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.
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!
It is common that I hear traders describe techniques they are using to make changes that sound good on the surface but that, in fact, are not effective. A great example of this would be the use of trading journals to review the day. Such review might be helpful for learning and, if focused, could help with goal-setting. But the process of making personal changes is not going to be fulfilled by doing some writing. Change requires a different focus and a very different mindset and emotional state. Writing down an intention to be more disciplined in trading is worlds apart from using psychological methods to rehearse that discipline and create a sense of emotional urgency around the rules and practices. In the most recent Forbes post, I lay out an important principle: the challenges that impact our trading are closely related to the personal challenges that bring people to counseling and psychotherapy. We first encountered this notion in the Psychology of Trading book, but the idea of a continuum linking all of our challenges is broader. As the Forbes post lays out, an important implication is that the techniques that help people with anxiety, depression, anger, and the like are effective for parallel problems in the performance domain: stress, negative thinking, frustration, etc. This is huge. There are evidence-based psychological methods known to help people with diagnosable emotional disorders. Every one of them can be adapted to help us with normal, developmental challenges and with the unique problems associated with the quest for peak performance. Moreover, all those techniques accomplish their goals relatively quickly, as the most recent research review of brief therapies lays out. We would never consider turning to unproven home remedies when research-backed medical help was available. Similarly, it makes no sense to turn to pop-psych, feel-good solutions when there are reliable methods for lasting change readily at hand. In upcoming posts, I will review some of these methods and their application.
December was pretty much straight down in the stock market, with accompanying weakness in other assets, such as oil and high yield bonds. January has been pretty much straight up, with reversals in all those asset classes. How can we make sense of this "schizophrenic" market behavior? An excellent blog post from David Moenning on the NAAIM site offers worthwhile perspective. When Fed Chair Powell indicated continued shrinkage of the balance sheet and the possibility of future rate hikes, the market sold off hard that very afternoon and didn't look back. The weakness was broad: on December 24th, we registered 50 stocks making fresh one-month highs and 3158 hitting new one-month lows. On that day, among the SPX stocks, we saw fewer than 5% of all shares trading above their 3, 5, 10, 20, 50, and 100-day moving averages. In other words, pretty much everything was down. Fast forward to Friday's close, January 18th. Over 90% of SPX shares are trading above their 3, 5, 10, and 20-day moving averages. A total of 1916 stocks across all exchanges registered fresh one-month highs against 67 new one-month lows. In other words, pretty much everything is up. Moenning, in his post, traces this reversal to the Fed's walking back their earlier "hawkishness", as they indicated flexibility in navigating the rate and balance sheet paths going forward. Their hawkish stance was a game changer for institutional investors and led to a broad risk off. Their flexible stance was an equal game changer and led to broad risk on. What does this tell us? Several things, I believe: 1) Any effort to foretell the market's path with technical indicators, chart patterns, and wave structures is inherently limited in value. We cannot operate with a crystal ball when game-changing events are occurring in real time. Flexibility in managing money is just as important as "conviction". 2) Monetary policy is a major driver of asset pricing. This is the message from Ray Dalio's recent work. The Fed is walking a narrow bridge in normalizing rates and not adding fuel to a strong economy versus pulling away the punch bowl and risking weakness. The Fed has told us they don't want to fall off either side of the bridge, so we can expect balancing messaging at market extremes, as Chairman Powell and Co. seek Dalio's "beautiful deleveraging". 3) Investors are behaving as a herd. For over 90% of stocks to be above their 20-day moving averages, all sectors have to be bought. Ditto when fewer than 5% were above their moving averages. Everyone is singing from the same hymnbook. This makes short-term breadth measures and short-term measures of upticks versus downticks handy in trading with the market's momentum. It also means that fighting the herd is a losing proposition. Of course, this, too, shall pass. At some point valuations will matter and we'll see diverging behavior among stocks and assets. So far, however, it appears that momentum is the upcoming starting pitcher.
I'll be writing much more on this topic in my upcoming book on trading and spirituality. Here is an important perspective: When we access our strengths--what we do best--we gain access to what we call the "zone" or the flow state. In that state, we tap into parts of ourselves that are relatively submerged during normal, day-to-day life. In a very important sense, when we are in sync with our talents, we become different people. I couldn't agree more with Market Wizard Ed Seykota when he pointed out that great traders have absorbed their talent: "They don't have the talent--the talent has them." Good traders have talent--and skill and motivation and discipline. But great is a different beast. It's when the talent drives everything and the performer becomes a channel for his or her strengths. When the talents have us, we are transformed. Success depends upon our ability to effect that transformation: to go from the good to the great. The key is structuring our work so that we are continually tapping into our greatest strengths and what is most meaningful to us. We recently got to see a good example of this when Courtney Hadwin, a painfully shy and awkward 13-year old singer who placed sixth in America's Got Talent returned at age 14, wrote her own song, and competed in the Champions show. She explains, "When I sing, I become a different person." She "gets into the music", moves her body, and accesses wholly different aspects of herself. If you're trading in your normal state of consciousness, you have not awakened your talent. That doesn't win singing competitions and it doesn't win in markets.
In my recent Forbes article reviewing historical patterns of bear markets, I noted that it was common to see extended bounces even within the context of longer-term declines. Indeed, we could be seeing just such a bounce in recent markets, which have taken stocks, oil, and high yield bonds meaningfully higher following significant declines. Speaking with investors and traders, I observe a high level of uncertainty and many questions. Is the decline over? Are we beginning a new bull market? Will we retest the lows? Thanks to a savvy trader for pointing out this perspective from The Fat Pitch, who evaluates historical evidence regarding bounces from highly oversold conditions. See also this useful preview of the coming week from Dash of Insight. In my own trading and investment, I have found it useful to track the relative performance of ETFs as a way of detecting market themes and the unfolding of strength and weakness. Here are a few ETFs that I view in this relative manner. Each of the charts is indexed to 100 as of the start of January, 2016 and each looks at the ETF versus SPY: * EFA - Here we're looking at stocks outside the U.S., including Europe, the Far East, and Austral-Asia. Note the ongoing weakness of EFA versus SPY. Many of the market vulnerability themes (disarray in the E.U.; concern over Italy and debt; concern over China and trade wars) stem from overseas. Watching the relative performance of EFA helps me walk forward, day by day, to see if those concerns are growing or waning.
* HYG - This tracks high yield bonds, which have been weak for a while, but which rallied strongly on the Fed chair's recent reassurances regarding the pace of shrinking the balance sheet. When high yield bonds decline in price, their yields rise. That is not necessarily a good thing, as it can mean that the market is pricing in growing odds of default. When we see high quality bonds (AGG, for example) outperform high yield bonds, it's a sign that smart bond investors perceive risks and seek safety. Watching the relative performance of HYG is one way of tracking their sentiment going forward.
* XLF - This familiar ETF tracks the performance of financial stocks within the SPX universe. In a stable and growing economy, banks should perform well and other financial firms should benefit from loan activity and loan demand. If we encounter threats to the financial system, such as we saw in 2007-2008 with the housing crisis, then banking and financial stocks should show particular vulnerability relative to the overall stock market. Lately we've seen relative weakness from the financial sector and a so-so bounce. I remain concerned about the European banks, which have been unusually weak: DB and CS are examples.
* DBC - This ETF tracks commodities and is sensitive to oil prices, which were quite weak and which have rallied nicely in recent sessions. In a growing global economy, rising production and consumption and increased building lead to an increased appetite for many commodities. Conversely, economies in recession will tend to consume less and that can lead to declining commodity prices. Oil and industrial metals are especially valuable to follow in this regard.
Note that overseas equities, high yield bonds, financial stocks, and commodities are all below their 2017 levels in relative terms. Should we see economic weakness not only overseas but in the U.S. as well, these measures could weaken further. Conversely, if we retest lows and these measures hold up well in relative terms, I will be open to a more benign thesis. The key is staying open-minded and letting the evidence speak for itself. We can't be open to possibilities--and profit from them--if we can't tolerate degrees of market uncertainty.
There are several ways that we can make improvements in our trading: 1) Become a better idea generator; become better at spotting opportunity; 2) Become a better trader/portfolio manager; become better at implementing ideas as favorable risk/reward opportunities and constructing portfolios of trades; 3) Become more consistent in drawing upon best practices; become more grounded in personal and professional processes that keep you in peak performance mode; 4) Become more consistent in recognizing and intercepting your worst practices; become more mindful of triggers and pitfalls that set you up for your worst performances. In working on any one or all of these, it is important that the efforts are daily. We internalize what we do. The idea is to start our changes with motivation, but continue them with positive habits. Tomorrow (Thursday, Jan. 10th, 4:30 PM EST), Mike Bellafiore and I will join the good folks at Futures.io to present a free webinar on how you can implement these four areas of improvement in your trading. We are working with developing traders who are making meaningful strides in their trading, so we see what is and isn't working in real time. Our hope is to leave attendees with specific ideas and strategies that they can use to move their trading forward in 2019. Here is the link for webinar registration; we look forward to seeing you there! Brett
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There are two necessary ingredients of trading success and it sometimes seems as though they are at odds with one another: prudence and aggressiveness. Prudence is all about staying in the game with proper risk management, position sizing, and selectivity of trading. Aggressiveness is all about making the most of the game with proper risk taking, position sizing, and assertiveness of trading. Depending upon the frequency of your trading, it is good to have a loss limit to constrain the downside each day, week, and/or month. If that loss limit is set prudently, it will keep you in the game (psychologically and financially) during normal, expectable periods of drawdown. Less well appreciated is that the daily/weekly/monthly loss limits should also serve as benchmarks for your profitability. If a trader has a loss limit of X, he or she should make X or more during that period of time. Thus, for a developing trader who has a $1000 daily loss limit, we should see in the span of a month occasional daily gains of $1000 or more. It is that ability to make the daily limit and not lose it too often that provides good risk-adjusted returns: the ability to make a good amount of money per unit of risk taken. Many traders lack prudence and trade aggressively, so that their big losing days outnumber their big winning ones. Eventually this leads to trading stress and possible blow up of the account. Many other traders trade with prudence but not aggressively, so that they don't have many large losing days and they also don't have many large winning days. Implicitly, they're trading to not lose. Eventually this leads to a lot of wasted effort and frustration. Trading with prudence and aggressiveness means that--during the life of the trade and during preparation for the day/week--you must engage in prudent self-talk and planning and you must engage in aggressive self-talk and planning. In practice this might mean mentally rehearsing where your trade is wrong and planning a stop out (prudence) and also mentally rehearsing what tells you your trade is right and planning an add to the position. In practice it might also mean using the information from a losing trade to place an even larger trade in the opposite direction. The point here is that your planning and your self-talk have to embrace both prudence and aggressiveness if your trading is to integrate these elements. Many performance fields--from being a fighter pilot to being a chess champion to being a race car driver to being a football quarterback--require the combination of prudence and aggressiveness. Your trading statistics will tell you how well you are doing with both of these vital trading ingredients.
One of the interesting dynamics I've observed during this recent period of market volatility is that many traders see large moves and thus want to make *the* big trade. They develop a market view and they trade that view doggedly, often ignoring actual price behavior. What makes this worse is that it masquerades as "confidence" and "conviction". In reality, it is ego. It is us saying we know what the market we do and then digging in and looking for opportunities to express our view, so that we can be right. The need to be right can blind us to evidence that goes against our ideas--and it can especially blind us to opportunities on the other side of the trade. We indeed see what we're prepared to see, which is why we should prepare ourselves for a multiplicity of scenarios. Once we decide we *know* which scenario will unfold, we're no longer prepared to see what could unfold. And that leads to losses and poor trading decisions. Feeling strongly about a view is as much a risk factor as a trading virtue.
Recently, Mike Bellafiore at SMB Capital has been emphasizing the idea of positive habit formation with his traders. It's a great focus for the new year: developing the patterns of thought and behavior that help us achieve our goals. Here's an excellent video from James Clear, based on his new book, Atomic Habits. An important point made by the video is that we can transform our experience of ourselves one small behavior at a time, as we internalize whatever it is that we do. Of course, that can also work in reverse: when we fall into bad habits, we can internalize the sense of being lazy, unproductive, undisciplined, etc. Here's an interesting video from Tony Robbins that connects changes in our behavior to changes in our emotional and physical states. The implication is that we don't have to repeat the common pattern of making new year's resolutions, only to see them fall by the wayside. We can use our emotional and physical states to trigger the right behaviors and we can change our behaviors to form new and powerful habit patterns. In the book that I am currently writing, I describe how the great spiritual traditions of the world provide us with powerful tools for changing our states and accessing our strengths. This has important implications for traders: the great trades come from the soul, not the ego. In developing ourselves spiritually, we can find greater success in the material world. This is because we move beyond ego-based motivations and reactions and more consistently access who we truly are. In short, we will not transform our trading by staring at screens, hanging on each tick of profit or loss. We will not transform our trading by pushing, pushing, pushing to get bigger, bigger, bigger in our trades. Nor will we transform our trading by focusing on every move that we don't monetize. Spirituality, too, can become a habit. Lots of good things can happen when our best practices and greatest strengths become our consistent processes.
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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