One of the key themes running through the TraderFeed blog, as well as the books that I've written on trading psychology, is that effective change comes from building on positive patterns of thoughts and behavior. We can think of these as "solution patterns", as opposed to the "problem patterns" that typically become the focus of coaching and counseling efforts.
The essence of the solution-focused approach is that we can often find the answers to our problems by looking at instances in which those problems are not occurring. For instance, if a trader who is troubled by a problem of overtrading exercises good restraint on a particular day, we would try to find out how he accomplished that. We would examine his preparation for the market day, his efforts to guide his decision-making with rules, his thought process while positions were on, etc. Out of this examination, we can figure out what he did right: what works for him. By crystallizing those positive actions into solution patterns, we can do more of what works and begin to build new, positive habit patterns.
The value of the solution focused method is that it does not impose answers from the outside: it builds upon the existing strengths of the trader. The key idea is that, in some ways, at some times, we trade well: we do not fall into problem patterns and instead enact the skills that define who we are when we are at our best. This requires a major mind shift for many traders: they are so focused on their problem patterns that they never note their strengths. And if they aren't aware of what they are doing right and how they're doing it, how can they hope to build on those competencies?
This is why it is valuable, in keeping trading journals, to identify clearly what you are doing well as well as what you need to improve. By turning positive trading behaviors into forward-looking goals, we build on strengths and move ourselves closer to our ideals.
Kudos to Mike Bellafiore, one of the principals at SMB Trading, for his forthcoming book One Good Trade. I recall when Mike first talked with me about writing about a book covering the proprietary ("prop") trading world. I thought it was a fantastic idea. Prop trading firms have traditionally been quite secretive about what they do and how they do it. Mike has lifted that lid, offering a variety of lessons that new and experienced traders can benefit from.
One Good Trade is filled with anecdotes of real traders facing real challenges in learning and mastering markets. Mike covers the fundamentals of trading success, from discipline and hard work to keeping daily work plans and mastering basic trading plays. He also explains how traders are hired at prop firms and the mistakes that lead many of those traders to fail.
Intraday traders will benefit from the hands-on trading material that describes selecting stocks "in play" and reading the tape to gauge when supply and demand come out of balance. The latter portion of the book covers what traders need to do to sustain their development, including training innovations that SMB has pioneered.
The book is written in an engaging way and, hands down, is the best inside look at intraday prop trading that I have encountered. I've had the pleasure of working with Mike and partners Steve Spencer and Gilbert Mendez and can attest to their commitment to training traders. Some of the work they are doing in video-based training is, in my opinion, state of the art. But best of all, One Good Trade offers uncommon trading wisdom. From Mike:
"There is nothing to 'get' as a trader. What works one month may not the next. Trading set ups you crush one year may be extinct the next. As prop traders our job is to recognize present patterns and exploit them. But we also must have the humility to accept that these patterns might change at any moment. And when they do we must find new patterns. We must adapt."
One Good Trade is one good resource for adapting to markets.
Note of disclosure: No one at Wiley or SMB requested this review or knew what I was going to write in advance. I do not accept reimbursement for the reviews I write. According to the Wiley website, One Good Trade is scheduled for release in August, 2010. .
One of the key themes running through the TraderFeed blog, as well as my books on trading psychology, is that changes in our behavior, thought, and emotion can be effected by relatively brief, targeted change methods.
All of our behavior--from our ways of thinking to our typical modes of responding to situations--is patterned. The sum of our patterns is what gives us our personalities. Many of our patterns begin as coping responses to challenges that we face early in life. For instance, if I find myself repeatedly hurt by others, I may learn to maintain a high degree of privacy and guardedness. Keeping to myself, I can't get hurt.
Such patterns may be adaptive for the situations that we are in, but they become maladaptive once we enter different environments. Thus, the withdrawal that worked when growing up now becomes a liability in forming new, romantic relationships. By then, however, the pattern has been overlearned; it has been internalized as part of the self. As a result, I can find myself repeating patterns that bring unwanted consequences. Worse still, I can be unaware that I'm repeating those patterns.
The process of changing our patterns of thought, behavior, and feeling begins with becoming aware of our repetitive patterns and the consequences of those patterns. While such awareness will not, in itself, change us, it is a necessary step: once we clearly recognize what we're doing, why we're doing it, and how it is hurting us, we can step back and try to do things differently. If I see that I am hiding behind a wall of guardedness in relationships because of previous problems in relationships--and if I clearly perceive how that is holding me back from cultivating new, meaningful relationships--then I can try, little by little, to take down that wall. Many times, that breaking of the wall (the changing of our patterns) starts in the relationship with a therapist.
When problem patterns do not overwhelm a person's life and prevent them from functioning in the world--and especially when those problems have been relatively recent and situational, not chronic and pervasive--it is usually the case that short-term, highly active and focused approaches to change can be effective in generating and sustaining change. These approaches fall under the category of brief therapy. Illustrations of how people can change problem patterns through such short-term approaches can be found in my Psychology of Trading book. A description of specific techniques drawn from the brief therapy literature, including behavioral, cognitive restructuring, and psychodynamic approaches, can be found in the Daily Trading Coach book. A more thorough coverage of brief therapy methods and research can be found in my co-edited volume on the topic.
Very often, repetitive patterns in behavior and relationships interfere with trading. At a simple level, they can interfere with our concentration and market focus. More broadly, however, those patterns have a subtle, destructive way of playing themselves out in our trading. The person who felt unappreciated by parents now takes on too much risk in markets to become successful and attract the desired admiration; the trader who experienced painful losses as a child now freezes up when markets move against him; the person who rebelled against authority and control in his early years now finds himself breaking his own trading rules.
When problems from your personal life are interfering with your trading, it is always the right strategy to stop trading and pour yourself into resolving those problems. This does not have to be with a trading coach: any competent psychologist schooled in brief therapy methods can help you understand your patterns, interrupt those, and replace them with more constructive ways of dealing with the world.
Then you can return to trading as a free person with full focus, ready to acquire and utilize a lifetime of skills.
There are three meta-themes that have dominated the TraderFeed blog and my three books on trading psychology. The first is that trading is a performance activity; the second is that personal and professional development is a function of building on strengths, not just addressing weaknesses; the third is that markets exhibit state shifts and repetitive patterns that mirror those we observe in ourselves. This series of posts will elaborate on the three themes; this post will focus on the performance aspects of trading.
What accounts for trading success? Is it having setups and trading systems that are better than those of others? Is it having an iron self-discipline? Is it a function of personality or inborn talent?
There are many possible explanations for why people succeed in markets. The idea of trading as a performance discipline is that the process of mastering markets is similar to the process of mastering any performance domain, such as athletics or public speaking. We begin with certain talents such as the abilities to process information quickly and synthesize large amounts of data, the capacity to sustain attention, and personality traits that enable us to keep a relatively steady mindset in the face of uncertainty.
These talents, and the interests that develop early in life, help guide us toward activities that we find to be rewarding and fulfilling. As we pour ourselves into those activities, we develop skills that are specific to the performance field. Such skill development is often facilitated by work with coaches and teachers, who structure practice sessions that hone particular skills. Such deliberate practice is what turns talent into actual performance, as we progress from being novices to developing competence and eventually expertise.
This developmental course is typically a lengthy one and involves numerous setbacks as well as milestones. What sustains the growth process is a very strong interest in the performance field and a learning process that nurtures continued motivation and a sense of growing mastery. Talent and interest will not turn into expertise if they are not channeled into ongoing learning, review of performance, and efforts at improvement.
This is why traders require training--like a physician or Olympic athlete--not just education. This is also why simulated trading, the practice of specific trading skills prior to risking capital, is an essential step on the way toward learning to manage real money and handle real risk. It is the deep, intensive exposure to markets over time that enables traders to internalize the market's recurring patterns and develop a feel for trading.
Many traders fail to reach a high level of development because they change what they're doing--run from one approach to another--long before they could ever build and internalize core trading skills. Many others fall short of their potential because their development is relatively unstructured, with vague goals and few concerted efforts to learn from experience.
Think of how an Olympic athlete develops from childhood to the point of elite competition and think of how they train for an Olympic event: that will provide a useful template for how traders can reach similar elite levels of performance. Psychology is necessary for elite performance; it is not sufficient.
I've written quite a few posts to attempt to guide beginning traders. But what if you're a trader who has reached the stage of competence? Now you can consistently cover costs and sustain modest profits. How do you get to the next stage of expertise, where you can make a solid living from your trading?
What many competent traders do is try to magnify their modest profits by trading more instead of by trading larger. Because they have modest account sizes, they cannot size their trades significantly, so they try to put on more trades. Such overtrading takes them out of their niches of competence and leads them to lose money.
Those traders don't recognize that they may already have the skills to become excellent traders. After all, a trader who can make $200/day trading 5 lots in the ES futures could be making $2000 a day trading 50 lots, not a bad six figure income. Given the liquidity of the market, the trades that work with 5 lots by and large will work with 50 lots. It's just a matter of growing into that size. The actual trading doesn't have to change significantly.
Probably, this issue occurs in other areas of business. The successful local restaurant might have all the makings of a powerhouse chain of eateries, but without access to capital and a managerial talent pool, that growth never happens.
That is why access to capital is key for the competent trader: either capital one has saved up or that one can access through trading for deep-pocketed firms.
The second thing that competent traders need is access to expert traders. A beginning trader, like a Little League ball player, can benefit from coaching from a more experienced person. It doesn't take an expert to coach a rookie. But once athletes becomes college stars, they require hands-on mentoring from coaches and mentors with expertise. It is not too unusual to see self-made competent golf players, traders, or singers. It's rare to see expertise develop in relative isolation.
That is because expert coaches and mentors help to mold and accelerate learning curves, to make the most of a person's talent. If you've reached a stage of competence, it is vital to use online resources, personal networking, and/or access to trading firms to learn from pros. Look at the history of great achievers in business, the arts, sciences, and sports: even the self-made greats stood on the shoulders of giants.
As I wind down the blog, I want to offer a shout out to the excellent Decision Point site, which has served for a long time as a valuable information source for me. I find it to be the best single source for tracking sector behavior in the stock market, as well as key market indicators. A review of the charts each week provides an excellent overview of how the market is trading.
One valuable aspect of such chart review is that it enables traders to synthesize information into broad market themes. It also helps traders identify when markets are in trending or range bound mode and whether they are gaining or losing strength/weakness.
At this juncture, those charts are telling us of a bull market that has been transitioning from mounting a wall of worry to riding a path of euphoria. New 52-week highs have continued to grow among NYSE common stocks (top chart), thanks in part to very significant relative strength among small-cap stocks ($SML; middle chart). Indeed, with a steadily rising advance-decline line, $SML is not so far away from its all time highs.
Such strength has emboldened traders. The 10-day moving average of the CBOE equity put-call ratio has been moving steadily lower (bottom chart; note the inverse scaling), as traders become increasingly bullish in the face of rising prices. As a rule, bull markets end with divergences and waning strength; so far, the charts I follow on Decision Point have not been displaying those kinds of cracks in the market foundation. .
Kudos to John Forman, who has assembled an edited volume specific to the questions most asked by developing traders. A variety of experienced traders and market bloggers have participated in the volume, offering a mix of viewpoints. It is often quite difficult for new traders to obtain impartial guidance in starting their careers, so such resources are quite valuable. The topics for the questions range from trading mechanics and trading psychology to market analysis and trading careers. Good stuff!
In general, I would highlight three areas of learning that I would want to have if I were looking to start out as a trader today:
1) Macroeconomics - I would want to have a grasp of intermarket relationships and how monetary policy affects interest rates, currencies, and economic growth. This information may not determine the trade over the next half-hour, but it does govern the market's longer time frame picture and help determine market trends. A lack of understanding of macroeconomics and intermarket relationships has been a major reason many short-term traders have lost money fighting the market over the last few months.
2) A Trading Theory - A trader needs a framework for thinking about price movement and making sense out of the steady stream of price changes across markets. I'm not sure that it matters greatly whether traders subscribe to one theory or another, but I am certain that having an explanatory framework is better than not having one. Personally, I have found Market Profile theory to be an especially useful way of conceptualizing market action across time frames. Other people find Elliott Wave theory or any of a variety of technical analysis frameworks to be useful.
3) Observation - Hands down, the smartest thing I ever did when learning how to trade was to watch markets for a long time before trying to trade them. I collected charts of intraday action and, each day, looked for the best trading opportunities. Over time, I started to see repetitive patterns among those opportunities and those became important to my subsequent trading. Watching not only price, but volume, sector behavior, intermarket action, and such measures as NYSE TICK help you recognize the dynamics of breakouts, reversals, and trends.
Knowing what I know today, if I were starting out as a trader or advising a beginning trader, I would advocate at least a full year of learning, observation, and practice trading before putting money at risk. I strongly believe that a major reason new traders don't succeed is that they fail to put in the necessary time to learn markets and acquire skills.
In the past, I've written about how life experiences serve as mirrors: they reflect to us something of who we are, which we then internalize as part of our identities. This is particularly true of relationships: we continually experience ourselves through the people in our lives: in a very real sense, who we allow into our lives helps shape who we become.
We also have relationships with our bodies, in a sense. Our bodies are constantly sending us signals about their state: whether we are tense or relaxed, energetic or fatigued, fit or falling apart. A common problem with sedentary occupations such as trading (and a common problem as people become older) is that they stop taking care of their bodies and focus on more "practical" things, like making money, raising children, and keeping up a home.
Over time, a divergence develops: the mind is trying to stay sharp and the person is trying to stay focused, energetic, and motivated, and the body is sending a completely contrary set of signals. It is very difficult to stay at the top of one's game if the other side in our mind/body relationship is sending frequent signals of exhaustion or deconditioning.
I see this often among traders--and too often in myself: neglecting the body and then not having enough fuel in the tank to sustain a crucial piece of motivation or optimism that could lead to that good career decision, that extra effort that gets noticed, or that one good trade after a couple of losers.
If our bodies are mirrors to our selves, what experience of your self are you living with and internalizing each day? A promising strategy for working on the mind might just be minding the body.
This morning, I went for a jog in the forest preserve park down the street from our home. Winding down the run, I cut through a section of the park and noticed to my surprise that, after the recent rain, clover covered the ground.
I have quite a few childhood memories of clover. As a grade-school age kid, I had a daily paper route and delivered newspapers from house to house. I used to watch the ground when I walked to see if I could find any four-leafed clover. If I found any, my mother pronounced it a lucky omen. She preserved the clover by pressing it in a heavy book and keeping it safe in a clear wrapper. I recall opening our family picture album and having a few pressed clover fall out. Maybe my mom thought that would bring luck to the family.
Those memories returned to me during the jog and I began to scour the ground for a four-leaf clover. I thought that would be a nice reconnection to my past; maybe it would be lucky, too.
There were no four-leafed clover in the first patch of ground that I examined. Nor the second, third, or fourth. Disappointed, I raised my head and began walking home.
On the way, the thought soon struck me that you can never really look for four-leafed clover. I never actually found one by looking for it; rather, I would be walking along and one would suddenly jump out at me. It was being primed to see one, but not *trying* to see it, that would lead to the discovery.
Most things are like that in life, I realized. You can't *make* things happen. You can't make people like you, you can't make stocks move your way, and you can't make yourself successful. When you press to make things happen, you're no longer properly primed to see opportunity when it presents itself. You're so busy looking for the clover that you miss the patch that lies several steps ahead.
How many times do we press to get in a trade, when it's just sitting back, seeing the trend, and finding a good place to participate that makes us the real money? How often do we try to make a public speech turn out perfectly or try to get to sleep, only to have the trying interfere with what comes naturally?
What makes the four-leafed clover lucky is that it presents itself to us; we cannot make it appear. It's true of all life's four-leafed clover: they appear when we're ready to see them.
I smiled as I made my way home. I realized that there were a couple of areas in my life where I had been pressing to make things happen. What I needed to do was stand back, do the right things, and position for the best possible outcomes. All we can do in life is walk through lots of clover fields and keep our eyes open. Eventually the four-leafed opportunities will present themselves.
As I walked just beyond the picnic tables, a few steps before I reached Greene Rd. to return home, a large four-leafed clover stood out on the ground. I held back a tear as I carefully plucked it and brought it home. I pressed it in a book and put it in an airtight clear wrap.
Somewhere, Mom was smiling. And I was feeling lucky: my blog topic for the morning was set. .
Here I used a pair of ETFs: the oil ETF USO and the euro ETF FXE to estimate the movement in the price of oil denominated in euros.
Because of the weakness in the euro and the firmness of oil prices, we see that oil has moved up about 50% since the bear lows in March of 2009. With the recent drop in the euro and rise in oil prices, we see that the price of oil in euros has been moving steadily higher thus far in 2010.
With many European economies being energy importers, not producers, such a rise in oil prices can only provide headwinds to economic growth in the eurozone. .
This post will begin a review of the key ideas from my three trading psychology books and the roughly 3700 blog posts on this site. Wherever possible, I will link to posts and resources pertinent to each topic for ready reference.
But first an introduction to trading psychology. The relevance of psychology for trading is based upon two important realities:
1) Trading is a performance activity, much like athletics or performing arts. Psychological variables influence both the acquisition of skills in any performance field and the application of those skills. While there is much more to performance than mindset alone--talents, skills, and interests must align--the wrong mindset can greatly hamper performance;
2) The human mind does not process information efficiently or effectively under conditions of risk and uncertainty. To simply "trade what you see" is a recipe for falling prey to a variety of cognitive and emotional biases. The trader's psychological development is crucial to learning how to properly gauge risk and reward when performance pressures mount.
Trading psychology is not something that is simply appended to trading practice: it is an integral part of functioning as a trader and is acquired in the process of learning how to trade. It is through the trader's developmental process that he or she learns how to manage risk, how to temper overconfidence and fear, and how to sustain positive motivation.
Indeed, a proper training curriculum for a new trader is one which helps the trader and the trading develop over time. A great deal of psychological learning comes from making the classic mistakes that bedevil all new traders: making impulsive decisions, allowing fear to overtake opportunity, overtrading, allowing losing trades to run and capping winners, and the like. If you can make those mistakes--and learn from them--long before you put the lion's share of your capital at risk, you will have an opportunity to grow into the trader you're capable of becoming.
Sometimes the best therapy for your trading is to get into therapy yourself. The markets are an expensive place to be working out your issues about success/failure, competency/adequacy, and need for approval/esteem. Many people take their repetitive patterns from family and romantic relationships and enact them in trading. When that is the case, psychological development needs to precede trading development: resolving those issues is the best way to approach markets with a clear and open mind.
Eventually, you will be able to take your psychological development to the next level of trading: you will recognize when others are making the mistakes you used to make. You will see markets acting on fear and greed and you'll be able to take the other side of those reactive trades. You'll observe when market sentiment is tilted one way and price can no longer sustain its trend. Developing yourself psychologically doesn't mean that you'll be free of emotion; it means that you will become increasingly competent at using your feelings as useful trading information.
More:
The Psychology of Trading is a good introduction to the topic of how life's challenges play themselves out in the trading world.
Enhancing Trader Performance is a good introduction to the learning curves of traders and the process of developing competence and expertise.
The Daily Trading Coach is a good compendium of self-help ideas and techniques for traders looking to coach themselves toward better performance. .
Above, we see a different ETF pair that tracks the relative performance of high yield credit (HYG) vs. investment grade credit (LQD). The idea is that, when investors expect stable and positive economic conditions, they will display their risk appetite by pursuing higher yield. When investors expect unstable and poor economic conditions, they will tend to be risk averse and seek the relative safety of high quality credit over high yielding issues.
As the chart above illustrates, throughout the bull market, we've seen high yield debt outperform investment grade issues. While the pace of that outperformance has waned recently--we have not made fresh 2010 highs since January--we've not seen any underperformance of HYG that would lead us to worry about an increase in perceived default risk. .
Energy is an important market sector, as it reflects not only demand for energy-related companies, but also for energy as a commodity. If traders and investors are expecting global growth, that should show up in terms of greater industrial activity and increased demand for oil and other fuels.
Note the upside breakout among energy stocks (XLE; above) today, reflecting firmness in crude oil prices. Should we get runaway growth in the current low interest rate environment, one would expect that to eventually show up in the prices of raw materials and energy--and the companies in those sectors. .
Here we can see the steady march higher of the S&P 500 Index (SPY; blue line) during the bull market, plotted against the number of stocks across the NYSE, ASE, and NASDAQ that have made 65-day new highs minus new lows. What we see is that dips in the 65-day highs minus lows have occurred at successively higher price points, a hallmark of a bull market. We also see that the 65-day highs minus lows have stayed persistently above zero since the important February bottom.
In evaluating market cycles, we generally want to look for momentum peaks--points at which the largest number of stocks make their new highs--and lows. As Terry Laundry has stressed, there is a proportionality between the time it takes markets to make momentum highs and cycle lows and the time it takes a subsequent bull cycle to make a fresh peak. With the momentum high in early September and the cycle low in early February, that formulation suggests that this bull phase could last into the summer.
Interestingly, that is consistent with today's market analysis by SentimenTrader, who investigated historical periods of persistent upside momentum and found that those rarely turn tail quickly. That view also meshes with the analysis of Market Tells, which finds intermediate-term bullish action tends to follow strength in their version of the S&P Oscillator.
All that is not to say that we won't have our share of short-term market pullbacks between now and then. It does suggest, however, that automatically assuming that an overbought market will reverse in the near term can be hazardous to your wealth. As long as more stocks are making 20- and 65-day highs than lows and the advance-decline line is making fresh bull highs, those pullbacks will tend to provide opportunity for investors to buy into a strengthening economy that continues to enjoy low interest rates and little inflation.
I am absolutely humbled by the large number of heartfelt responses to my recent blog postannouncing that I will be winding down the blog. I've experienced many gratifying moments in my career, but few can compare with today. To be able to be a part of so many people's personal and professional development is a real honor.
In response to a question that many readers raised, yes, I will do everything I can to keep the blog up and archive "best of" posts. If, as expected, I do join a trading firm on a full-time basis, it is likely that my contract will prevent me from doing new writing. There is just too much room for conflict of interest if the firm is sharing its positions with me and then I'm writing about markets for the trading public.
Similarly, if I'm developing coaching innovations for the firm, they don't necessarily want me sharing those with others, including competitors.
So, for a while, I will take a break from writing. For many of the same reasons, I will need to take a break from trading.
I look back on the opportunities that have come from the blog--the books and book sales, the coaching opportunities, the valuable contacts and colleagues--and the return on the investment of my time has been immense. It's been phenomenally rewarding personally and emotionally, but it's also contributed to many hundreds of thousands of dollars of income. All without subscriptions. All without advertising.
And that's the thought I want to leave you with: If you put yourself out there, share your best ideas, reach out to people, and give more than anyone ever could expect you to give, you'll attract the right kinds of people--and the right kinds of opportunity. If you have passion and you have talent, make yourself visible: the best people will find their way to you and everyone will benefit.
I've been blessed with many colleagues and friends through the TraderFeed blog; it has been a most gratifying experience sharing ideas about psychology and markets over the years. With nearly 3700 posts on topics ranging from short-term trading techniques to behavioral finance and self-help methods for problems affecting traders, the blog has become the largest compendium of trading psychology-related material on the Web.
Unfortunately, or perhaps fortunately, my continued writing of the blog will need to wind down in coming weeks due to a major career change. My future coaching involvement with traders will preclude me from writing: much of what I'll be doing will need to be proprietary. When the i's are dotted and the t's crossed, I'll announce that change in coaching involvement more specifically.
The reason for the career change is pretty simple: If I as a coach am not pushing myself to grow and develop, then my efforts to help others evolve are fraudulent. I cannot offer others more than I can achieve myself. To take myself to the next level as a psychologist, I need to pursue challenges that will bring the best out in me.
Remember this: Your growth always lies on the other side of your discomfort. Whether it's in the weight room or in career decisions, you'll never develop yourself by staying in your comfort zone. People don't become old when they reach a certain birthday; they become old when they decide to live life without crossing that line of discomfort.
So, as the blog wraps up, what topics would you like for me to tackle? I'll happily take suggestions as comments to this post. I may not be able to get to all topics in the days ahead, but I'll make a sincere effort. As always, thanks for your understanding and support.
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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