Where Can We Find Market Opportunity?

Here's an end-of-year musing about market opportunity:

As of Monday, we had fewer than 40% of stocks in the SPX trading above their 3 and 5-day moving averages, but over 70% trading above their 20, 50, 100, and 200-day averages.  That's a nice proxy for a market that is short-term oversold in a consistently rising market.  When that has happened in the past, what have we seen going forward?  (Data from Index Indicators).  

Going back to July, 2006, the start of my database and a period that covers many market conditions, we've only seen 14 occasions when this has happened out of well more than 3000 market days.  Right away, I find that interesting.  The kind of consistent strength we've seen of late is not common.  

Also interesting is that six of the occasions occurred in 2009 and 2010 (right after a major bear market) and six occurred in 2013 and 2014 (during the runup to the early 2018 high).  In other words, this pattern has tended to cluster during bullish periods following prolonged market weakness.  An important potential implication is that early 2018 to the 2019 lows was a bear market (much more evident in overseas stock indexes and small caps) and what we're seeing now is a fresh bull market.

So where is the opportunity in all this?

I note that when we've been short-term oversold in a consistently bullish market, there has been no consistent upside edge over the next five trading sessions (6 up, 8 down).  Over the next 20 sessions, there has been an upside edge (10 up, 4 down), with an average gain of twice the rest of the sample.  Fifty days out all 14 occasions were higher and significantly more so than the rest of the sample.

My guess is that the great majority of traders will get caught in the chop of no edge over coming days and fail to capitalize on the longer-term edge that is there.  This is for two reasons:

1)  People who identify themselves as traders feel a need to trade - What if the greatest edge in a particular market is buying and holding for a few weeks?  We're not talking about an eternity.  To the "daytrader", "swing trader", and "active trader", that is not who they are and what they want to do.  In an important psychological sense, they trade to feel productive and active, not to maximize returns.  I predict if you had a great system that was consistently profitable with excellent risk-adjusted returns and that traded a few times per year with holding periods of weeks to months, the majority of traders would not follow it.  

2)  Traders are universally overleveraged - This is true at hedge funds, which seek limited downside and large positions, and it is true at prop firms, which are allowed to highly leverage capital for intraday trading.  The result of this overleverage is that traders cannot take heat.  They can't participate in an edge of weeks to months, because there is no way they can hold through choppy price paths.  In short, they hit their pain thresholds (their stop out levels) well before their edges can be realized.  In theory, they hope to trade the longer-term edge with shorter-term trades in the direction of the edge, but this rarely works.  A longer-term edge is different from a sequence of shorter-term trades without demonstrated edge.

What if the greatest edges in the market come from playing a game that few traders want to or are able to play?

What if most of the psychological frustrations and emotional upheavals that traders face come from trading crowded time frames and strategies with limited edge?

What if success comes from trading the time frames that objectively present edge and not the time frames we're most comfortable with?

What if the path to success isn't sizing up shorter-term trades with fleeting edge, but staying modestly sized to participate in longer-term edges?

What if the great majority of trading that goes on, with shockingly small odds of ongoing success, is a massive waste of time and energy with a dead-end future?

No brokerage firms, self-anointed market gurus, trading firms, or trading coaches have a vested interest in contemplating the above questions.  They profit from the (hyper)active trading and the replacement of older, failed traders with starry-eyed rookies.

That's sad, because edges *are* there in markets.  But they're like gold:  best mined where the masses aren't digging.

I wish readers a Happy New Year filled with the activities that most bring happiness, fulfillment, and success!

Brett

Three Ideas To Turn Your Trading Around

Over the holidays, I've received a number of positive comments and expressions of appreciation for the free blog-book that I wrote this year, Radical Renewal.  I wrote the book as a blog (each chapter is a separate post), so that it could be accessed anywhere at any time with an online connection.  I wanted the book to be a gift to the trading community that has been so supportive of my work over the years.  Amidst all the self-promotion and false claims that go on in the trading world, there are valuable people doing valuable things in the trading world.  I acknowledge some of those people and their contributions in the book's appendix.

There are three ideas in the book that could be particularly important to turning your trading around in the new year:

1)  Being a better trader means being a better listener - We fill our heads with what we think markets should do and how much money we should make.  That leaves little room for processing what markets are actually doing.  As a psychologist, if I filled my head with how much money I would make doing therapy and what I think my client will say next, I'm not fully attentive to what they are saying.  Without listening, there can't be deep understanding.  A great first step in improving our trading is improving our focus and immersion in market activity.  We're best able to perceive market patterns across different time frames if we're actively processing who is in the market, what they are doing, and when.  Trading can only hijack our emotions if it first hijacks our egos.

2)  Peak experiences are a key to peak performance - We typically operate within a narrow band of emotional experience.  That helps us get tasks done from day to day, but it doesn't bring out the best in us.  A wealth of research suggests that we perform at our best when we are inspired:  when we experience joy, fulfillment, and energy.  I read the journals of traders and talk with them about their trading and rarely do I hear inspiration and a sense of vision.  Too often, we run our lives to reduce stress, not to maximize well-being.  We achieve a fraction of our potential because we're operating at a fraction of our energy level.  We cannot achieve great things in our trading or in our lives if we're not doing something greatly each day.  We can't trade with inspiration if we're not doing something inspirational each day.  It's the absence of distinctive positives and not just the presence of negatives that keeps us from being who we are capable of being.  What we do outside of trading--our relationship lives, how we treat our bodies, how we learn from what we do right and wrong--are key to either inspiring us and giving us energy or draining us and keeping us on autopilot.

3)  Relationships are a powerful vehicle for growth - Being with the right people brings out the best in us.  Being with the wrong people--or being isolated from people--leaves our many of our strengths dormant.  Every relationship is a mirror:  a way of experiencing ourselves.  If we're with people we can learn from, who support us, and who inspire us, that stimulates our own development.  Many traders are in suboptimal learning environments:  they are not exposed to new ideas, new research, and people doing new and promising things.  Entrepreneurs love being around others starting new companies; there's a vibe to the startup mentality that isn't present in large, stodgy companies or solo, isolated enterprises.  Turning your trading around can't occur in a vacuum.  We gain from being parts of networks that make everyone better.

In short, reaching your trading potential is not simply adding more "setups" to your trading, writing more in a journal, or vowing ever-tighter "discipline".  How we live impacts how well we trade.  We cannot turn our trading around if we ourselves remain static.

Further Reading:

Radical Renewal

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The Importance of Your Trading Environment: Lessons From Aries

Well, our youngest rescue cat, Aries, has been with us for a year and has a new lesson to offer.  The last lesson from the black tabby was a thought experiment:  Suppose a movie was being made of your life.  Would you want to watch it?  The answer to that question tells us a lot about the path we're on.

Aries was in an apartment for the earliest part of his life, but didn't fare well.  He ran around, knocked things over, chewed through furniture and power cords, and otherwise created havoc.  We didn't want to see him placed in a rescue shelter if that could be avoided, so we took him in.

It was a total change of environment for Aries.  He now had three girl cats to play with and a house with four floors and more cat toys than we can count.  He still ran around and played actively, but no longer destroyed anything.  In one setting, he was disruptive and destructive; in an enriched setting, he has become a loving family member and a great companion.  (As I write this, he's sitting at my feet, listening to our favorite music).

Our environments can facilitate our needs or thwart them.  Our environments can either bring out the best in us or frustrate us.  Sometimes we focus on changing ourselves when the reality is that we need an interpersonal, work, and physical environment that helps us be the best possible versions of ourselves.  We spend far too little time on optimizing our environments at home and work.

Recently, there was an insightful Twitter stream on the topic of loneliness and trading.  The reality for many traders--myself included--is that trading can be fulfilling as an activity, but completely barren socially.  For others, the trading environment can be barren intellectually, leaving us dead from the neck up.  How many traders are like Aries, acting out of frustration, not because they lack self-control, but because they are in the wrong settings?  Might it be possible that a different, more enriched setting could bring out the best in you as a trader?

That's a great vision for 2020.

Further Reading:

Investing in Your Trading

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Trading the Psychology of the Market

In the recent Forbes post, I discuss the importance of setting goals for the New Year that are truly effective, by engaging our motivation and providing us with an inspiring vision for our future.  Dry, laundry list goals may capture worthwhile "to-do's", but we rarely end up actually doing them, because they don't give us energy.  Ineffective goals are energy takers; effective goals inspire, drawing upon energy we never realized we had.

So here's one potentially effective goal for 2020:  Trading the psychology of the market and not your own psychology.

Many trading decisions are colored by the fear of loss, the need to make money, the impulse to be involved in each move, etc.  Those decisions are suboptimal because we're actually trading our psychology and not the psychology of market participants.

Above is a chart of the recent ES futures market.  In this post, we'll take a look at what's happening in terms of market psychology.

First, you might want to check out previous, related posts:

*  Getting Past Trading Illusions - This is what kicked all this off, with my going undercover and seeing what "trading education" sites were actually teaching.  Yikes.

*  Understanding the Psychology of the Market - How what we think of as "choppy" markets may display meaningful cyclical patterns.

*  Tracking the Psychology of the Market - How patterns of upticks and downticks across market sectors deepens our view of buyers and sellers.

*  The Importance of Context in Trading - How viewing the current market relative to longer time frames helps us see who is in control of price action.

*  What is Really Important in the Market - An actual example of recent market behavior and what it was telling us.

*  Learning to Trade:  Building Market Understanding - How we can integrate price, volume, and time into coherent views of the market.

*  Learning to Trade:  Understanding Cycles and Market Context - How we can integrate our views of the market over new and different scales to generate meaningful trading views.

*  Learning to Trade:  Tracking Market Cycles Using Breadth, Strength, and Momentum - How we can look at waxing and waning patterns of buying and selling to track market trends and cycles.

*  Learning to Trade:  Going From Market Analysis to Synthesizing Trade Ideas - A real time practical example of using market information to inform a trading view

All of these posts are relevant to understanding and trading the psychology that moves the marketplace.

Above we see the recent ES market with volume-based bars in the top panel; volume transacted at the market offer versus bid price in the bottom panel.  The left hand graphic captures the amount of volume transacted at each price, similar to Market Profile.  The price action represents the period of time from December 16th through the 20th. (Chart is from Sierra Chart).

Note how much of the price action occurs in a narrow range, from Monday morning (12/16) through Thursday morning (12/19).  If we look at price behavior alone, the market seems narrow and choppy.  More than one trader told me that "This market isn't tradeable!"  And, yes, if you impose your time frame and trading preferences on the market, opportunity may not be there.  But what if your job is not to trade your favorite time frames, but adapt to how the market is actually behaving?

Once we integrate the information from the bottom panel, we can see that there is net selling pressure throughout this narrow period.  The red bars (volume transacted at the bid) exceed the green ones (volume transacted at the offer) over that period.  Despite the selling pressure dominating, price is not moving meaningfully lower.  Sellers are there in the market, but can't get anything done.  These are the participants who are potentially trapped when buyers finally step in (blue arrows).  Moreover, when sellers take their turn after the upside break (yellow arrows), note that they cannot retrace much of the upside move at all.  Again the sellers can't get it done and will be trapped for the next round of buying (pink arrows).

Folks, this is a tradeable market, but not if you only look at price action, not if you don't see the auction process between sellers and buyers, and not if you are wedded to particular time frames.  These patterns of market psychology occur at multiple scales and require an openness to trading the patterns that actually set up.  Trading your psychology and not the market's will not be helped by doubling down on your self-focus with self-help techniques.  One of the best things we can do for our trading psychology is immerse ourselves in the market's psychology.

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What's Really Important In The Market

Above we have two screens that I watch in tracking the market on a short-term basis.  (A third screen appears in this post; yet another screen in this post.)  All screens are from what I've customized on the Sierra Chart platform.  What we're looking at above is the one-minute opening action in SPY for Friday, 12/13/19, along with relevant indicators.

Here's what's on the screens.  On the top chart, the top panel is SPY on a one-minute basis.  The panel just below that is volume for the one-minute period, color-coded green (if the market was up for that minute) or red (if the market was down).  The third panel is a five-minute moving average of the ratio of volume transacted at the offer price (values greater than zero, representing buying pressure) to volume transacted at the bid price (values less than zero, representing selling pressure).  The very bottom panel of the top chart is a three-period RSI, to show very short-term overbought and oversold conditions in SPY.

The bottom chart is an advance-decline ratio specific to the 500 SPX stocks, drawn on a one-minute basis.  

So I'm looking at the two above screens, this screen, this screen, and also screens for the sector ETFs and ETFs for the NASDAQ and Russell Indexes, all on a one-minute basis.  I'm also keeping an eye on breaking news and markets relevant to stocks, such as interest rates.

What am I not doing?

I'm not chatting about where I think the market could go.  I'm not opining as to whether the trade deal is a good or bad one.  I'm not speculating about the future of Brexit.  I'm not looking at chart patterns, wave counts, moving average crosses, or the like.

Here's an analogy:  Doctors in the emergency room have to gather much relevant information in a short amount of time to know what to do.  Time is of the essence.  Many different readings are taken, from blood pressure and heart functioning to temperature, scans of injured area, and respiratory functioning.  A great deal of measurement and cognitive bandwidth is needed for effective and rapid functioning in the ER, which is why the ER is always staffed by a team, not a solo physician.

This is also why teams are effective in trading, especially when following multiple markets and time frames.

What I'm trying to do with all the screens is track the market's vital signs.  Sometimes those signs take a turn for the better (buyers are coming in) or worse (sellers are coming in).  Those become short-term trading opportunities.  If we're chatting about what we think will happen or what we think should happen, we're no longer attuned to the vital signs.  If we're looking at random shapes on charts, we never read the vital signs.  Does any competent physician look for chart patterns in a patient's blood pressure readings, brain waves, temperature, or respiration rate?  If shapes and chart patterns aren't informative in the ER, in weather readings, or in baseball statistics, why would they be any more so in financial markets?

Most of what is taught to developing traders by would-be gurus is randomness.  When I went undercover and monitored a number of trader education services, the great majority of what I saw and heard had no relationship whatsoever to what I was seeing among the successful traders I work with every week.  

Similarly, what I see offered as "coaching" for traders or "trading psychology" is self-help advice, with no specific market content whatsoever.  Come on.  Would a basketball coach advise team members with no reference to actual plays being run or maneuvers on the court?  Would a chess coach advise students and never refer to actual moves on chess boards?  If I tried "coaching" an ice-skating team with platitudes about mastering emotions and having a good mindset, how far in the Olympic trials would my students get?

So let's look at a few important things, walking through the two charts above with the arrows as guidance.

Note that a little after 10 AM EST, we get a spike higher in price (top panel, first chart) on expanded volume (second panel, first chart) and coming off a short-term oversold condition (bottom two panels, first chart).  We get a corresponding spike in the advance-decline stats for the SPX stocks (second chart).  In short, significant buying has just entered the market:  new participants are lifting offers and creating momentum.  Such momentum tends to continue in the short-run, as it does indeed over the coming minutes.

But what happens after those minutes of momentum?  The vital signs change significantly.  Notice that volume declines considerably (second panel, top chart) and we get a meaningful decline in the advance-decline statistics (bottom chart).  By the time we make a fresh short-term overbought reading around 10:19 AM, already it's at a lower price high and weaker advance-decline levels.  In other words, after the initial spike, volume dries up and with it, the buying strength.  That tells us that the market cannot sustain this level of valuation and the prior buyers will be trapped.  That creates the conditions for meaningful selling through the remainder of the morning.

That is one way a momentum thrust and turning point manifest themselves in the market.  When we track supply and demand--volume and its distribution among buyers and sellers--we can pick up on those episodes of momentum and reversion, within the context of larger cyclical patterns.  (See the series of posts on how to trade).  It takes cognitive bandwidth and focus to track these things in real time, and it takes experience to recognize patterns in supply and demand as they unfold.  If it was as easy as looking for price-based "setups", a lot more people would be making a fortune in markets.  Look at the proportion of daytraders that actually sustain success in markets, and then ask yourself why that would be.  An important start toward success is following what's really important in the market.

Further Reading:

TraderFeed Home Page and Index

RADICAL RENEWAL - A free online blog-book on taking the ego out of trading

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Three Improvements You Can Make In Your Trading In 2020

I recently met with traders at SMB Capital regarding their goals for the new year.  Here are three things that emerged from those conversations that traders can profitably focus upon for 2020:

1)  Become more consistent in your trading - This means relentlessly keeping score on what you're doing.  We can't improve what we don't measure.  How many up and down days/weeks/months do we have?  Are we making more on our up periods than our down ones?  Are we taking less heat on our trades?  Are we making more money per unit of risk that we're taking?  Are we taking the right amount of risk?  Which types of trades are giving us our best returns?  An important principle is that consistency in trading should precede growth in risk-taking.  Another important principle is that our best and most consistent trading reflects our greatest personal and trading strengths.  Becoming more consistent as a trader means doing a better and better job of accessing the best within us.

2)  Grow your trading - If your best trading is in liquid markets and strategies, you most likely have room to grow the sizes of your positions and expand your rewards.  This is easier said than done, because it's easy to anchor ourselves in the dollars that we make and lose.  If we're accustomed to losing only a thousand dollars or so during a day, growing our risk-taking and risking many thousands of dollars can feel intimidating.  Out of that intimidation, it's easy to stop doing the things that justified the initial sizing bump.  That is why growing our trading should be done gradually and steadily, so that we're always expanding our limits, but never overwhelming ourselves.  It is very common that, when hedge fund managers get more capital, they deploy it in ways that vary from their strengths.  In the excitement of getting more capital and being able to make more money, they stray from what they do best.  Growing your trading means expanding your risks and rewards--and doing so in a way that preserves your consistency.

3)  Grow your edge - In this video with Mike Bellafiore, he and I emphasize the need to expand what we do in markets.  Success comes from having multiple, independent ways to make money.  Any single edge in markets has a limited shelf life.  Ongoing success requires digging and finding new ways to exploit market patterns.  This is the area that trips up most traders.  They spend so much time watching screens and focusing on trading that they neglect the research and development time needed to discover new ways to succeed.  It's like a pharma company that spends all its time selling a good drug and not developing a robust pipeline of new medications.  Eventually the drug goes off patent and the company no longer has an edge in its market.  This is why working in teams--in close collaboration with others--can be so valuable.  We learn from others--their successes and failures--and can synthesize that learning into our own understandings.  If we're not working on new sources of edge, we're actually working on becoming obsolete.

A good business plan for the new year will have concrete goals in each of these three categories and specific plans for how to achieve these goals.  A good business plan will also be accountable, with ways of tracking whether we're actually making progress on those goals.  Every single goal should have a dedicated spot on your calendar each day/week.  Goals become part of our psychology when they regularly guide our lives.

Further Reading:

Setting Effective Trading Goals

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Putting Our Trading Edge Into Practice

In my previous post, I laid out the source of my most durable--and really my only--trading edge:  the ability to detect selling that cannot push the market lower and buying that can't push us higher.  When sellers or buyers are "trapped" in that manner, they need to cover, and that leads to good trading opportunities in the other direction.  This is a pattern that shows up across multiple time frames, and identifying the most relevant time frames is a big part of trading this way successfully.

So here's the ES futures market as it's setting up this morning.  Note the cyclical action captured by the blue arrows.  Note also that the most recent down-phase of the cycles has not been able to retrace price very much thus far.  The middle panel of the display captures the amount of volume transacted at the market offer price (green) versus the amount at the bid price (red).  The bottom panel is a moving average of the ratio of volume at offer (buying pressure) to volume at bid (selling pressure).  We can see that recent selling pressure has come into the market, as noted in the previous post, but has not moved us meaningfully lower.  

All this leads to a hypothesis--*not* a conclusion--that we will make a higher price low above the market's point of control (left side graphic) when the down-phase of the cycle ends, setting up a potential buying opportunity where the shorts are trapped.  I don't act on that hypothesis until I see evidence in the day's trading that the pattern of sellers unable to move the market lower is continuing.

This is all relevant to trading psychology, but it's focusing on the psychology of the market itself.  In reading the patterns of buyers and sellers, we can identify unique opportunities that take advantage of skewed supply and demand.

Further Reading:

The Importance of Context in Trading

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My Only Edge in Markets

Here's a screenshot from Friday's trade in SPY (bottom panel), with the NYSE TICK (ratio of stocks upticking to downticking) in the top panel.  Overlaid on the TICK is a 10-period moving average, and the blue line represents the zero level, where upticks and downticks are equal.

I've studied the hell out of my winning and losing trades and the bottom line is that I only have one edge in trading.  When I identify spots where sellers are dominant, but can't push the market significantly lower, that works out as an area to buy.  The sellers are trapped and have to cover.  When I identify spots where buyers are dominant, but can't push prices to new relative highs, that is often worth fading.  The buyers are trapped and have to bail.

Everyone is overleveraged.  No one can take meaningful heat.  That is the source of my short-term trading edge.

I make money when I trade that edge.  I lose money when I try to be someone other than who I am in markets.

Which makes self-understanding and especially self-acceptance the only true source of trading edge.

Further Reading:

Trading the Market's Psychology

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Not All Negative Emotions Are Problems

I recently spoke with an experienced, insightful trader who was experiencing performance anxiety.  He was so concerned with losing money that he failed to follow his own rules regarding entering positions, taking profits, etc.  As a result, he chronically felt frustrated, because his ideas were good, but his trading was mediocre.

It turns out that this trader had a pretty small account and was trying to use his trading to support himself and his family.  As a result, he was taking positions that were quite large--quite leveraged--relative to his capital base.  This ensured that, if he had a normal and expectable run of losing trades, his account would draw down meaningfully.

He knew that he could not afford to draw down significantly, so he was caught between a rock and a hard place.  He had to take risk to make the money he needed; he could not lose much of the money at all.  

In such a case, anxiety is a normal and healthy response.  It is information, not a problem.  It is telling us that the trader's goals are not realistic and are placing too much pressure on him and his performance.  He either needs to find other ways to support his family while developing his trading or find a position as a funded trader.  Most important, he needs to trade without the fear of risk of ruin.

Many times, the negative emotions of rational people are themselves rational responses to irrational situations.  If a spouse experiences emotional abuse from a partner, reactions of fear and anger are normal and natural--and they are telling us something!  Negative emotions can become prods to get us to look at our circumstances and expectations and make constructive changes in those.  Too often, we look to rid ourselves of negativity rather than looking into it and learning from it.

Further Reading:

Dealing With Performance Pressure as a Trading Challenge

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Training Your Mind By Training Your Body

This is a radical and powerful idea:

Figure out what you want to develop in your life and then create disciplines and workout routines that exercise those capacities.  That is training your body to cultivate your optimal psychology.

I recently reviewed research concerning the ways in which the right kinds of physical exercise can generate surprising psychological benefits.  After just a couple of days, that article has been downloaded 60,000 times, illustrating the level of interest people have in finding new ways of developing their potentials.  Counseling, coaching, and psychotherapy can be helpful in addressing performance challenges.  Through the right physical disciplines, however, we can directly experience the person we wish to become.  Are we interested in becoming more disciplined and self-controlled?  More resilient in the face of adversity?  More able to draw upon our storehouses of energy?  More grounded in a sense of self-mastery?  All of these can literally be exercised by the right disciplines.

It's a game-changer for psychology:  Don't talk with someone to reach your goals; do the things you wish to become.

Further Reading:

The Surprising Psychological Benefits of Exercise and Body Disciplines

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Tracking the Psychology of the Market

Whether one is a portfolio manager or trader, success comes from generating sound market ideas and then translating those into positions that provide positive reward relative to risk.  There are many big-picture managers who develop great ideas but fail to implement them as excellent trades.  Similarly, there are many short-term traders who treat trading patterns as ideas, only to get run over by what is happening in the larger picture.  Great trading is an integration of the strategic and the tactical.  

Many of the trading patterns that I rely upon to implement bigger-picture ideas are measures of the psychology of the marketplace itself.  The NYSE TICK measure, which I have written about for a while, looks at the moment-to-moment upticks and downticks in every single NYSE stock and combines those into a single measure.  When buyers are dominant, we see more upticks than downticks; when sellers dominate, we see more downticks.  We can create a short-term moving average of the TICK, which looks like an oscillator.  By observing if the oscillator is mostly above or below the zero line and whether it is making higher or lower peaks and valleys, we can detect overall sentiment over the course of a trading day.  A cumulative measure of the TICK, constructed like an advance-decline line, can provide us with a sense for longer-term shifts in sentiment.

Recently, I have taken a more detailed look at the upticks and downticks.  Using data from the Sierra Chart platform, I have constructed TICK measures specific to the SPX 500 stocks, NYSE stocks, NASDAQ stocks, and Russell 2000 stocks.  As illustration, we see above a 20-minute moving average of upticks vs. downticks for the SPX 500 stocks only, covering the day of November 27th.  Comparing similar moving averages for the Russell 2000 TICK and the NYSE TICK can help us identify when there is stronger and weaker sentiment among the small-cap and large cap segments of the marketplace.  When we see strength and weakness across all the TICK measures, we can be alert for the possibility of trending market behavior.

Over time, we can become quite good at detecting patterns in the uptick/downtick data to identify how sentiment is actually moving the market.  For example, note how in the first half of the chart above, we get periods of net selling that fail to move SPY meaningfully lower.  In other words, the sellers are present, but are unable to move the market.  This is valuable information.  Observe how buying could not move the market higher late in the day, which was equally valuable for the astute trader.

The big takeaway here is that higher-frequency market information (the TICK measures update multiple times per minute) can capture the trading patterns of active participants, revealing the evolving psychology of the marketplace.  Longer-term shifts in this psychology can help us generate market ideas; shorter-term shifts can help us find good risk/reward spots for implementing those ideas.  Of course, it's important to use psychology to understand and master ourselves.  What is often missed, however, is that psychology is equally important in understanding the markets that we trade.

Further Reading:

How to Trade:  From Analysis to Synthesis

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Is Your Trading Purpose-Full?

What is the purpose of your trading?

For many market participants, this would seem to be a foolish question.  "Of course!", they might exclaim, "The purpose of my trading is to make money!!"

Is it that simple, however?

The purpose of a job is to make money.  But is that the purpose of a career?  Is it the purpose of a calling?

If someone were to suggest that the purpose of my being a psychologist is to make money, that would strike me as absurd.  Do I make a living from my profession?  Of course.  But is that the *purpose* of what I do?  Of course not.  Show me an artist whose aim is to make money and I'll show you a mediocre artist.  A priest, minister, or rabbi?  A physician?  The good ones aren't in it for the money, even though it is their primary source of income.

When a trader approaches his or her craft to make money, what they're really saying is that markets are their job, not a career, and most certainly not a calling.  We shouldn't be surprised, therefore, when they treat trading as an activity limited to market hours, and we shouldn't be surprised by the lack of true passion and effort that goes into their market preparation, review, and journals.

Purpose breeds passion.  Passion without purpose is mere emotion and drama.

The most recent Forbes article is based on eye-opening research that reveals the emotional, health, and productivity benefits of living with a sense of purpose.  Purpose gives us resilience--the ability to bounce back from setbacks.  Purpose also enables us to draw upon hidden reservoirs of energy.  All of these are key to success in markets.  

The trader who trades for money has nothing to energize them during inevitable periods of drawdown.  As the Forbes article makes clear, many of the greats of trading have been motivated by a sense of purpose beyond immediate P/L.  Teaching/training others; learning new modes of self-mastery; discovering new patterns and creative sources of edge--all of these are purposes associated with the process of trading, rather than the outcome.

If there isn't an overarching point to your trading process, trading will eventually feel pointless.  That is not a formula for success.

Further Reading:

The Amazing Psychological Benefits of a Purposeful Life

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The Importance of Context in Trading and Trading Psychology

Here's an interesting market display from Sierra Chart.  It is a Market Profile-style depiction of volume traded at each price in the ES futures over the past seven trading days.  The grey regions represent the value areas for each day; the magenta line represents the point of control, and the green areas represent volume traded above and below the value area.  Thus at one glance we can track the red arrow on the most recent day and see where we are currently trading relative to recent value, whether buying/selling volume can take us above/below the point of control and above/below the value area, whether volume is increasing or dying out as we move out of the value region, etc.  In short, the display places current market activity in context, helping us understand the meaning and significance of moves that are occurring.

Many trading problems occur when we lose sight of context and become so focused on short-term price action that we get run over when the larger picture predominates.  For instance, we may see the market moving lower in the short run and chase the move lower, missing the fact that the selling is on reduced volume and is unable to establish value lower.  When the market snaps back to the point of control, we get whipsawed out of that short term trade.

It's interesting that many trading psychology problems also occur when we fail to put our activities in proper context.  We can become frustrated by three losing trades in a row, failing to appreciate that, with a hit rate near 50%, this is bound to occur often to active traders.  Similarly, we can become overconfident or underconfident based upon our recent trades and thus lose sight of well-established rules for setting stop loss points.  Reminding ourselves that we are not as bad as our most recent losses might make us feel and not as good as we might feel after a win is also establishing context.

So much of trading psychology is possessing the mindfulness to process the larger context before acting on and reacting to the most recent market and trading events.

Further Reading:

Training the Brain for Mindfulness

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Peak Experience and Peak Performance

When I wrote the recent free blog book, Radical Renewal, I started with the insight that many of the problems we encounter in trading psychology are ones in which our egos become attached to short-term performance.  Once we make profit and loss a measure of our personal success and value, we introduce fear, greed, frustration, and overconfidence into our processing of markets.  To the degree that we become focused on outcomes, it becomes impossible to fully focus on sound trading process.  Too, when we are self-focused, we lose our focus on what is happening in markets.

One idea that emerged during the writing of the book is a bit different:  It's not simply the presence of negative emotional experience that interferes with good trading performance, but the absence of distinctively positive experience.

The psychologist Abraham Maslow wrote about "peak experiences", which are powerful experiences of positive emotion, meaning, and purpose.  In the book, I explore the idea that peak experiences are the positive equivalent of traumatic stresses.  Just as trauma is processed directly with the potential of reshaping personality, peak experiences exert a similar--but more constructive--reorganization of our experience.  Consider the "born again" experience of a religious person or the experience of falling in love.  These exercise an ongoing inspiration that gives us energy and positive emotional experience.

What supercharges our performance is a level of absorption in what we're doing that opens us to the flow state and peak experiences.  I question if we see ongoing peak performance without an engine of peak experience.  The trader's focus on negative emotion is the surest sign that flow states and peak experiencing are missing.  We achieve in any field when we discover something profound and meaningful that inspires ongoing effort.  That is the ultimate psychological edge of any entrepreneur.

Further Reading:

Radical Renewal

TraderFeed Home Page and Index

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The Two Paths Toward Winning

I recently interviewed with Seth Freudberg of the SMB Options Group, and the interview was posted to YouTube.  In the interview, I summarized research I had conducted at a number of different trading firms regarding what creates success for traders and portfolio managers.  As I suggested in a recent tweet, a major finding is that distinctive performance is based upon distinctive strengths.  The idea that all profitable traders have a particular "secret sauce" ingredient that creates their success is silly.  What we find is that success--in trading as in other fields--leverages native talent and interest, builds skill upon that base, and then channels those talents, skills, and interests in ways that exploit opportunity.  

In general, there are two paths toward winning for traders:

1)  The first path is where the trader has experienced success and is engaged in markets in ways that are interesting and fulfilling to him/her.  Very often, the approach to trading makes use of one or more strengths that show up in other areas of life.  For example, someone who demonstrates unusual intellectual curiosity outside of markets will make use of that curiosity in developing new sources of edge in markets.  Of course, markets are always changing, and so the trader who has experienced early success must work to maintain that success.  Like a talented athlete, this trader is always working on his or her game, refining and expanding skills and finding new opportunities.  Working harder and better at your game:  that is the first path to success.

2)  The second path is where the trader has not experienced success and is frequently frustrated in his or her engagement of markets.  Such a trader may work harder and harder, but the path to progress is a slow one.  Over time, the trading takes energy; it does not energize.  That is one of the best signs that this trader is playing the wrong game.  All the work on refining skills won't be helpful if you're playing the wrong game.  Getting better and better at implementing a random chart pattern that lacks edge is not going to lead to distinctive profitability.  Working harder and harder at approaches to trading that don't leverage your talents, skills, and interests will similarly lead to mediocre results.

If you look at most performance fields, you'll see that each one actually incorporates specific roles that require unique skills and interests.  On a baseball team, the role of pitcher requires very different skills from the role of outfielder or catcher.  In an orchestra, the violin player is "playing a different game" from the percussionist and keyboardist.  The medical world has space for pediatricians, psychiatrists, and surgeons:  very different "games" indeed!  A huge part of success is finding the game that is right for you, given your native abilities, your interests, and your skills.  Very, very often you have to try many paths to performance before you find the one that is right for you.  Indeed, trying out all specialties is a requirement in medical training and in many formal training programs at investment banks.

The most popular TraderFeed post of the year was one that called out many providers of "trading education" for promoting strategies that have no edge whatsoever.  That's a different way in which we can find ourselves playing the wrong game.  A huge part of the learning curve for a developing trader is trying different approaches to markets--shorter term, longer term, discretionary, quantitative--and different markets to see which "specialties" truly fit with talents and passions.  Only then can we find sound mentoring to help us play the right game the right way.  There are some excellent resources in the appendix to my blog book that point the way toward such mentoring.

That is the challenge of trading:  There is no single path toward winning.  The challenge is to find our path.

Further Resource:

The Six Characteristics of Successful Traders

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How The Market Cuts You Up

Perhaps the best trading psychology advice ever:

Move the heart, switch the pace, look for what seems out of place

Cuts You Up - Peter Murphy

I find you in the morning

After dreams of distant signs

You pour yourself over me

Like the sun through the blinds

You lift me up

And get me out

Keep me walking

But never shout

Hold the secret close

I hear you say

You know the way

It throws about

It takes you in

And spits you out

It spits you out

When you desire

To conquer it

To feel you're higher

To follow it

You must be clean

With mistakes

That you do mean

Move the heart

Switch the pace

Look for what seems out of place

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