Friday, April 26, 2024

A Quick Trading Self-Assessment


Here's a checklist to guide your evaluation of yourself as a trader:

1)  What did I learn from today, and how--specifically--will I bring that lesson to tomorrow's trading?

2)  What do I see in markets that others don't see and what am I seeing uniquely in the market right now?

3)  When is not trading the right decision and how have I utilized my time when I'm not in the market?

4)  What is my pipeline of new trading approaches and ideas that I am developing for the future and how am I working on that today?

5)  What have I learned this week from others and what have I cemented by teaching others?

When we do positive things in trading, we grow a positive trading psychology.  When we do positive things in life, we grow a positive psychology.


Monday, April 22, 2024

The Key To A Successful Life

Let's start with the conclusion:  The only path to a successful life is to live a success-full life.

I've been reading a number of books summarizing recent research in positive psychology and will sharing the major conclusions in my next book.

One conclusion especially stands out:  The various attitudes and activities that lead to a happy and fulfilling life--love and social connections; spirituality; gratitude; physical health; achievement; self-acceptance--all are developed by actively exercising them.

If we challenge ourselves in our work, relationships, mindset, and physical development, we can live a life that is successful, because it is success-full.

Living life consciously and intentionally takes a hell of a lot more than sitting for a few minutes and doing meditation exercises.

Living life purposefully means that we create challenges and goals in every area of life that matters to us.  

All of life is a gym.

One question matters:  What is today's workout?

Further Reading:

Building Our Emotional Fitness


Thursday, April 18, 2024

Positive Trading Psychology - III: Framework


The first post in this three-part series on positive trading psychology emphasized the emotional and physical side of optimal performance, which has been called flourishing.  The second post looked at the cognitive side of trading success, including the development of focus and deeper, faster processing of information.  In this post, we'll examine the importance of developing a framework for understanding markets and creating our trading edge.

In any competitive endeavor, whether it is chess, basketball, or boxing, we have to understand who we are competing against.  Notice that in all these activities, we don't just prepare for success by building ourselves up.  We also study the opposition and their strengths and vulnerabilities.  An important part of preparation for the next game is watching film, studying the opponent, and then formulating strategies and plays that maximize our strengths and take advantage of our opponent's weaknesses.  Because the opposition is always changing, our game prep always varies.

Over the years, I've found that consistently successful traders possess a framework for understanding markets and opportunities.  That framework clarifies three vital components of strategy:  1) who they are making money from; 2) how those other players behave in particular market conditions; and 3) the types of trading that work in those different market environments.  We can think of a trader's framework as the essence of their business plan:  it guides decision-making under dynamic conditions of risk and reward.  As Michael Dell points out above, we need a dream to succeed, and it's our framework that helps us realize that dream in the real world.

Volume is always changing in markets, which means that market participants are always changing.  Volatility is always changing in markets, which means that market moves always vary in how they extend and reverse.  Correlations are always changing in markets, which means that what we are trading varies in its sensitivity to other markets.  Without a framework to make sense of the environment we are facing today, we are as unprepared for game time as the team that never studies its next opponent.  Can you imagine preparing for an outdoor football game without understanding the probable weather conditions at game time?  Without studying how the opponent varies its offensive and defensive alignments and strategies?

This is an important reason mentoring is vital to a trader's development.  When we are exposed to multiple mentors, we absorb different frameworks and ultimately synthesize those into our own.  We develop our own positive psychology when we broaden and deepen our understanding of what to do and why we are doing it.  Take a look at groups that are active in mentoring, such as SMB CapitalBearBull Traders; and My Investing Club.  All feature multiple mentors that enable a developing trader to internalize a framework for making decisions under dynamic conditions of uncertainty.  The result of all this mentoring, for a trader as well as a football quarterback, is what Mike Bellafiore calls a "playbook".

Trading psychology aids our performance, but having a framework for trading grounds our trading psychology.

Further Reading:


Sunday, April 14, 2024

Broad Selling After A Broad Advance: What Happens Next?

On Friday, we saw something unusual.  After the day's steep drop, we finished the day with fewer than 10% of SPX stocks closing above their 3, 5, and 10-day moving averages.  At the same time, by Friday's close, we still saw more than 50% of those shares trading above their 100 and 200-day averages.  Since July of 2006, when I first began collecting these data (over 4400 days), this set of conditions has only occurred 20 times.  In other words, it's been unusual to get a broad short-term decline following a broad longer-term advance. 

While 20 instances is not enough for a robust statistical analysis, I do find it noteworthy that 18 of the occurrences finished higher 20 days later for an average gain of +2.66%, substantially above the average for the entire sample.  

I've found that such historical queries are useful tools for framing market hypotheses.  If I see evidence of buying going forward and then see that we cannot make fresh lows on subsequent selling pressure, the chances are good that I'll participate in the potential bounce.  This is particularly the case if several queries drawing upon different data point to similar conclusions.

The future does not always mirror the past and, in the present situation, it would just take a further escalation of the Middle East conflict to potentially move oil prices higher and stocks lower.  When the present varies greatly from historical patterns, that, too, can be information.

Further Reading:


Wednesday, April 10, 2024

Positive Trading Psychology - II: Focus

The first post in this series on positive trading psychology took a look at flourishing and what we need to do in order to maximize our performance in life and markets.  When we establish flourishing as a personal and professional goal, we move past the preoccupation with our mistakes and instead learn to make the most out of what we do well.  

In this post, we explore an area of trading psychology that is underappreciated:  cognitive performanceResearch that I've conducted at multiple trading firms finds that our cognitive strengths--what we do best in processing information--are every bit as important to trading success as our personality strengths.  For example, one of the consistent qualities we see among very successful traders is intellectual curiosity.  Rarely, however, do we see traders actively working on growing the breadth and depth of their interests.  

There is much more to trading psychology than "mindset".

Especially important to our cognitive functioning is focus:  the degree to which we can intensify our concentration, processing individual things in great depth and also processing a wide range of things.  One of my first observations when I began my trading career was that I could often identify the best traders by observing their screens.  The best traders had more screens open with a broader range of information.  They had the unique ability to scan and quickly identify what was important and then focus their attention on those areas of opportunity.  This meant that they exhibited quick information processing as well as deep information processing.  During trading, they were laser focused on what was in front of them.  In the state of high focus, they simply saw more than other people and were more prepared to act on what they saw.

I see this among the best traders I currently work with.  By having only the most important information on their screens and focusing intensively on the most relevant news, markets, and price action, they minimize distractions.  This concentration enables them to quickly turn to what is important and act on what they see.  If you watch chess champions during matches, you can appreciate that intensity of focus.  They are not simply focused on winning; they are focused on making the right moves.  They exhibit the flow state, in which they are totally absorbed in their performance.

The capacity for focus is something we can develop.  Many traders make the mistake of performing "meditation" exercises--sitting still and quieting their minds--in hopes of improving their trading.  Quieting the mind is necessary for focus, but not sufficient.  We also need to train ourselves to intensify our concentration and hold that concentration for longer and longer times.  Attention is a kind of "muscle" that can grow with exercise.  A number of apps, such as Brain HQ, can be useful in expanding our capacity for focus.  Meditative exercises that require us to sustain attention for longer and longer times are also useful, particularly when they challenge us to maintain our focus while switching the objects of our concentration.

Yes, it's helpful to maintain our best mindset, but if we don't process information as broadly, deeply, and quickly as possible, we're going to miss opportunities and overreact to limited information.  What I learned early in my work with traders is that successful traders succeed in part because they see more and better than others.  

Cognitive strengths matter.

Further Reading:

Creativity in Analyzing Market Information


Saturday, April 06, 2024

Positive Trading Psychology - I: Flourishing


In the next several posts, I will outline an approach to trading psychology based upon recent research in the field of "positive psychology".  I believe this can be a game-changer for many traders and trading teams.

To use the analogy of positive psychology's founding researcher, Dr. Martin Seligman, the goal of positive psychology is not to go from -5 to 0, but to go from +2 to +5.  This means that feeling good and performing well is not enough.  We are meant to "flourish" by amplifying what is already positive.  According to Dr. Seligman's research, there are five dimensions of flourishing, known by their acronym PERMA:

1)  Positive Emotion
2)  Engagement
3)  Relationships
4)  Meaning
5)  Accomplishments

As the Positive Psychology site explains, flourishing is not something we have or don't have.  Rather, it's a process that can wax and wane at various points in our lives.

Think about what this means:  We think about trading processes, and we might even follow personal processes regarding what/how we eat, our sleep and exercise, etc.  How many of us, however, explicitly follow processes of flourishing in how we approach markets?  Consider a simple PERMA review for traders:

1)  Are your reviews and research efforts generating positive emotion, by focusing on opportunities, learning, and insights?

2)  Are you constructively engaged with markets?  With other traders?  With learning?  Are you focused and operating in a "flow state", or are you distracted and jumping from screen to screen and idea to idea?

3)  Who is mentoring you and how are you learning?  Who are you mentoring and how are you improving them and cementing your ideas?  What are you doing to nourish your friendships and personal relationships, and how are they nourishing you?  If there is no nourishing, there can be no flourishing.

4)  What is meaningful to you in your trading beyond short-term P/L?  What in markets captures your interests and passions and helps you find unique opportunity?  What is meaningful in your life outside of trading that keeps you emotionally and spiritually nourished?

5)  What have you accomplished recently and how can you build upon it?  What have you learned from the accomplishments of others?  How are you celebrating your accomplishments and who are you celebrating with?  How are your achievements in all areas of life keeping you energized and focused?

We develop a flourishing life by focusing on flourishing each dayEach day is a miniature lifetime.  We are born in the morning and by nighttime we lose energy and lie down to rest.  In between, our challenge is to live the most meaningful and successful life possible.  It's great to cope and correct our mistakes, but the key question is:  How can we flourish today and be all that we're capable of being?  One hint:  a large, recent research review finds that mind-body applications of positive psychology are especially effective.  Maximizing our daily, physical well-being may be the best way to flourish emotionally and in our trading.

Further Reading: