.  So it is with markets.  If you could stabilize your body's state, perhaps with medication that controls your blood sugar levels, the emotional problems recede--because you've addressed their cause.  Similarly, if you have methods to adapt to market changes, a great deal of emotionality in trading is circumvented.

But of course it's more comfortable for traders to say they need to work on their discipline than to acknowledge that what had worked a month ago now yields entirely random outcomes.  And would-be gurus and coaches?  It's difficult for them to know about changing environments if they lack the tools for measuring blood sugar or market regimes.


Think of it this way:

If markets were stable and discipline could sustain profitability, then backtested trading systems would forever remain profitable.  There would be no need for discretionary traders whatsoever.  

Above is a quick screenshot from my laptop of the recent ES market.  Every data point represents the ES price after the index has made 500 price changes.  The blue line and right Y axis represents ES price.  The red line and left Y axis represent price change over the last 20 periods, where price change is measured in standard deviation units.

When the market slows down, we have fewer data points.  When the market is less volatile, the standard deviation units represent less movement.  The chart is one way to standardize price action--make it more stable--given shifting activity and volatility.  Thus standardized, we can ask intelligent questions about trend, the presence/non-presence of stable cycles, etc.  Those questions can help us frame trading strategies in the midst of market changes.

When we do so--perhaps by relying on a repeating cycle to enter/exit trades in the direction of the overall trend--we have a clearer idea of what we're doing and why we're doing it.  That anchors our understanding and our trading decisions and, thus anchored, lo and behold:  trading becomes less emotionally fraught.

Further Reading:


Thursday, February 14, 2019

Taking The Ego Out Of Trading

The central hypothesis of the book that I am writing on trading and spirituality is that the major emotional challenges of trading are due, not to intractable psychological problems, but to the intrusion of our egos into decision-making processes.  

What we attach our egos to controls us.

If trades and trading are our only activities filled with purpose, we will overtrade.  If we judge our success and failure by profits and losses, our moods will rise and fall with market conditions.

It sounds so great:  the "passion" for trading.  Too often, however, that belies an ego-attachment to trading.

So how do we take the ego out of trading?

By tapping into the soul.

Meaningful relationships tap into the soul.  Worthy causes and challenges speak to the soul.  Appreciation of the world--from art and music to travel--nourishes the soul.  Our religious beliefs awaken the soul.  Playing an important role in the lives of others, developing our potential in various life areas, learning and creating new things--all take us out of our narrow egos and connect us with larger meanings and purposes.

We take trades we shouldn't and avoid the ones we should because we're using the ego of trading to fill soul needs.  If we work on our trading to the point of neglecting the rest of our lives, we are like bodybuilders who obsessively develop their upper bodies while their middle sections go flabby and their legs are like twigs.

A great first step in taking the ego out of trading is evaluating our trading by process criteria, not by profits and losses alone.  If we focus on placing good trades, our trading can build mindfulness, intentionality, and resilience.  

At the end of the day, however, trading cannot sustain us always, in all ways.  We need not just the pleasures, victories, and gratifications of the ego, but also the energy, connectedness, and fulfillment of the soul.  It is amazing how much easier it is to tackle trading challenges when trading is not burdened with needs it was never meant to fill.

The question is not simply whether we live a successful life or an unsuccessful one.  The question is whether we live a full life or an empty one.

Further Reading:


Sunday, February 10, 2019

Tough Advice For Aspiring Traders

Recently, I have received an unusually large number of emails and messages from new traders who have been encountering problems--and losses--in their trading.  The majority have opened up their own accounts and are trying to learn on their own and eventually make a living from their trading.

Of course, they find out that it is not so easy to make a living from trading--just as it's not easy to make a living from any performance activity, from acting to sports.  But to hope to learn completely on your own and somehow rise to elite levels of performance?  How often does that occur in any performance domain?  Show me a successful performer and I'll show you one who has undergone years of training, practice, and mentoring.  No one goes from their backyard basketball court to the NBA.  No one tries acting at home and makes the casting calls on Broadway.

No one.

But those selling services to traders won't say this.  Educators will pretend that their books and classes can make traders successful.  (Would anyone possibly believe that books and online courses on acting would take someone to Hollywood?  To the NBA?).  Coaches will pretend that, if you just use their techniques and gain mental mastery, you'll find profitability.  (Really?  Will emotional control and self awareness win you chess championships or help you find success as a baseball pitcher?)  

I receive requests for coaching every week from individual, retail traders.  In the 15 years I've been doing this full-time, how many of those requests have I taken on?



The only way I work with aspiring traders is if they are enrolled in full-time programs of mentoring, either on a hedge fund desk or a training program at an investment bank, graduate program of finance/financial engineering, or proprietary trading firm.  Because anything else would not be practicing performance psychology.  It would be selling hope.

If you're an aspiring trader, hope and passion and desire are not business plans.  They do not substitute for talent, skill, and experience.  If you think you have the talent and drive, my advice is to find yourself the best training possible and do what medical students, Olympic athletes, and performing artists do:  learn from successful practitioners in a daily, structured curriculum.  

It may not be what you want to hear, but that advice will save you a lot of money, time, and heartache.  And, more importantly, it will free you up to do what you're truly meant to do in this world.

Further Reading:


Wednesday, February 06, 2019

Improving Performance With Relentless Score Keeping

In this new year, I'm working with Mike Bellafiore and a group of newer traders to hasten their learning curves.  An important part of that process is the keeping of monthly statistics on trading results.  These stats, compiled in TraderVue, allow a trader to break down performance into many categories.  For example, a trader can view profitability as a function of the setups/strategies traded; as a function of time of day; as a function of position sizing; etc.  At a single glance, mentors can see if a trader has improved their win percentage on trades; if risk management has been sound; and much more.  That creates a very high level of visibility and accountability.  It also provides a rational basis for setting goals and plans from month to month.

Perhaps the most eye-opening result from the ongoing score-keeping is that it highlights strengths and problems in trading that both trader and mentor may not have been aware of in real time.  For example, one trader showed a pattern of losing money following early morning losses, with the frequency of trading increasing as the losing day progressed.  This did not occur every day, but it happened sufficiently often as to hurt monthly profitability.  Seeing this pattern clearly in real time allows mentors, coaches, and traders to create a plan to take breaks following opening losses and readjust, both psychologically and in trading.

I recently began work with a Fitbit, which spits out real time information on everything from heart rate and number of steps taken to quantity and quality of sleep.  The app allows for easy goal setting, so that the wearer always has targets to hit to improve wellness.  As with the trading stats, some of the results took me entirely by surprise.  For instance, there was much more variability in my active exercise from day to day than I expected.  By adding just one component to my daily workouts, I have been able to derive significantly greater aerobic benefit.

The most subtle benefit of the relentless score keeping, however, is that the stats themselves have a psychological impact that is carried over from one period to another.  Seeing improvement in the numbers builds confidence and a sense of control.  Achieving poor numbers can arouse the competitive instinct to make improvements, focusing on doing things the right way.

If a sports team proclaimed their desire for a championship but never reviewed game film and performance and coaches never looked at where the team was most and least successful, we would question the true commitment of the team--and we would question their odds of achieving a championship.  Similarly, when traders pronounce their passion for trading but never bother to systematically keep score on what they are doing right and wrong, can we truly say that we would invest *our* money with those traders?

It is when we make ourselves fully accountable that we become our fullest successes.

Further Reading:


Sunday, February 03, 2019

Three Ways of Turning Your Trading Psychology Around

Looking back on recent conversations with traders, here are a few ways of turning your trading psychology around by finding the light in the darkness:

1)  Using losing trades as learning experiences - The best losing trades are ones that should have worked, but didn't pan out this time.  Very often, that tells you something about the market that you can incorporate into your next trade.  The losing trade is not a loss if it leads to a larger winner.  And it's not a total loss if it leads to good learning about your trading.

2)  Using people's negativity as a positive challenge - Others may doubt us or not care about us and that can be hurtful.  It can also provide the motivation to double down on our efforts and refuse to buy into their negativity.  We don't have to become bitter when we can focus on becoming better.

3)  Pulling out your winning trades and learning from them - It's human nature to focus on what we've done wrong.  But if you're relatively flat in your performance over time, it means you've probably done some things well and others not so well.  Often, it's the winning trades that can teach you what works in the current market and how you best manage positions and risk.

The research in psychology tells us that maintaining a positive mindset is good for creativity, it's good for productivity, and it's good for our mental and physical health.  The latest Forbes article contains more ideas about how we can turn negative emotions into positive well-being.


Thursday, January 31, 2019

Finding Your Transformation

The recent post on awakening your talent cited Courtney's performance on the talent show as a beautiful example of how we "become a different person" when we are doing what we're meant to be doing.  We can be one person in day-to-day life and quite another when we enter our performance zone.

This is an important characteristic of great relationships and great careers:  they bring out the best in us and transform us.

It's important to note the opposing reality, however.  Just as we're trans-formed when we're activating our strengths and values, we are de-formed when those are chronically frustrated.  Consider a few examples:

*  Employees start their careers with enthusiasm, but quickly become caught up in office politics and playing the games that can move them up the ladder.  I have seen talented people become "yes-men", completely lacking in integrity--all in the name of protecting and advancing their positions.  For a while, they gain status, but in a more enduring way they lose their souls and become bitter, cynical, and unproductive.

*  Couples start their relationships with real feeling, but soon are caught up in a social whirlwind of impressing others and/or an indulgence of personal/material needs.  Meanwhile, the activities and values that brought them together are submerged and their relationships increasingly become ones of convenience and emptiness, with little empathy for or genuine connection to others.

*  Members join a social organization out of an initial desire to learn, grow, and connect to others, but eventually are drawn into ego battles for status and position, creating social rifts and alienation in the process.  I've met a number of people active in social organizations who know many people and yet have shockingly few genuine friends.  In the immersion in me, me, me, they never get to we.

*  Traders start out with eagerness and anticipation, but before long are drawn into the consensus chats online and on trading floors.  They trade the same ideas in the same ways as others, never truly adding original, creative elements to their trading.  As they achieve the same, undistinguished returns as others, they become increasingly frustrated and discouraged, losing their energy and wasting day after day doing more of what doesn't work.

Sometimes we find ourselves stuck in the hell of situations that are de-forming rather than trans-forming.  A beautiful outcome occurs when we use those deforming situations to transform us:  to become so revolted by emptiness and superficiality that we double down on what is most meaningful to us and that helps us find our voice.  

Consider:  role models are everywhere.  We can find positive role models who inspire us, or we can find negative role models that so fill us with disgust that we're able to do what Courtney does at the end of her song:  turn our backs, throw up our hands, give a little "mwah", and move in a different direction.  

There is a lot of positive that can be derived from negative role models.  Utilizing the deformation of negative role models as positive life motivation is the ultimate transformation. 

Further Reading:


Saturday, January 26, 2019

Finding Your Drinking Accountability Buddies

We've been hearing a lot lately about the importance of having a "trading accountability buddy" to help you avoid mistakes and stick to good trading processes.  That is very helpful, but let's focus on what traders really need:  Drinking Accountability Buddies.  You know what I'm talking about:  people who will go out with us and make sure we don't do things we'll regret in the morning.  After all, if you make a bad trade, you can always battle back the next day.  If you bring home the wrong person from the bar, you've probably exceeded any reasonable stop out level.

So how can a Drinking Accountability Buddy help us?  Here are three situations they help us avoid:

1)  The Joint Closers - Look, at real bars there are always guys who are there until the bitter end, drinking away until the joint shuts down.  Very often they get more surly and belligerent as the night goes on, because they're frustrated that they haven't found any cute young thing to take home.  You're just starting to have a good time and a couple of the closers give you the evil eye.  That's when, nursing your third strong one, you're tempted to dust off your Andrew Dice Clay line and ask the closers, "Hey, are you Neil and Bob or is that just what you do?".  Well, you know how that goes down.  Faster than you can say, "Katie bar the door," the surly dudes get off their barstools and it's all flying fists and broken glass.  Your Drinking Accountability Buddy will see the evil eye and knows that you can mouth off, so he'll quickly get your ass out of there.  Think of how much you'll save on a 24-hour bail bondsman.   

2)  The Newbs - OK, you decide to go out after the market close with a few traders and you head out to a good craft beer spot.  You know, one that's rough enough to have some color and action but not one where there are so many joint closers that a beer and a shot is likely to mean a beverage and a handgun.  You find the right spot and you place your order, maybe a good bourbon barrel aged stout or maybe you up your game and get a double shot of a good reposado.  The next guy orders and, along with the others, cheerfully announces that they'll share a pitcher of Bud Light Lime.  Well, at that point you are screwed.  Your evening is about to be spent with complete idiots.  Because the fact that they are drinking newbies usually means that they are trading newbies and will ask you questions about strange chart patterns and "what the algos are doing".  Your Drinking Accountability Buddy will see this situation before it gets underway and steer you to a bar where you can maintain a normal blood pressure and avoid week-long bilateral hemiplegic migraines.

3)  The Classy Drinkers - This is where you end up going out with "successful traders" who, of course, have to hang out at the kind of place where successful people hang out.  Nice soft music, in-your-face cocktail service, and a wine list 30 pages long.  And, sure enough, that's what all the classy drinkers drink:  petite goblets of wine that they sip with their pinkies turned out.  Meanwhile, you're sitting there with your 18 year old single malt, wondering why the major topic of conversation is "toxic masculinity".  One time it got to me so bad I started singing The Rodeo Song and telling stories about growing up in a trailer park and dating my cousins.  That didn't end well.  A Drinking Accountability Buddy will notice right away that everyone in the joint is wearing way-too-tight clothes and nibbling from veggie plates and steer you the hell away from there.  Then you can go to a dive bar and have yourself a fun evening telling jokes like, "What's the similarity between Michelob Ultra and sex in a rowboat?  They're both very close to water..."

Well, there it is.  Trading Accountability Buddies are fine, but it's the Drinking Accountability Buddies that really have your back.  Hell, they're almost as valuable as that near-perfect market indicator I discovered and that infallible wave structure I wrote about.  The main thing is to have a good time--in life and in trading--and never lose your sense of humor!