Thursday, December 28, 2023

Three Best Practices of Successful Traders


With this post, I'll be taking an extended sabbatical in order to complete my next book and related projects.  I thought a worthy final post would summarize the best practices of traders who have experienced success in 2023, with the aim of improving yourself and your trading processes in 2024.

Best Practice #1:  Moving From Reactive Trading to Planned Trading

Very often, the psychological challenges that traders face occur because they are making trading decisions in the heat of the moment, when they are most likely to be stressed and impulsive.  Successful traders have intensively studied their most successful trading and know what they do best.  They then turn their best practices into trading rules, so that they know exactly what kinds of opportunities to look for in markets, how to express those opportunities, how to size the positions and manage them, etc.  The beauty of knowing what you do best and how you do it is that you can then mentally rehearse the right actions as part of preparation for the day.  Biofeedback and visualization methods can be helpful in that mental rehearsal.  Keeping the right kind of trading journal also helps greatly in focusing on your learning lessons.  Knowing your best trading also enables you to stand apart from markets when opportunity isn't present.  The best traders I work with patiently wait for their opportunity and don't feel a need to trade.  They are like the baseball batter who knows the pitcher well and is willing to wait for a good pitch in the strike zone.

Best Practice #2:  Drawing Upon Your Strengths     

Here is a short personality quiz designed to identify your strengths.  Here is a way of interpreting the results.  The successful traders I've worked with know who they are, what they're good at, and what excites and challenges them.  They also are aware of their flaws and can leverage those into strengths.  Because they find ways of trading that leverage their strengths and are meaningful to them, they have no problem staying engaged in markets during challenging times.  They also draw upon their strengths outside of their involvement in markets, so that their personal activities are an ongoing source of fulfillment.  The right work-life balance isn't just spending time in activities outside of trading; it's making use of the best of you in relationships and in personal pursuits.  The number one occupational hazard for full-time traders is burnout.  When we don't achieve work-life balance based on what is meaningful to us, we lose work efficiency and we become less creative.  I've often advised traders to always make sure they have passions in life that are greater than their passion for trading.  If your only strength is trading, that becomes a vulnerability.

Best Practice #3: Creativity   

The greatest weakness of traders overall is that they are looking at the same markets, processing the same information, and trading from the same charts and ideas as others.  There is very little original in their thinking or trading.  They are like the business owner who sets up a shop to compete with surrounding businesses, but who copies what they do.  If you don't do different and distinctive things in markets, you won't achieve different and distinctive results.  This is a topic I address in the Trading Psychology 2.0 book and that I've also tackled in the blog here and here.  As the book emphasizes, there are specific techniques and processes we can learn to become better and more differentiated idea generators.  The key is to look at new information and integrate information in new ways.  Teamwork--networking with others who have backgrounds and skills different from us--is a valuable practice that can help us expand our horizons.  In my own trading, I have found the best results by focusing on data that others don't look at, from high-frequency measures of buying and selling to patterns of breadth across time frames among equity sectors.    


I hope this helps you coach yourself to greater success.  As further resources, please check out this series of articles on trading psychology techniques (links to all articles at the bottom of the post); this post on best practices; and this post on learning from our best trades.  If there is a specific trading psychology topic you are interested in, there's a good likelihood you can find something by doing a search for "TraderFeed topic".  So, for instance, a search for "TraderFeed trading discipline" yields relevant posts.  If you are interested in a collection of self-help techniques for your trading psychology, The Daily Trading Coach book might be most helpful.  Best of luck for a happy, healthy, and prosperous 2024!  


Sunday, December 17, 2023

Can This Market Rally Continue?

The U.S. stock market has rallied sharply off its late October lows, bringing us to fresh highs in several large cap indexes.  On Thursday we saw particular breadth strength with over 2500 stocks across the major indexes registering fresh monthly highs and over 1700 making new three-month highs.  At the same time, only 188 and 86 stocks hit new one- and three-month lows.  Thanks to the dovish shift by the Federal Reserve and a dramatic turn lower in interest rates, the buying was broad, lifting both small and large cap shares.  When we see large moves across asset classes--fixed income, currencies, equities--we know that something fundamental is afoot among macro investors.  But what comes next?  After such broad strength, do we see further upside momentum or reversal?  Let's take a look at recent market history.

As I have indicated in the past, strength (as measured by the number of shares making fresh new highs) and weakness (as measured by new lows) need to be considered as relatively independent variables.  To be sure, the two are related--since 2016 (almost 2000 market days), the correlation between 1 month new highs and lows is -.54 and between 3 month new highs and lows is -.46.  What this means is that only about 25% of the variance in new lows is accounted for by the number of new highs and vice versa.  (All data from

When we examine the historical data since 2016, we can see the importance of considering strength and weakness separately.  For instance, we've only had 24 days in that time where three-month new highs exceeded 1000.  Over the next 10 trading sessions, SPY averaged a loss of -.11%, compared with  +.23% for the remainder of the sample.  Over the next 50 trading sessions, however, SPY gained an average of +3.81%, well more than the average gain of +2.39% for the remainder of the sample.  Indeed, when we have had an explosion of new highs, the market was up 21 times, down only 3 over the next 50 days.  Over the next 10 days, it was up 11 times, down 13.

Conversely, when three-month new lows are below 100 (N = 475), returns have been superior over the next 20 trading sessions, averaging a gain of +1.99% vs. an average gain of +.59% for the remainder of the sample.  In other words, when new highs are high, we have seen momentum over a longer time horizon; when new lows have been low, we see shorter-term upside momentum.  When new highs are high *and* new lows are low, the pattern has been similar to that for elevated new highs:  weak returns over the next ten trading sessions; superior returns over a 50-day horizon.

No doubt, forward news on inflation and growth will impact rates markets and that, in turn, could move stocks.  During rising trending/momentum markets, I have found it to be helpful to look for short-term oversold points in the market (points during which the majority of stocks close below their 3 and/or 5 day moving averages) that occur at higher price lows.  Those dips are opportunities to participate in the broader trend and also create logical spots to stop out if the uptrend is broken.  At least for now, markets are treating the Fed news as a game changer.  Recent historical evidence suggests that the rising tide lifting all boats often continues, though not necessarily in the short run.

Further Reading:

Using Emotion to Change Emotion


Sunday, December 10, 2023

Establishing Targets For Our Trades

Recently, I've heard from a number of traders regarding the challenge of establishing effective targets for their trades.  What has been happening in most of these situations is that a trade will go the trader's way and be profitable.  That leads the trader to hope for further gains and sometimes even add to the position.  At that point, the trade reverses and leaves the trader with no gain or even a loss.  The frustration caused by such "choppy" market conditions can then fuel subsequent poor decisions and excessive losses.

This is one of those situations in which the best psychological strategy is also the best trading strategy.  It is imperative to study the markets and instruments you're trading and identify clearly how far moves are likely to go in various regimes of volume and volatility.  If you're trading a stock index, such as the SPY ETF or the ES futures, the market VIX will be highly correlated with the average size of moves on any time frame.  Similarly, the volume of the instrument will be quite correlated with the size of market moves.  If SPY is trading an average of, say, 70 million shares per day, you can do very basic research and recognize that daily moves of much more than 1% will be difficult to achieve with such volume.  For a day trader, if today's volume is not significantly greater than recent volume and you get a breakout move of over half a percent in a 12 VIX market, you know that the conditional probability of the move going much further in your favor is pretty low.  If the VIX was greater than 20 and volume was exceeding 100 million shares, you'd be on firmer ground holding for further gains.

One thing I found very helpful in my own trading is to know what my anticipated holding period is for a trade and to know, precisely, how much directional movement can be expected during that period across different segments of the market day.  An expected holding period of an hour would lead to larger moves in stocks during early morning hours, for example, than at midday.  By studying the size of market moves for given holding periods, levels of volume and volatility, and for time of day, I can set rational, reasonable targets for profits.  That makes the exit process automatic, and it avoids the major pitfall of making execution decisions in the heat of battle.

The key is making trading planned and not reactive.  Once you have a plan, you can mentally rehearse it and base your exit on a reasonable goal, not a wish.  Trading becomes emotional when we act on hopes and fears and not hard information.  The trade exit should take into account what the market is typically giving you; expecting more is perfectionism and a setup for frustration.

Further Reading:


Friday, December 01, 2023

Where I See Opportunity: In The Market And In Ourselves

Note:  This post is a summary of the webinar I held with traders this past Monday.

I've been involved in trading the U.S. stock market since 1977.  My professional work with traders began in 2003 and continues to this day.  So I've seen my share of markets, and I've seen quite a bit in terms of what goes into trading success.

What I find noteworthy in recent markets is the degree to which more and more money is being put to work, seeking relatively short-term advantages in the marketplace.  Quite a few of the hedge funds and money management firms around the world have greatly increased their assets under management.  They have also expanded operations across markets and across geographic regions.  When I started my performance coaching, it was common that funds specialized in specific strategies and consisted of solo portfolio managers, sometimes aided by assistants.  Now, we find many funds trading multiple strategies ("multistrat") with large teams.  This means that each team acts as a miniature fund, building diversified portfolios.  Back in the day, my work was largely limited to traders in NY and London; now it's truly global.

At the same time that trading organizations have exploded, their tolerance of risk has gone down.  Back in the day, a manager could lose up to 20% in a year before being stopped out.  Now it's not unusual for that number to be 5-10%.  What happens in practice is that risk managers don't want to see their teams stopped out, so they reduce risk taking well before the downside limits are threatened.  Once a trader goes down a few percent, their allowable risk is often cut.  So, for instance, if my capital is cut in half when I go down 5%, I now have to make 10% on the new capital base just to break even.  That is daunting, so--in reality--no one wants to go down more than a very few percent. 

Over the years, I've seen the same dynamic among day traders and proprietary trading firms that largely engage in short-term trading.  They do not typically have large capital bases and thus need to manage risk tightly.  Historically, they've made their money by leveraging capital, further ensuring that risk had to be carefully managed.  As day trading has grown, especially since the period of the "meme stocks", we find more and more participants chasing moves, but with limited capacity for loss     

The net impact of these developments is that we have very crowded markets jumping in on moves and needing to bail out when the moves don't work out.  If a trend seems to be under way, there is a lot of "chasing" of the perceived opportunity, and when the trend reverses, there can be equally significant abandonment of the positions.  On balance, this has created choppier markets.  To the degree that this choppiness is a function of more and more capital managed more and more tightly, I expect this choppiness to continue.

So where does the spirituality of trading fit into all this?

My research has found that, at turning points in the market, we see clear shifts in the breadth of market moves, as well as changes in relative strength.  This occurred in late October, when heavy selling brought us over 1900 fresh one-month lows and over 1600 three-month lows among NYSE stocks.  For the next few days, we moved still lower--by about 2%--and yet fewer stocks registered new lows.  Indeed, we began to see relative strength emerging in a few sectors of the market.  That led to a burst of buying (and short covering!) and, by November 2nd, we suddenly had new highs outnumbering new lows.  This created a momentum move that now has taken us to new highs in a few parts of the market.  

(Interestingly, as we've moved higher the last few days, breadth has stalled out and we're seeing shifts in relative strength among sectors.  I'm watching the market closely for the possibility of reversal).

With the crowding of market participants and limits on allowable losses, the two trades that set up most clearly are momentum moves (the crowd chases a move) and reversal moves (there is initial bailing out of previously popular ideas).  The breadth and relative strength measures that I track daily--for the market as a whole and sector by sector--can be found on; and  Backtesting of momentum and reversal moves can be found via and  Creating a database of market and sector breadth has been invaluable in detecting when there is momentum and when moves are stalling. 

As I stressed in the online book, Radical Renewal, our greatest trading problems occur when our egos take control of our market activity.  We impose *our* views on markets, and we trade--not because of distinctive opportunity--but because we *need* to be active and make money.  Once our egos are in control of what we do, we become poor listeners to what markets are actually doing.  As a psychologist, if I am filled with my own preoccupations while I'm speaking with a client in therapy, the odds are good I won't be very helpful to that person.  I need to listen to them and act based on deep understanding.  So it is with markets.

What I refer to as the spirituality of trading is putting ego aside and training ourselves to be sensitive listeners.  If we can master that in markets, it will be great training for our personal and work relationships.  The right trading makes us better as people.  The goal is to trade selectively, from the soul--not reactively, from the ego.

Thanks for your interest--


Further Reading:

Best Practices of Successful Traders