SMB recently published top trading tweets from their prop desk. There are good ideas there, but one jumped out at me. It encouraged traders to post their report cards daily, not just their P/L. Sharing P/L each day can be humbling, but sharing your report card is something different. The report card includes everything we've done well and also the mistakes we've made. If we've traded poorly from a process vantage point, it will show up dramatically on the report card, even if P/L is relatively flat. Sharing our process grades makes us extra-accountable. It's taking a risk. It's very interesting: one thing I've found predictive of a trader's success is the amount of detail they share with me in meetings. Some traders are really upset about not doing well and provide exhaustive detail to track down what they might be doing wrong. They have very specific goals and very detailed ways of tracking their progress on those. They come to meetings with me with prepared questions and topics to discuss. Very often, they have materials to share with me prepared as well. Other traders breeze in and don't have a specific agenda. They talk about what's going right and wrong in a very general sense, but there is no particular urgency in their presentation. Their goals are broad; they are not tracked on a systematic basis. Many times, they will use time with me to complain about market conditions, not to truly discuss their trading. Bottom line is that some traders take real psychological risks when they meet with mentors or coaches. The kimono is wide open. Other traders stay comfortable. They take few risks; they avoid uncomfortable realities. If you can't take risk when you meet with team members, how will you effectively take risk when market conditions line up? Comfort is the enemy of change. The big risk is staying stuck in the status quo.
In this post, we'll explore a very important concept: the difference between primary and secondary psychological challenges and why that difference makes an important difference in our trading. A good place to start would be anxiety. Suppose we experience panic symptoms where, out of the clear blue, we suddenly feel very high levels of anxiety. Panic can be very scary for people because the anxiety seemingly makes no sense. We can be resting in bed or walking on a street and suddenly experience overwhelming feelings of dread and fear. Panic disorder would be considered a primary problem in our example. It's treatable with cognitive-behavioral therapy and medication in a relatively short period of time. Let's say, however, that we become so afraid of our panic symptoms that we stop doing normal activities. The last time we had a meltdown was in a shopping mall, so now we'll avoid groups of people or public places. Maybe the panic attacks have been when I've been alone, so now I try to avoid situations where I'm by myself. Or maybe I feel as though I'm going crazy--there's something wrong with me--so I lose confidence in developing relationships and begin to feel lonely and depressed. All of these are examples of secondary problems. The fear of open places (agoraphobia) or the depressed feelings are the result of how I respond to the primary problem. How I think and react to my problem can create entirely new problems. That can make our situations seem quite complicated. As Shakespeare's quote suggests, how we think about things creates our reality. If we respond negatively to a primary problem, the odds are good we'll create a new, secondary problem. Let's take an example from the trading world: A young man I worked with was losing money in trading, largely by trading too often, sizing individual trades too large, and taking trades when not much was going on in the market. As his losses mounted, he became frustrated and discouraged and stopped putting as much time and effort into his preparation. His frustration spilled over to his relationship with his girlfriend and they were now talking about splitting up. Nothing seemed to be going right in his life. He was feeling pretty down when I met with him. In fact, he had met with a trading mentor/coach, who encouraged him to calm himself, trade more patiently, and stick to his trading plans, but none of that seemed to help. It turns out that the young trader's primary problem was attention deficit disorder (ADD). The very thing that attracted him to markets--the stimulation and risk-taking--was the thing that got in the way of his staying focused in his trading. The lack of focus led to impulsive trades and eventual losses, which then created secondary problems in his relationship and in his mood. The trader addressed the primary problem through medication and with biofeedback exercises that train the mind for focus and this enabled him to trade in a disciplined manner. He began to make money, felt better about his situation, and addressed the problems with his girlfriend by helping her understand what had been going on for him. We worked on alternate ways of dealing with frustration, including ways of constructively engaging the relationship during times when trading didn't go well. Had we not addressed the primary problem, however, no amount of "trading psychology" advice or techniques would have helped him. Very often, what look like primary problems in trading--such as loss of discipline--are in fact secondary consequences of other, less recognized difficulties. How we think about the actual primary problems creates the negativity and frustration that leads to the secondary overtrading, FOMO, etc. The challenge facing us is to identify the problem underneath our poor trading. I recently suggested that a major primary problem affecting traders is using trading to meet psychological needs for which trading was never designed. If we come to markets with self-esteem concerns; unmet needs for recognition; an inner sense of failure from previous efforts at achievement; or a lack of excitement and purpose in life, those primary problems will burden our attempts at trading with an open mind. "It is amazing how much easier it is to tackle trading challenges, " I wrote, "when trading is not burdened with needs it was never meant to fill." Take it to the bank: people who trade out of unmet needs need to trade. That is a common primary problem, and one that deserves priority.
One of the most common questions I get from traders is how to tune out thoughts and feelings that can sway our decision making. Some of the common steps traders take to keep away fear, greed, and frustration include focusing exercises (including meditation) before the start of the trading day and taking breaks during the trading day to clear one's head. What is interesting, however, is that, despite these steps, many traders continue to struggle with impulsive, reactive trading. What is going on? First, let's establish why this is important. As the quote above suggests, when we quiet our minds, we gain access to our intuitive knowing. There is nothing mystical about this. Our pattern recognition represents a non-verbal level of knowing. We engage in that form of information processing every time we drive a car or read a person in a conversation. If we are busy talking to ourselves--engaging in inner chatter about missing trades, needing to trade bigger, losing money, etc--we by definition are not in our non-verbal processing mode. We cover over our intuitive processing with our endless self-talk. Quieting our minds provides us with access to what we know but don't necessarily know that we know. So let's say we practice relaxation techniques prior to trading and teach ourselves to focus our attention and calm ourselves. That way, when we become stressed and go into fight-or-flight mode, we can return to our exercises and regain our composure. Sounds good, but it doesn't work that way. The problem is that the state we are in when we are doing our exercises is miles apart from the state we're in when we're experiencing our fear and frustration. We can't prepare for the heat of battle off the battlefield. The skills simply don't transfer. That is why behavioral therapists try to recreate stressful situations through imagery and gradual exposure while engaging in the self-control exercises. We need to program our minds for when our bodies are going haywire. Otherwise, we perform the exercises fine prior to trading and during our breaks and then fall back into reactive processing when the fight/flight mode is upon us. A technique that behavioral psychologists have found helpful is known as interoceptive exposure. What this means is that we simulate the physiological state that is associated with the stress and then learn effective coping methods. For example, someone with a panic disorder might go round and round in circles making themselves dizzy and lightheaded. This simulates some of the physical sensations of panic. In that state, the person practices their coping techniques, so that they can stay calm and centered despite those sensations. When panicky feelings actually hit, they now are prepared for them and don't become stressed by their own anxiety. It turns out that many of our problems are not due to initial stress and anxiety reactions, but to our getting stressed out about our stress! This is known as secondary anxiety. Through interoceptive exposure, we literally program our minds to stay focused and relaxed during those initial periods of stress. Then, sure enough, the stress passes without causing us distress. So how does this relate to trading? I've recently begun a creative exercise that has been greatly helpful not only in trading but across a number of challenging life situations. Each morning I do an aerobic workout on my treadmill. The idea is to keep myself in an elevated, target heart rate zone for a certain period of time. My Fitbit tracks my progress on that. The unique part of the exercise is that, while I am working out on the treadmill, I practice my deep, regular breathing and focused imagery. In other words, I get myself "in the zone" by quieting my mind while I'm sustaining an elevated heartrate. Through daily practice, I've become quite good at entering that flow state during my time on the treadmill. A side benefit is that the workout seems to go much quicker, and I more quickly find my second wind. Once in the flow, I don't really feel fatigue. The greatest benefit, however, is that the daily repetition literally trains and programs my mind to stay focused and calm--i.e., stay in the zone--while my body is aroused. That fight or flight state begins with elevated heartrate and a speeding up of physiological functions. By training ourselves to stay relaxed through the initial arousal, we can make that fight/flight state completely non-threatening. There is no snowballing into secondary anxiety/stress. Now, when a stressful event occurs in the market, I very naturally slow my breathing and enter the focused rhythm from the treadmill. This turns interoceptive exposure into a peak performance tool. Most of the problems of trading psychology are state-dependent. They are triggered by particular states of mind and body. By training ourselves to engage in our best information processing while we are in the states that trigger us, we gain a level of control over ourselves and our trading that simply is not possible with casual self-help techniques. Who knew? Your aerobic workouts could become your best trading psychology workouts!
We hear it all the time: trading is mostly a mental game, all you need to do is tame your emotions once you have a winning trading method, etc. etc. Total and complete bullsh*t. Yes, of course, if markets were stable and deterministic, then we could just figure out what works and all that would be left is sticking with that. But markets are not stable. They change in their patterns, their volatilities and volume, their trends, their correlations within a day and across days. What works in one environment does not in others. And markets are not deterministic. What drives markets today could be different tomorrow if we get a significant geopolitical event or central bank action. The entire reason markets are so difficult to trade--and it's so challenging to make money from them--is that the game is always changing. We adapt to one regime and make money only to face a different regime and lose that profitability. That can be frustrating. That can be bewildering. That can be discouraging. But it's the changing markets--and the changes they create for our trading--that stimulate the emotional reactions. It's not emotions preventing us from making money from fixed, ever-successful trading methods. Consider an analogy. Let's say our blood sugar levels rose and fell greatly throughout the day, making us sleepy and lethargic when we were hyperglycemic and shaky and unable to concentrate when we were hypoglycemic. The swings in our energy and focus throughout the day interfere with our work productivity and we fall behind in our goals. That becomes frustrating and we start to fear that we'll lose our job. Then along comes a business guru who tells us if we just master our frustration and fear, we'll be more productive and reach our goals. He even teaches us some positive thinking and relaxation exercises. You would consider such a guru to be a complete moron. You could work on your frustration and fear all day every day and, as long as your blood sugar levels are changing wildly, your work efforts and productivity will be variable. The emotional fallout is the result of the changing situation, not the cause. So it is with markets. If you could stabilize your body's state, perhaps with medication that controls your blood sugar levels, the emotional problems recede--because you've addressed their cause. Similarly, if you have methods to adapt to market changes, a great deal of emotionality in trading is circumvented. But of course it's more comfortable for traders to say they need to work on their discipline than to acknowledge that what had worked a month ago now yields entirely random outcomes. And would-be gurus and coaches? It's difficult for them to know about changing environments if they lack the tools for measuring blood sugar or market regimes. Sigh. Think of it this way: If markets were stable and discipline could sustain profitability, then backtested trading systems would forever remain profitable. There would be no need for discretionary traders whatsoever. Above is a quick screenshot from my laptop of the recent ES market. Every data point represents the ES price after the index has made 500 price changes. The blue line and right Y axis represents ES price. The red line and left Y axis represent price change over the last 20 periods, where price change is measured in standard deviation units. When the market slows down, we have fewer data points. When the market is less volatile, the standard deviation units represent less movement. The chart is one way to standardize price action--make it more stable--given shifting activity and volatility. Thus standardized, we can ask intelligent questions about trend, the presence/non-presence of stable cycles, etc. Those questions can help us frame trading strategies in the midst of market changes. When we do so--perhaps by relying on a repeating cycle to enter/exit trades in the direction of the overall trend--we have a clearer idea of what we're doing and why we're doing it. That anchors our understanding and our trading decisions and, thus anchored, lo and behold: trading becomes less emotionally fraught.
The central hypothesis of the book that I am writing on trading and spirituality is that the major emotional challenges of trading are due, not to intractable psychological problems, but to the intrusion of our egos into decision-making processes. What we attach our egos to controls us. If trades and trading are our only activities filled with purpose, we will overtrade. If we judge our success and failure by profits and losses, our moods will rise and fall with market conditions. It sounds so great: the "passion" for trading. Too often, however, that belies an ego-attachment to trading. So how do we take the ego out of trading? By tapping into the soul. Meaningful relationships tap into the soul. Worthy causes and challenges speak to the soul. Appreciation of the world--from art and music to travel--nourishes the soul. Our religious beliefs awaken the soul. Playing an important role in the lives of others, developing our potential in various life areas, learning and creating new things--all take us out of our narrow egos and connect us with larger meanings and purposes. We take trades we shouldn't and avoid the ones we should because we're using the ego of trading to fill soul needs. If we work on our trading to the point of neglecting the rest of our lives, we are like bodybuilders who obsessively develop their upper bodies while their middle sections go flabby and their legs are like twigs. A great first step in taking the ego out of trading is evaluating our trading by process criteria, not by profits and losses alone. If we focus on placing good trades, our trading can build mindfulness, intentionality, and resilience. At the end of the day, however, trading cannot sustain us always, in all ways. We need not just the pleasures, victories, and gratifications of the ego, but also the energy, connectedness, and fulfillment of the soul. It is amazing how much easier it is to tackle trading challenges when trading is not burdened with needs it was never meant to fill. The question is not simply whether we live a successful life or an unsuccessful one. The question is whether we live a full life or an empty one.
Recently, I have received an unusually large number of emails and messages from new traders who have been encountering problems--and losses--in their trading. The majority have opened up their own accounts and are trying to learn on their own and eventually make a living from their trading. Of course, they find out that it is not so easy to make a living from trading--just as it's not easy to make a living from any performance activity, from acting to sports. But to hope to learn completely on your own and somehow rise to elite levels of performance? How often does that occur in any performance domain? Show me a successful performer and I'll show you one who has undergone years of training, practice, and mentoring. No one goes from their backyard basketball court to the NBA. No one tries acting at home and makes the casting calls on Broadway. No one. But those selling services to traders won't say this. Educators will pretend that their books and classes can make traders successful. (Would anyone possibly believe that books and online courses on acting would take someone to Hollywood? To the NBA?). Coaches will pretend that, if you just use their techniques and gain mental mastery, you'll find profitability. (Really? Will emotional control and self awareness win you chess championships or help you find success as a baseball pitcher?) I receive requests for coaching every week from individual, retail traders. In the 15 years I've been doing this full-time, how many of those requests have I taken on? None. Ever. The only way I work with aspiring traders is if they are enrolled in full-time programs of mentoring, either on a hedge fund desk or a training program at an investment bank, graduate program of finance/financial engineering, or proprietary trading firm. Because anything else would not be practicing performance psychology. It would be selling hope. If you're an aspiring trader, hope and passion and desire are not business plans. They do not substitute for talent, skill, and experience. If you think you have the talent and drive, my advice is to find yourself the best training possible and do what medical students, Olympic athletes, and performing artists do: learn from successful practitioners in a daily, structured curriculum. It may not be what you want to hear, but that advice will save you a lot of money, time, and heartache. And, more importantly, it will free you up to do what you're truly meant to do in this world.
In this new year, I'm working with Mike Bellafiore and a group of newer traders to hasten their learning curves. An important part of that process is the keeping of monthly statistics on trading results. These stats, compiled in TraderVue, allow a trader to break down performance into many categories. For example, a trader can view profitability as a function of the setups/strategies traded; as a function of time of day; as a function of position sizing; etc. At a single glance, mentors can see if a trader has improved their win percentage on trades; if risk management has been sound; and much more. That creates a very high level of visibility and accountability. It also provides a rational basis for setting goals and plans from month to month. Perhaps the most eye-opening result from the ongoing score-keeping is that it highlights strengths and problems in trading that both trader and mentor may not have been aware of in real time. For example, one trader showed a pattern of losing money following early morning losses, with the frequency of trading increasing as the losing day progressed. This did not occur every day, but it happened sufficiently often as to hurt monthly profitability. Seeing this pattern clearly in real time allows mentors, coaches, and traders to create a plan to take breaks following opening losses and readjust, both psychologically and in trading. I recently began work with a Fitbit, which spits out real time information on everything from heart rate and number of steps taken to quantity and quality of sleep. The app allows for easy goal setting, so that the wearer always has targets to hit to improve wellness. As with the trading stats, some of the results took me entirely by surprise. For instance, there was much more variability in my active exercise from day to day than I expected. By adding just one component to my daily workouts, I have been able to derive significantly greater aerobic benefit. The most subtle benefit of the relentless score keeping, however, is that the stats themselves have a psychological impact that is carried over from one period to another. Seeing improvement in the numbers builds confidence and a sense of control. Achieving poor numbers can arouse the competitive instinct to make improvements, focusing on doing things the right way. If a sports team proclaimed their desire for a championship but never reviewed game film and performance and coaches never looked at where the team was most and least successful, we would question the true commitment of the team--and we would question their odds of achieving a championship. Similarly, when traders pronounce their passion for trading but never bother to systematically keep score on what they are doing right and wrong, can we truly say that we would invest *our* money with those traders? It is when we make ourselves fully accountable that we become our fullest successes.
Looking back on recent conversations with traders, here are a few ways of turning your trading psychology around by finding the light in the darkness: 1) Using losing trades as learning experiences - The best losing trades are ones that should have worked, but didn't pan out this time. Very often, that tells you something about the market that you can incorporate into your next trade. The losing trade is not a loss if it leads to a larger winner. And it's not a total loss if it leads to good learning about your trading. 2) Using people's negativity as a positive challenge - Others may doubt us or not care about us and that can be hurtful. It can also provide the motivation to double down on our efforts and refuse to buy into their negativity. We don't have to become bitter when we can focus on becoming better. 3) Pulling out your winning trades and learning from them - It's human nature to focus on what we've done wrong. But if you're relatively flat in your performance over time, it means you've probably done some things well and others not so well. Often, it's the winning trades that can teach you what works in the current market and how you best manage positions and risk. The research in psychology tells us that maintaining a positive mindset is good for creativity, it's good for productivity, and it's good for our mental and physical health. The latest Forbes article contains more ideas about how we can turn negative emotions into positive well-being.
The recent post on awakening your talent cited Courtney's performance on the talent show as a beautiful example of how we "become a different person" when we are doing what we're meant to be doing. We can be one person in day-to-day life and quite another when we enter our performance zone. This is an important characteristic of great relationships and great careers: they bring out the best in us and transform us. It's important to note the opposing reality, however. Just as we're trans-formed when we're activating our strengths and values, we are de-formed when those are chronically frustrated. Consider a few examples: * Employees start their careers with enthusiasm, but quickly become caught up in office politics and playing the games that can move them up the ladder. I have seen talented people become "yes-men", completely lacking in integrity--all in the name of protecting and advancing their positions. For a while, they gain status, but in a more enduring way they lose their souls and become bitter, cynical, and unproductive. * Couples start their relationships with real feeling, but soon are caught up in a social whirlwind of impressing others and/or an indulgence of personal/material needs. Meanwhile, the activities and values that brought them together are submerged and their relationships increasingly become ones of convenience and emptiness, with little empathy for or genuine connection to others. * Members join a social organization out of an initial desire to learn, grow, and connect to others, but eventually are drawn into ego battles for status and position, creating social rifts and alienation in the process. I've met a number of people active in social organizations who know many people and yet have shockingly few genuine friends. In the immersion in me, me, me, they never get to we. * Traders start out with eagerness and anticipation, but before long are drawn into the consensus chats online and on trading floors. They trade the same ideas in the same ways as others, never truly adding original, creative elements to their trading. As they achieve the same, undistinguished returns as others, they become increasingly frustrated and discouraged, losing their energy and wasting day after day doing more of what doesn't work. Sometimes we find ourselves stuck in the hell of situations that are de-forming rather than trans-forming. A beautiful outcome occurs when we use those deforming situations to transform us: to become so revolted by emptiness and superficiality that we double down on what is most meaningful to us and that helps us find our voice. Consider: role models are everywhere. We can find positive role models who inspire us, or we can find negative role models that so fill us with disgust that we're able to do what Courtney does at the end of her song: turn our backs, throw up our hands, give a little "mwah", and move in a different direction. There is a lot of positive that can be derived from negative role models. Utilizing the deformation of negative role models as positive life motivation is the ultimate transformation.
We've been hearing a lot lately about the importance of having a "trading accountability buddy" to help you avoid mistakes and stick to good trading processes. That is very helpful, but let's focus on what traders really need: Drinking Accountability Buddies. You know what I'm talking about: people who will go out with us and make sure we don't do things we'll regret in the morning. After all, if you make a bad trade, you can always battle back the next day. If you bring home the wrong person from the bar, you've probably exceeded any reasonable stop out level. So how can a Drinking Accountability Buddy help us? Here are three situations they help us avoid: 1) The Joint Closers - Look, at real bars there are always guys who are there until the bitter end, drinking away until the joint shuts down. Very often they get more surly and belligerent as the night goes on, because they're frustrated that they haven't found any cute young thing to take home. You're just starting to have a good time and a couple of the closers give you the evil eye. That's when, nursing your third strong one, you're tempted to dust off your Andrew Dice Clay line and ask the closers, "Hey, are you Neil and Bob or is that just what you do?". Well, you know how that goes down. Faster than you can say, "Katie bar the door," the surly dudes get off their barstools and it's all flying fists and broken glass. Your Drinking Accountability Buddy will see the evil eye and knows that you can mouth off, so he'll quickly get your ass out of there. Think of how much you'll save on a 24-hour bail bondsman. 2) The Newbs - OK, you decide to go out after the market close with a few traders and you head out to a good craft beer spot. You know, one that's rough enough to have some color and action but not one where there are so many joint closers that a beer and a shot is likely to mean a beverage and a handgun. You find the right spot and you place your order, maybe a good bourbon barrel aged stout or maybe you up your game and get a double shot of a good reposado. The next guy orders and, along with the others, cheerfully announces that they'll share a pitcher of Bud Light Lime. Well, at that point you are screwed. Your evening is about to be spent with complete idiots. Because the fact that they are drinking newbies usually means that they are trading newbies and will ask you questions about strange chart patterns and "what the algos are doing". Your Drinking Accountability Buddy will see this situation before it gets underway and steer you to a bar where you can maintain a normal blood pressure and avoid week-long bilateral hemiplegic migraines. 3) The Classy Drinkers - This is where you end up going out with "successful traders" who, of course, have to hang out at the kind of place where successful people hang out. Nice soft music, in-your-face cocktail service, and a wine list 30 pages long. And, sure enough, that's what all the classy drinkers drink: petite goblets of wine that they sip with their pinkies turned out. Meanwhile, you're sitting there with your 18 year old single malt, wondering why the major topic of conversation is "toxic masculinity". One time it got to me so bad I started singing The Rodeo Song and telling stories about growing up in a trailer park and dating my cousins. That didn't end well. A Drinking Accountability Buddy will notice right away that everyone in the joint is wearing way-too-tight clothes and nibbling from veggie plates and steer you the hell away from there. Then you can go to a dive bar and have yourself a fun evening telling jokes like, "What's the similarity between Michelob Ultra and sex in a rowboat? They're both very close to water..." Well, there it is. Trading Accountability Buddies are fine, but it's the Drinking Accountability Buddies that really have your back. Hell, they're almost as valuable as that near-perfect market indicator I discovered and that infallible wave structure I wrote about. The main thing is to have a good time--in life and in trading--and never lose your sense of humor!
It is common that I hear traders describe techniques they are using to make changes that sound good on the surface but that, in fact, are not effective. A great example of this would be the use of trading journals to review the day. Such review might be helpful for learning and, if focused, could help with goal-setting. But the process of making personal changes is not going to be fulfilled by doing some writing. Change requires a different focus and a very different mindset and emotional state. Writing down an intention to be more disciplined in trading is worlds apart from using psychological methods to rehearse that discipline and create a sense of emotional urgency around the rules and practices. In the most recent Forbes post, I lay out an important principle: the challenges that impact our trading are closely related to the personal challenges that bring people to counseling and psychotherapy. We first encountered this notion in the Psychology of Trading book, but the idea of a continuum linking all of our challenges is broader. As the Forbes post lays out, an important implication is that the techniques that help people with anxiety, depression, anger, and the like are effective for parallel problems in the performance domain: stress, negative thinking, frustration, etc. This is huge. There are evidence-based psychological methods known to help people with diagnosable emotional disorders. Every one of them can be adapted to help us with normal, developmental challenges and with the unique problems associated with the quest for peak performance. Moreover, all those techniques accomplish their goals relatively quickly, as the most recent research review of brief therapies lays out. We would never consider turning to unproven home remedies when research-backed medical help was available. Similarly, it makes no sense to turn to pop-psych, feel-good solutions when there are reliable methods for lasting change readily at hand. In upcoming posts, I will review some of these methods and their application.
December was pretty much straight down in the stock market, with accompanying weakness in other assets, such as oil and high yield bonds. January has been pretty much straight up, with reversals in all those asset classes. How can we make sense of this "schizophrenic" market behavior? An excellent blog post from David Moenning on the NAAIM site offers worthwhile perspective. When Fed Chair Powell indicated continued shrinkage of the balance sheet and the possibility of future rate hikes, the market sold off hard that very afternoon and didn't look back. The weakness was broad: on December 24th, we registered 50 stocks making fresh one-month highs and 3158 hitting new one-month lows. On that day, among the SPX stocks, we saw fewer than 5% of all shares trading above their 3, 5, 10, 20, 50, and 100-day moving averages. In other words, pretty much everything was down. Fast forward to Friday's close, January 18th. Over 90% of SPX shares are trading above their 3, 5, 10, and 20-day moving averages. A total of 1916 stocks across all exchanges registered fresh one-month highs against 67 new one-month lows. In other words, pretty much everything is up. Moenning, in his post, traces this reversal to the Fed's walking back their earlier "hawkishness", as they indicated flexibility in navigating the rate and balance sheet paths going forward. Their hawkish stance was a game changer for institutional investors and led to a broad risk off. Their flexible stance was an equal game changer and led to broad risk on. What does this tell us? Several things, I believe: 1) Any effort to foretell the market's path with technical indicators, chart patterns, and wave structures is inherently limited in value. We cannot operate with a crystal ball when game-changing events are occurring in real time. Flexibility in managing money is just as important as "conviction". 2) Monetary policy is a major driver of asset pricing. This is the message from Ray Dalio's recent work. The Fed is walking a narrow bridge in normalizing rates and not adding fuel to a strong economy versus pulling away the punch bowl and risking weakness. The Fed has told us they don't want to fall off either side of the bridge, so we can expect balancing messaging at market extremes, as Chairman Powell and Co. seek Dalio's "beautiful deleveraging". 3) Investors are behaving as a herd. For over 90% of stocks to be above their 20-day moving averages, all sectors have to be bought. Ditto when fewer than 5% were above their moving averages. Everyone is singing from the same hymnbook. This makes short-term breadth measures and short-term measures of upticks versus downticks handy in trading with the market's momentum. It also means that fighting the herd is a losing proposition. Of course, this, too, shall pass. At some point valuations will matter and we'll see diverging behavior among stocks and assets. So far, however, it appears that momentum is the upcoming starting pitcher.
I'll be writing much more on this topic in my upcoming book on trading and spirituality. Here is an important perspective: When we access our strengths--what we do best--we gain access to what we call the "zone" or the flow state. In that state, we tap into parts of ourselves that are relatively submerged during normal, day-to-day life. In a very important sense, when we are in sync with our talents, we become different people. I couldn't agree more with Market Wizard Ed Seykota when he pointed out that great traders have absorbed their talent: "They don't have the talent--the talent has them." Good traders have talent--and skill and motivation and discipline. But great is a different beast. It's when the talent drives everything and the performer becomes a channel for his or her strengths. When the talents have us, we are transformed. Success depends upon our ability to effect that transformation: to go from the good to the great. The key is structuring our work so that we are continually tapping into our greatest strengths and what is most meaningful to us. We recently got to see a good example of this when Courtney Hadwin, a painfully shy and awkward 13-year old singer who placed sixth in America's Got Talent returned at age 14, wrote her own song, and competed in the Champions show. She explains, "When I sing, I become a different person." She "gets into the music", moves her body, and accesses wholly different aspects of herself. If you're trading in your normal state of consciousness, you have not awakened your talent. That doesn't win singing competitions and it doesn't win in markets.
In my recent Forbes article reviewing historical patterns of bear markets, I noted that it was common to see extended bounces even within the context of longer-term declines. Indeed, we could be seeing just such a bounce in recent markets, which have taken stocks, oil, and high yield bonds meaningfully higher following significant declines. Speaking with investors and traders, I observe a high level of uncertainty and many questions. Is the decline over? Are we beginning a new bull market? Will we retest the lows? Thanks to a savvy trader for pointing out this perspective from The Fat Pitch, who evaluates historical evidence regarding bounces from highly oversold conditions. See also this useful preview of the coming week from Dash of Insight. In my own trading and investment, I have found it useful to track the relative performance of ETFs as a way of detecting market themes and the unfolding of strength and weakness. Here are a few ETFs that I view in this relative manner. Each of the charts is indexed to 100 as of the start of January, 2016 and each looks at the ETF versus SPY: * EFA - Here we're looking at stocks outside the U.S., including Europe, the Far East, and Austral-Asia. Note the ongoing weakness of EFA versus SPY. Many of the market vulnerability themes (disarray in the E.U.; concern over Italy and debt; concern over China and trade wars) stem from overseas. Watching the relative performance of EFA helps me walk forward, day by day, to see if those concerns are growing or waning.
* HYG - This tracks high yield bonds, which have been weak for a while, but which rallied strongly on the Fed chair's recent reassurances regarding the pace of shrinking the balance sheet. When high yield bonds decline in price, their yields rise. That is not necessarily a good thing, as it can mean that the market is pricing in growing odds of default. When we see high quality bonds (AGG, for example) outperform high yield bonds, it's a sign that smart bond investors perceive risks and seek safety. Watching the relative performance of HYG is one way of tracking their sentiment going forward.
* XLF - This familiar ETF tracks the performance of financial stocks within the SPX universe. In a stable and growing economy, banks should perform well and other financial firms should benefit from loan activity and loan demand. If we encounter threats to the financial system, such as we saw in 2007-2008 with the housing crisis, then banking and financial stocks should show particular vulnerability relative to the overall stock market. Lately we've seen relative weakness from the financial sector and a so-so bounce. I remain concerned about the European banks, which have been unusually weak: DB and CS are examples.
* DBC - This ETF tracks commodities and is sensitive to oil prices, which were quite weak and which have rallied nicely in recent sessions. In a growing global economy, rising production and consumption and increased building lead to an increased appetite for many commodities. Conversely, economies in recession will tend to consume less and that can lead to declining commodity prices. Oil and industrial metals are especially valuable to follow in this regard.
Note that overseas equities, high yield bonds, financial stocks, and commodities are all below their 2017 levels in relative terms. Should we see economic weakness not only overseas but in the U.S. as well, these measures could weaken further. Conversely, if we retest lows and these measures hold up well in relative terms, I will be open to a more benign thesis. The key is staying open-minded and letting the evidence speak for itself. We can't be open to possibilities--and profit from them--if we can't tolerate degrees of market uncertainty.
There are several ways that we can make improvements in our trading: 1) Become a better idea generator; become better at spotting opportunity; 2) Become a better trader/portfolio manager; become better at implementing ideas as favorable risk/reward opportunities and constructing portfolios of trades; 3) Become more consistent in drawing upon best practices; become more grounded in personal and professional processes that keep you in peak performance mode; 4) Become more consistent in recognizing and intercepting your worst practices; become more mindful of triggers and pitfalls that set you up for your worst performances. In working on any one or all of these, it is important that the efforts are daily. We internalize what we do. The idea is to start our changes with motivation, but continue them with positive habits. Tomorrow (Thursday, Jan. 10th, 4:30 PM EST), Mike Bellafiore and I will join the good folks at Futures.io to present a free webinar on how you can implement these four areas of improvement in your trading. We are working with developing traders who are making meaningful strides in their trading, so we see what is and isn't working in real time. Our hope is to leave attendees with specific ideas and strategies that they can use to move their trading forward in 2019. Here is the link for webinar registration; we look forward to seeing you there! Brett
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There are two necessary ingredients of trading success and it sometimes seems as though they are at odds with one another: prudence and aggressiveness. Prudence is all about staying in the game with proper risk management, position sizing, and selectivity of trading. Aggressiveness is all about making the most of the game with proper risk taking, position sizing, and assertiveness of trading. Depending upon the frequency of your trading, it is good to have a loss limit to constrain the downside each day, week, and/or month. If that loss limit is set prudently, it will keep you in the game (psychologically and financially) during normal, expectable periods of drawdown. Less well appreciated is that the daily/weekly/monthly loss limits should also serve as benchmarks for your profitability. If a trader has a loss limit of X, he or she should make X or more during that period of time. Thus, for a developing trader who has a $1000 daily loss limit, we should see in the span of a month occasional daily gains of $1000 or more. It is that ability to make the daily limit and not lose it too often that provides good risk-adjusted returns: the ability to make a good amount of money per unit of risk taken. Many traders lack prudence and trade aggressively, so that their big losing days outnumber their big winning ones. Eventually this leads to trading stress and possible blow up of the account. Many other traders trade with prudence but not aggressively, so that they don't have many large losing days and they also don't have many large winning days. Implicitly, they're trading to not lose. Eventually this leads to a lot of wasted effort and frustration. Trading with prudence and aggressiveness means that--during the life of the trade and during preparation for the day/week--you must engage in prudent self-talk and planning and you must engage in aggressive self-talk and planning. In practice this might mean mentally rehearsing where your trade is wrong and planning a stop out (prudence) and also mentally rehearsing what tells you your trade is right and planning an add to the position. In practice it might also mean using the information from a losing trade to place an even larger trade in the opposite direction. The point here is that your planning and your self-talk have to embrace both prudence and aggressiveness if your trading is to integrate these elements. Many performance fields--from being a fighter pilot to being a chess champion to being a race car driver to being a football quarterback--require the combination of prudence and aggressiveness. Your trading statistics will tell you how well you are doing with both of these vital trading ingredients.
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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