Thursday, May 28, 2020

Very Important Trading Psychology Insight

Let's take a look at recent posts:

This Forbes article examines research on meditation and how meditative practice can make us better traders;

This Three Minute Trading Coach video describes a technique for reprogramming our minds by pairing stressful trading scenarios with a calm, focused state;

This Three Minute Trading Coach video illustrates a quick technique for entering calm, focused states in trading.

From these three posts, we can identify a very important trading psychology insight:

It's not emotion that interferes with our trading; it's the inability to stay grounded in the present.

Think about it:  Many of the problematic emotions of trading take us out of the present moment.  When we feel fear, we're worried about the future.  When we're afraid of taking a trade, we're regretting a recent loss.  When we're pushing ourselves to size up, we're focused on the future.  When we focus on a missed trade or a poor exit, we're caught in the past.

It's the distraction of the past and present that prevents us from being truly immersed in markets and feeling the patterns that we've studied and observed.  Even if you *could* eliminate emotion from trading, you'd wind up losing your *feel* for markets.  We want that capacity to feel!  But we want to stay grounded in the present, as the observer of our feelings, so that we can distinguish a feeling taking us back to the past or one caught up in the future versus one that comes from a deep, intuitive feel of what is happening here and now.

If you're struggling with discipline in your trading, perhaps it's not emotion that you need to banish.  Perhaps it's mindfulness that you need to boost.  That is a game changer in trading psychology.

Further Reading:


Sunday, May 24, 2020

Getting Better Before You Get Bigger

One of the very talented traders I work with at SMB recently talked about pushing his trading to get bigger and make more money.  It's a great issue for him to be tackling, as his trading has been remarkably consistent.  So why not focus on getting bigger--and bigger--and bigger to make more and more and more money?

In a recent Confessions of a Market Maker podcast, I joked that pushing ourselves to get bigger in our trading (a common topic among male traders) is akin to pushing ourselves to get bigger in the bedroom.  If there is one formula for diminished performance in both domains, it's focusing on size.

Research suggests that risk-taking is linked to personality traits (particularly extraversion), but is also domain specific.  One can take risks in one area of life and be quite averse in others.  Many traders moderate their risk-taking precisely because they need to maintain an even mindset during their trading.  As soon as they experience the drama of rising and falling P/L, their trading processes become disrupted.  For those traders, thinking big and acting big is a path toward getting small.

For many traders, we want to get better and better before we get bigger.  And we want to get bigger, not necessarily by taking more risk per unit of capital, but by increasing our capital base.  In other words, if I'm trading stock index futures and leveraging my best trades by three-to-one, the answer to getting bigger is not necessarily to go to five- or ten-to-one.  The answer is to increase my capital base and keep doing my consistent thing with 3:1 leverage.

The best path to a consistent trading psychology is consistent trading.  And the best path to growing your trading is to do so sustainably, maintaining consistency of trading and mindset.  Pushing yourself to get bigger, putting outcome ahead of process, too often means that our egos have hijacked our trading.  If we fill our minds with P/L concerns, what room is left to process markets?

Further Reading:


Friday, May 22, 2020

How To Stay Passionate About Your Trading

All too often, I see traders begin their careers with passion and energy and then gradually lose the spark.  I see it in people's romantic relationships as well.  What starts out with energy and excitement eventually becomes routine.  And no one ever felt passionate about routine.

I recently discussed with a savvy trader how he has changed up his review process to make it more challenging and meaningful.  Tackling the right new challenges *gives* us energy.  It's something we look forward to.  As I discussed on the Confessions of a Market Maker podcast recently, we stay passionate about our trading when we have fun with what we're doing; when what we're doing is meaningful to us; and when we're connected to people through what we're doing.

What a great report card for evaluating ourselves:

*  Am I having fun with my trading?
*  Am I learning new and meaningful things in my trading?
*  Am I energized by my trading processes?
*  Am I connecting with the right people in my trading and do we make each other better?

Research suggests that we perform best when we are in a positive mindset:  when we are energized and engaged.  Yes, it's great to write journal entries and scan charts and review performance.  But all that can eventually become routine.  How are you going to stay passionate about your trading?

The Three Minute Trading Coach:  How to Shift Your Trading Psychology

Wednesday, May 20, 2020

Training Your Mindset For Success

The most recent Three Minute Trading Coach video demonstrates a simple technique we can employ to return to a focused, mindful state during the heat of trading.  Where we get the greatest value in mastering our trading psychology, however, is not through the occasional use of techniques or reading pieces of advice.  We master our mindset through regular, disciplined training.

What that means is that any technique has to be practiced again and again and again before it truly becomes a part of us.  It could be a golf stroke, a baseball pitch, or a way for a singer to hit a very high note:  only repeated practice makes the new skill part of us.  But once we master the skill, we have it for life.  The key, as Muhammad Ali points out, is having a burning vision of being a champion that is so inspiring and motivating that it drives us through the suffering of day-after-day practice.

In coming videos, I will outline research-backed strategies for practicing ways of improving our mindset.  But the videos won't matter if you don't have that burning desire to "live the rest of your life as a champion."  Goals and practice channel our efforts, but it's vision that drives our efforts to train ourselves for success.

Hell is not just an afterlife.  We can find hell on this earth if we look back at our lives and find ourselves filled with the regret of, "I could have been a champion."  At SMB, very successful traders earn a shirt, which is presented to them in a group happy hour.  At one level, you could say, "WTF, all that work for a shirt??"  But, of course, that misses the point.  The shirt is a step on the path toward living your life as a champion.  The shirt is a tangible goal that focuses our efforts to be our best selves and train, train, train ourselves for success.

What is your "shirt"?  What is your tangible, visionary goal that will drive tomorrow morning's practice?


Sunday, May 17, 2020

The Key To Successful Trading Psychology

We generally think of the sleep and waking states as binary.  We are either asleep or we are awake.  A very important recognition, reflected in the recent Forbes article, is that sleep and waking are a continuum.  Much of the time, we are not fully awake and we are not fast asleep.  Our bodies are awake and we talk and act and trade, but we are not self-aware. We can drift from thought to thought, habit to habit, routine to routine quite mechanically, seemingly awake but not awakened.

A paradox in trading is that we need routines and processes to trade with consistency, but this same immersion in routine can leave us lacking self-awareness.  Most of us have had the experience of making poor trades and then, at the end of the day, wondering, "How could I have done that?!"  Quite literally, "I" did not do that.  It was "me" reacting.

Without self-awareness, we are reactive.  Action requires intention: the "I" must be in the driver's seat.  Trying to get rid of emotion in our trading, in and of itself, will not build our capacity for intentional action.  We can be just as reactive in quiet boredom as frustrated fury.

Experienced trading psychology coaches recognize this:

*  The AlphaMind Podcast, with Mark Randall and Steven Goldstein, emphasizes mindfulness as an important component of performance, facilitating self-management and even pain management.

*  Yvan Byeagee, in his Trading Composure blog, describes a process for mindfulness and its ability to "detach" us "from unfruitful patterns of behavior".  

*  Adam Grimes, on his site, explains that meditation, a key path toward mindfulness, helps us "work toward a state of clarity and...the stopping of random thoughts and influences."

Gary Dayton, speaking with Andrew Swanscott and the Better System Trading podcast about mindfulness in trading, notes that even traders with many years of experience feel emotions related to profits and losses and that suppressing and controlling emotions doesn't work.

What the Forbes article adds to these valuable insights is that the development of our intentionality is enhanced when we operate within an intentional community.  It is not coincidence that serious students of meditation learn within communities headed by a master teacher.  Nor is it coincidence that peak performance, whether from an Olympic athlete or a performing artist, is never developed in a vacuum.  There are always schools, always coaches and mentors, always supervised practice and structured feedback.  Operating within a high performance community keeps us continually mindful of what we need to do to perform at our best.  It is no coincidence that, at trading firms such as SMB Capital, preparing for the day, searching for trade ideas, and reviewing performance is all undertaken in a team context, where being around awake people helps keep each trader from falling asleep at the trading wheel.  

Viewed from this perspective, every single day offers a potential workout of our intentional muscles.  Each day lived purposefully cultivates our capacity for self-direction and true wakeful living.  The key to successful trading psychology is living life purposefully, expanding our capacity to sustain direction and intention.  At root, all bad trading is mindless trading.

Further Reading:


Friday, May 15, 2020

Why We Need A Checkup From The Neck Up

The most recent Three Minute Trading Coach video explains how we can take our emotional temperature and keep ourselves in the calm, focused zone in which we best see market patterns and act upon them. 

Why is this particularly necessary for traders?

Trading appeals to competitive individuals and the competition for trading profits is an ongoing and fast-paced one.  The stronger our competitive drive, the more susceptible we become to frustration.  Frustration occurs when an important goal is blocked:  when we want and need an outcome and something gets in the way of achieving it.  

It is not possible to eliminate frustration altogether, nor is it even desirable.  Frustration can be channeled in such as way as to spur new searches for ways of reaching our goals.  For the experienced trader, frustration often contains information.  The market we're trading right now might not be acting the same as the one last week or last month.  For the self-aware trader, frustration pushes us to re-examine what we're doing and how we're doing it.

But we can't channel frustration if we're unaware of it in real time.  That is why the simple three-item checkup from the neck up described in the video is helpful during trading.  As Ziglar points out, without such a checkup, we are all prone to "stinkin' thinkin'" and "hardening of the attitudes".  We fail in trading when we fail in sustaining an optimal mindset.

When we're in the calm, focused mindset, we want to be completely absorbed in markets.  When we're frustrated, we want to be completely aware of our state so that we can take the necessary breaks and return ourselves to our zone.  In the next video and blog post, I will describe a powerful technique that can quickly restore our optimal trading mindset and provide us with the perspective to learn from our frustration.  With the right, proven techniques, we can truly become our own trading coaches.  And it all starts with sitting back and conducting our checkup from the neck up.

Further Resources:


Tuesday, May 12, 2020

How To Stop Forcing Trades

We often hear the term "overtrading", but what *is* overtrading?  Quite simply, it's trading that no longer has any probabilistic edge.  An example would be a poker player in Vegas who feels a need to bet a chunk of his or her stack despite holding a mediocre hand.  When we overtrade, we trade for psycho-logical reasons, not logical ones.  

A common form of overtrading is "forcing" trades.  That's where we become so convinced about an upcoming opportunity that we don't wait for a sound risk/reward place to enter the market.  Rather, we push too much size and try to predict the next move rather than wait and *identify* when it's occurring.  Forcing trades is a great example of how our egos can get in the way of our making moneywe are so eager to be right that we overplay our hands.

So how do we stop forcing trades?

The important concept to keep in mind is that when we quiet the mind, we also quiet the ego.  As Radical Renewal discusses, our stream of self-talk *is* our ego.  To focus on markets and trade them well, we don't want to be chattering to ourselves positively *or* negatively.  Rather, we want to quiet the chatter and simply "listen" to markets the way we would listen to someone we care about during a conversation.  A good listener doesn't "force" the conversation by constantly jumping in with what he/she wants to say.  The good listener is attuned to the other person and knows what to say and when because of *understanding* that other person.

To stop forcing trades, we need to be quiet enough in our minds that we can sit and sit and sit and let the market make sense to us.  Then we will know what to do.  Meditation, where we learn to sit still, breathe regularly, and focus our minds on a single thing, is actually a training in quiet mind.  Meditation is practice in not forcing; it is training in *not doing*.  Meditation quiets the chatter of self-talk and that keeps our egos our of our trading.

In a coming Three Minute Trading Coach video, I'll demonstrate a simple meditative exercise that can quickly return us to the "zone" where ideas come to us and we no longer need--or want--to force.  It's amazing how much we can see in markets when we simply open our minds.

Further Reading:


Sunday, May 10, 2020

The Three Minute Trading Coach: When Should We Take Trading Breaks?

The Three Minute Trading Coach is a new video series that features specific trading psychology challenges and techniques for mastering those.  Every video will have a practical takeaway idea that can help your trading.  Over time, the videos will form the backbone for an online course in trading psychology, accompanied by a how-to handbook.

Many new traders are flocking to financial markets, no doubt as a response to the work-from-home trend and growing unemployment.  My hope is that these videos and the soon-to-come handbook will help these new traders with their learning curves.

Here's the first installment of The Three Minute Trading Coach:

Thanks for your interest and support--


Thursday, May 07, 2020

How To Adapt To Changing Markets

Show me a successful trader during 2020 and I will show you someone who has adapted well to massive changes in the trading environment.

Above is information you normally don't see on your trading screens.  This is the amount of movement that we are averaging for each unit of volume that we're trading.  The blue bars on the chart represent 50,000 contracts traded in the Standard and Poor's 500 futures (ES) from the start of 2020 to the present.  The red bars are a 20-period average range per bar.  Note that, as the market fell and volume increased, the amount of movement for each unit of volume rose exponentially.  Similarly, as volume has come down recently, we have also seen less movement for each amount of volume.  In short, we've seen a great volatility expansion in 2020 followed by a great volatility collapse.

One of the great misconceptions of trading is that all we need to do is find our edge in markets and then all the rest is psychology and staying in the right mindset.  The reality is that markets are ever-changing and so are the edges in trading them.  The market we saw at the start of the year was very different from the declining market of mid-February through mid-March and that market was very different from the present market.  The breakout trades that worked wonderfully and made people so much money when the VIX was north of 50 are now working far less reliably.  The successful trader understands the market environment and finds edges appropriate to what the market provides here and now.

Much of the frustration traders experience is the result of an inability to adapt.  It is a great example of how poor trading can negatively impact our trading psychology.  The answer to this situation is not merely to calm ourselves; we have to adjust to the trading environment we're in.

In a talk with SMB traders, I shared an interesting statistic:  the correlation between yesterday's market volume in SPY and today's volume is a whopping +.82 since the start of 2018.  Think about that:  volume tells us *who* is in the market.  The odds are good that the players who dominated yesterday's trade will also be dominant today.  If we want to find out what the upcoming market will look like--and the opportunities likely to present themselves--we need to actively study the last few trading sessions.  More specifically, if we want to figure out how to make money in today's market, we need to closely examine what worked for us yesterday and the day before.  Playbooking the most recent days' trades will provide us with the practice in pattern recognition that can prepare us for today.

Of course, if we get a genuine catalyst and volume today expands meaningfully above the most recent volume, we know that new players have entered the market and consider the catalyst to be trade-worthy.  That is important information and often precedes momentum moves higher or lower.  Being able to see the new traders in a market or stock and which way they're leaning can itself provide a meaningful edge.

Further Reading:


Wednesday, May 06, 2020

Cultivating a Mindset of Plenty

A trader recently wrote to me about missing a couple of trading opportunities on the day.  He shrugged those off, found fresh opportunity, and finished with a nicely profitable, low stress day.

How did that happen?

It's no coincidence that this trader looks at an unusual number of stocks and instruments to trade during the day.  He also scans across multiple time frames and programs multiple alerts.  This means he has a vastly expanded opportunity set relative to other traders:  he's mining in more locations and thus is more likely to strike gold.

But there is an important psychological component to this.  Because he has studied so many markets and time frames and opportunities, he comes to trading in a mindset of plenty.  His framework is one of abundance, not scarcity.

If you have a very scarce opportunity set, any missed opportunity is a threat and a source of potential great frustration.

If you have an immense opportunity set, any missed opportunity is no big deal.

In other words, the best thing for your trading psychology is a highly diverse playbook.  There is little reason for frustration and tilt trading if fresh opportunity is around the corner.  When you have multiple ways of making money, you can enter any set of market conditions with a constructive mindset. 

What's your outlook on trading?  On life?  One of abundance and plenty, or one of scarcity?  It doesn't matter how large your account size is:  you'll be happier in a full cabin than an empty castle.

Further Reading:


Monday, May 04, 2020

How Is This Pandemic Making You A Better Person?

I have often written that good traders have two kinds of trades:  one that they profit from and another that they learn from.  In losses, great traders find learning and growth.  The key is managing those losses so that we can ultimately benefit from our learning curves.

Now we have a much more serious crisis on our hands.  Some people I see are frustrated, emotional, and defeated by the prospect of a continuing pandemic.  Others are using the crisis as an opportunity to grow, to do things they normally would never have done.  Sometimes it's by learning new things; sometimes it's by getting closer to family; sometimes it's by finding opportunity in markets despite limited opportunities elsewhere.

Tomorrow I will be speaking with employees at a firm where I work.  I will be making myself available as a psychologist to help them and their families survive and even thrive during the pandemic.  I won't bill the company for these visits.  I won't invoice the families.  It's what I have to do.

I look at myself staying safe at home and then I look at the many nurses, doctors, and other healthcare staff that put themselves on the line every day.  It makes me ashamed.  It makes me want to man up and put myself out there in some fashion to make this time better for others.  

So my schedule will get busier.  I'll get less sleep and more calls.  I'll get over it: there are people with real problems, real suffering out there.  This pandemic has led me to reach out to people in ways I never would have before.  I can't control how this will play out ultimately, but I can make sure it makes me a better person.  The virus only wins if it kills our souls as well as our bodies.

How is this pandemic making you a better person?  The goal is to emerge from this difficult period as much better versions of ourselves.  Here are five ways people I'm working with are using this time creatively and constructively:

1)  Trying out a new, different charting platform that gives access to new market information and studying new and different edges in the market.  Imagine you and three other like-minded traders doing this on your own, each coming up with new market approaches and perspectives and sharing those within your group.  

2)  Taking classes and learning totally new things.  So many sources of online learning out there:  we can literally go back to school and become part of a passionate learning community.  Couples can take a class together and share in the learning:  how about a cooking class or an exercise class?  How about learning a new language and preparing for a future trip overseas?

3)  Giving back.  So many religious communities and community groups are holding events and meetings online.  Some of these are social; some are focused on improving the community.  Many communities are focusing efforts on helping out vulnerable populations:  what can you contribute?

4)  Building your fitness.  Most of us have time to be able to take the jogs, do the stretching, lift weights, and raise our level of fitness.  What a great way to make sure that staying-in-place is not a time of passivity and deterioration!  And how about cognitive exercise??  I've returned to new biofeedback routines to improve my concentration.

5)  Building your relationships.  It could be little things, such as the new foreign films Margie and I watch in the evening, or fun projects like a family-wide Mother's Day call coming up.  It could also be larger things, like improving your teamwork at home; doing new and fun things with your children; or using Zoom time to spend quality time with friends.  Social distancing may continue for a while, but we can stay connected and actually deepen our relationships.  

It all starts with a vision:  Creating an image of the better person you'll become at the end of all this!

Further Reading:


Sunday, May 03, 2020

How To Overcome Trading On Tilt

Are you the pilot of your trading, or do markets take you for a ride?

When we go on tilt, we are no longer the pilot.  Our emotions--particularly frustration--get the better of us.  That leads to decisions and actions that we would *never* take in our normal mindset.

That is a key recognition:  Being on tilt--trading out of control--is triggered by our emotional state.  We cannot overcome this problem simply by telling ourselves to be more disciplined, etc.  We need to be able to reprogram our emotional states in real time.

Here's how to do that:

As a first step, please review the most recent Forbes article.  It describes exactly how we can make lasting changes in our thoughts, emotions, and actions, according to psychological research.  What I will explain below will make a lot more sense if you have the background from that article.

To change your state of frustration--or prevent such a state from occurring in the first place--you need to enter a state of mind and body that is incompatible with frustration

So what we do, beginning with practice outside of trading hours, is rehearse a simple relaxation strategy in which we close our eyes, sit very still, listen to peaceful and relaxing music, and slow down and deepen our breathing.  The idea is to focus entirely on the music and breathe slowly and deeply for at least 5 to 10 minutes--until you get yourself into a focused zone.  In the beginning, it may take more time than that.  No problem.  As you practice this exercise (I recommend practice at least twice daily), you will become quite good at getting into your zone.  Eventually, it will only take a matter of seconds for you to close your eyes, adjust your breathing, imagine the music and get yourself calm.

It takes practice, but is very doable.

Once you've gotten the knack of entering your zone, you then want to take a step-by-step, gradual approach to change as the article describes.  You do this by returning to your relaxation exercise, but now while imagining very mildly frustrating trading events.  Perhaps you're imagining getting a price that's not so good or getting out of a portion of your trade a bit too soon.  While you vividly imagine these mildly frustrating events, you're keeping yourself calm and focused with the breathing and the music in the background.  You keep doing the relaxation work until the frustrating scenarios no longer lead to any sense of frustration.  Again, this takes some repetition.

Once you've extinguished the frustration for the mild scenarios, you then create more moderately frustrating ones to rehearse in the same way.  Perhaps you'll imagine missing an opportunity or entering your position incorrectly and losing some money.  Again, you visualize such scenarios vividly while doing your deep breathing and while immersing yourself in the music.  You repeat this until these moderately frustrating situations no longer affect you.

Finally, you'll continue the mental rehearsals but now using very frustrating situations to walk yourself through while listening to the music and keeping your breathing deep and slow.  For example, you might imagine getting stopped out on the day or having a winning trade reverse against you and cause a loss.  Just as before, you keep yourself in your zone while vividly imagining the frustrating scenarios until they no longer evoke any upset.

At that point, you can take your exercises to real time.  While you are trading, you play the music in the background.  The music has been associated with your calm, focused state through the process of anchoring, as explained in the articleOnce you start feeling even a bit frustrated during the trading day, you immediately close your eyes briefly and do your deep breathing.  That places you in a state of mind and body that is incompatible with frustration and the tilt that results.  

For a different exercise that can be used in a similar reprogramming way using your visual field rather than the breathing, check out this article, which was brought to my attention by the ever-alert Tadas Viskanta of Abnormal Returns.  In this case, the visual shift helps place us in a state incompatible with tilt.   

Quite literally, you've retrained your emotional response patterns so that you don't go on tilt when frustrating events occur (as they do for all of us!).

It's all about the practice, repetition, and positive habit-building that make you the pilot and put you in control.  All the writing in journals and reading of superficial tweets about discipline and planning will not reprogram your mind and body.  We can change, but not by doing the same old things and staying locked in our same old states of mind and body!

Further Reading:


Thursday, April 30, 2020

How To Size Up Your Trading

An issue I hear quite often from developing traders is how to size up their trading.  They've traded in simulation mode and then live with small size and they are seeing promising results.  Now is the time to make the most of their market edges.  What is the best way to do that?

Allow me to offer an analogy:

I work out each morning and include a run on the treadmill as part of the workout.  The treadmill is programmable for level of incline and speed, and it monitors heart rate in real time.  That means that I can set the incline and speed to keep myself in a target heart rate zone for best cardiac fitness.  

This morning I ran at my recent levels of incline and speed and could no longer get myself to the target heart rate.  I had to increase the speed to a new level.  

Toward the end of my run, I gradually decrease the incline and decrease the speed and wind down.  Today, when I moved my speed lower at the latter part of my run, my lower speed was my former peak speed.  Surprisingly, the level that had been my peak now felt like winding down.

Sizing in our trading is like the speed setting on the treadmill.  We have to set our size to challenge ourselves, but not overwhelm.  At some point, we adapt to a given sizing and it no longer challenges us.  That is when we can step up on the trading treadmill.  When we move higher in increments and adapt to a new level of challenge, that creates a staircase of improvement.  Step higher, adapt, step higher...what was the higher level now becomes a step down.  That's what builds our resilience and trading fitness.

Notice that markets themselves become more and less volatile and impact the movement for a given level of sizing.  Our sizing needs to adapt to the volatility of what we're trading by making sure we're risking similar amounts in different environments.  That's the incline of the treadmill.  I don't run at the same speed at a very steep incline as at no incline at all.  Markets change incline for us and our size has to take that into account.  By risking a similar amount per trade across markets and stocks, we can ensure that we get the right workout and don't overwhelm ourselves or remain stagnant.

Your bumps in sizing, like your progress on a treadmill, should build your sense of confidence and control.  When you no longer break a sweat at one level, you know it's time to move to the next.  And if a new level is destabilizing emotionally, you know that you need to readjust your treadmill setting lower.

Further Reading:


Monday, April 27, 2020

How Can You Identify A Trend Day In The Stock Market?

A topic that TraderFeed has covered in the past is identifying trend days in the market.  (For example, see here and here and here).  These do not happen often, but when they do, they can be tremendously profitable.  Today's market was a great example of an upside trend day, and I thought I'd share a couple of tells that helped me identify the trend in the first hour of trade.

The upside trend day typically begins with significant strength.  One tell, which Market Tells has noted and backtested, is a high level of NYSE TICK early in the session.  Related to that is breadth strength in the market early in the day's trade.  Above you can see a chart of the intraday advance/decline ratio for the Standard and Poor's 500 stocks for today's market.  (Chart from Sierra Chart).  Note that the ratio started at over 7.0 in the first five minutes of trading and, after an early dip that still left the ratio high, expanded even further to over 9.0.  In other words, practically everything in the SPX universe was going up.  That was a great sign that sellers were just not in the market.

But here's another worthwhile tell below:

This is the same advance-decline ratio for the day session, but this time it's constructed with the Russell 2000 stocks.  (Chart from Sierra Chart).  Observe that we opened the day with a ratio of over 5.0 and quickly moved higher on the day.  In other words, among small caps, we started strong and got even stronger over time.

So what does that tell us?  The big caps were strong and getting stronger and the small caps were strong and getting stronger.  Nothing was weak!  That tells us we can literally be in dip buying mode all day and make money.  Or we can buy early weakness and hold through the afternoon.  Or we can hold a piece of a position through the day and buy dips with added pieces along the way.

And, yes, the NYSE TICK was positive through the day and the TICK specific to the Russell stocks was positive as well.  Quite simply, when we get *broad* strength on any time frame that is a favorable condition for upside momentum.  On the day time frame that creates trend days--and great opportunities for riding momentum for profits.  This is a great example of the principle that edges in markets come from looking at information that others are not looking at and seeing it in ways that others can't perceive.

Further Reading:


Saturday, April 25, 2020

Why Volatility Makes Such A Difference In Your Trading

Many traders have what Taleb would call fragile trading.  Their returns are vulnerable to changes in market volatility.  Interestingly, most traders focus on price and price direction.  They don't adapt their trading to market volatility, which impacts the momentum of price movement.

Let's take a close look at that.

Imagine a market with very great volatility, such as we had during the stretch between February and March this year.  Then imagine a market with very low volatility, such as we had at the start of 2018.  In that first week of 2018, VIX averaged between 9 and 10.  In the second week of March, 2020, the VIX average was in the mid 50s.  That tells us that options are anticipating more price movement going forward.  

During that first week of 2018, SPY volume averaged between 80 and 90 million shares.  SPY volume during the second week of March, 2020 averaged over 300 million shares traded.  The average daily true range in the first week of 2018 (actual, realized movement; not what options are pricing in) was around .70%.  The average daily true range in that first week of March, 2020 was about 4.50%.  Notice that volume expanded by 3 to 4 times between these periods, but actual movement expanded more than 6 times.  As markets become more and less volatile, each unit of volume gives us more or less movement.

For instance, we saw each unit of 50,000 contracts in the ES futures provide a range of a little more that 1 percent in that first week of March, 2020.  During the second week of November, 2019, when we averaged a VIX a little over 12, the average range for the 50,000 volume bars was under .15%!

Volatile markets tend to be busier markets, and each unit of busyness adds exponentially more price movement.  So when markets become less volatile, price movement *really* collapses, and when they become more volatile, price movement *really* expands.  Since the start of 2018, the correlation between daily SPY volume and daily average true range in SPY has been an incredible .87.  The important takeaway is:  Who is in the market determines how much the market moves.  This dynamic occurs at every time frame.

In busier markets, moves extend.  The trader can enter on strength or weakness and, on average, that strength or weakness will continue.  This is why momentum traders do so well in higher volatility environments.  In slower markets, those momo traders suffer.  They enter on strength or weakness and moves *don't* extend; they reverse.  The skilled trader in low volatility/low volume markets is getting long or short by fading selling and buying action that is drying up.  Quite simply, the trader could see the exact same price pattern or have the same idea in quiet vs. busier markets and would have to enter those trades differently and manage the positions differently.

(If you get the idea above, you can see why traditional patterns in technical analysis have such mixed results in objective backtests:  they play out differently in different markets.)  

Now you can see why traders often become frustrated and lose discipline when market conditions change.  Doing the same thing in different conditions brings different results.  If you're boxing against an aggressive opponent with poor defense you'll use different tactics than if you're fighting a counterpuncher who covers up well.  Good traders have playbooks for their best trades, as Mike Bellafiore has stressed.  What we see among great traders is different playbooks for different market conditions.  That is a big part of what makes them anti-fragile.

Further Reading:


Thursday, April 23, 2020

Your Trading Edge Is *Inside* The Bars On Your Chart

In the last post, I explained where true short-term trading edges in the market can be found.  I used as an example the Delta indicator that tracks the proportion of transactions that occur at the market offer price versus the amount of volume that is hitting bids.  I also included a link in that post that directs you to software platforms where you can get the Delta data.

In this post, we'll look at a somewhat similar indicator, the NYSE TICK.  It is found on many charting platforms as $TICK.  It tracks the number of stocks at any time trading on upticks versus trading on downticks.  The chart above is from Sierra Chart, and I've used $TICK on e-Signal and other platforms that carry a full feed from NYSE.  I like Sierra, because of the availability of TICK calculations specific to Standard and Poor's 500 stocks, Russell 2000 stocks, etc.  

The important point is that both Delta and TICK are calculated transaction by transaction.  As Trevor Harnett has observed, they are telling you what is happening inside the market bars.  That is where important edges can be found.

There are many sources of edge to be found in the TICK numbers.  As noted above, what they tell us is, at every moment, how many stocks are trading on upticks minus the number trading on downticks.  That tells us, in real time, where we have buying pressure and selling pressure, and it tells us if that buying or selling pressure is increasing or decreasing.  We can also use a moving average of TICK values to serve as a short-term overbought/oversold measure, and we can use a cumulative total of TICK values to track the trend of buying or selling and identify bigger picture trading opportunities.

Above is a snapshot from yesterday's market.  The top panel is the NYSE TICK on a one-minute basis.  I drew a yellow horizontal line at the zero level.  The green line going through the NYSE TICK bars is a 15 period exponential moving average of TICK values.  Where I've drawn yellow arrows are spots where price of SPY (bottom panel) has made a fresh high or low, but TICK values have dried up.  That has led to short-term price reversals.  Those TICK divergences can mark useful trading opportunities.  Extremes of TICK can also alert us to the possibility of trend days in the market.  Important changes in market direction are often accompanied by shifts in the distribution of NYSE TICK values.

It's the transaction-by-transaction data that reveal the psychology/sentiment of other traders in the market.  If we look at those data in real time, we can see sentiment shifting and quickly jump on board those moves.  Studying Delta and TICK patterns day by day gives you a sense of pattern recognition to trade the market's psychology with deeper insight and greater confidence.

Further Reading:


Tuesday, April 21, 2020

Where To Look For True Edges In The Market

In yesterday's webinar, we took a look at how new and different information can help us identify turning points in the market.  Specifically, we saw that tracking the order book over time to see where large buyers and sellers are getting into and out of the market helps us see significant price levels that don't show up on plain vanilla charts.

Above is my main trading screen (Sierra Chart platform; here is a useful post that links to all the major charting programs that provide the information discussed below) and how the market was looking a little while ago this morning.  I went short the market based on what we see with the purple arrows above, and that has been a good trade.  As I emphasized in the webinar, many of the short-term edges we're seeing in the market are spots where buyers can't move the market higher or sellers can't move the index lower.  Those participants are trapped and have to cover their positions, fueling a move in the opposite direction.  (See my post on navigating market fear and greed in this market for more context).

So let's break it down and see how we can find edges in the psychology of other market participants.

The top panel is the ES futures, where each bar represents 80,000 contracts traded.  As I've emphasized in the past, such event bars standardize our charts, as we draw fewer bars at slow times and more when trade picks up.  I find that technical indicators in general--and ones that track cycles specifically--work better with such event charts.

The green line through the ES futures chart is simply a 40-period exponential moving average line.  It provides context to tell me if the market is stretched to the upside or downside and whether the trend is rising, falling, flat, etc.  

The middle panel represents the proportion of volume traded in each bar that transacts at the market's offer price (green) vs. the market's bid price (red).  This Delta measure tells you, transaction by transaction, if buyers are more aggressive (lots of green) or if sellers are more aggressive (lots of red).  The bottom panel takes a moving average of the Delta data. 

What we're looking at are occasions where the aggressive buyers can no longer move the market to new highs.  As we stressed in the webinar, this is because there are many (often hidden) orders in the market absorbing the buying flows.  Note where I placed the purple arrows:  those were telling me that buyers were becoming exhausted, could not move the market higher, and eventually would be trapped.  That, indeed has played out.

Finally, note the yellow arrows at the side, where we have a histogram.  The histogram captures the amount of volume transacted at each market price, so that we can actually visualize where buyers and sellers are most active (and the cards they hold in their hand).  This information, similar to what we see in Market Profile displays, identifies where value exists in any market and helps you visualize if we're breaking out of a value range or staying rangebound.  Note how we broke out of the top value region (top yellow arrow) and have come down to test the lower value area (bottom yellow arrow).  This can be very helpful in framing both entries (breakouts from the value areas) and targets.

What I find most helpful is that all of this is on one screen.  If I want to look at shorter or longer term perspectives, I simply create a new bar size and all the indicators refresh.  

In the webinar, Scott made a good point:  Many times our frustration in markets comes from not understanding what is going on and why markets are moving.  My experience, having worked with many successful traders in proprietary trading firms and hedge funds, is that simple charts are not enough.  We need to see beneath price and volume to understand the intentions and psychology of large market participants.  That is where we can find true edges in the market.

Further Reading:


Sunday, April 19, 2020

The Biggest Mistake New Traders Will Make

We're hearing about record numbers of new traders opening accounts at brokerage firms lately in the U.S. and in Asia.  Why?  Commissions have dropped to near zero and trading from home suddenly looks appealing during a period of social distancing and increased unemployment.

But the risk is that these new traders will start out by trading, not by learning markets.  Enticed by self-appointed gurus, teachers, and coaches who offer little more than stale chart patterns and technical indicator readings as "edges", this new generation of traders is likely to take risks with their capital well before they have truly understood and mastered the markets and strategies they trade.

Frustrated with their failures, many will turn to trading psychology for answers.  But the answer is not just in psychology.  The answer is that you have to learn the game before you can master the game.  No one starts out as a musician by trying out for concerts at Carnegie Hall, and no one takes up a sport and expects to be in the Olympics any time soon.  When we're trading, we're trading against career professionals and finely honed algorithmic systems.  When you place a trade, you're stepping into the big leagues.

So here's my advice to new traders:  If you get a sales pitch promising big trading success without a rigorous learning curve, know that you're being mislead.  Those making the pitch are selling hope, not trading expertise.  The biggest mistake you can make as a new trader is to take short cuts in your learning process.  How many years of playing golf does it take before someone makes the PGA tour?  How many years of piano lessons precede a solo with a recognized orchestra?  How many chess games are played and reviewed before someone reaches master and grandmaster status and wins tournaments?  

I recently mentioned that I will be posting how-to videos and content on proven psychological methods for peak performance.  On a new website, I will also be laying out a curricular process that will help traders to learn markets from the ground up, drawing upon the actual learning curves of successful traders.  No fees, no sales pitches, no promotions.  If we can all do a little giving back during this time of health crisis, we will all be richer for our efforts.  In sharing, we receive.  #EachOneTeachOne

Further Reading: