Finding Our Greatness

Update:  Here's a valuable reading passed along by an experienced, successful trader.  It explains how we can make very large gains in any area of life by making small improvements every single day.  Note how this builds consistency of mindset, as our daily focus becomes forward-looking and constructive.

In an impactful video, Mike Bellafiore at SMB Capital explains how our development as traders embraces the far larger development of our greatness.   

The reason for this is that, for us to be successful, our development has to be based upon our strengths:  our talents and our passionate interests.  Very often, we find our passion when we pursue our talent:  the exercise of our distinctive talents is intrinsically rewarding and motivating.

That is why our development as traders should always begin broadly and only later proceed deeply.  We need to try different styles of trading, work with different mentors, and trade different markets before we discover what truly speaks to us.  This is why medical students participate in rotations in different medical specialties before they focus their training on the field that matches their talents, skills, and interests.  Play many sports and then focus on one.  Play many positions on the field and then pursue one.  

Many, many times we fail to achieve our potential--and we cannot find our passion or greatness--because we have short-circuited the developmental process.  We try to go deep before we explore broadly.  We are typically meant to date many people before we find our lifetime partner.  If we jump into partnership without the exploration of dating, we are far more likely to make a poor decision.  Some traders so need to make money that they jump into a style of trading before exploring a variety of styles and markets.  Greatness cannot be grounded in desperate need.  It must stem from what speaks to us uniquely.  

Your greatness as a trader will be related to something you already do greatly in life.

Your past successes and passionate interests hold clues to your trading success.  Try many roles and ways of engaging markets.  After you date lots of trading roles, you just may find your mate.

Further Reading:

What Is Your Path To Greatness?

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Two Important Lessons From Professional Traders

 

Here are two key takeaways from successful portfolio managers and traders I've been privileged to work with.  

1)  Create Multiple Ways to Win - A trader who only knows to go long or short a particular instrument is like a baseball pitcher that only knows how to throw one kind of pitch.  There are many ways to win in markets:  by using options to trade patterns of volatility; by trading the relative relationships between two or more assets; and by expressing market views across a variety of instruments and markets.  Note that the stock market pullback today would have hurt a trader who was long, but would have made money for a trader who had recognized the shift in relative strength between small cap stocks and large cap ones.  What is the best way to express a given market idea?  Trade structuring is every bit as important to returns as trade ideas themselves.

2)  Create a Lifestyle That Builds Your Strengths - If we internalize what we consistently do, then consistently exercising our strengths will make us stronger people and more successful traders.  What we do outside markets ultimately finds its expression in our trading.  Profitable trading requires intensity of focus and flexibility of focus, as we shift from generating ideas to executing and managing trades.  If we live a distracted life, we unwittingly undermine the cognitive strengths needed for market success.  The degree to which we actively structure our calendars is the degree to which we can live each day intentionally and use each day to build our capacity for focus and purpose.  There can be no trading discipline if life itself is lived without discipline.

Trading is a performance activity that builds upon our talents and skills.  Whatever you do that is successful in markets will be an expression of what you've already done successfully in life.  We find our passion in expressing our talents:  that is what drives us to build skills, and it is what ultimately builds our trading psychology.  A masterpiece painting is crafted one brushstroke at a time.  A masterpiece life is created one purposeful, meaningful day at a time.

Further Reading:

What Predicts Success Among Developing Traders?

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Sound Trading Is Training In Trading Psychology

 

A sound trading process is a kind of gym where we exercise the functions that contribute to a successful trading psychology.

As the recent post illustrated, what we call a "trading process" is actually a number of interwoven processes that push us to exercise our abilities.  Idea generation alone may have us analyzing historical information; synthesizing information across markets; consulting market research and valued market participants; and making sense of shorter and longer-term patterns of price, volume, volatility, and more.  

Once we've generated the idea, there is the work of defining and structuring the trade to achieve best risk/reward; establishing position sizing to best meet risk management goal; assessing moment-to-moment action to identify sound entry and exit points, as well as points for adding to positions or taking pieces of our trades off.  Notice that all of these processes require:

*  Sustained focus/concentration;

*  Deep, broad, creative thinking to assemble information into ideas;

*  Fast, flexible thinking to execute sound trades;

*  Personality strengths of conscientiousness and emotional balance.

When we treat our trading process as a gym with many workout stations, we build a sense of inner strength, growth, mastery, and confidence.

A poorly defined, simplistic trading process reinforces laziness and fails to build us cognitively or emotionally.  We internalize what we do.  What we do day after day in our trading preparation exercises the strengths that contribute to a strong trading psychology.  When our processes are grounded in our strengths, the efforts of workouts are fulfilling, not taxing.  There is no challenge as important to developing traders as that of defining processes grounded in our particular competencies and strengths.    

Further Reading:

How Developing Traders Are Most Likely To Succeed

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Two Important Takeaways From The Recent Stock Market Action

 

Update:  7/14/24 - We continued to see breadth strength on Friday and finished the session with 1901 stocks across the NYSE making fresh monthly highs and only 109 registering new monthly lows.  This is considerable breadth strength, bolstered by buying of small- and midcap shares.  Interestingly, going back to 2010 (over 3400 trading sessions), we've only seen 45 trading sessions in which we had over 1500 new monthly highs and less than 150 fresh monthly lows.  Three days later, the SPX averaged a loss of -.41% (17 up, 28 down), quite a difference from the average three day gain of +.35% for the remainder of the sample.  Once we look 20+ days out, there was no downside bias.  I will be watching for near term weakness following the recent strength, mindful of the bigger picture bullish implications of the breadth thrust (see below).  I'll especially focus on which sectors are relatively strong and weak during any market pullback; that information could help set up a good trade.  

On Thursday, the stock market was quite the magician.  Good magicians will get you to look at what they're doing with their right hands but meanwhile the actual "magic" is happening outside our awareness, in the left hand.  The market's right hand gave us a solid decline in the SPX and especially in the growth areas that have been unusually strong.  The left hand, however, pulled off the real magic.  Market breadth increased significantly, creating what we call a breadth thrust.

The purpose of most of my quantitative analyses is to investigate market history and see if a given move is likely to lead to retracement (mean reversion) or momentum (trend).  If I can get a clear signal from market history, I then look at high frequency data to identify solid risk/reward points for entry in the direction of the analysis.  From this perspective, the "setup" is not the trade idea; edge occurs when the market sets up in the direction of solid research.

The market magic yesterday is that we saw very strong smaller cap stocks at the same time that SPX and tech sold off.  Up to now, small and midcap stocks have largely underperformed the large cap and especially the tech market.  Not yesterday.  According to the excellent Barchart resource, that created a situation in which 1518 stocks across the NYSE made fresh monthly highs and 187 registered new monthly lows.  Moreover, if we take a look at the number of stocks giving buy vs. sell signals on technical indicators on the very helpful Stock Charts site, we find that yesterday registered over 600 stocks giving buy signals on their Bollinger Bands and only 13 gave sell signals.  That is unusual breadth strength.

I've tracked these readings since 2019 and can tell you that, in over 1200 trading sessions, we've only seen that kind of breadth strength six times.  Moreover, when we've seen 400+ stocks close above their upper Bollinger Bands on the same day (N = 25), the SPX has been up 21 times, down 4 over the next ten trading sessions.  Interestingly, there has been no distinct upside edge up to 5 days out.  Where that leaves me is looking for short term pullbacks in the broad market that cannot make new lows in order to participate in anticipated continued strength.  It also has me looking with fresh eyes at the specific sectors likely to show this momentum.

So what's the second takeaway from yesterday's market action?  It's that the entire move was triggered by a drop in interest rates in the U.S.  Moderation of inflation numbers led to a rally across the curve.  Not so long ago, I was getting close to 5% on my two-year T-notes.  Now we're closer to 4.5%.  The markets are suggesting that economic strength will broaden out if we indeed see a sustained move toward lower rates from the Fed.  That is important information for traders and investors alike.  What were the best trades in a higher rate regime may not be the best trades if rates sustain a fall.

There are many implications for trading psychology in all this...I'll outline those in the next post.  

Further Reading:

Using Breadth, Strength, and Momentum to Track Market Cycles

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How Developing Traders Are Most Likely To Succeed

 

I'd like to call attention to a very important dynamic in recent markets.  Many experienced traders focused on traditional asset classes, such as rates and currency markets, are struggling with their performance.  The ones I meet with who are making money in those spaces are focused on regions of the world that are less crowded than the US and Europe.  On the other hand, many traders focused on individual stocks--especially active traders--are doing quite well.  What's up with that?

The current stock market is not a stock market; it's a market of stocks.  Some sectors have literally gone nowhere in the last few months, such as financial shares (XLF) and industrials (XLI).  Small and medium cap shares (IWM) have similarly traded in a relatively narrow range for months, as have stocks outside the U.S. (EFA).  On the other hand, we see technology shares (XLK) powering to new highs, along with communications stocks (XLC) and consumer discretionary shares (XLY).

What makes the stock market unique--to use a phrase popular at SMB--is that there is always something "in play":  some sphere of opportunity.  The tricky part is that those areas of opportunity are always changing.  Just as important as how to trade is knowing what to trade.  Because the stock market is so diverse, with so many sectors and companies, developing traders are most likely to succeed by focusing their efforts on current areas of opportunity.  Sometimes it will be with an individual stock or sector.  Sometimes it will be with the entire market.  In an asset class with thousands of things to trade, there's usually something promising that is setting up.

Developing traders need to work on improving their game, but also make sure they're playing the right game.  The lesson of recent markets is that even the best fishermen will struggle if they're casting their lines in the wrong lakes.

Further Reading:

Managing Your Trading Business

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