Sunday, June 30, 2019

Looking at the Market Through Different Lenses - 2: NYSE TICK

The first post in this series took a look at cumulative fresh monthly highs minus monthly lows among all listed stocks.  This is a nice way of capturing intermediate term strength and weakness among shares, as we should see more new highs than new lows during solid uptrends and vice versa.  As we saw in the post, the recent strength in the large cap stock indexes has not been confirmed by the cumulative new highs/lows, reflecting breadth weakness, particularly among midcap and small cap shares.

In this post, we examine breadth through a different lens.  Above we see SPY (blue line) plotted against a cumulative line constructed from the five-minute values of the NYSE TICK.  Recall that the TICK ($TICK on most platforms) is a real time measure of the number of NYSE shares trading on upticks minus those trading on downticks.  By adding the values to one another over time, as we do with advance-decline lines, we can gauge whether there is overall more buying or selling pressure in the market.

Note that the cumulative TICK has tended to top out ahead of the market, reflecting growing selling pressure even as SPX makes new highs.  This pattern is seen at present, as the Cumulative TICK is well short of its highs of earlier this year and early in 2018.  Again reflecting relative weakness among the smaller cap components of the NYSE Index, the Cumulative TICK has been particularly weak during this most recent rise in prices.

All of this gives me pause regarding the intermediate-term outlook for stocks.  Price has moved higher, but fewer stocks are participating in the strength.  This pattern has been playing out with a vengeance globally.  If we look at weekly charts of European equities (VGK); global stocks minus the U.S. (EFA); and especially emerging market shares (EEM), we can see significant relative weakness with respect to U.S. stocks.  Those same weekly charts reveal relative weakness across many sectors of the U.S. market, including XLE (energy); smaller cap shares (IWM); financial shares (XLF); homebuilders (XHB); and raw material stocks (XLB).

In the past, lengthy periods of breadth divergence have given way to meaningful bear markets, as many bulls are trapped in their positions and eventually have to protect their profits.  This occurred in 1999-2000 and again throughout 2007-early 2008.  The current divergence from early 2018 through the present is not encouraging in that regard.  I need to see a meaningful pickup in breadth to justify a medium-term exposure to stocks.

Further Reading:


Thursday, June 27, 2019

Looking At The Market Through Different Lenses: 1 - Cumulative Highs/Lows

In these posts, I will take a look at the overall U.S. stock market (SPY) through some non-traditional lenses that help inform my view.  The key is not getting stuck viewing the market through any one lens, but rather using the different perspectives to synthesize an overall market perspective.  This is fundamentally a creative process, assembling information into fresh views.

Above we can see SPY (blue line) plotted against a cumulative line of daily fresh 20-day new highs minus 20-day new lows for all exchange listed shares.  (Raw data from  The idea here is that breadth will be expanding over time for strong markets and waning for weak ones.  As markets top out, they become more selective in their strength, with certain sectors holding up well and others leading the way to the coming decline.

Note that we have made marginal new highs in SPY recently, but the cumulative line has failed to confirm.  It appears we are making a lower high in that line currently, given the relative weakness of smaller-cap shares.  This pattern of extended non-confirmation of the cumulative line showed up in 2007 prior to the large decline of 2008.  I treat this information as a cautionary signal for the market longer term, but do not form a market opinion solely upon one such yellow flag.

Further Reading:


Monday, June 24, 2019

Three Tough Questions Traders Need To Ask Themselves

I work with traders who do a great job of tracking their most recent trades and figuring out what they did right and wrong each day.  What they don't do as well is ask the big questions.  It is like a company that gets better and better at manufacturing their product, but fails to look at the bigger picture of supply/demand for that product.  It doesn't help to get better at making manual typewriters or flip phones when those are becoming extinct.  No amount of focus on tactics can substitute for effective strategy.

Here are three sets of questions traders need to ask themselves periodically:

1)  Is what I'm doing truly unique, or am I simply part of the consensus?  What, specifically, in my trading approach and process is different from what the herd is doing and how, specifically, is that giving me an edge?

These are questions every business needs to ask.  Why should you succeed?  What makes you different and better?  How do you know that you have a genuine edge?  There are many "me too" businesses and many "me too" traders.  It is difficult to think of highly successful business or traders who are playing the same game as their competitors, the same way.  

2)  How am I building my business?  What am I researching and developing today that will help provide tomorrow's profits?  How am I actively adapting to market conditions to find new sources of edge?

Many traders spend all their time trading and very little time developing new frameworks for exploiting financial markets.  They are like businesses that keep churning out a product or service, never adapting to the changing needs and desires of consumers.  Look at the great technology businesses, retailers, and pharma firms.  All heavily invest in research, development, and technology and all have a pipelines of innovations.

3)  How, specifically, does my lifestyle provide me with an edge in this peak performance activity of trading?  What do I do each day to maximize my energy, focus, wellness, and emotional well-being?  How do my review processes actively create new goals and learning for the future, so that I am always growing?  If I saw a professional athlete with my lifestyle, would I expect him/her to succeed?

One dynamic I've emphasized over the years is that performance professionals are always training.  They spend more time preparing to win than actually participating in formal competition.  Can we expect ourselves to be disciplined in trading if we lead undisciplined lives?  Can we expect to maximize our focus in trading if we are continually distracted by our phones, televisions, and chats?  Our time outside of trading is our training for trading, by design and by default.

The above questions make a great backbone for a trading business plan.  Yes, it helps to review trading each day, but it's the overarching plan and vision that keeps us energized and inspired.  As the old saying goes, failure to plan can amount to planning to fail.  We're not likely to reach any distant destination if we don't have a map and travel plan.  Writing out your plan can be a solid grounding that aligns your daily efforts with your larger life goals.

Further Reading:


Thursday, June 20, 2019

Trading Psychology Techniques - #10: Overcoming Overconfidence

I have found that runs of winning trades are just as dangerous for traders as runs of losers.  It is very common that we anchor ourselves to our most recent returns, trading too small after we lose money and too large after wins.  This means that we're often too small when we turn our trading around and too large when we encounter inevitable losing trades.  The overconfidence dynamic is common among momentum traders who become more confident in the trade as it goes their way, adding to positions that have already moved in their favor.  This greatly changes their average price and makes them vulnerable to normal reversals.

The mistake traders make in anchoring themselves to recent returns is a failure to recognize randomness in the outcomes of a few trades.  A 50/50 win/loss ratio for an active trader means that strings of four losing trades (or days) will inevitably occur.  If every such series leads to a loss of confidence and a micro-managing of the trading process, it will be difficult to sustain consistency.

On the other hand, it's inevitable that such a trader will have strings of winning trades or days simply by chance.  If this leads to overconfident thinking and a doubling down on risk-taking, the trader will quickly give back those gains.

A great exercise to combat overconfidence is to visualize the scenario in which it's January 1st and you are neither up money or down money.  Would you take the trade that you're contemplating if your P/L was flat?  If so, how would you size that trade?  How much would you risk?  If the trade is truly a good one, you would take it on January 1st and size it reasonably.  If the trade is more marginal--the result of overconfidence--you would be much less likely to put it on with a flat P/L.  By vividly imagining a flat P/L, you help yourself get flat in your head, reducing emotional pulls.

Another useful technique is to actively rehearse, prior to putting on the trade, what you would need to see to tell you the trade is wrong and that you need to exit.  When we're overconfident, we often don't process adverse scenarios.  By making such processing an active part of your preparation, you give yourself a more balanced perspective during the life of the trade.  

"This, too, shall pass" is a great mindset after periods of both losing and winning.  Imagine the surgeon about to operate.  You don't want that surgeon to be wildly excited and overconfident, and you don't want that surgeon to be fearful and hesitant.  Each trade is a kind of surgery, and the best you can do is stick to the best practices that have produced favorable outcomes in the past.

Further Reading:


Monday, June 17, 2019

Trading Psychology Techniques - 9: Conquering Negativity

The past three posts in this series have dealt with building self-awareness; facing trading fears and anxieties; and overcoming frustration and anger.  In this post, we will tackle negative thinking patterns and how these can be turned around.

The first principle and most important practice is to live a positive life outside of your trading.  It is impossible to sustain an optimistic and constructive mindset during trading if what you are reinforcing during your other hours is negative.  If you take a look at the recent Forbes posting, you'll notice a non-traditional take on the recent Father's Day holiday.  The idea is to turn the holiday into a positive emotional experience by widening its meaning.  This is something that can be done in many areas of life.  Spending time with friends, relationship partners, family, and colleagues is great, but how can we make this time truly fun, inspiring, and meaningful?  As I point out in the book that I am currently writing (due out during the summer), the key is avoiding routine and seeking experiences that are special.

How can we possibly turn our thoughts and behaviors around if we are stuck in a life of routine?

The cognitive approach to conquering negativity is especially powerful.  That requires building the self-awareness to recognize when you are talking to yourself in ways that are not helpful and constructive.  As I've mentioned in my books, a great way to reinforce that self-awareness is to regularly ask yourself, "Would I be talking to someone else I cared about who is in my situation the same way that I'm talking to myself?"  This is helpful, because it reframes our thought patterns as conversations.  Very often, if we view our thoughts as ways that we're talking to ourselves, we can see that the conversations are negative and serve no constructive function.

Once we can recognize the negative thinking patterns, we want to tune into their destructive consequences.  By reminding ourselves that this kind of thinking robs us of energy, takes away our focus, and causes us to be less productive and creative in generating ideas, we gain the ability to become angry at our own negativity.  This is a very important principle.  We are most likely to change a pattern when we view it as an adversary: as something that stands in the way of our happiness and success.  Reminding ourselves of the consequences of our negative self-talk helps us marshal the energy to engage in a much more helpful processing of our situation.

That sequence--recognize negativity, challenge negativity, replace negativity with more constructive self-talk--can become a positive habit pattern if repeated multiple times per day for many days.  Yes, of course, negative thoughts will pop into your head, but you'll be able to quickly smack them down if you immediate recognize their consequences and generate more helpful ways to view the situation.  In my own trading, I turn negative thoughts into learning thoughts.  If each of my losses and mistakes can teach me something--something about me, something about markets--then I can actually value my mistakes and stay positive in the face of temporary drawdown.

Negative things always happen in life.  The resilient person doesn't internalize those setbacks.  Setbacks exist for a reason, and we can turn them into fuel for our personal development and the development of our trading.


Thursday, June 13, 2019

Trading Psychology Techniques - 8: Overcoming Frustration

The last post in this series focused on ways of overcoming our trading fears.  Many times, it is frustration that can take a trader out of the zone and disrupt trading plans, including risk management.  When trades don't work out--or when we miss good opportunities--there is plenty of room for anger and frustration.  Frustration occurs when we have a strong set of desires or needs and those are thwarted.  Getting stuck in a traffic jam when we have to make an appointment is a great example.  

There are two types of methods that can help us overcome frustration:

1)  Behavioral - This would include relaxation/visualization exercises, biofeedback work, and meditation.  In these techniques, we learn to recognize the signs of frustration as they are occurring (angry thoughts, physiological arousal, pounding the table, etc.).  We then pull back from the frustrating situation and perform exercises that calm us and require us to sustain focus.  For example, in meditation we might slow and deepen our breathing, keeping it quite regular, while we maintain focus on a peaceful image.  By entering cognitive and physical states incompatible with frustration, we can short circuit the anger and prevent it from dominating our actions and decisions.  One powerful variation of the behavioral method is to engage in guided imagery when we are not trading and vividly imagine scenarios that normally might frustrate you.  While you are imagining the frustrating scenes in great detail, you are keeping yourself chilled:  slow, deep breathing, maintaining stillness, etc.  Doing this exercise repeatedly allows you to internalize the calm response when the frustrating situation occurs in real life.  The key is repetition, so that your calming becomes an automatic response to situations that don't work out.

2)  Cognitive - Cognitive methods look at our thoughts and mind states as triggers for our emotional responses.  As the above quote suggests, frustrations are generally preceded by strong expectations and needs.  If we strongly expect a trade to work out--and, even more, if we need it to work out--we set ourselves up for frustration when our scenario doesn't play out.  Such expectations and needs occur when we place too much ego into our trading, so that our feelings about ourselves rise and fall with our profits and losses.  One technique that works well for me is to size initial positions moderately and view the initial trade as a hypothesis.  If my hypothesis is disconfirmed, I can take a modest loss and use that information to potentially take a trade in the other direction.  By viewing my idea as a hypothesis rather than a conclusion, I am mentally prepared to be wrong and, indeed, am in a mindset where I can accept the loss as money well spent for market information.  Risk management is a powerful tool for keeping frustration manageable.  I never want to lose so much in one day that I can't come back over the course of the week.  I never want to lose so much in a week that I can't go green on the month.  When we can frame losses as challenges, they can energize us, not frustrate us.

Trading with too little capital and expecting unrealistic returns to make a wonderful living set us up for disappointment and frustration.  I know developing traders who view each day and week as a verdict on whether or not they'll succeed at what they're doing.  That is simply too stressful for the purpose of maintaining consistency in trading.  We are much more likely to be consistent in our trading if we sustain a consistent mindframe.  That means training ourselves to accept and learn from losses and treat them as learning opportunities, not as existential threats.  Practice in behavioral and cognitive methods can help us create positive habit patterns that defuse frustration and keep us in control of our trading.

