Two Hallmarks Of Quality Trading

 

I recently wrote an important article on the topic of how the ways in which we trade impact our psychology.  We commonly assume that working on our heads will improve our trading.  Less often do we recognize that the best way to maintain a positive trading psychology is to trade well.

What does it mean to trade well?  Here are two key hallmarks of quality trading:

1)  Quality trading is planned, not reactive - Planned trading means that we begin with an idea that we have researched and then identify good risk/reward points for participating in the idea and proper sizing for the trades, so that we can easily survive being wrong.  Planning means that we clearly identify what needs to happen for us to exit and/or modify our positions.  When we overtrade or take positions out of a fear of missing moves, those trades are reactive.  In reactive trading, we make decisions for psycho-logical reasons, not logical ones.

2)  Quality trading is open-minded, not biased - Sometimes we see traders who trade with a fixed idea and/or a persistent directional bias.  They look for evidence to support their views and discount evidence that might lead them to question their positions (confirmation bias).  Open-minded trading  means that we can express ideas in multiple ways and that we can trade multiple, independent ideas.  We are not wedded to one side of the market or one trade idea.

A very simple way to evaluate our trading is to rate each trade on the two criteria above and sum up those ratings.  If we're developing as traders, we will become more planned and more open-minded in what we do.  We will develop processes that keep us planned and open-minded.  The goal is to trade well, not to simply make money.  If we trade well, we inevitably maintain a focused mindset and place ourselves in the best possible position to succeed.

Further Reading:

How We Trade Impacts Our Psychology

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Awareness and Acceptance in Trading

 

I had two interesting experiences recently.  The first occurred on Friday morning.  The stock market was short-term oversold and displaying early signs of strength before the NY open.  Prior to the decline, we had been seeing unusually low volume and volatility.  I had a string of losing trades during that period.  Each time I recognized the poor environment for what it was and limited my losses.  That awareness, I've found, has been essential in managing risk and maintaining a sound trading psychology.  It was not a great environment for my trading, and that accepting that allowed me to take the losses with equanimity.  Once the market showed strength on Friday, my research suggested the possibility of a short-covering rally.  I bought several positions early on and then other research kicked in shortly after the open suggesting that we could see a trend day.  Now the awareness was of a positive opportunity set.  I added to the positions and the resulting gains more than erased the prior losses.  It was awareness and acceptance of the environment--and the rapid updating of these--that allowed for good decision making.

The second conversation was with a trader who insisted that his goal for trading was to maintain a consistent high level of calm and confidence.  He wanted to be positive in his outlook (and aggressive in his risk-taking) no matter what was occurring in his trading and in markets.  I explained to him that feelings of doubt and uncertainty can represent information and are not necessarily things to brush aside.  My recent market experience was a case in point.  It was the loss of "conviction" that helped me limit losses and stand aside until opportunity presented itself.  Open-mindedness was the key from my perspective, not optimism.  The trader was surprised by what I had to say.  He had not considered that a state of doubt and uncertainty could be a wonderful guide for actions (and inaction!) in markets.

Awareness of the environment we're in and acceptance of the opportunity sets in front of us is essential to making sound trading decisions.  It's when our needs for profits and our desire for risk-taking drive our decision-making that we lose self-awareness, lose market awareness, and overtrade.  If markets were perfectly consistent, it would make sense for us to pursue a totally consistent mindset.  When opportunity sets vary over time, it makes sense for us to accept reality and adjust accordingly.  The weather might look overcast and windy, with a forecast for rain.  Staying "positive" and leaving the umbrella at home is no virtue.

Further Reading:

How to Change Negative Patterns in Our Lives

How Spiritual Growth Furthers Our Psychological Growth

Knowing Your Limits as a Trader

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The Importance of Rejuvenation

 

This is one of the great challenges of performance in trading:  We need routine ("process") to follow rules and best practices accumulated through experience.  We need variation in routine ("creativity") to discover new and better rules and practices.  

It is important to immerse ourselves in trading and maximize our focus to best apply what we've learned from research and experience.

It is important to step away from trading to refresh our views of markets and rejuvenate.

If you want to make changes in your trading--or in your life--those have to begin by breaking routine and changing something you do.  Daily.

When we rejuvenate, we can view what we are doing in a fresh light and figure out how to best break our routines.

Many traders fail for the same reason many marriages fail.  They get stale.  Love--for a person or for markets--never dies.  It has to be killed.  Routine kills.  

How are you rejuvenating?  How are you innovating?  How are you staying fresh in your approaches to markets?

TraderFeed and The Three Minute Trading Coach will be on a short hiatus during a period of rejuvenation.  During that time, I will be researching new edges in the market and new ways of trading those--and I look forward to sharing those.  I will also spend time with extended family in a reunion:  connection brings rejuvenation.  Stay tuned, and thanks as always for your interest and support--

Brett

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Playing The Right Game

 

A number of traders that contact me are working very hard at improving the "setups" that they trade each day.  Often, they're doing a good job of improving their game, but are they necessarily playing the right game?

Let's take a look at relevant statistics with the SPY ETF as a market proxy.  What we want to see is how much of the movement in the index occurs during NYSE trading hours and how much occurs when the NYSE is closed.  

Going back to the start of 2019, we have gained about 188 points in SPY.  Of those, nearly 109 occurred in overnight action, when the NYSE was closed.  During 2021 thus far, the number of points gained overnight was very similar to the number gained during the day sessions.  Bottom line, much of the directional opportunity in the market has been unavailable to daytraders.

This is an important reason why a number of the traders I work with at SMB have begun researching multi-day edges in the market.  They've opened longer-term accounts, and they've been learning options strategies that provide them with superior risk/reward in holding positions overnight.  By changing the game they're playing, they've expanded their opportunity set--and that is paying off.  

I'm finding the same thing in my own trading.  I have three separate accounts.  Two hold positions over longer horizons (days to weeks) and one trades mostly intraday.  When I backtest a pattern in the market that shows a historical edge over a one-week+ horizon (such as when occurred when the sharp drop on June 19th was followed by a sharp rise), I enter and hold positions in the two accounts and then trade intraday pullbacks in the short-term account.  The net result is that I can pursue opportunity even when the market moves against me short-term.  This creates a win-win mindset.

Similarly, among the SMB traders, I find a more positive mindset because they can participate in far more opportunity and not face the frustration of having their ideas play out in time zones when they're not active.

It's a great example of how improving your trading can improve your mindset and trading psychology.  If you're frustrated that you're not taking advantage of the opportunity that is present, perhaps it's not simply that you're playing the game poorly.  Perhaps you need to reassess the game you're playing.

Further Resources:

How Spiritual Growth Can Further Our Psychological Growth

Three Minute Trading Coach:  Building Our Emotional Awareness

Building Our Capacity for Reaching Our Goals

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