How to Change Your Life

 

An important key to psychological change is turning desired patterns of thought, feeling, and action into positive habit patterns.  We don't do this through motivation.  We do this by finding ways of being who we want to be every single day, with each day building on the next.  Over time, we internalize those changes:  they become natural parts of us.

In short, paraphrasing Aristotle, we become what we consistently do.

If I want to become a more caring, less self-centered person, I will perform an act of caring each day.  If I want to become a more disciplined trader, I will carefully plan my next trade and make sure it is grounded in sound research and understanding.  If I want to become a more energized person, I will incorporate into my morning routine something stimulating and meaningful.

We climb the ladder of our ideals one rung at a time. 

In what way will you be your best self today?

What will you do today that you'll be proud of as you get ready for bed?

You're writing your own life story day by day.  Be the heroine or hero of that story, not an incidental character.

To achieve greatness in life, we must do something greatly each day.

What are you doing greatly today?

Further Reading:

Greatness in Life and Trading

Greatness, Creativity, and Trading Success

Radical Renewal:  Tools for Leading a Meaningful Life

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Why Am I Losing Money In The Market?

 

I have had a record number of people reach out to me asking for coaching help.  Why?  The majority have developed their trading in a bull market and have learned to buy market dips.  And so they have bought, and bought, and bought--and they have lost a lot of money in the past month.  In my view, this is not a problem of psychology.  It is a problem of not knowing how markets behave under different conditions of volatility, correlation, and monetary/fiscal environment.

As you may have noticed from my recent post, I am quite the optimist and believe in the power of making fresh starts--in life and in markets.  To continue risk taking without knowing what you are doing, however, is not a formula for optimism.  We have to learn from our experience before we can benefit from it.

So let's begin with two basic concepts of financial returns:  the average return over a period of time and the variability of those returns over that same period.  Too often, traders focus on the first and neglect the second.

Here's a current example from my database:

As of Friday's close, we had fewer than 20% of all stocks in the SPX close above their 3, 5, 10, and 20-day moving averages.  That is unusually weak short- and medium-term breadth.  Indeed, since the start of my database in 2006 (approximately 3900 trading days), only 179 days have met those criteria.  In other words, the market is not only broadly oversold, but more oversold than on 95% of all occasions.  Right away, that tells us that this is not just a normal market pullback, but something more extreme.  But of course we only know that if we make the effort or invest the resources to create such a database.  There is certainly no guarantee that the future will mirror the past, but pursuing the future with ignorance of the past is not a winning proposition in any field.

So let's take a look at the 179 occasions when we've been broadly oversold at these intervals and see what the SPX has done afterward.  Sure enough, we find that the market, on average has been up +.75% compared to an average gain of only +.18% for the remainder of all occasions.  Surely, therefore, we are due for a bounce and should be long going into next week!  That is what I've been hearing from traders of late.

If we look a bit deeper, we find that the market rises after such oversold conditions 64% of the time, compared with 60% of the time for the other occasions.  That doesn't look like such a great edge.  When we look at the variability of returns, however, we see that the standard deviation of next five-day returns for the oversold occasions is more than twice that than for the rest of the sample (4.81 vs. 2.32).  What does this mean?  It means that, following such oversold markets, we have had significantly more volatile returns going forward.  So, for example, in August of 2011, we would have made well over 7% over the next five trading days.  In November of 2008, we would have made over 19%; in March of 2020, we would have made over 16%.  But in October of 2008, we would have lost almost 19% over that next five-day period.  In early March of 2020, we would have lost over 13%; in early August of 2011, we would have lost over 13%.  

The important point here is that we have to be aware of the range of possible returns and not just the average return if we are to place intelligent bets.

Suppose I told you that I would make you a bet where you had 80% odds of winning $10,000.  Would you take that bet?  A not-so-smart trader would say, "Sign me up!"  The risk-savvy trader would ask, "What happens the other 20% of the time?".  Well, in this case, the bet is to go to an interstate highway at 2 AM and cross all lanes blindfolded with earplugs.  At that time of the morning, you'd have an 80% chance of reaching the other side free and clear.  The other times, you'd be hit by an oncoming vehicle and either crippled or killed.

Not such a great bet after all.

"We're due for a bounce" is not a substitute for a rational assessment of markets and their possible outcomes.  No amount of trading psychology techniques can substitute for knowing what you're doing when you put capital at risk.  People who tout their "passion for trading" most often need to trade and that leads them to take undue risk.  Far better to have a passion for good bets.  If you know that broadly oversold markets move a lot on average, the smart bet is to shorten your time frame, reduce the volatility of your returns, and find short-term bets that pay well without a scary downside.

Further Reading:

A Dozen Reflections on Life and Markets

Why I Am Proud to be a Trader

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Making a Fresh Start: Lessons From Molly Ruth

 

Well, it's been about a three-month break from blogging and social media, and I have to say it's been rejuvenating.  In any life activity that is important, there is a time for stepping back, taking a good look at what you're doing, and making a fresh start.  When we make a fresh start, we can make major life changes, because we've broken old patterns and are now ready to build new, positive ones.

Above we can see a picture of our newest rescue cat, Molly Ruth, who is a khao manee, a relatively rare breed of cat.  We found her in a shelter, afraid of people and cowering in a corner.  Her time in our home has been a fresh start for Molly and she has come out of her shell.  We can now play with her, and she has grown fond of the other three cats.  What she needed was new experience:  she needed to be safe and feel safe and just explore her environment.  As that has happened, her personality has blossomed.

Sometimes traders become overwhelmed too, and sometimes they take losses that rock their sense of safety.  Sometimes, after hard work, markets change and it seems as though all their progress has disappeared for good.  It's tempting to push forward and push forward, but often that compounds the problem.  The better strategy is stepping back, finding new edges in markets, and then--like Molly--making a fresh start.

I'll be making a fresh start with this blog, taking advantage of the break, and hope that the new slant will be helpful to traders.  As long as we can make fresh starts, we can always stay fresh--in trading, in relationships, and in our work.  

Further Reading:

Overcoming Trauma

Making Your Energy Level Your Priority

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Taking A Break From Blogging And Social Media

 

Thanks for all the interest in TraderFeed, my books, and the Three Minute Trading Coach videos.  There's quite a library of material available there, and a lot more on performance psychology through the Forbes articles and the spirituality of trading, via the online book Radical Renewal.  

I'm working on a big new book project and have decided to focus all my efforts there.  I'll continue to Tweet every so often, but will be taking time off from writing about markets and trading psychology otherwise.  

I appreciate all the support and look forward to very interesting markets going forward!

Brett

Stages In A Trader's Development

 

A beginning trader starts with eagerness and passion and focuses on winning.  The beginner's great fear is to miss opportunity and so the beginner overtrades and eventually takes significant losses.  Many traders never move beyond this stage.

With experience, the beginning trader recognizes that the goal is not simply making money, but making more money on winning trades than losing ones.  Instead of focusing solely on winning, the more experienced trader also focuses on not losing and containing risk.  The goal is thus consistency of trading and profitability and, above all, staying in the game.  This is when the beginning trader becomes a good trader.

Now, however, the good trader faces a new stage of development:  growing that consistency of trading.  The good trader grows laterally, expanding their expertise and skills and finding a broader range of opportunity.  The good trader also develops depth in their trading, finding superior ways to manage positions and their ever-evolving risk/reward.  The good trader becomes a great trader by exercising skills and experience in different market environments and finding a balance between assertively seeking opportunity and mindfully managing risk.

Good traders become better and better at playing the game.  Great traders find new and promising games to play.  

I recently spent an intensive period of time studying the stock market on a daily basis from 2014 to present.  I tracked cycles in a new way and explored ways of taking best advantage of phases of those cycles.  Instead of regularity of time, I looked for regularity of structure in defining the cycles.  That has led to new trade ideas.  Early days, early days.  But we always have the power to innovate and develop what is good into what is great.

Further Reading:

Trading Psychology 2.0 and the role of creativity in our development as traders

Reading Market Cycles

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Trading With Clarity

 

It has become clear to me that clarity underlies my best trading.

If I sit and sit and watch and watch and process and process what the market is doing, eventually it will become clear what is going on.  I can see that sellers are active and cannot push price lower; I can see that fresh market participants have entered the market at price levels making it unlikely we will return to those prices.  I can see a rotational trade between market sectors; I can see when volume and volatility are so low that sustained directional moves are unlikely.

It isn't just patience; it's immersing myself in the market information I understand and letting the market tell its story.  It's the same thing I do as a psychologist.  When I first meet a person, I have no clue what they're going through, so I listen and listen and ask questions and eventually clarity hits.  Success as a psychologist requires comfort with that initial cluelessness.  

For the curious, there is joy in discovery.  For the incurious, there are confirmation biases and attempts to impose "conviction" on markets.  Clarity allows ideas to come to us.  No ego-based needs to project our views onto markets can yield clarity or understanding.  It wouldn't work for me as a psychologist and, for the same reason, it fails in trading.

Further Resources:

How We Can Improve Our Access To Intuition

Awareness and Acceptance in Trading

Three Minute Trading Coach Video:  Creating Purpose In Our Trading

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Two Great Questions To Ask During A Trade

 

What we think about before we put on a trade helps determine our mindset during the life of the trade.  When I am trading well, my thinking before the trade focuses on two topics:

1)  What will tell me the trade is wrong?  - Knowing *exactly* what will tell me I'm wrong and where I would exit is essential to sound risk management of the position.  I am constantly updating my views on what would tell me I'm wrong.  For example, on Friday I put on a trade where I bought the ES futures early in the morning and the position quickly went in my favor.  I immediately told myself that, if I'm right, we should not see a reversal to the prior low.  We did indeed reverse and I got out with a small loss.  That experience helped me see that the market could not sustain buying and was one of the data points that got me into a nicely profitable short position a little later.  Because I am mentally rehearsing being wrong, I am accepting the possibility of loss and taking the psychological threat out of that possibility.  My best trading is not with confidence and optimism.  My best trading is with open-mindedness to the possibility of being wrong. 

2)  What will tell me the trade is working out? - If I'm trading well, I am open to the intuition that this trade is working.  Perhaps I see volume coming into my direction; perhaps I'm seeing a move triggered by a catalyst; perhaps I'm seeing a breakout of a key level.  At some point, I get the sense, "This is working".  My best trading occurs when I'm prepared for that possibility and can add to the trade, particularly when I've identified the trade as a medium-term opportunity.  In Friday's trade, we broke to new lows in the NYSE TICK, which told me fresh institutional selling  was coming into the market.  Using the next bounce in TICK to add to the position helped me make the most of the opportunity.

The combination of knowing where you're wrong and identifying when you're right allows you to keep losses small and maximize gains.  Notice that both questions keep a trader market-focused and not focused on previous wins, losses, P/L, fear of missing, etc.  The right trading psychology is not positive or negative; it's focused.

Further Reading:

A New Way to View Trading Challenges

How We Can Become More Intuitive in Our Trading

Two Hallmarks of Quality Trading

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A Different Way Of Viewing Your Trading Problems

 

Think about the important relationships in your life.

What are the greatest challenges and problems you experience in your relationships?  What are your greatest weaknesses in your relationships?

Those are what you will repeat in your relationships with markets, and those are what will undermine your success.

What are your greatest relationship strengths and your most fulfilling relationship experiences?

Those are what will show up in your relationships with markets, and those are what will underpin your success.

Great things come from loving relationships; problems in relationships occur when we place our own egos and needs ahead of our love for our partners.  

Ayn Rand pointed out that, before we can say "I love you", we have to be able to have an "I".  No relationship can provide self-esteem where it is lacking in ourselves.

How would you trade if you had loving relationships with markets?  

How would you trade if you expected relationships to provide you with your self-esteem?

How well would your relationships work out if you approached them the way you approach markets?

Knowledge is necessary for trading success, but it's wisdom that unlocks that knowledge.  Love is the key that unlocks.

Further Reading:

Radical Renewal

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How We Can Improve Our Access To Intuition

 

The heart of discretionary trading is pattern recognition.  Some traders track patterns in fundamental data; some follow price and volume behavior; some attempt to quantify patterns in sentiment and breadth data; some focus on patterns that follow events, such as earnings releases.  When we have experienced many examples of patterns, we internalize them and develop a "feel" for their occurrence.  It is that feel that we call intuition.

In the Radical Renewal blog book, I raise the issue of how our egos impact our trading.  What is ego?  It is our self-talk.  Whenever we focus on hopes, fears, frustrations, and needs, we end up talking to our selves about ourselves.  Such self-talk can be useful in planning and thinking through issues.  We need our egos to navigate the world and accomplish things.

The problem occurs when our self-talk becomes so loud that it drowns out our intuition, our feel for patterns.  There is no way we can be sensitive to patterns in what a market is doing if we're raging to ourselves about the need to make money, the fear of losing, or the fear of missing out.  If intuition is the whisper of the soul, self-talk is the shout of the ego.  Often, we lose our feel for what we're doing as we become most self-focused.  This happens in all areas of life, not just trading.  

Many self-help and coaching techniques simply substitute one kind of self-talk for another.  Filling our minds with positive talk might feel better than burying ourselves in worries, but both lead to clutter that drowns out the whisper of intuition.  What we need is a quiet and open mind so that we can amplify the whisper into a clear and consistent voice.  This is why many traders find meditation helpful:  in controlling and quieting the body, we can focus the mind and let patterns speak to us. 

One exercise that I have found remarkably effective in quieting the mind and improving access to intuitive knowing is simply to take a brisk walk very early in the morning.  The streets where I live are completely quiet and the air is often cool and refreshing.  During the walk, I focus my attention on all that I see and look for the beauty in my surroundings:  an attractive house, colorful flowers, a cute squirrel, the morning sky.  My mindset is one of appreciation and gratitude, focusing on all that I am privileged to be surrounded by.  I don't think about my work and the day ahead; I don't think about what happened the day before.  The mindset is entirely focused on the present.

Think about how many trading problems occur because we are not simply present in the present.  We are caught up in what just happened and we become focused on what might happen.  We talk, talk, talk to ourselves and never reach the quiet state where we can simply listen.  We become masters of intuition when we can operate continuously with a focused, open mind.  This is a strength that can be exercised and developed:  the simplest walk can help us turn the soul's whisper into a reliable voice. 

Further Reading:

Radical Renewal - Spirituality and Trading

Intuition, Luck, and Anxiety in Trading

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Two Hallmarks Of Quality Trading

 

I recently wrote an important article on the topic of how the ways in which we trade impact our psychology.  We commonly assume that working on our heads will improve our trading.  Less often do we recognize that the best way to maintain a positive trading psychology is to trade well.

What does it mean to trade well?  Here are two key hallmarks of quality trading:

1)  Quality trading is planned, not reactive - Planned trading means that we begin with an idea that we have researched and then identify good risk/reward points for participating in the idea and proper sizing for the trades, so that we can easily survive being wrong.  Planning means that we clearly identify what needs to happen for us to exit and/or modify our positions.  When we overtrade or take positions out of a fear of missing moves, those trades are reactive.  In reactive trading, we make decisions for psycho-logical reasons, not logical ones.

2)  Quality trading is open-minded, not biased - Sometimes we see traders who trade with a fixed idea and/or a persistent directional bias.  They look for evidence to support their views and discount evidence that might lead them to question their positions (confirmation bias).  Open-minded trading  means that we can express ideas in multiple ways and that we can trade multiple, independent ideas.  We are not wedded to one side of the market or one trade idea.

A very simple way to evaluate our trading is to rate each trade on the two criteria above and sum up those ratings.  If we're developing as traders, we will become more planned and more open-minded in what we do.  We will develop processes that keep us planned and open-minded.  The goal is to trade well, not to simply make money.  If we trade well, we inevitably maintain a focused mindset and place ourselves in the best possible position to succeed.

Further Reading:

How We Trade Impacts Our Psychology

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Awareness and Acceptance in Trading

 

I had two interesting experiences recently.  The first occurred on Friday morning.  The stock market was short-term oversold and displaying early signs of strength before the NY open.  Prior to the decline, we had been seeing unusually low volume and volatility.  I had a string of losing trades during that period.  Each time I recognized the poor environment for what it was and limited my losses.  That awareness, I've found, has been essential in managing risk and maintaining a sound trading psychology.  It was not a great environment for my trading, and that accepting that allowed me to take the losses with equanimity.  Once the market showed strength on Friday, my research suggested the possibility of a short-covering rally.  I bought several positions early on and then other research kicked in shortly after the open suggesting that we could see a trend day.  Now the awareness was of a positive opportunity set.  I added to the positions and the resulting gains more than erased the prior losses.  It was awareness and acceptance of the environment--and the rapid updating of these--that allowed for good decision making.

The second conversation was with a trader who insisted that his goal for trading was to maintain a consistent high level of calm and confidence.  He wanted to be positive in his outlook (and aggressive in his risk-taking) no matter what was occurring in his trading and in markets.  I explained to him that feelings of doubt and uncertainty can represent information and are not necessarily things to brush aside.  My recent market experience was a case in point.  It was the loss of "conviction" that helped me limit losses and stand aside until opportunity presented itself.  Open-mindedness was the key from my perspective, not optimism.  The trader was surprised by what I had to say.  He had not considered that a state of doubt and uncertainty could be a wonderful guide for actions (and inaction!) in markets.

Awareness of the environment we're in and acceptance of the opportunity sets in front of us is essential to making sound trading decisions.  It's when our needs for profits and our desire for risk-taking drive our decision-making that we lose self-awareness, lose market awareness, and overtrade.  If markets were perfectly consistent, it would make sense for us to pursue a totally consistent mindset.  When opportunity sets vary over time, it makes sense for us to accept reality and adjust accordingly.  The weather might look overcast and windy, with a forecast for rain.  Staying "positive" and leaving the umbrella at home is no virtue.

Further Reading:

How to Change Negative Patterns in Our Lives

How Spiritual Growth Furthers Our Psychological Growth

Knowing Your Limits as a Trader

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The Importance of Rejuvenation

 

This is one of the great challenges of performance in trading:  We need routine ("process") to follow rules and best practices accumulated through experience.  We need variation in routine ("creativity") to discover new and better rules and practices.  

It is important to immerse ourselves in trading and maximize our focus to best apply what we've learned from research and experience.

It is important to step away from trading to refresh our views of markets and rejuvenate.

If you want to make changes in your trading--or in your life--those have to begin by breaking routine and changing something you do.  Daily.

When we rejuvenate, we can view what we are doing in a fresh light and figure out how to best break our routines.

Many traders fail for the same reason many marriages fail.  They get stale.  Love--for a person or for markets--never dies.  It has to be killed.  Routine kills.  

How are you rejuvenating?  How are you innovating?  How are you staying fresh in your approaches to markets?

TraderFeed and The Three Minute Trading Coach will be on a short hiatus during a period of rejuvenation.  During that time, I will be researching new edges in the market and new ways of trading those--and I look forward to sharing those.  I will also spend time with extended family in a reunion:  connection brings rejuvenation.  Stay tuned, and thanks as always for your interest and support--

Brett

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Playing The Right Game

 

A number of traders that contact me are working very hard at improving the "setups" that they trade each day.  Often, they're doing a good job of improving their game, but are they necessarily playing the right game?

Let's take a look at relevant statistics with the SPY ETF as a market proxy.  What we want to see is how much of the movement in the index occurs during NYSE trading hours and how much occurs when the NYSE is closed.  

Going back to the start of 2019, we have gained about 188 points in SPY.  Of those, nearly 109 occurred in overnight action, when the NYSE was closed.  During 2021 thus far, the number of points gained overnight was very similar to the number gained during the day sessions.  Bottom line, much of the directional opportunity in the market has been unavailable to daytraders.

This is an important reason why a number of the traders I work with at SMB have begun researching multi-day edges in the market.  They've opened longer-term accounts, and they've been learning options strategies that provide them with superior risk/reward in holding positions overnight.  By changing the game they're playing, they've expanded their opportunity set--and that is paying off.  

I'm finding the same thing in my own trading.  I have three separate accounts.  Two hold positions over longer horizons (days to weeks) and one trades mostly intraday.  When I backtest a pattern in the market that shows a historical edge over a one-week+ horizon (such as when occurred when the sharp drop on June 19th was followed by a sharp rise), I enter and hold positions in the two accounts and then trade intraday pullbacks in the short-term account.  The net result is that I can pursue opportunity even when the market moves against me short-term.  This creates a win-win mindset.

Similarly, among the SMB traders, I find a more positive mindset because they can participate in far more opportunity and not face the frustration of having their ideas play out in time zones when they're not active.

It's a great example of how improving your trading can improve your mindset and trading psychology.  If you're frustrated that you're not taking advantage of the opportunity that is present, perhaps it's not simply that you're playing the game poorly.  Perhaps you need to reassess the game you're playing.

Further Resources:

How Spiritual Growth Can Further Our Psychological Growth

Three Minute Trading Coach:  Building Our Emotional Awareness

Building Our Capacity for Reaching Our Goals

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Intentionality: Expanding Free Will

 

The central problem of psychology is what Freud called the "repetition compulsion".  We repeat patterns of thought, feeling, and/or behavior even though those repetitions interfere with our happiness and success.  We can be fully aware of our maladaptive patterns at certain times and unwittingly repeat them a short while later.  Because our intentionality--our capacity for free will--is limited, our ability to act upon our goals and ideals is also limited.  Every problem of trading psychology ultimately boils down to a restriction of our ability to act upon our best plans and intentions.  The evidence-based approaches to psychology are a collection of techniques that help us become aware of our repetitions, so that we can write new endings to old stories.  At root, good psychology expands our intentionality:  our capacity for free will.

We can develop our capacity for intentional activity by sustaining intentional activity.  One routine that I like on the treadmill is to run with an uphill incline until I become tired and feel like quitting.  Then I decide upon how much further to run.  In other words, I sustain effort beyond the point of discomfort.  That usually means breaking a good sweat.

The problem for most of us is that we rarely break a sweat--in trading or in other areas of life.  We stay in our comfort zones and sustain an action until it becomes uncomfortable.  So, for example, when writing my book I'll eventually become fatigued and feel like taking a break.  That is when I most need to push further and write several more pages.

Similarly, I recently placed a few trades in the morning and got chopped up.  I felt discouraged and decided it was best to pack it in.  On reflection, however, I could tell that this was just discouragement talking; that, in fact, I was now seeing the market clearly.  I pushed forward, redoubled my analysis, hit a point of clarity, placed one more trade, and profited nicely.

Now here's the interesting thing:  When I push further and write a few more pages or do another lap on the treadmill, I break through my fatigue and often can do much more.  After the winning trade, I was not deflated and discouraged at all and felt energized for the rest of my day.  When we push past our comfort levels, we eventually tap into our second wind--a fresh source of energy and enthusiasm.  When we continually make efforts to push past our comfort zones, we become increasingly capable of drawing upon that second wind of consciousness.  

Every effort to sustain activity beyond our comfort zone is an exercise of will.  We are energized when we tap our intentionality.  We lose energy when we remain static, within what is familiar and comfortable.  A great best practice--in trading and in life--is to break a sweat every day by sustaining effort beyond the comfort zone.  As on the treadmill, we find that, over time, that comfort zone expands:  what once took significant effort now comes readily.  Note carefully:  Every part of our trading processes--from our preparation to our reviews--can become opportunities to expand our capacity for effort when we push beyond our comfort zones.

That is the expansion of free will, and it underlies all success--in markets, and in life.

Further Resources:

Trading and Training the Will

Radical Renewal:  Spirituality and Trading

Planned Trading and Intentionality

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A Simple Strategy For Making Your Trading Better

 

Here is a simple scheme for making yourself better as a trader month by month:

1)  Review your trading for the month.  Keeping statistics on your trading is an excellent way of doing this.  How many winning and losing trades did you have?  What were the average sizes of your winning and losing trades?  How did your largest winning trades compare with your largest losers?  What ideas were responsible for the winning and losing trades?  

2)  Identify the one thing you did best during the month and identify the one thing from the month that you most need to improve.  That means comparing your best and worst trades and/or your best and worst trading days.

3)  In the spirit of FIGS--focused, intensive, goal setting--identify the one thing you'll do each day to do more of what you did best and correct the thing you did worst.  This has to be a daily plan that you will tackle each trading session and that will involve building on your strength and addressing your weakness.

4)  Keep a daily report card of how well you accomplished the two goals set for the week and how you can extend your progress the next day.

5)  Repeat this process, setting new goals, each month.

You are most likely to become consistent in your trading if you are consistent in working on your trading.  The consistency and intensity of your work on yourself will shape your rate of progression.

Further Resources:

Free Blog-Book on the Spirituality of Trading

The YouTube Video Channel for Trading Psychology

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Learning From Our Best Trades

 

Please note:  I will be discussing this topic in greater length during my Sunday evening podcast with Better System Trader live.  You can use the link to sign up; the session will be held on Sunday, July 11th at 8 PM ET / 7 PM Central.

Since the writing of Trading Psychology 2.0, I have emphasized the importance of studying our best trades to identify "best practices" that are unique to our success.  It is in combining these best practices that we become able to develop "best processes" that make us consistent in our performance.  It's a great example of how our trading psychology follows from our development as traders:  we become confident and consistent as we develop our talent the right ways.

Friday was one of my best days in the market in a while, so I thought I would share a few of the learning lessons reinforced by the day's profitability.

If you click on the chart above (screenshot from Sierra Chart), you can see how Friday morning's trade in the SPX (ES) futures evolved.  We went into the day's session considerably oversold on short and medium time frames, but in an uptrend on longer time frames.  For example, we closed on Thursday with fewer than 50% of SPX stocks closing above their 3, 5, 10, 20, and 50-day moving averages, but over 50% of stocks closing above their 200-day moving averages (data from IndexIndicators.com).  Over the last two years, that has occurred 19 times, with 15 of those occasions closing higher five days later for an average gain of 1.74%.  So we went into the session with possible upside edge.  Interestingly, a pattern I had posted earlier in the week also suggested a multiday  upside edge.  So there's the first best practice:

Best Practice #1:  Only go into a trade with a backtested edge and preferably more than one.

So, did I enter a long position at the close of trading on Thursday?  Not at all.  In the historical sample, there were a few instances of decent sized losing days.  The backtest provides a worthwhile idea, but I want to see the idea playing out before committing my hard-earned capital!  You can see from the above chart that we moved nicely higher in overnight trading, with transactions lifting offers (pink arrow).  That means buyers are aggressive.  With that price strength, we see the short-term moving average cross above the longer-term one on the Ehlers Adaptive Moving Average system (yellow arrow).  This confirms we have moved to an uptrend.  This leads us to a second best practice:

Best Practice #2:  Wait for a good trading idea to turn into a good trade by getting confirmation from price action.

So, did I enter a long position on the moving average crossover?  No, I didn't!  Why not?  It was between 2:00 AM and 2:30 AM in the morning and I was sleeping!  Did I get frustrated that I had missed a signal, where the market continued rising afterward?  Not at all.  The backtested edge was over a multiday period, so my default entry mode was to buy the first short-term retracement in the market.  That occurred a little before 6 AM ET (blue arrows).  I entered a first clip of risk on the retracement and then added a second clip on the subsequent rise.  The market was now going my way nicely and I set a stop where I had entered the first clip.  That provided very good reward relative to risk, leading us to the third best practice:

Best Practice #3:  Don't worry about catching highs or lows when you enter.  Focus instead on inflection points that provide superior risk/reward.  

As the stock market opened for the day on Friday, I noticed that advancing stocks were swamping losers by more than 5:1.  The NYSE TICK was skewed toward upticks and, during the first hour of trading, we never saw significant levels of downticks.  In short, buyers were solidly in control.  I knew from my prior research that such strong openings out of oversold conditions often lead to upside trend days, as many short-sellers are stopped out and buyers jump back in.  That gave me confidence to hold the position rather than take quick profits, setting up our fourth best practice.

Best Practice #4:  Adjust your position sizing and holding period to evolving price action.  A backtest and favorable price action will get you into a trade, but it's the subsequent price behavior that gets you to build your size and hold onto the trade.

Notice that I don't start the day looking for "setups".  If there's no solid edge, there's no trading.  And notice that I'm not concerned about "missing" or "chasing":  I'm following the edge in the trade and the evolving market action.  I don't get big in the trade until I see confirming evidence lining up.  Finally, note that I'm not simply generating ideas from chart patterns or "macro" stories that link a limited number of data points.  There's no guarantee that a pattern that has played out in the recent past will play out in the immediate future, but the alternative is to trade in ignorance of market history.  That doesn't strike me as a rational and promising alternative.

Once you've identified your best practices, they can form the basis for a checklist that guides your trading going forward.  Consistent profitability begins with a consistent process.  Correcting mistakes can help us limit the downside, but it's by maximizing our strengths that we find meaningful upside.

Further Resources:

Sunday Evening Podcast With Better System Trading

How To Change Negative Patterns In Our Lives

Finding A Backtested Edge In Your Discretionary Trading - Video

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Asking Good Questions In Your Trading

 

In recent meetings with traders, I've heard a similar question:  When are stocks going to come down?  Those traders have been frustrated by the seeming steady march higher, as time and again, they have tried to sell "overbought" stocks and indexes.

When I hear the same question again and again, I've found it's usually the wrong question.

Here's an example of a good question, which I define as a question coming from a fresh, unexpected perspective:

"Last week, we saw a majority of SPX stocks trading below their 50-day moving averages, according to the Index Indicators site.  After such a correction, what has the market done when we've returned to a situation where over 50% of stocks are trading above their 50-day moving averages?"

Note why this is a good question:  It ignores what the chart looks like and instead defines correction as any period in which the majority of stocks trade below their moving average.  By that definition, a correction has already occurred, even though it looks as though we've simply moved higher.

Good questions often are grounded in what is not obvious.

Well, according to the backtesting function of Index Indicators (see the MarketCharts.com site for even more extensive backtesting), we've had 10 instances over the past two years in which stocks have traded below their 50-day moving averages and then crossed back above.  All 10 instances were profitable 10 days later, by an average of +3.16%.  Indeed, just these 10 instances accounted for well over half of all SPX gains over the two year period.

So far, it's been a good trade.

To be sure, 10 instances does not constitute proof, and one would not build an algorithmic trading system on such limited data.  But I'm not looking for proof or systems; I'm looking for promising hypotheses.  Once I have those and I notice that everything I look at intraday is confirming the hypothesis, I have an idea worth trading.  

Very often, when I have traded poorly, I have not grounded my trading in good questions.

There's no sense working on your "trading psychology" if you're looking at the same charts and trading the same way as everyone else.  Our edge comes from uniqueness of perception and analysis.  That's true in every human endeavor.

Further Reading:

How to Set Goals the Right Way

The Three Minute Trading Coach Video Series

Forbes Articles on Performance Psychology

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FIGS: Focused, Intensive Goal Setting

 

Many traders that I work with involve me in their performance reviews.  Sometimes they create weekly reviews, sometimes monthly or quarterly.  Invariably these reviews summarize what they did wrong over this period and how they could improve.  They set lots of goals, but then that's often the last I hear about those goals until the next review period!

There are three big problems with the goal-setting of many (and perhaps most) traders:

1)  Too Many Goals - By setting a large number of goals, traders have difficulties prioritizing the changes they want to make, and they find it difficult to give each of the goals proper attention.  As a result, they chronically feel as though they are falling short in achieving their goals and lose motivation.  Goals should move us forward, not discourage us!

2)  Vague Goals - A trader may set a goal of trading with greater discipline, so that they stop overtrading.  Great!  How are they going to do that?  How will they monitor performance to know that they're making progress?  A vague goal is only a good intention; it's not likely to energize or shape performance.  My experience is that vague goals get the least follow-through.

3)  Goals Lacking Vision - The best goals are tied to a vision of what is possible.  We want goals to bring out the best in us.  We want goals to excite and challenge us.  Many of the goals set by traders are prioritized to-do lists.  That turns the pursuit of goals into chores, robbing us of energy and enthusiasm.  If there's no emotion and excitement associated with our goals, we're unlikely to put forth our best efforts toward change.

In short, we don't see things as they are; we see them as *we* are.  Our moods and energy level help shape our perceptions and actions.  If we are overloaded with too many goals, vague goals, and goals not tied to an inspiring vision of the future, we are likely to lose our passion for markets and trading.  

Consider the radically different alternative of FIGS:  Focused, Intensive Goal Setting.  What if, at any given time, we worked on one goal and one goal only.  Suppose we worked on it every single day and made it the focus on each day's efforts.  And suppose we made it an emotionally intensive goal, where we actively rehearse and *feel* the consequences of not reaching the goal and the joy and benefits of making progress on the goal.  Suppose we grow--as people and as traders--by working one goal at a time in FIGS fashion, rather than by creating laundry lists of changes that are "shoulds" rather than "musts".

We see FIGS at work among people who work on their recovery from drug and alcohol dependence and addiction.  At some point, they "hit bottom" and make recovery their number one life priority.  They attend AA meetings every day, connect with a sponsor who helps them through rough patches, and work on their sobriety one day at a time.  What makes such change efforts powerful is the emotional commitment to reaching goals.  After someone has hit bottom, they *hate* their old habits and ways.  They never want to go back to the consequences they created for themselves and others.  Their goals are focused, but also intensive, because the goals aren't mere items on a list or in a journal.  The goals carry emotional intensity.

We don't change because we want to.  We change because we must:  we *need* to.  Without urgency, we don't sustain change efforts and simply relapse into old ways.  When goal setting is focused and intensive, we more readily create the conditions of urgency that help us see ourselves and others in new ways.  

FIGS starts with a simple question: What changes do you need to make?

Further Reading:

Mastering the Art of Goal Setting

How Goal Setting Helps Performance

When Goal Setting Falls Short

How Emotion Sets Our Goals in Motion

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Finding Better Edges In Your Trading

 

I thought I would do something different with this blog and actually chronicle the development of new edges in my trading.  I'll post my successes and failures and learning lessons, with an eye toward trading psychology and also the psychology of the things I'm trading.

One lesson that I've learned from working with the traders at SMB Capital is that their success is as much about *what* they trade as *how* they trade.  Both are quite important, of course, but if one is trading directionally and the stock, index, or asset being traded simply isn't moving, there won't be a lot of opportunity.  During this recent period of "meme trading", I've also noticed that very high levels of movement are not necessarily very high opportunities for profit.  We don't just want things that move; we also need them to move in meaningful and predictable ways.

When we trade suboptimal trading vehicles, it has the same potential impact on our results as utilizing suboptimal trading methods.  Both lead to significant missed opportunities.

One tool that I will be employing in finding superior opportunity is the Market Charts site.  Long time readers know that I have made use of the Index Indicators site to identify promising breadth patterns in the overall market.  The Market Charts site is a much expanded version of Index Indicators, tracking more indicators, multiple indicators, and a variety of stocks and ETFs.  I respect Mo's work and so view this as a worthwhile platform to begin finding fresh sources of edge.  (Please note:  I have no commercial interest in these sites; as always, I only share resources that I have found to be useful and promising).

Please note the recent blog post on innovating in our trading.  An important theme from that post is that innovation begins by asking different and better questions.  I will be looking to the Market Charts platform to first generate better hypotheses and only then to come up with superior trade ideas.  For example, might it be possible to generate long/short trades and portfolios by finding related stocks that have greater and lesser edge?  By being long the stock with good upside edge and short the stock without such an edge and weighting the pair for relative volatility, one could make money whether the overall market goes up or down, as long as the edge plays out.  In other words, does the presence of a historical edge predict *relative* performance?  

Good trade ideas come from good questions.

Much more to come!

Brett

Further Resources:

Three Minute Trading Coach:  Drama Creates Trauma

Playlist for The Three Minute Trading Coach

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