Previous Posts in This Series:


Sunday, June 09, 2019

Three Key Mistakes Traders Make In Evaluating Their Trading

Ongoing evaluation of our trading enables us to learn from experience and guide ourselves toward improvements.  We cannot change what we do not observe and measure.  Successful traders study themselves--and their performance--every bit as diligently as they study markets.

On Monday, June 10th, I will participate in a webinar with the good folks at Bookmap, where we will discuss ways of evaluating and improving our trading.  The session will be at 11 AM Eastern Time and will include time for Q&A.  Registration is free and available here.

Traders make a number of mistakes when trying to evaluate themselves.  Here are three of the most common:

1)  Too general and subjective - The trader doesn't drill down to identify what he or she has done well or poorly in specific trades.  The evaluation simply notes general problems like fear of missing or traded too small.  The evaluation should not only identify specific mistakes, but also highlight specific ways of correcting those.  That turns the evaluation into goal setting and planning.

2)  Not enough information - The traders I work with at SMB utilize software that captures information on all trades all the time.  That way the traders know exactly how many winning and losing trades they've had; the average sizes of winners and losers; the win rate as a function of time of day; a breakdown of P/L by strategy; and much more.  All this information provides useful information about what the trader is doing well and what needs improvement.  Many, many times, the areas that stand out as needing work are ones that the trader was not focusing on.  In the webinar, I'll discuss the use of software to aid our evaluation.

3)  Not tailored to the trader - Some of the best evaluation comes from knowing what you do best and how you do it.  That way, you can evaluate yourself according to your best practices.  A generic evaluation sheet is probably better than none, but most helpful is an assessment that grades you on the dimensions most crucial to your success.  For example, if certain ways of managing your time and energy help your trading, those should be part of your evaluation.    

Many traders could be advancing much faster if they would only improve their learning processes.  In the Monday webinar and in future blog posts, I look forward to outlining ways in which we can become more effective learners.


Monday, June 03, 2019

Trading Psychology Techniques - 7: Facing Your Fears

A while back, I worked with a trader and reviewed his P/L statistics.  Keeping good statistics on your trading is a universal best practice.  The patterns of wins and losses--and the progress over time--reveals a great deal about your trading--and your trading psychology.

What made this trader unusual was a pattern of small wins and small losses.  He had a daily loss limit and never came near that number, either on the downside or the upside.  

When we examined his trading, it was clear that he had profit targets on his trades and he had stop loss levels.  These were appropriate, given his daily limits.  He gave himself room to be wrong with his stops and also gave room to trades to run if they worked out.

So what's the problem?

As we examined his trading, we quickly saw that he rarely let his trades stop out and he rarely hit his profit targets.  He stopped out of trades quickly when they went against him and he took profits quickly when trades went his way.

In short, his trading was an exercise in fear.  When he feared loss, he quickly exited.  When he feared losing gains, he quickly exited.  Over time, that had him playing small ball as a trader.  Psychologically, it meant that he was always acting on fear.

We reinforce what we act upon.  If we act on fear, we reinforce fear.  If we act out of frustration, we reinforce frustration.  Is it any wonder that, fearfully exiting one trade after another, this trader never developed confidence in what he was doing?

An important psychological rule is that we can only overcome our fears by directly facing them.  If I am afraid of going outdoors, I cannot develop confidence by staying indoors.  What I need is to experience the very thing that I'm afraid of and see--in my own experience--that nothing terrible happens if there is an adverse outcome.  In that sense, we don't gain confidence from success alone.  We gain confidence by failing--and seeing that we can bounce back.

This is where the use of imagery is tremendously helpful.  We can visualize, in great detail, having a winning trade reverse on us or having a trade hit its stop, and mentally rehearse how we would like to deal with that situation.  If we mentally rehearse these scenarios again and again, they become familiar to us and no longer so threatening.  That reinforces confidence, because we're telling ourselves that we can fail and bounce back.

Note that what we're doing with such imagery methods is sustaining a state of self-awareness while talking ourselves through the fearful episode.  With sufficient practice, we can become quite good at invoking the self-awareness in real time.  What we've rehearsed with imagery comes back to us during actual trading.

The trader I met with learned to redefine his fears.  Once he realized that playing small ball guaranteed he would never reach his goals, he became fearful of being fearful.  In other words, he changed his perspective.  The problem wasn't losing money; the problem became preventing himself from making money!  In the state of self-awareness, he now viewed his situation differently, and that enabled him to trade very differently.

Further Reading: