More Ways Of Finding Edges With Momentum And Value

 

In the recent post, we took at look at short-term breadth strength and how that can help us identify opportunities associated with momentum and value.  Now let's extend that view by exploring breadth strength at longer time horizons.

Using the same database with SPX, what we find is that when the percentage of stocks closing above their 20-day moving averages is in the highest quartile of the sample, the next five days average a gain of +.51%.  When the percentage of stocks closing above their 20-day moving averages is in the lowest quartile of the sample, the next five days average a gain of +.33%.  All other occasions actually average a loss of -.17%.  In other words, in the rising market since 2014, essentially all short-term gains were achieved when the market was broadly strong and broadly weak.  If we look at next 20-day returns, we find out that when stocks were most broadly strong, returns averaged +1.76%.  When stocks were most broadly weak, returns averaged +.98%.  All other occasions averaged a gain of only +.17%.  

Now let's zoom out to the percentage of stocks closing above their 100-day moving averages.  When we have had the greatest longer-term breadth strength, the next 20 days have averaged a whopping gain of +2.36%.  When we have had the lowest level of breadth strength, the market has actually averaged a loss of -.33%.  In other words, breadth strength at the longer time frame has brought considerable momentum, but low breadth strength has also shown a level of downside momentum--not value!

We're starting to see that edges are complex:  the result of interplays among short, medium, and longer timeframes.  That cannot be captured by a single chart pattern or indicator reading.

But let's take another look:  We will divide the sample into quartiles based upon VIX readings.  When VIX has been in its highest quartile, the next 20 days in SPX have averaged a large gain of +2.40%.  The remainder of the sample has averaged a gain of only +.28%.  So here we see a large value effect (weak and volatile markets leading to reversals) and relatively modest evidence of momentum.  When we look at edges in the market, breadth strength matters but may show very different forward returns in low and high volatility regimes.

What I have found is that it's when short-term patterns of supply and demand, such as the ones described here and here and here, line up with the multi-day patterns of breadth strength and volatility that the best trading opportunities occur.  There is a huge edge in clearly knowing where your edge lies.

Added 9/1/20:

Notice how we closed 8/31 with fewer than 50% of SPX stocks above their 3- and 5-day moving averages, according to the Index Indicators site.  That triggered the breadth signal from this post.  We can see from the chart below that we were getting a good amount of volume hitting bids in the ES futures, taking us to a short-term oversold point at a higher price low.  That is how price and volume behavior can confirm a signal from breadth.  Note how we have since bounced in premarket trading.

Trading psychology cannot substitute for understanding the psychology of the market you're trading.  Per Ms. Parker, when you hear someone say that your mindset is your edge, don't toss their advice aside lightly.  Hurl it with great force.  

The Three Minute Trading Coach Video Series

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Actively Trading Momentum and Value In The Stock Market

 

This post will begin a short series on finding edges in the broad stock market related to momentum (directional persistence) and value (directional reversal).  A good place to start would be to review the recent post on how to trade a trending market.  Notice how the signal described in that post captured the most recent upside opportunity quite well.  Not all movement in the market is meaningful and it's easy to get so caught up in short-term ups and downs that we end up trading randomness.  If we can backtest patterns of momentum and value, we can begin to ground our trading is what is meaningful.

So let's begin simply.  We're interested in the percentage of stocks in the SPX universe that close each day above their respective five-day moving averages.  (Data can be found via the Index Indicators site).  That provides an indication of what I call breadth strength:  the degree to which there is broad strength or weakness in the market.

My database goes back to August of 2014, so let's see what happens in the market after five days of broad strength and weakness.  To accomplish that, I first divide the dataset into quartiles and examine average forward returns.  When we have seen the broadest strength in the market (top quartile of readings above five-day moving averages), the next twenty days in the market have averaged a gain of +1.31%.  When we have seen the weakest readings on our indicator, the market has averaged a 20-day gain of +.97%.  All other occasions in the market have averaged a 20-day return of only +.48%.  

In other words, we have achieved superior returns by buying the market when we've had unusually strong breadth and when we've had unusually weak breadth.  The unusually strong breadth has provided upside momentum; the unusually weak breadth has provided value.  During the overall upward market from 2014 to present, that has been a way of capturing a good chunk of returns in the market trend, as the recent post observed.  This simple indicator has done a pretty good job of tracking the psychology of the market.

Are there ways of improving on this indicator and refining our ability to trade value and momentum?  That is what we'll explore in the next post.

Using Breadth, Strength, and Momentum to Capture Market Cycles

What Does A Professional Trader Work On In His Trading?

 

I jumped at the opportunity to participate in the upcoming Festival of Learning hosted by RealVision.  (Here is where you can sign up for the sessions that run from September 2nd - 4th).  My eagerness came from the chance to speak with Mark Ritchie, Jr., an experienced trader and fund manager.  I wanted to hear his take on trading psychology and the challenges he faces running his own fund.

So what was one of the very first things that Mark discussed in our pre-recorded session?  Was it managing his losses or staying in emotional control of his trading?  No.  It was letting his profits run.  He wisely pointed out that a trader can be great at limiting losses and getting stopped out, but still not make the most of his or her trades.

Mark questioned the wisdom of the old saying that you can't go broke taking a profit.  Because much of a trader's total return comes from a handful of top opportunities, taking profits prematurely can cap success.  This is why, in my work with traders at SMB, we focus on monthly statistics and pay particular attention to whether the average size of winning trades is greater than the average size of losers.  Many times that ratio needs improvement, not because the trader is letting losing positions go or adding to them, but because they stop out of winners before the positions have hit their targets.

Here's a big psychological point:

The traits and strengths that we need to limit our losses are different from the ones we need to maximize our gains.  We need to consider these as separate skill sets and work on them independently.

Limiting our losses is all about prudence and conscientiousness:  the ability to be careful.

Maximizing our gains is all about willpower: the ability to sustain a goal in the face of uncertainty. 

Mark's insight was that, for experienced traders, the prudence comes naturally.  If it didn't, they would never get to the point of being experienced!  But tolerating uncertainty is different.  When we watch our positions tick by tick, it's easy to see something concerning and use it as an excuse to bail.

There's an old saying:  failure to plan is tantamount to planning to fail.  If tangible targets for our positions aren't firmly set in our minds and mentally rehearsed, we will have no goals to focus on to get us through the uncertainty of price paths.  The real problem is not just getting out of trades too early.  The problem is failing to set vivid goals for our trades that energize us and feed our willpower.  Come to think of it, that's a problem many of us face in life as well as markets!

RealVision Festival of Learning

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A Different Look At The Market's Weak Breadth

 

Above, with big kudos to the excellent Index Indicators site, we can see a chart of the SPX (black line) over the past six months.  Overlaid in the green line is the percentage of SPX stocks trading above their 20-day moving averages.  Note how this percentage has tailed off in recent days, falling slightly below 50%.  It is one further indication of weak breadth in the current stock market.  (Please check out the recent Forbes article for a detailed discussion of current market breadth and what that has meant for stocks over the past 20 years).  Indeed, I went back to my database which starts in 2006 and examined all market occasions in which SPX was up over 5% in a month, but the majority of its stocks were trading below their 20-day moving averages.  Surprisingly, there was only one occasion, on July 25, 2011.  That preceded a double-digit percentage decline in stocks over the next 10, 20, and 50 days.

When I divided the sample of strong monthly returns in quartiles based upon the percentage of SPX stocks trading above their 20-day moving averages, I found that the quartile with the weakest breadth returned an average of -.77% over the next 50 trading sessions.  All other occasions averaged a 50-day return of +3.05%.  The results suggest that, when we have strong upside momentum, the rising tide lifts all boats and forward returns are favorable.  When the tide is not lifting all boats, there is reason for caution.

The current market is interesting because there are differences among stock sectors regarding relative strength, with technology (XLK), consumer discretionary (XLY), and communication services (XLC) sectors quite strong in the relative performance ratings of StockCharts and the energy (XLE), financial (XLF), utilities (XLU), and real estate (XLRE) sectors notably weak.  Even within each of these sectors, there are relatively strong and weak industries.  For example, in the weak energy sector, renewable energy equipment shares are very strong.  In the strong technology sector, telecommunications equipment companies are weak.  

As we move forward, shifts in the market's advance-decline numbers will tell us a great deal as to whether the rally can broaden out and sustain itself or if it falls into a topping mode with continued industry and sector weakness.  I note that, even with the recent market strength, we're seeing subpar performance from banking stocks, real estate REITs, integrated oil and gas shares, airlines, and marine transportation companies.  If the economy is to turn around, these areas should display growing strength.  For that reason, they are among the parts of the market on my radar.

Further Reading:  Runaway Bull Market and Weak Breadth

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What We Do Shapes How We Feel

 

The Rabbi makes a profound point:  Our joy supports our thinking.  When we are downhearted, can we really focus on opportunity?  When we are joyful, will we really become wrapped up in short-term P/L and missed trades?  We tend to think that trading well will make us happy.  But what if happiness helps us trade well?

A fascinating study finds that even just simulating the act of smiling leads us to feel happier.  What our muscles do, our minds process.  "When your muscles say you're happy, you're more likely to see the world around you in a positive way," the study author reports.  There are houses of worship where prayer is interwoven with dancing, singing, and clapping of hands.  We see the same thing during weddings.  Could it be that the physical acts of celebration help us internalize a celebratory frame of mind?

We know from psychological research that positive emotional experience helps us process information more broadly and more effectively.  Research also finds that positive experience also helps us be more productive and is associated with enhanced physical health.  What if active expressions of joy, fulfillment, love, and energy actually contribute to our positivity?

This has important implications for trading psychology.  What we express with our bodies may shape the quality of our mindsets and experience.  Think of what you're expressing during your trading, during your meetings with peers, and during your reviews.  Perhaps you're not expressing very much at all in your body language, your tone of voice, etc.  How might such a lack of expression impact your experience?  Perhaps it's not a coincidence that the interns I see learning so well at SMB are so physically expressive in their enthusiasm.

What our bodies do may shape what we experience--and that can either strengthen our common sense or disrupt it.  Cognitive psychology emphasizes that our viewing impacts our doing:  how we process events shapes how we experience and respond to them.  But perhaps it's equally true that our doing shapes our viewing:  what our bodies do shapes our feelings and thoughts.  Could a restricted range of physical activity and expression create limitations in our states of awareness?  

Think about team meetings in most workplaces.  Think about the environment on most trading floors.  Think about how much energy, joy, and satisfaction you give visible expression to during your trading.  Too often, our image of behavior that is "professional" does not permit such expressions.  Could it be, that in our pursuit of the professional, we never find the common sense that is strengthened by joy?

Further Reading:  Radical Renewal

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How You Learn Shapes How You'll Earn

 

There's a trader I'm working with who I believe will be a star in the not-too-distant future.  He reviews his trading extensively each day and week, keeps a wealth of statistics about his trading, and often sends his reviews to me and others for suggestions. What I find unique about this trader is that his sole focus has been on improving the consistency of his trading, not the P/L.  He is like a Toyota manufacturing plant, closely examining quality in every part of the process and then pouncing on opportunities for quality improvement.  He derives pleasure from getting better and better and that drives increases in his sizing and risk-taking.

I recently did a video on how to avoid trading on tilt.  It's a big question for so many traders: How do we make sure that emotional disruptions don't color our decision-making and hijack our trading?  It was only after making the video that I realized that I had never seen this trader on tilt.  Yes, he had losing days, and in the past he had some slumps.  But I never saw emotional, reactive trading.  That's when it hit me:  The entire way he had set up his learning process has kept him level-headed.  He is always looking for what he could do better, so missing trades and placing losing trades aren't threats or frustrations.  They are simply fuel for quality improvement.  

When we focus on learning and quality of trading, we take P/L out of the equation, which helps us take our egos out of trading.  Some journals I read are like, "I did this and then I did that. I lost money and next time I need to take my time." It's all about them!  The trader I'm working with spends much more time examining how his stocks moved and how he could better recognize that movement.  He's like a diamond cutter looking at his work, finding small flaws, and then working on reducing those.  It's a focused, intentional process, without much drama at all.

Little wonder, then, that his trading has this same quality.  How we learn shapes how we earn.  Our learning processes shape our mindsets and our priorities.  What we do and how we do it becomes what we internalize.  Without a disciplined, focused learning process, can we truly expect to trade in disciplined, focused ways?

The Three Minute Trading Coach Video Series

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Trading A Trending Market

 

I had an interesting conversation with a frustrated trader recently.  He lamented that it is impossible, as an active trader, to trade a market that "goes up every day".  Out of this frustration, he had broken rules, placed trades outside his "playbook", and lost money.

It's a great example of how a negative trading psychology can create poor trading, but also follows from poor market understanding.

With a big shoutout to the Index Indicators site, above we see a chart of the SPX 500 (black line) over the past three months.  The green line represents the percentage of stocks in the index that close above their three-day moving averages.

Now here's the important principle:  In any market, there is always a trend component and a cyclic component.  In other words, we can best describe any time series as a linear, directional function plus a dominant cycle.  It is the ways in which the linear (trend) component combines with the cyclical component that creates the charts we see.

In a market with a strong trend, the linear component will dominate and corrections (from the overlying cycles) will be short-lived.  In a range market, the cyclical component will dominate and there will be only a small directional aspect to movement.  If we can estimate cycle frequency by locating trends and ranges within longer time-frame cycles (cycle amplitude is in part a function of volatility), then we can use cycle extremes to more actively trade directional movement.  

The chart above illustrates this concept.  We have had good buying opportunities when the percentage of stocks trading above their three-day moving averages has dipped below 50.  In an uptrend, such pull backs occur at successively higher price lows.  By waiting for the cycle trough, we can participate in the trend with good risk/reward.

So, for instance, buying those 11 occasions in the past three months when fewer than 50% of SPX stocks were above their respective short-term moving averages led to a a 91% win rate with an average holding time of a little more than two days.  Such an active trading strategy did not capture all the gains of buy-and-hold, but the active trader participated in half of those gains while keeping the maximum downside to under half a percent.

The important point here is that many trading psychology problems come from fighting trends.  If we perceive a trend, a promising strategy for active traders is to buy dips at successively higher lows (or sell bounces at successively lower highs).  Trending markets are impossible to trade only if you have no tools for identifying the cycles within trends.

Trading Psychology Resources

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Avoiding Burnout: Every Goal Needs A Vision

 

One mistake traders make is reviewing their trading and stating an intention to do things better next time, but then never actually turning that review into specific goals and plans that would guide the improvement process.  This is very common when traders begin keeping a journal.  

A second mistake traders make is setting very specific goals--and often multiple goals--but never connecting those goals to a broader vision that provides energy and inspiration.  Without the vision, work on goals easily becomes drudgery:  an endless task list.  Perhaps that is why I'm hearing from so many burned out traders during this COVID period.  Goals can push and guide our efforts, but it's the pull that comes from vision that truly moves us forward.

In the previous blog post, we looked at handling adversity as a key element in trading success.  It is when we are supremely challenged that we dig deep and access fresh sources of energy.  Many times, this rising to a challenge occurs in a team context, where members of the team draw from each other in a positive role modeling.  When we have an individual or shared vision, we can tap into the meaning and significance of that ideal to forge ahead with our goals even in the face of setback.  

The vision may need to be something larger--more meaningful to you--than P/L alone.  It may be a vision of the kind of person you wish to become; the kind of business you ultimately want to build; the ways in which you want to make use of the returns from your trading.  Perhaps trading is a means to a vision that you pursue in the non-market hours of your life.

In any of these cases, what moves us forward is a purpose that is larger than us.  Yes, it helps to work on our execution, our idea generation, our risk management, etc.  But we will pour ourselves into those efforts if they speak to what is important to us in life.  To use an analogy, no amount of working on problems will restore love and commitment to a troubled relationship.  A fulfilling relationship is so much more than something we work on.  We have a relationship with markets as well.  Working on trading is necessary, but it can't be all that we do.  We also need to nurture the positives to keep the vision alive.

Trading Psychology Resources

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How Do You Handle Adversity?

 

It is said that adversity doesn't build character; it reveals it.  When the sh*t hits the fan and everything is going against us, we learn a lot about ourselves.  

When power went down in our region and we were left without telephone, internet, or cable service, I wondered how I would work with traders.  Everyone was working from home, which meant that my only ways of connecting with them had been taken away.  A fleeting thought went through my mind that I could cancel all my meetings.  As soon as the thought entered, I rejected it.  I was not going to give up.  I drove my car to various towns in the area until I found a spot with a solid internet connection.  I kept my phone charged with the car battery and downloaded an app that allowed me to do face-to-face meetings with minimal bandwidth demands.  Instead of working from home, I discovered work-from-car!

Similarly, when everything went down in the recent storm, I received encouragement from Margie and together we figured out how to use a portable generator and connect it to major portions of our house.  I have minimal mechanical skills--I actually tested as learning disabled with respect to performance tasks as a child--but I was not going to be a victim of the storm, and I was not going to let Margie down.  

In both cases, adversity brought out a latent strength, a quality I have, but do not always draw upon:  persistence in the face of challenge.  I refuse to let circumstances control me.  That refusal gives energy and leads to creative solutions I would have not pursued otherwise.

Recently, I've noticed significant differences in how traders handle adversity, whether it's a losing trade, a missed opportunity, a drawdown, etc.  The really good traders refuse to let the setback control them.  They view and re-view their trading and they make sure they drill the learning lessons in their head.  They miss an entry, but they don't give up on the idea.  They don't simply place a revenge trade; they become even more focused as a result of the missed trade--and that allows them to find another way to participate.

That's really it:  adversity can disrupt us, or it can focus us.  It can lead us to withdraw and seek comfort, or it can push us to dig deep and draw upon our latent strengths.  The concept of sisu suggests that each of us possesses a second wind of energy that we can access during periods of challenge.  Might it be the case that the winners in life's race are those with the greatest capacity to draw upon that second wind?  Perhaps by continually placing ourselves in challenging circumstances, we can cultivate the sisu--the access to hidden strengths--needed to perform at our best when we most need to perform.

Further Reading:

The Profound Psychological Benefits of a Purposeful Life

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Why Virtual Internships Are The Future Of Trader Education

In a recent Forbes article and in this Bloomberg interview, I explained how the current work-from-home phenomenon is likely to reshape workplaces in an ongoing way.  The same is happening in the world of education, where work-from-home has become study-from-home, leading to an explosion of online education that creates unique opportunities for students.  Consider the following:

*  I recently delivered a talk to students enrolled in the Greenwood Project, which is introducing women and minority students to the world of finance.  This week I will be conducting mock job interviews with Greenwood students, helping prepare them for the workplace.  In the pre-COVID world, there is no way I would have enjoyed this opportunity.  Now, the Greenwood students benefit from many contacts in the industry who can help them navigate the career world beyond internship.  The net result will be a highly significant broadening of the hiring base for financial firms.

*  In my work with SMB Capital, I am for the first time able to offer coaching and education to college student interns interested in finance and the trading business.  Because the internship is a virtual one, I can read the performance reviews of each intern and help them with their learning in real time.  Prior to that, I only met with interns if they were hired by hedge funds and even then we weren't connected on a regular basis.  The virtual medium has allowed college students to sit in on trading teams led by experienced, expert traders and participate in ongoing instruction, mentoring, and coaching.  The old model of trader education with unconnected webinars, conferences, and talks given by traders pales in comparison:  the virtual internship is a complete disruption of the education business not only for trading firms, but also for banks.

*  I've recently been working with Connect-123, a provider of virtual internships for college students seeking work and learning experiences in unique cultures.  A student working from home connects with organizations in such places as Cape Town, South Africa; Barcelona, Spain; and Dublin, Ireland and works with teams in those locations to complete a project.  The experience provides an amazingly affordable and engaging way of gaining the career competencies emphasized by organizations like the National Association of Colleges and Employers (NACE), including teamwork, leadership, and intercultural communication.  The online classes that I teach help prepare students for their work experience and then support them in bringing their updated skills to the new workplace.       

What makes these virtual internships work is that they are much more real than the usual classroom.  They allow for a learning-by-doing, with real-time instruction and support.  Amazingly, it's now possible to learn globally and learn directly from and with experts.  Education, including in the trading world, will never be the same.

Further Reading:

Positive Career Development:  Bringing Positive Psychology to the Internship

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What Your Personality Strengths Mean For Your Trading

In this recent post, I offered a short personality assessment to help traders better understand their strengths.  The scoring of the assessment and meaning of the categories being measured were covered in this post.  I encourage you to take the quiz and score your results before reading the rest of this article, so that you can directly apply the findings to your trading.

We will call your top three strengths--the ones you identified as number 1, 2, and 3--as your "signature strengths".  These are the competencies that most fit with your self-image and capture you as you see yourself.

The next three strengths--numbers 4, 5, and 6--we call your "latent strengths".  These are areas that you draw upon but that aren't necessarily front and center in how you view yourself and in your day to day life.

As mentioned in the previous post, the remaining 12 areas that you didn't identify as your greatest strengths are not necessarily weaknesses.  They simply are less relevant to your ideal vision of who you are.

Now let's look at what these strengths might mean for your trading.  I will elaborate on these ideas in an upcoming Forbes article:

*  Your greatest vulnerabilities as a trader may come from overutilizing one or more of your signature strengths.  Imagine someone who developed great upper body strength in the gym and then continued to only exercise the upper body.  At some point, good development would become grotesquely unbalanced development.  Let's say, for instance, that you indicated "disciplined" to be your greatest strength.  And let's say you're so disciplined that you turn all your trading into automatic routines.  Would that make you a better trader when themes and trends in markets change?  At some point, too much discipline becomes rigidity.  Similarly, if we are overly "driven" and "competitive", might that interfere with needs at times to trade with patience and risk-prudence?

*  Your greatest vulnerabilities as a trader may come from not making optimal use of your strengths.  Let's say that one of your signature strengths is that you are "caring" or "helpful".  You are trading in isolation from home and experience little teamwork.  It's difficult to believe that the isolated trading environment would bring out the best of your learning, and it's easy to imagine that being in such an environment would feed frustrations that could interfere with your trading.

*  Your greatest growth as a trader may come from turning latent strengths into signature ones.  If we just pound away at those signature strengths, we'll eventually overutilize them as noted above.  And if an area is not at all a strength, will it really impact our trading in a meaningful way if we make that area incrementally stronger?  The "openness" strengths of loving variety, accepting others, and being intellectually curious have long been strengths of mine, but subordinated to those signature strengths included in "likeability" and "entrepreneurialism".  My greatest growth as a trader has been to expand my openness, learn new approaches to markets, and form new relationships with traders who are very different from me.  Turning latent strengths into core ones helped me approach myself--and my trading--in radically different and profitable ways.

*  You can learn a lot by taking the test a second time.  Here's a great exercise:  Imagine the person and trader you would ideally like to become.  Fill out the survey to describe your ideal self--that person you'd like to be as a trader.  Then take a hard look at the difference between your "real" self--who you originally described yourself to be--and your "ideal" self, who you would like to become.  Which strengths would you de-emphasize?  Which strengths would you grow?  This is a helpful way of defining goals for your personal and trading development.  Or switch it up!  Take the assessment and describe the person you were five or ten years ago.  The differences between your scores today and your scores for your past self might illuminate growth paths that you are already on--and suggest ways of extending those paths.

In my upcoming Forbes article (you can access past articles here), I'll talk more specifically about personality strengths and how those impact our trading styles and success.  The goal is to help you understand yourself as well as possible, so that you are setting the right goals and making the most of what you actually bring to markets.  We want to turn the development and leveraging of our strengths into a strength itself!

Further Reading:

The Profound Psychological Benefits Of Leading A Purposeful Life

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Scoring Your Personality Strengths Quiz

The last post offered a brief assessment of personality strengths that are relevant for the success of our trading.  If you haven't completed the assessment, please go back to that previous post and select the six adjectives that best describe you.  What follows is the scoring of the survey.

For that scoring, we will look at the 18 adjectives row by row (click on image above).  Count the number of selected items in the first row and that will be your conscientiousness score.  The number of items in the second row will be your emotional balance score.  The selected items in the next four rows will be your extroversion, openness, likeability, and entrepreneurialism scores, respectively.  

Here are the meanings of those categories:

*  Conscientiousness - Tendency to be precise, detail-oriented, responsible, and structured in your actions and decisions.  Conscientiousness correlates to some degree with a process orientation to trading.

*  Emotional Balance - Tendency to be even-keeled across situations, with few emotional extremes up or down and a general level-headedness.  Emotional balance correlates to some degree with risk prudence and an interest in solid risk-adjusted returns.

*  Extroversion - Tendency to be people-oriented, active, and oriented to doing.  Extroversion correlates to some degree with risk appetite.

*  Openness - Tendency to like novelty, including new ideas, new ways of doing things, and new activities.  Openness correlates to some degree with creativity and an interest in idea generation.

*  Likeability - Tendency to get along with others and respond to others with emotional intelligence and sensitivity.  Likeability correlates to some degree with an interest in and capacity for teamwork and networking.

*  Entrepreneurialism - Tendency to be goal-oriented, persistent, and focused on the attainment of outcomes.  Entrepreneurialism correlates to some degree with leadership and the creation of trading businesses.

The first five categories are derived from the "big five" personality traits identified in psychological research.  The category of entrepreneurialism has been studied separately and appears to be not a direct function of the big five.

Which categories have the most items in your top six?  Which ones have the least?

Please note that if none of your six top strengths fell into a particular category, it doesn't make that category a weakness.  What we're focusing on is identifying where you see your greatest strengths, particularly your top three.

The next three that you selected are not your top strengths, but you clearly see them as assets.  We can refer to these as latent strengths, as opposed to the signature strengths (your top three).  It is the blending of our strengths that creates sweet spots in our performance.  It is a failure to draw upon our strengths--or sometimes a tendency to overutilize them--that creates performance difficulties.  We will explore how to best use the information from the assessment in the next post.

Meanwhile, here is an additional exercise that can broaden the assessment:  Have a close friend, colleague, or romantic partner rate your top six strengths on the quiz.  See how their ratings are similar and different from yours.  Might it be possible that you have strengths that you don't fully appreciate?  Very often, what we see as our top strengths are not what others see as our greatest assets.  There is real information in such discrepancies.

Can we truly expect to make the most of our trading if we're not making the most of who we are?  And can we make the most of who we are if we don't understand who we are at our best?

Further Reading:

Personality Strengths Quiz

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Take A Personality Strengths Quiz!

Below are 18 adjectives.  Please select the six that best describe you, where number one is the adjective most like you, number 2 is next most like you, etc.  

Disciplined Organized Diligent Calm Competent Prudent Friendly Energetic Outgoing Intellectually Curious Loves Variety Accepts Others Cooperative Caring Helpful Achievement Oriented Competitive Driven

Save your results.  In the next post, I will go into detail about what your choices tell you about your personality strengths and what those mean for your trading. 

Please refer to the previous post regarding the role of strengths in our trading (and life) performance.   

I'll post the key to the questionnaire later this weekend, and we can explore how our best trading comes from the best inside us!

Further Reading:

Radical Renewal - The Role of Spirituality In Trading

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Why Are Your Strengths Important To Your Trading?

Our strengths reflect what we do well:  they are the essence of us at our best.

Engaging our strengths is naturally enjoyable and fulfilling, giving us energy and fueling our performance.

We are most likely to pour ourselves into our work and relationships and find success if our work and relationships actively engage our strengths.

One source of failure, in trading and in all of life, occurs when we fail to recognize and play to our strengths.

Another source of failure occurs when we overutilize strengths and become one-sided and rigid.

An important source of personal and trading growth comes from building our latent strengths:  those capabilities we haven't fully developed.

Tracking our successes and failures can teach us a great deal about our strengths and how we need to deploy those.

The techniques that are most effective in building our strengths are different from those used by psychologists to correct weaknesses.

In coming posts and webinars, I will be helping traders identify their core and latent strengths and figure out how to best make use of those in their trading.  

Let's grow.  

Together.

Further Reading:

Our Struggles Develop Our Strengths

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Controlled Aggression: Trading Like A Sniper

When I wrote the book on developing trader performance, one group that I studied intensively was military snipers.  (See this post for an overview of how good trading is like good sniper technique).  Good trading is all about the integration of aggressiveness and self-control.  The sniper is concerned, not only with the kill shot, but doing so in a way that will not be detected.  That means that the sniper must only act when reward is high relative to risk.

In practice, that means that the sniper does not simply start firing when the high-value target first appears.  The sniper waits, slows his breathing, and looks for the ideal opportunity for a lethal head shot or an unobstructed shot at center mass.  Then it's a single pull of the trigger and a quick move to another location before the enemy can figure out where the shot came from.  It's all about controlled aggression and the patience, selectivity, and self-control that leads up to the ideal shot.

A sniper who "overshoots", like a trader who overtrades, is not one with a long career.  It's not enough to wait for the "setup" to occur.  You want to wait that extra few seconds to see price confirming your idea before you fire.  You want the lethal shot.  That means you don't try to catch exact tops and bottoms:  you hold your fire until you have *reason* to believe a top or bottom has been put into place.  

A good sniper does not feel confident or anxious; a good sniper does not feel excitement or fear.  

A good sniper feels a bit of recoil.  

That's controlled aggression.

Further Reading:

The Trader As Sniper

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A Few Big Ideas For The Weekend

Here are a few thoughts and links for the weekend:

*  The thoughts, emotions, and behaviors that we repeat in our day-to-day lives are those that will inevitably dominate our trading.  Our trading psychology will never be better than the psychology of our daily lives.

*  Successful people--and successful traders--face limitations and restrictions creatively, by finding new ways to thrive in their new environments:  How we make working from home work for us.

*  Amazing things happen when team becomes a verb--something we do--and not just a noun: The workplace (and teamwork) of the future will be a flexible one.

*  If the Fed indeed targets an *average* inflation rate of 2%, then it will tolerate periods of even higher inflation without tightening policy.  Stocks, commodities, bonds:  could we be relatively early in the process of fueling asset inflation?  

*  Greatness is the sum of small improvements, rigorously and continually implemented: The goal is consistency, not just profitability.

*  Very big picture thinking from Ray Dalio re: historical cycles and what they mean for the U.S. and the U.S. dollar.

*  Achievement is a twin function of 1) pushing ourselves to do better and 2) being pulled by a vision of what is possible.  The first gives us our direction; the second provides our energy.

Have a great weekend--

Brett
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How Trading Reviews Build Your Trading Psychology

Trading psychology is a strange field.  We find people offering coaching who show no evidence whatsoever of playing the game or even knowing much about the game.  Can you imagine a swimming coach who works on people's mindsets, but knows nothing about diving technique or how to hit the right water depth in a breaststroke?  How about a golf coach that counsels people about staying calm, but hasn't the first clue about which clubs to use on different holes, how to adjust stance and swing, etc.?

Sigh.

The truth is that, especially for developing traders, a bad psychology typically results from bad trading.  Learning to trade well and working on trading technique is great for the mindset.  

The latest Three Minute Trading Coach video takes a look at traders' review processes and how we can review opportunities that set up in markets.  In that video, I describe one of the patterns I have found most effective in my recent trading.

If you click the charts above (top chart is for Friday's market; bottom chart is for today's), you can see the patterns I review and study.  The pattern occurs in the broad market (ES futures or SPY).  The top panel shows price action and the yellow arrows highlight short-term oversold conditions that are occurring at higher price lows.  The panel below tracks the proportion of volume traded at the market offer price minus the volume traded at the bid, so that we can see buying and selling pressure come in and out of the market.  The arrows on that panel show selling pressure waning, even as the market bottoms.  The panels at the bottom are different ways of capturing short-term overbought and oversold conditions through moving averages of bid/offer volume, RSI, etc.  (Charts created in Sierra Chart).

Viewing and re-viewing these patterns cements them in our mind.  In that way, Friday's review acted as a heads up for trading today's early strength.  As the video emphasizes, the purpose of review is training in pattern recognition.  With enough exposure, we become able to see patterns unfold in real time and perceive solid risk/reward opportunities.

Allow me to add one additional element to the charts and video.  Reviewing optimal execution of the patterns is just as important as reviewing the patterns themselves.  The key to consistent trading is not just finding good ideas, but finding ways to trade them that offers solid reward relative to risk taken.  I don't try to capture exact bottoms of the pattern above.  Rather, I wait to see selling pressure wane and then I want to see buyers start to assert themselves.  The idea is to ride that initial wave of buying and lean against the low for superior risk/reward.  Especially for active traders, the proper execution of the pattern is as important to work on as the recognition of the pattern.  

Just like swimming.  Just like golf.  Working on great execution is key to winning and key to a winning mindset.

Further Resources:

Reviewing Trading Opportunities

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Letting The Market Reveal Its Psychology

I recently posted one of my favorite trading patterns in the broad market that reveals the psychology of market participants.  Here is another favorite trading practice:

I let the opening minutes in the market go by without making any trades.  I'm watching the flows in the NY day session and getting a sense for how the market is moving.  Specifically, I'm looking at:

1)  Breadth and Market Sector Behavior - Is everything going up or down on extreme breadth, or are we seeing a mixed market with rotation among sectors?  The former gets me thinking about a trend day; the latter has me thinking about trading relative strength or weakness with the sectors that are strongest or weakest.  The advance-decline line can also be helpful in this regard.

2)  Relative Volume in the Market - Are we seeing more volume than average come into the general market in opening minutes, same, or less?  Volume tells us about *who* is in the market.  Fewer institutional participants means less movement and greater likelihood of choppy or range trading; more participants leads to greater momentum in the overall market.

3)  Buying and Selling Pressure in the Market - I use the upticks versus the downticks among the stocks in the market averages to tell me how many stocks are attracting buying or selling in real time.  Especially important is the degree to which the buying or selling is capable of moving the market. 

So let's put it all together.  If you click on the chart above, you'll see the upticks versus downticks among all Russell 2000 stocks in the top panel, along with a moving average of the ticks (green line).  I've also drawn a yellow line at the zero level so that you can easily see when the short-term moving average of the ticks is above and below zero.  The bottom panel shows the price of IWM on a one-minute basis (Chart and data from Sierra Chart). 

The early action in the day, as well as recent days, suggested to me that the smaller cap stocks are showing relative weakness.  Waiting out the first minutes of opening trade, we can see more downticking among the Russell stocks than upticking.  Notice them (yellow arrows) how bounces in the Russell TICK occur at lower price highs, providing nice risk/reward opportunities to sell IWM.

Three things help me let the market reveal its psychology:

1)  Looking at all market sectors, not just the overall market or the same stocks that everyone else is trading;

2)  Waiting out the opening minutes of trade to let the market patterns come to me;

3)  Looking at data that the majority of players don't look at, such as upticks/downticks that are sector specific.

As I've stressed in the past, you become a good trader by improving your game.  You become far better when you figure out ways to play different games.

Further Reading:

Looking at the Market Through Different Lenses

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