Sunday, January 22, 2023

Changing Your Trading Psychology By Changing Your Body

A fascinating finding from research in psychology is that lasting changes in thought, feeling, and behavior require processing of our experience in states of heightened emotional arousal.  When we are in novel modes of consciousness, we become more open to new ways of viewing ourselves and the world.  One of the most powerful gateways to shifts in our states of awareness is the body.  We see this in meditation, yoga, and hypnosis.  We also see this principle at work in psychotherapy, when the enhanced emotional experience of a relationship with a therapist helps us get in touch with feelings and opens the door to new perspectives on ourselves.  Think about visualization exercises in behavioral work or self-talk exercises in cognitive therapy.  We change our viewing by shifting our doing.

Of course, we don't need to be in therapy to enhance our states of awareness and our physical states.  Indeed, there is much to be said for using our physical states during the day to keep ourselves from falling into the ruts of routine.  Research in psychology tells us that high levels of positive emotional experience (well-being) are essential to optimal productivity and creativity.  An important dimension of well-being is our energy level.  We cannot expect to be dynamic people or performers living in static bodies.

Many of our most successful change efforts begin with the body.  We can use our bodies to program our minds, as in biofeedback and self-hypnosis, enabling us greater access to our "gut" intuitions.  In a prior post, I noted that what we internalize is much more a function of what we do than what we say and think.  How we move the body greatly impacts our psychology.  Think about how different kinds of dance impact our experience; think about how we use anchoring to cement new behaviors.  Across the great religious and spiritual traditions of the world, we see how the body is a gateway to change, as in the case of fasting and shifting the body during prayer.

In her insightful and practical book Body Aware, Erica Hornthal, a licensed therapist and dance therapist, explains how utilizing the body to promote change is not just about physical exercise.  How we move--from hour to hour and day to day--greatly impacts our experience of ourselves.  "It is through the body that permanent change occurs, ultimately bringing new patterns of thought and speech...We must address how the body is wired, or in some cases 'miswired,' to fundamentally rewire the mind.  A body that is stretched by new experiences changes the mind's dimensions forever" (p. 74).    

Could it be the case that, just as we read others through their "body language", we process our experiences of ourselves through our bodily states?  What if we are continuously reading our own body language and internalizing what we're reading as our self-image, self-concept, and self-esteem?  As traders, we could be religiously keeping journals, studying markets, and collaborating with others, but if we are physically inert, not eating well, and not getting optimal sleep, can we expect to be truly open to fresh learning from our reviews and teamwork?  We can set goals and push for greater performance, but if we're experiencing ourselves as static and constrained, will we ever truly internalize the right mindsets?  As Erica Hornthal notes, a resilient mindset begins with a resilient body.

Further Reading:

Radical Renewal - The Spirituality of Trading


Saturday, January 14, 2023

What Does Recent Stock Market Strength Tell Us?


I've found that if you look at enough market indicators, you'll always find reasons to be long or short, and you'll always find reasons to trade.  Far better than following a host of canned indicators is constructing a select number of measures that make sense to you and then learning (and backtesting) their ins and outs.  Chasing multiple rabbits is a great way to wind up with none.

Kudos to the SentimenTrader service, which consistently offers excellent research for equity traders and investors.  They recently highlighted the upward breadth thrust in the market--a situation in which many stocks go from being oversold to overbought in a relatively short period of time--and noted the historical tendency for such moves to continue higher.  A common scenario that explains the pattern is that bears miss the market bottom and then miss the initial thrust higher and so view pullbacks as opportunities to ride the new trend.  That keeps pullbacks relatively modest and helps to create a trending move higher.

One of my favorite indicators comes from data offered by the Stock Charts site and their scans.  Each day I track how many stocks in the NYSE universe closed above and below their upper and lower Bollinger Bands.  When many stocks close above their respective bands, that tells you that there is unusual strength--and it is broad.  

Just in the past week alone, we've had three days in which over 400 stocks closed above their upper bands.  To put this into perspective, since 2019, when I first began archiving these data, there have only been 15 prior occasions of individual days with over 400 stocks closing above their bands.  Such days of strength are rare--and now we're seeing a cluster of such strong days.  Somewhat similar clusters occurred in June and November of 2020; both led to higher prices in the medium term.  Indeed, following the 15 occasions of breadth strength, SPY was higher 11 times, lower 4 times over the next 20 trading sessions.  Average gains were +2.45% vs. +.85% for the remainder of the sample.  Interestingly, following the strong days, there has been no significant directional edge over the following five trading sessions.  It's not unusual to get some consolidation before the trend resumes.

I'm currently working on an intraday breadth thrust model to see how well it anticipates short-term patterns of momentum.  That will require a new and different indicator and perhaps a new way of thinking about breadth.  This could open the door to intraday measures of breadth thrust.  

We hear a lot about traders' "edge" in the markets.  Edges, I've found, are always evolving--and the successful traders are the ones who evolve along with markets.  As an increasing amount of capital is being traded by highly leveraged funds, we're finding a growing number of portfolio managers managing risk on a short-term basis.  This is creating shorter-term patterns of momentum and reversal that can be exploited by nimble traders employing the right tools.  

Further Reading:


Friday, January 06, 2023

Being Honest With Yourself

The person we long to be is not necessarily the person we're meant to be.  Many people pursue ideals that don't represent their true strengths and how they can best succeed.  They develop a picture of who they *should* be and work harder and harder at climbing that ladder, only to eventually find it's leading against the wrong wall.  

Consider a few examples:

*  The hedge fund accumulates more and more capital and expands into an increasing number of liquid strategies and markets, only to lose its edge and and performance;

*  Money managers expand their teams again and again, only to find that they are much better at managing portfolios than managing people;

*  A trader works harder and harder at perfecting their "setups", only to find that they are locked into patterns that don't work in new market conditions;

*  Traders spend more and more time on their performance, only to find that their self-absorption creates dead-ends in their relationships.

Here is my fable, based on the recent post:

The caterpillar is not content with being a little creepy-crawler and so hires a performance coach.  The coach convinces the caterpillar that he can be a much bigger caterpillar and move much more quickly.  The coach then gives an inspirational talk and tells the caterpillar that he should not be content with being a caterpillar.  He should become a large, fearsome snake!  So the caterpillar works harder and harder at becoming a snake, only to fail again and again.  But that's not the sad part.  The caterpillar spends so much time trying to be a snake that he never enters the chrysalis and thus never becomes a butterfly.

The important reality is that there are two forms of growth.  One type of growth is improving who you are and what you do.  The second type of growth is transforming who you are and what you do.  Look at Apple; look at Amazon; look at McDonalds.  All are very different companies from when they began.  Year over year, they became better versions of themselves, but periodically they became different versions of themselves. 

In other words, there is a time for becoming a better caterpillar, and there is a time for becoming a butterfly.

Many, many performers hit dead ends because they keep trying to become better caterpillars and never evolve and transform.

The hard part is being honest with ourselves and recognizing when it's time to get better at the game we're playing and when it's time to play a different game.  It's not easy to let go of the past and begin an uncertain future.  If we never enter our chrysalis, however, we will never take flight.

Further Reading:

Trading Psychology 2.0:  Developing Best Practices and Robust Processes

Be Your Best Self


Sunday, January 01, 2023

How To Start Your New Year


The recent post pointed to how recent research and practice in psychology can help us develop spiritually.  Our ability to detect patterns in the world crucially hinges upon our state of consciousness.  Jumping from dataset to dataset, trading pattern to trading pattern, and journal entry to journal entry merely adds to the clutter inside our heads.  The caterpillar is transformed into the butterfly, not by becoming a better creepy-crawler, but by withdrawing from the world and emerging as a different creature.

As the Radical Renewal book points out, it is no coincidence that the world's great religions make space for periods of "sabbath", when we stop doing and instead reflect.  If making changes were as simple as writing goals in a journal and re-viewing our actions, we would all be butterflies.  What we learn from research in psychology is that important life changes are inevitably preceded by significant emotional arousal.  It is the pain of hitting a dead end and the resolution to do things differently that leads us to abandon what isn't working and embrace a new and different future.  But in between acknowledging our dead-ends and finding our new paths is a difficult period when we are withdrawn in our chrysalis, neither caterpillar nor butterfly.

"There is nothing as whole, or as perfect, as a broken heart," Menachem Mendel of Kotsk observed.  It is the broken heart that energizes lasting efforts at change.  That is why members of Alcoholics Anonymous embrace the idea of "hitting bottom".  One key to success in developing as a trader:  hitting bottom--again and again--without depleting your capital.

Then, from that low spot, study, study, study what you did well in markets in 2022:  every good idea, every successful trade.  Look for the patterns to your success, your glimpse into a future built upon the best of who you are:  the butterfly you're meant to be.

Happy--and successful--2023!

Further Reading: