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:

How to Identify Trend Days in the Market

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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:

TraderFeed Index and Home Page

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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:

Tracking Relative Volatility

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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:

After the Market Rally, What Comes Next?

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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:

TraderFeed Home Page and Index

My Series of Posts on How to Trade

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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:

Mastering Trading Psychology

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Can We Master Trading Psychology By Learning the Techniques of Psychotherapy?

Rollo May had it exactly right:  All psychological problems are ultimately limitations on our free will.  We seek help when our patterns of thought, feeling, and action control us.  The role of psychology is to help us control those patterns, so that we can freely pursue our deepest values and goals.

There is a rich research literature on change techniques in therapy and their effectiveness.  My colleagues at SUNY Upstate Medical University in Syracuse and I have summarized much of this research in the third edition of our textbook for the American Psychiatric Association.  The evidence-based techniques to master stress/anxiety, mood problems, and impulsive behavior patterns are what I teach second year medical residents in the psychiatry department.  Soon, I'll be participating in an overview course for fourth year medical students to help them help others.  The techniques I'll be demonstrating are the same ones I've used for years directing a student counseling service and working for years with traders.

The sad truth is that the majority of what passes for "trading psychology" is nothing more than practical advice.  I find little evidence that those dispensing the advice have actually consulted the extensive research literature on change methods or contributed to that body of knowledge.  Traders deserve more.

For that reason, I will be working with videographer Eli Francoeur to put out a series of "how-to" videos teaching traders the very same skills I'm teaching in Syracuse.  What's more, we will show traders how to integrate those skills into their trading processes.  A little while back, I offered a glimpse of Trading Psychology 2.0...let's use this period of working from home to take a look at Version 3!

Be Well,

Brett

Why Relative Performance Is A Key To This Market

Most of us look at a particular index, stock, or asset and try to figure out from charts whether it is weak or strong.  In the current market, it is also helpful to look at relative performance:  what is relatively strong to an overall market or asset class and what is relatively weak.  Many good trades can come from picking out the winners and losers in the recent COVID outbreak.  That is precisely what money managers I work with are doing:  going long what benefits from the current environment and short what gets hurt.  Here are some illustrations:

Technology stocks (XLK) have bounced quite nicely from the market lows, reflecting favorable outlooks for an online world during a period of social distancing.  For example, we recently saw new 52-week highs for Amazon.

Regional banks (KRE) on the other hand are not that far off their lows, reflecting concerns about commercial and real estate loans that may not be repaid--and the dwindling market for new loans.

Gold (GLD) has been soaring from recent lows, fulfilling its traditional role as a hedge to fiat currencies during a period of wildly expanding central bank balance sheets.

Oil (USO) has suffered a double whammy of a price war and greatly reduced demand, given the shutdown of much travel.

It is in the shifting of these themes that we will see evolving opportunity in markets.  If the experts I'm following are correct, periods of social distancing will be with us for a while.  That is going to create new opportunity sets and shut down others.  As I recently noted, that is likely to lead to a promising trading environment.

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Have We Put In A Bottom?

To a person, the smartest traders I know acknowledge the uncertainty of the current market situation.  That is because the fate of economies and the fate of markets are so intertwined with the fate of the coronavirus outbreak and the ultimate policy responses we make going forward.  Tyler Cowen notes the large confidence bands for forecasts in epidemiology due to limited data and the simple fact that the virus truly is novel.  His base case, like that of many informed writers I follow, is that we could have rolling periods of social distancing and COVID flare ups until a vaccine is developed, tested, manufactured, and delivered.  The unevenness of social distancing efforts so far suggest different disease curves for different locales.

We have seen a record rally in recent days, with over 90% of stocks closing on Thursday above their 5, 10, and 20-day moving averages.  (Data from Index Indicators). That not only means the market is strong, but that institutions are buying up pretty much everything.  That is not a response that suggests uncertainty!

I spent a chunk of the weekend studying what happens in the market when we get very broad rallies following very broad selloffs.  Please check out the recent Forbes article for all the details.  One of my major conclusions from this exploration of market history was that such volatile downs and ups lead to better trading environments than investment environments.  Even in recent times (since 2006), the large, broad bounces (in 2011 and in 2009) were ultimately followed by lower price lows.  Further back in history, in the bear markets of 1972-1974 and the 1930s, the ultimate price lows were quite a bit lower than the points of initial broad buying.  During such periods, volatility was more persistent than price direction.

So have we put in a bottom?  The great majority of instances of broad bounces since 2006 were higher one year later, often with meaningful swings along the way.  In the previous, larger bear markets, assuming that the first broad bounce meant we had put in a bottom would have been hazardous to one's wealth.  The bottom line is that we don't know the ultimate course of the virus, and we don't know the effectiveness of our responses to the viral situation going forward.  What we can safely forecast is that there will be waves of optimism and pessimism along the way, with extremes of buying and selling, that will create meaningful trading opportunity.  As Mike Bellafiore and I noted in our recent presentation for MoneyShow, this can be a historic period of opportunity for rational traders able to flexibly adjust their forecasts as data emerge and adapt their trading accordingly.

Further Reading

What Market History Tells Us About The Recent Market Rally

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How Are You Going To Grow Through This Crisis?

The Radical Renewal blog book (free download here) that discusses the spirituality of trading covers an important topic relevant to our trading psychology:  how we deal with adversity.  In trading, we are guaranteed that we will have losing trades and periods of drawdown.  We will always miss some trades, always get some ideas wrong.  How we process our setbacks shapes how we move forward--or don't.

So how are we processing this shocking setback in health, this setback in the economy, this setback to our lifestyles?  How are we adapting to a life largely spent in our homes?

A theme in Radical Renewal is viewing setbacks as opportunities for growth.  If life's challenges occur for a reason, we can embrace our setbacks and figure out how to grow through them.  So, in that spirit, how are we growing through the current crisis?

How are you growing your trading?

How are you growing your teamwork?

How are you making other traders better?

In the spirit of Project Impact, how are we using this period as an opportunity to give to others?

How are you using this period to get yourself in better physical condition?

How are you using this period to build your family and romantic relationships?  

How are you using this period to learn new skills?

In short, once this crisis passes, how will we be better?  How well will we have used this time as opportunity?

What a great exercise:  Developing a trading plan and a personal plan for coming out of this crisis stronger and better.  Don't. Stand. Still.

A Rabbi from Jewish history was afflicted with many ailments and suffered greatly.  When people asked about his challenges, his response was "Gam Zu Le Tovah":  This, too, is for the good.  Yes, there is loss and there is setback.  If we can use this time to keep ourselves safe, keep ourselves healthy, and keep ourselves growing, we will be able to look at this period as also being for the good.

Be well!

Brett

Real Time Market Sentiment And Why It Matters

Just thought I'd share this screen shot with you of the market this morning.  Once again we see the pattern that I had shared earlier in the blog:  selling pressure (amount of volume transacted at the market bid price for ES; middle panel, red bars) versus buying pressure (amount of volume transacted at the market offer price; green bars) and how that selling pressure has been unable to move price to new lows (arrows).  (Data from Sierra Chart).  This has set up on multiple scales (shorter and longer term) and has been a reliable pattern during the recent market volatility.  I'll be discussing this in greater detail during my Traders4ACause presentation with Mike Bellafiore this coming Saturday at 9 AM Eastern.  

The location of where volume is transacted tells us something about real time market sentiment (urgency of buying and selling).  The specific prices where we see strong sentiment tells us something about price levels that traders find important.  In my quant work, I find the correlation between volume at offer vs. bid to be correlated with price change by approximately .41.  That tells us that these are not different versions of the same variable, though they are clearly related.  I've found that, once we take price change out of the sentiment equation, the volume at bid/offer adds predictive value to trading models.  In short, real time sentiment matters because it captures the intentions of larger market participants.

It's yet another example of how looking at market information in new ways can help us achieve fresh insights.  If we only look at the things others look at, we'll see what they see.  That's not a formula for unique and exceptional returns.

Further Reading:

A Pattern Worth Tracking In This Market

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How To Trade With Discipline

Here are a few key trading psychology ideas:

*  It is impossible to trade with focus and discipline if we are in states of high emotional arousal.

*  It is impossible to trade with focus and discipline if we are in states of upset and distress.

*  It is impossible to trade with focus and discipline if we are in states of high distraction.

*  It is impossible to trade with focus and discipline if we are fatigued or burned out.

All the above tend to occur when we focus on profits and losses and become emotionally attached to those.  As the Radical Renewal book points out, what we become attached to owns us.  The more we *need* P/L, the more our profits and losses control us.

In every performance domain, developing performers have to focus on process and execution before they worry about winning or losing, doing well or poorly.  The concert pianist has to be focused on the music, not the audience; the golfer has to be focused on the mechanics of the swing; the pitcher has to focus on the batter, not the scoreboard.  

If we want to trade with discipline, we have to be fully focused on the present and doing the right things.  A process mindset doesn't look backward at recent profits and losses; a process mindset doesn't look forward at desired wins or feared losses.  A process mindset is here and now, with full focus.  This is why meditation can be so helpful to traders.  

Imagine being on a bomb squad, and you have to defuse a device that is set to go off in a matter of minutes.  You would calm yourself; you would focus yourself; you would take the time to see where the wires lead and how the bomb is constructed; you would figure out which wires to disconnect when; and then you would slowly, carefully disconnect each connection.  It's all a process.  It's all rule-based, where the rules have become so rehearsed and practiced that they become second nature.

That is how to trade with discipline.

Further Reading:

Radical Renewal - Free Blog Book on the Spirituality of Trading

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Tracking Breadth Spreads In The Stock Market

In the recent post, I mentioned how traders who are successful in the current environment have been flexible in their approach to trading and focused on opportunity, not just risk.  Those traders are highly involved in markets, but still taking the time to review their trading, identify what is working and what is not, and research areas of fresh opportunity.  In the volatile environment, they are not just coping; they are innovating.  

Above is something fresh I've been looking at, which I call breadth spreads.  The chart represents the topping of the SPX from the beginning of December, 2019 through the February top.  The red line represents the percentage of stocks above their 100-day moving average in the Standard and Poor's 600 Index of small cap companies minus the percentage of stocks above their 100-day moving average in the Standard and Poor's 500 Index of large caps.  (Data from Index Indicators).   Notice the steadily weakening breadth spread as the large cap index made its all-time highs.  Well before the market tanked, small caps relative to large caps were selling off.  

This is something I'll be researching going forward.  Do breadth spreads of shorter-term moving averages precede shorter-term moves in the market?  Do breadth spreads of other indexes precede important market turning points?  This strikes me as a promising line of inquiry; I'll update findings on the blog.

Meanwhile, FWIW, we're seeing short-term negative breadth spreads show up between small and large cap indexes in the most recent market action.  Let's see how that plays out--

Note:  4/5/20 - I went back to January, 2015 (start of my dataset) and divided the breadth spread into quartiles.  When the spread was highest between the percentage of SP600 and SP500 stocks above their moving averages on a five-day basis (highest quartile), the next five days in SP600 averaged a gain of +.34% and the next five days in SP500 averaged a gain of +.40%.  When the spread was lowest on the five-day basis (lowest quartile), the next five days in SP600 and SP500 respectively were -.065% and -.037%.  

Further Reading:

Brett's Forbes Article Archive

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Three Things I'm Seeing Among Currently Profitable Traders

I'm seeing lots of commonalities among traders who had a very profitable March during volatile markets and uncertain times.  Here are three of the most important:

1)  Relying on Others - I recently wrote about the importance of information flows in trading.  The successful traders are connected to carefully selected information sources and continually updating their views on what they are trading.  Lots of things have been moving quite a bit, and there has been constant news flow.  Traders well connected to peers they trust and respect are adapting quicker, and their teamwork helps sustain a positive attitude.

2)  Flexible, Flexible, Flexible - Yes, the successful traders may have bigger picture views, but they are trading actively and tactically with those in mind.  Almost to a person, the successful traders have reduced holding periods and traded selectively, where they see solid risk/reward.  As the SMB site notes, they have made a quick adaptation to the higher volatility environment, with specific adjustments each day.  They have focused their trading on what they know and do best, and they are actively minimizing distractions.

3)  Mindset - The successful traders view the current markets through the lens of opportunity; the not-so-successful traders are viewing markets through the lens of risk.  To be sure, the successful traders are doing a good job of risk management, partly because of point number two above.  But they approach the day with enthusiasm and recognize that they are living through historic times of opportunity.  This helps them deal with setbacks, because they know that other opportunities will be presenting themselves.

Active, interactive, engaged, constructive:  These are some of the qualities I'm seeing among traders who have been doing quite well in the recent market environment.

Further Reading:

TraderFeed Home Page and Links to Articles, Podcasts

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Trading Process: Information Flow Versus Idea Flow

We often hear about the importance of following a trading process.  This is helpful, but not quite accurate.  Good trading is like good manufacturing; it consists of many processes.  The superior trader is a manager:  one who weaves distinct processes into a seamless whole.  Much of the work of improving our trading comes from examining our intellectual assembly lines and figuring out where we might be experiencing glitches.

One topic I've recently discussed with portfolio management teams is the distinction between information flow and idea flow.  Information flow is the real time processing of new inputs, whether those be breaking news, data releases, or conversations with knowledgeable peers.  Information flow also embraces real time data as to how various markets are moving and what buyers and sellers appear to be doing in those markets.  An important component of team success is high quality information flow from all members.  Having more eyes and ears on more things allows traders to expand their bandwidth and respond more quickly to shifting market conditions.  When teams fall down, it is often because of inadequate information flow or unfiltered flow.  Not all data qualify as information.

Separate from information flow is idea flow.  Trading ideas, as I've noted elsewhere, are the result of a reflective, creative process.  We assemble pieces of information into a larger picture that provides us with a broader perspective on risk/reward.  For example, I may notice that traders are lifting offers among consumer staples stocks but not consumer discretionary ones.  That information could lead me to examine the relative yields of those two groups and the earnings guidance that companies in the two groups are providing.  Out of these investigations, I could develop a thesis that investors are seeking safety, stability, and yield in an uncertain world of zero interest rates.  That could inform my stock picking and, indeed, could have implications for trades in other asset classes.

Observe how different these processes are.  Information flow benefits from broad, fast processing.  Idea flow benefits from deeper, slower reflection.  Good trading requires fast thinking, to use Kahneman's framework, and it requires deeper processing.  The information flow helps us manage positions in real time.  The idea flow provides the source of these ideas.  An important element of teamwork--whether it's individual traders connecting with peers online (I've been sitting in during the online team chats/meetings at SMB, for example) or actual portfolio management teams--is separately evaluating the quality of information flow and idea flow and making sure that we are never relying on stale thinking.

Further Reading:

The Role of Creative Insight in Trading Success

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