Making a Friend of the Sentiment Trend

A number of my posts have drawn upon the NYSE TICK as a measure of sentiment among large market participants. Recall that the TICK represents the number of NYSE stocks trading at their offer price minus those trading at their bid prices. When we see sharp rises or drops in TICK, it means that a large number of stocks are simultaneously trading at offer or bid. This most often happens because institutions are buying or selling baskets of stocks.

My most recent trading has greatly benefited from looking at the trend in the NYSE TICK and trading in that direction. For example, I showed how an emerging average of the TICK--assessing how current TICK values compare to the average level up to that point in the day--can help keep us on the right side of large trader sentiment. We can also gauge the TICK vs. its own regression line to track the trend of sentiment.

In the chart above, I've taken a relatively simple strategy. I'm charting a 10-minute moving average of the TICK (pink line) vs. the ES futures (blue line). The red horizontal line represents the average NYSE TICK level over the past 20 trading days.

One thing I look at as the day unfolds is how much time we're spending above or below that horizontal line. That tells me if we have above average or below average buying sentiment during the day.

The second thing I look for is whether, over time, the area above the horizontal line is expanding or contracting. That tells me something about the trend of sentiment. We can see above, for example, that the trend of the TICK was down through much of the morning. That had me leaning to the sell side.

Third, I look at the bounces and dips in the 10 minute average of the TICK. If we get lower high and lower lows, I view that as a trend in sentiment, and I'll use those TICK bounces to sell the market. Conversely, if I see a drying up of the 10 minute average TICK following a meaningful decline--such as happened in mid-afternoon above--I'll use that as a possible occasion to buy.

Finally, the moving average of the TICK also nicely alerts us to those inefficiency patterns I've mentioned in past posts. Those occur when we get readings in the TICK that are above the horizontal red line, but that cannot push price to higher levels. Such inefficiency dominated the morning trade and was a nice tell for a selling strategy.

The last couple of weeks I've focused on refining my morning trading around trends in the NYSE TICK. So far it's been quite promising. Ken Wood of Woodie's CCI Club jokes that, "We don't need no stinkin' prices". He simply trades off patterns in the indicator itself. While I'm not quite to that point vis a vis TICK, I'm pretty close. If we get a bounce that can't push price higher, I'll sell and cover and the next TICK thrust downward and vice versa. Such a strategy does not lead to huge gains per trade--holding times are short--but my win percentage has risen as a result and losses are quite contained. The key is being patient enough to establish an unfolding trend in the TICK and then trading within that larger trend.

Here Are Tuesday's Blog Links, Pivot Levels, and Market Views

A View From The Style Box: What's Performing Best And What That Tells Us

A while back we looked at the style box and found that value was handily outperforming growth. If we take a fresh look at investment styles and performance, however, a different picture emerges. In this look, we're using the Vanguard ETFs: VUG (large cap growth; dark blue line); VTV (large cap value; pink line); VBK (small cap growth; yellow line); and VBR (small cap value; light blue line).

What we find is that, since the start of 2007, growth has been outperforming value. Indeed, small cap growth is beating the pants off the other investment styles.

Investor preference for small caps is not exactly what I'd expect if the market were expecting recession. Nor would I expect a preference for growth stocks.

But then, again, there are numerous indications that the market is not pointing toward recession:

* Breadth Strength - Remember how beat up the advance-decline stats were during the late February and early March drop? They have recovered that ground and then some, rising steadily to bull market highs.

* Dollar Volume Flows - Twelve of the last fifteen trading sessions have shown above average money flows into Dow stocks. Institutions are putting money to work in the market, not taking funds away.

* All Time Price Highs - It's not just the Dow making all-time highs. The broad NYSE Composite is doing the same. Over 86% of S&P 500 stocks are trading above their 50-day moving averages--and that proportion has been rising. That's not exactly the weakness we'd expect to see in a topping market.

Our look at the investment styles suggests that we have transitioned from a more defensive market (in which value leads growth and large caps lead small caps) to a more speculative one (in which we see the reverse). At this juncture, institutions are committing funds to equities. And that is benefiting the most entrepreneurial segments of the market.

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Finding Gain Where There's Been Pain

Here we see major world stock market averages during 2007. Representing the U.S., we have SPY (dark blue); Asia is represented by the Vanguard Pacific ETF (VPL; yellow); Europe is the Vanguard European ETF (VGK; pink); and emerging markets are the Vanguard Emerging Market ETF (VWO; light blue).

Notice that Europe and the emerging markets were hammered the worst during the late February/early March selloff. Note also that they have become the performance leaders since that time. Indeed, at present, the U.S.--despite all-time Dow highs--is the world performance laggard.

During the market debacle of late February and early March, I noted the extreme negative sentiment, with put/call ratios more bearish than we had seen even during the 2000-2002 crash. In retrospect we can see that this was an overreaction to fears at the time regarding the demise of housing and the Yen carry trade. What we've seen since then is a repricing of world equity assets reflecting an unwinding of that overreaction.

Panic takes everything down with it; the good with the bad. A powerful market strategy is to find good assets caught in the panicky downdraft and invest for the return of rational repricing. While it's true that markets can stay irrational longer than traders can stay solvent, it's also the case that prudent investors who wait for irrational pricings can put their solvency to good use by making longer-term bets on eventual market sanity.

Toshiba: A Stock That's Powering Higher

Let's connect the dots:

* Here's a stock that broke significantly higher on a surge of volume in late 2005. Note that it has continued that surge recently, with a break out from consolidation on high volume. The stock is Toshiba.

* Here's the early 2006 announcement of Toshiba's major entry into the nuclear power market via its purchase of Westinghouse.

* Here's one view of the case for nuclear power in the search for alternatives to fossil fuels.

* It isn't just India, Iran, and North Korea clamoring to join the nuclear club; it's also Saudi Arabia, Jordan, Turkey, Egypt, and other countries in the Persian Gulf.

* In the wake of record uranium prices, the NYMEX is listing a new uranium contract to help operators of nuclear plants hedge against further rises.

Assembling these dots, one might get the impression that a variety of forces--concerns over emissions, desires for energy independence, peak oil fears--have converged to provide a shot in the arm for the nuclear industry.

Maybe, just maybe, smart money has been buying Toshiba--and not just for their electronics.

Bloggers and Readers: A Call For Links

The only way to keep a blog like this fresh is to bring in as many valuable perspectives as possible. That's an important reason why I periodically solicit reader input into best practices, ways of handling trading challenges, etc.

Each day I try to find valuable blog and website links on trading and markets. These are posted to the Trading Psychology Weblog. There's no way, however, that I can hope to read all the blogs that are out there. For that reason, I welcome link suggestions emailed to me or offered as blog comments when bloggers or readers come across something special.

The links should offer fresh insight, unique analysis, and/or practical aids to trading. If it's something that hits you between the eyes and gets you looking at trading or markets differently and usefully, by all means forward the URL so that I can share with readers.

Bloggers should not be shy about submitting their own best work. I'm only too happy to provide recognition to those who make a special effort to educate traders. I also enjoy posting items of unusual creative interest, such as the eco-project in New Mexico.

What I'm not looking for are posts that promote products or services; self-congratulatory posts that boast about all the great calls made during the past; or articles that describe frankly mystical approaches to the markets. I'm also not looking for journal entries that emote about one's trading, unless those make larger points that would enlighten readers.

But if you're providing unique analysis and insight to traders and investors, I welcome getting URLs to the best of your efforts and passing those along. My email address is at the end of the "About Me" section at the right of the blog home page and is also at the end of my bio.

Thanks again for all your input--

Brett

Trading Psychology and Stock Market Psychology Resources for Traders

I received an interesting phone call a little while back. Someone from a major trading firm contacted me regarding this blog and my personal site. His question did not begin with the phrase "Why the hell?", but the tone of his question certainly implied it. He simply asked why I would possibly "give away" so much content on the sites.

The question reveals a lack of understanding of the academic culture. Say what you will about the ivory tower--and there's plenty to find fault with--but the fact remains that it is an incredible generator of research and knowledge. Why do researchers at my medical school so freely share their data? They realize that advances in medicine are only possible when ideas build on ideas. If you're trying to generate and refine understandings, nothing beats open source.

Whatever I have shared on the sites has more than returned to me through the resulting interactions with professional traders and firms. You would be surprised how open many of the best traders are when they understand that they will receive openness and privacy in return.

The best traders don't owe their edge to this or that idea. Their edge comes from their ongoing ability to cultivate ideas. When you're competent at cultivating ideas, you don't have to hoard the ones you've developed to that point.

The best medical researchers are the ones with the best world-wide research networks. They give away the most and receive the most in return.

I find that giving love in the same way works best in raising a family. Not because you're altruistic, but because giving the best within you inspires others to do the same.

I've updated my articles page of trading psychology and market psychology resources for traders. You'll find links to more than 3 years worth of articles, as well as links to hundreds of other blog posts.

I've also been asked how I manage to write so much and have so many ideas. Maybe it's because others, finding the best within them, have been equally willing to educate and enrich me. My deepest thanks to readers and traders who have also chosen to be contributors.

Brett

Handling Performance Anxiety: More Views From Readers

I recently posted comments from readers regarding ways of handling performance anxiety. In this post, I'll summarize emailed ideas from readers and also add a few thoughts of my own. Because these readers opted to email me rather than comment publicly, I am not mentioning them by name to preserve their anonymity.

* Trader O recommends a book by Terry Orlick entitled In Pursuit of Excellence: How to Win in Sport and Life Through Mental Training. Orlick is a former Olympic athlete and coach and has worked with many Olympians on mental training. His methods include focused goal setting, visualization, relaxation, and methods to block out distraction. Recall that performance anxiety occurs when concerns about the outcomes of performances interfere with the actual act of performing. By learning how to direct awareness and achieve a state of focused concentration, a performer can become immersed in the act of performing. For instance, during my best trades I focus intensely on what various sectors are doing and how volume is behaving. My thoughts are on how the market is trading, not on whether my trade will make money. As Trader O and the book suggest, one can train oneself to sustain such focus as a positive habit pattern.

* Trader M observes that "The most effective technique I use for dealing with anxiety is to remember that anxiety is missing the letter ‘d’. There is no entry in any English dictionary entered as “andxiety”." His excellent point is that we tend to lapse into thought patterns where we see ourselves as either all good or all bad. Anxiety can be seen as a form of justice, pushing us toward a more balanced perspective. The word "and" itself adds a balancing element, reminding us that we are subject to both good and bad: winning and losing. This simple reminder--by turning "anxiety" into "andxiety"--helps a trader think and feel with "and". That's a balanced perspective that doesn't put pressure on the performer.

* Trader S recommends the book Emotional Intelligence and its description of methods to resolve problematic emotional patterns. He particularly mentions becoming aware of your own breathing, especially when it becomes short and shallow. By purposely elongating those breaths, he is able to slow himself down both mentally and physically. He has used the Journey to the Wild Divine biofeedback software to help him learn to control his body's arousal. Finally, after undergoing some traumatic losses, Trader S. has limited himself to trading one contract and losing only $100 per trade. This takes the possibility of large losses entirely off the table and enables him to regain confidence. In my next post, I will outline some of my own uses of biofeedback to deal with performance pressures. This can be a very useful tool for self control.

* Trader A mentions a technique from a book that helped him greatly when he started a new trading position with a firm. He kept a daily journal and wrote down the time of day whenever he experienced feelings of panic regarding his trading. He then wrote down the time of day when that anxiety subsided. Although it seemed as though the nervousness was lasting a long time, he could see that, in fact, it only lasted a few minutes at most. Each time he repeated the exercise, the duration of the anxiety period lessened. This is an excellent method, because it reinforces for the trader the sense of "This, too, shall pass." It is one easy way to deal with secondary anxiety: the fear of becoming anxious.

* Trader F recently went through a harrowing loss and dealt with it by shedding half his position and protecting his remaining capital. He notes that such a loss can spiral, taking a trader out of his discipline and interfering with subsequent opportunities. I believe his basic point is so important : we should always have loss limits in place that we can live with. This takes much of the pressure off of losing. I personally try to ensure that no single loss in a day's trade could prevent me from having a green week; no single losing week could prevent me from being up on the month. The key is to have control over one's losses, rather than letting them control you.

Once again, I thank readers for sharing their experiences and life lessons. One great advantage of a blog is that it can become a two-way vehicle for communication, in which we learn from each other's experiences. In the last post and this one, readers have written a virtual manual regarding how to overcome performance pressure. My next post in this series will offer a few perspectives of my own and attempt to contribute to that manual.

Here Are Sunday's Blog Links and Market Views

The Most Important Question To Ask When You're In A Slump

Slumps happen. The trader who has a respectable 60% win rate has a 2.5% chance of losing four times in a row simply as a matter of chance. That doesn't sound like high odds, until you realize that, over the course of regular trading, such strings of losers are virtually guaranteed to happen. When traders encounter one of these losing streaks, they often interpret the outcome as a "slump". They may even become fearful of the slump--having seen other traders go through harrowing drawdowns or firings--and develop performance anxiety. This only adds to trading woes, making the "slump" a self-fulfilling prophecy.

The question traders naturally ask when they're in the "slump" mentality is: What am I doing wrong? Of course, they have good intentions. They want to identify their problem so that they can effect a possible solution.

But sometimes that question is the problem. The trader is so caught in a problem mindset that he or she loses sight of strengths and what brought success to that point.

For that reason, the most important questions to ask when you're in a slump are: What are you really good at? What are your distinctive strengths as a trader? What has brought you success to this point?

Too often, traders after a hot streak will stop working on their game. Conversely, after a losing streak, they become mired in problem thinking. It's far better to focus on improvements you want to make when you're making money and get back to basics--your distinctive strengths--when you're down. That way, you always avoid overconfidence and underconfidence that can result from mere chance runs of winners and losers.

Here are a few questions that I find helpful in focusing on strengths:

* What markets do you trade most successfully?
* What time frames (holding periods) are most successful for you?
* What times of day represent your greatest trading strengths?
* What are your most successful trade setups?
* Do you tend to trade better from the long or short side?
* What position sizes and stops work best for you?
* How do you prepare for trading when you're at your best?
* How do you handle losses when you're trading well?

The idea is to handle drawdowns by building on what you do best. It also means that it's important to keep tabs on your results and identify your trading niche. If you're not sure of your niche--that area of trading that best maximizes your talents, skills, interests, and opportunities--this chapter from my book might be of help.

It's difficult to stay modest and hardworking when things are going well, but it's just as hard to stay solution-focused when problems abound. If, however, you ask problem questions when you're mired in problems, you may just be compounding your difficulties. Slumps are only permanent if you lose sight of the best within you.

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Handling The Performance Pressures Of Trading: Perspectives From Reader Comments

I recently proposed that performance anxiety is the most common psychological problem faced by traders. In the comments section of that post and in private emails to me, readers have weighed in with their successful approaches to dealing with performance pressures. This post will summarize reader comments; tomorrow's posts will synthesize perspectives from reader emails and add a few views of my own.

Let's start with views from the comments section:

* Reader Charles talks about an approach that is common among proprietary traders I've worked with. When he hits a slump, he temporarily reduces his size, takes pressure off, and then raises his size once he gets back into the groove. I will do something somewhat similar: I will temporarily limit my trading to my highest probability setups and get a winning day or two under my belt during a slump period. The reason this strategy can work is that it takes an important element in stress--perceived control--and puts it squarely in the trader's hands. Often, performance anxiety occurs when we feel out of control of a situation. By creating an enhanced degree of control, we can regain our sense of mastery and minimize stress. The one caveat in this approach is that position sizing is crucial. If you risk too much of your portfolio on individual positions and then hit a losing patch, you could dig too deep a hole for yourself--particularly if you reduce your size in order to recover psychologically. Not betting the farm on any single idea is one great preventive measure for performance pressures.

* Trader David offers a fascinating analogy between trading and skeet shooting. He also provides a link to an Olympic shooting coach who helps his students with performance pressures. He suggests visualization techniques to occupy the conscious mind, enabling the subconscious (i.e., our automatized skills) to take over. Most performance anxiety occurs when a task that normally occurs automatically is disrupted by our conscious focus on the outcomes of that task. Any exercise that absorbs our awareness and directs our focus away from the performance itself will be helpful in that regard. As I will indicate in tomorrow's post, enhancing our state of concentration and directing that concentration toward the process of performing (not the outcome) can form the foundation for an effective self-hypnosis routine. David's approach is much more than simple positive self-talk: it is a redirection of attention and hence a redirection of regional cerebral blood flows.

* Dr. Bruce, who has offered so many fine comments on this blog, puts his training to good use and recommends the use of beta blockers in combating performance anxiety. I cannot agree more. When I ran the counseling program for medical students in Syracuse, I encountered performance anxiety problems all the time: test anxiety, public speaking stress, etc. My first line of assistance was the use of specific behavioral exercises that research has found to be effective in dealing with anxiety. (More on those tomorrow.) There were times, however, when even those exercises were not sufficient to gain self control. The beta blockers were very helpful in reducing physiological reactivity, reducing the secondary anxiety that I mentioned in the prior article. Instead of becoming anxious about their own anxiety, performers notice their reduced arousal and focus on that. Here's a nice summary of the use of beta blockers for professional musicians. Note that these are to be used as temporary measures before major performances and must be prescribed and supervised by a physician.

* Dr. Bruce also recommends relaxation and biofeedback. At present, a combination of these, along with directed behavioral exercises, is my favorite intervention for performance anxiety. Here you're training the body to remain calm--and training the mind to stay focused--under varying emotional conditions. Much of my post tomorrow will deal with this combination. As Dr. Bruce notes, the techniques work much like the beta blockers: by reducing autonomic arousal.

* Finally Dr. Bruce emphasizes the role of preparation in preventing performance anxieties from taking over. Making skills automatic is the best way to enable performances to flow. When I have a public speaking engagement, I will always prepare the opening of my talk most extensively. I'll also use overheads to cue me through the opening. I know that if performance pressures are going to be present, they'll get to me early in a talk. By being super prepared with the first portion of the presentation with plenty of cues, I get into the rhythm of the speech and the automatic skills take over. Similarly, I will intensively mentally rehearse the entry of a trade and what I'll do if it goes against me. This preparation takes the scariness out of a situation and, as noted before, enhances the sense of personal control. Please also take a look at Dr. Bruce's point about running wind sprints (increasing your physiological arousal) when you're anxious; it's an excellent point. By exercising vigorously when you're anxious, you override your body's nervousness with normal pumped-up arousal, which no longer plays into the secondary anxiety. Indeed, as the good doctor notes, you can actually use your awareness of your pumped-up state to aid your performance.

* Trader Dan mentions a technique that psychologists call cognitive reframing. Remember that performance anxiety occurs when we perceive a situation to be a threat. By reframing the situation, we take much of the threat out of it. His reframing is based on an analogy to the baseball player: The hitter can get on base less than half the time and still be an all-star player. It is not necessary to win on each trade to be a successful trader, and all successful traders have strings of losers simply as a function of chance. Making losing a normal, expectable part of the game--and making sure position sizes are reasonable in order to survive those losing streaks--is very helpful in taking the threat out of trading losses. My own approach, as readers know, is to view outcomes in two ways: trades that make me money and trades that teach me something about myself and/or the market. By embracing loss as a learning experience, I reduce the stress often associated with thoughts of losing.

* Reader AnaTrader, who has also graced this blog with many fine comments, offers several perspectives from her mentor. The essence of her mentor's approach is enhanced self-awareness: taking one's "emotional temperature" hourly to monitor stress levels and thought patterns associated with stress. AnaTrader passes along a key insight: the importance of staying focused in the present. It's when we become wrapped up in the past or future--worrying about past losses or possible future ones--that anxiety is most likely to appear. By using breathing techniques to stay grounded in the present and reduce physiological arousal, it is possible to regain a present-centered awareness. Citing Steidlmeyer, AnaTrader's mentor notes the value of immersing yourself in current market data as a way of staying focused on the present. Immersing oneself in meditation music and constructive self-talk, as AnaTrader notes, can also short-circuit the worry process that generally precedes performance pressures.

* Trader Jeff mentions returning to paper trading mode as a way of regaining one's rhythm. This is similar to the above-mentioned technique of reducing trading size, but now it takes money off the table altogether and just has the trader focus on the process of putting on trades and managing them. This approach is common in the area of sexual performance anxiety, where psychologists will help couples by telling them to *not* engage in intercourse and simply get comfortable with themselves and their partners in bed. By taking the performance pressure away from the sexual situation, couples can allow their natural feelings to take over. Similarly, the trader who goes back to paper trading temporarily can find his or her rhythm return relatively quickly, making it easy to return to putting money on the line. One caveat here is that you don't want to retreat to paper trading for too long a time; that could be an escape that would not enhance a trader's sense of master. As a temporary measure for getting away from money pressures and returning to sound trading practice, however, going into simulation mode can be very useful.

* KC Equity Trader makes a super-important point about making sure you can always survive losing trades. In my own position sizing, I always assume that I could have six consecutive losing trades. If my bets are so large that six consecutive losers would put me in an emotionally bad place (and a large P/L hole), then I know I'm trading too much size for my own risk tolerance. Because KC Equity Trader knows he's always going to survive to make another trade, no single loss is unduly threatening for him. KC's point about keeping things mechanical--carefully following planned entry and exit signals--also makes the trade automatic, reducing performance worries. By making losses planned and routine, the trader takes away their threat.

* Dinosaur Trader mentions how it's easy to become more focused on P/L when a new child enters the home and there are greater household expenses and perceived trading pressures. He also mentions reducing trading size as a way of reducing this pressure. Sound financial planning is also key: making sure that you always have cash reserves to handle unexpected expenses, loss of a spouse's income, etc. I'm a firm believer that one should not be trading one's household savings. There should be separate accounts: one for savings/investment that remains safe and secure and one for trading. If your trading account is also your savings and retirement capital, that is too much objective pressure for most traders. What that means in practice is that a portion of trading profits should always be devoted to rainy days, trading slumps, and future needs. It also means that new traders should have enough reserve capital not at risk (or secondary sources of income) to survive their learning curves. That having been said, I know many traders who have traded more cautiously (and smaller) immediately following a major life event (marriage, birth of a child, relationship break) until they're sure they have their equilibrium. The ounce of prevention in such cases is truly worth the pound of cure.

* Finally Trader M. mentions anxiety that comes from being unable to anticipate market trends. He engages in considerable market preparation to make such anticipations and feels pressure to incorporate new methods/information in order to not miss anything. The risk here is one of perfectionism: setting a standard of being able to predict trends that not even highly successful traders live up to. Many, many successful traders (trend followers, short-term traders) don't succeed by anticipating market trends. Rather, they identify shifts in trend as those are occurring or right after they've been confirmed. I know quite a few successful breakout traders who don't try to predict the breakout: they simply go with it once it's confirmed by volume and the participation of large traders. Trader M. perceptively notes that trading is like speed chess. In speed chess, however, you don't succeed by trying to predict your opponent's moves. Instead, you train yourself to respond to board configurations as they emerge. Moderating one's demands on oneself can be a powerful method for reducing performance pressure.

So there we have it! There are many more fine insights from commenters than you'll get in any high priced seminar or coaching session. Tomorrow, I'll summarize the equally astute insights of those who have emailed me with comments and then I'll post my own techniques for handling performance anxiety. Thanks to all who have participated in this exercise and shared their learning and experience!

Here Are Blog Links For Saturday and Market Views

Tracking Sentiment Shifts With An Emerging Average

You ever have a song stuck in your head? Anyway, I was humming my favorite version of Britney's song and, whoops, it happened again: I suddenly had the idea of creating a different kind of moving average.

The above chart from Wednesday, April 18th tracks what I call the emerging average for the NYSE TICK (pink line) vs. the ES futures. The emerging average takes the average value of the indicator from the start of the trading day to a specific point in time. Thus, the value for 10:00 AM would be the average TICK from the open to 10:00 AM. The value for 10:01 AM would be the average TICK from the open to 10:01 AM. As the day goes on, you're averaging more values.

The average TICK level over the prior 20 trading sessions was 300. We opened with far less buying interest than that on the 18th, but notice how the emerging average for the TICK stayed strong through the day--even as it remained below the 20-day average. This suggested to me that there was early selling interest, but that that interest was drying up through the day.

A rising or falling emerging average tells us something about shifts in the distribution of the TICK during the day. If the line rises, it means that current TICK values are above their average for the day to that point and vice versa.

By comparing the TICK to its 20-day average (Adjusted TICK), but also by comparing new TICK values to the prior distribution during the day, we can get a good idea for whether buying or selling interest is expanding, contracting, or remaining relatively constant. Ideally, we want to be a buyer when the emerging average is rising *and* the emerging average is greater than the 20-day average value for TICK. We want to think about selling when the emerging average is falling and the emerging average is less than the 20-day TICK.

All of this simply measures shifts in the willingness of traders to execute trades at the bid (bearish sentiment) or offer (bullish sentiment). By noticing the trend (tendency) of traders to hit bids or lift offers, we can get an early reading of directional tendencies in the market.

TraderFeed Stockfest

So far, the dollar volume flow data has provided a useful perspective on this market. It has also helped identify some worthwhile stocks and pointed the way to some useful trading patterns.

So now let's try something fun: not a linkfest, but a stockfest. If you're a trader/blogger or a frequent commenter on this blog, email me the symbol of a stock that you find promising (i.e., conduct your own screening) and I will conduct a dollar volume flow analysis and post here on the blog. All you have to do is put the stock symbol in the subject header of the email and write a couple of lines re: why this stock is worth looking at. My email address is at the bottom of the "About Me" section at the right side of the TraderFeed home page and is also at the end of my bio page.

I won't be able to include all submissions, but will focus on the ones that come with the best prescreening. (I especially welcome screening based on solid fundamentals and screening based on insider activity and activity among market pros). Let's see if, together, we can come up with some market winners!

Brett

The Most Common Problem Traders Face

There's one problem that seems to be universal to traders, whether they're professionals trading in large banks or funds or part-timers trading from the home: performance anxiety.

Performance anxiety afflicts even accomplished individuals in sports, performing arts, and games of skill such as poker and chess. It occurs when awareness of the performance--and especially the outcome of the performance--interferes with the actual act of performing.

Performance skills have generally been honed to the point of automaticity. This is especially true of performers in high-speed activities, such as race car drivers, fighter pilots, baseball batters, and short-term traders. When the performer becomes self-aware and focuses attention on the outcome of the performance, this leads to efforts at conscious control of the automatic activity. The result is a disruption of performance.

A great example is the basketball player who is shooting a free throw in the last seconds of a game with his team down by a point or the golfer who has a putt to win a tournament. Aware of the importance of his shot, he carefully aims the ball and does not deliver his natural stroke. In the financial world, a trader will overthink a trade, missing a great opportunity when it doesn't set up exactly right. Heightened awareness of risk interferes with the pursuit of reward.

What causes performance anxiety? Sometimes a single poor performance or set of performances create the view of a "slump" in the performer's mind, leading to efforts at correction that only exacerbate the problem. Other times, changed circumstances can generate the performance anxiety. Being hired by a new firm and wanting to impress everyone; having one's trading size raised considerably and becoming aware of the new risk; giving birth to a child and now feeling more pressure to bring in money--all of these can shift the mindset of the trader. The result frequently can be seen as a change in the trader's mood.

The traders' questionnaire I posted a while back is one way to assess a disruption of mood. Performance anxiety can become debilitating, not only because it inhibits performance, but because it affects global well-being and the accurate assessment of risk and reward.

One of the poorly recognized aspects of performance anxiety is known as secondary anxiety. This occurs when a person becomes aware of their own emotional arousal and becomes anxious about being anxious! It is a major dynamic behind panic disorder, but it also frequently plays an important role in sustaining performance anxiety. A trader can become threatened by even the normal fight-or-flight responses generated by activities that involve risk and uncertainty. Once those responses are perceived as threats, they generate further anxiety, which in turn becomes even more threatening. Many times, performance anxiety is the result of just such a downward spiral.

There are many effective psychological techniques for mastering performance anxiety. But before I offer some of these in my next post, I would like to ask readers to comment to this post or email me with their own favorite techniques, including links to relevant posts on trading blogs. Performance anxiety is one of those normal, developmental challenges that all traders face at some point in their careers. What has worked for you? How have you gotten past the jitters, self-doubts, and mental interference? I'll collate responses and then offer a few techniques from the research literature in psychology. My email address is at the end of the "About Me" section on the blog home page.

Here Are Thursday's Blog Links, Indicators, and Market Perspectives

Investors Putting Some Chips on INTC?

We've had some recent strength in the semiconductor stocks. Intel (INTC) has been on my radar for the last few days due to a breakout in relative dollar volume flows. Not only are we seeing more investor dollars being put to work in INTC; these inflows are occurring with consistency. Indeed, we've now had 13 consecutive sessions in which dollar flows were above average (i.e., above the 200 day average; horizontal red line on chart) for INTC.

Recall that dollar volume flow looks at whether transactions occurred on upticks or downticks and weight those transactions by their dollar volume. As a result, it's an excellent indicator of institutional interest in companies and sectors. I will be continuing to watch INTC and the semis to see if large traders and investors continue to put their chips to work in the sector.

Volume and Opportunity in the Stock Market

A while back I posted a volume-based tool for identifying opportunity in the stock market. At the request of a couple of readers, I am updating that work.

I went back to the beginning of March (N = 33 trading days) and calculated the average volume for each 15-minute segment in the S&P emini futures market (ES). Here's how the data look (Eastern Time):

9:30 - 9:45 AM - 89,295
9:45 - 10:00 AM - 65,418
10:00 - 10:15 AM - 83,020
10:15 - 10:30 AM - 56,083
10:30 - 10:45 AM - 53,329
10:45 - 11:00 AM - 51,402
11:00 - 11:15 AM - 38,718
11:15 - 11:30 AM - 36,625
11:30 - 11:45 AM - 37,432
11:45 - 12:00 N - 36,176
12:00 - 12:15 PM - 35,816
12:15 - 12:30 PM - 32,387
12:30 - 12:45 PM - 28,597
12:45 - 1:00 PM - 22,768
1:00 - 1:15 PM - 26,359
1:15 - 1:30 PM - 25,091
1:30 - 1:45 PM - 33,799
1:45 - 2:00 PM - 27,099
2:00 - 2:15 PM - 37,832
2:15 - 2:30 PM - 40,125
2:30 - 2:45 PM - 38,464
2:45 - 3:00 PM - 32,324
3:00 - 3:15 PM - 35,541
3:15 - 3:30 PM - 34,831
3:30 - 3:45 PM - 37,462
3:45 - 4:00 PM - 59,943
4:00 - 4:15 PM - 62,491

You can clearly see the "smile" pattern of volume: highest at the beginning and at the end of the day. Recall that a relatively small proportion of trades account for a relatively large proportion of total volume due to the disproportionate influence of institutions and large locals in the electronic futures markets. What the above volume figures tell us is that these large participants are most active early and late in the day.

It is this participation of large traders that creates opportunity. When 15-minute volume has been above 150,000 contracts, the average high-low range in the ES futures has been .65%. When it has been between 100,000 and 150,000, the average range has been .41%. Between 75,000 and 100,000 contracts, we have a range of .31% and between 50 and 75 thousand, the range drops to .23%. At the lower end of volume, when we're between 25 and 50 thousand contracts, the average 15 minute range declines to .17%, and when we're less than 25 thousand, that average range contracts to .11%.

Indeed, the correlation between 15 minute volume and the price range of that same 15 minute period is a whopping .86. Volume brings volatility, which helps define the short-term trader's opportunity.

One of the great, unrecognized reasons so many daytraders fail is that they expect the same patterns and setups to produce the same results at different times of the day. Markets trade differently at different times of day, and they differ from day to day. The same profit targets and stops for a particular trade idea may lead to profit at one time of day and whipsaws at others. If you conduct your own performance review and notice significant P/L variation as a function of the time of day of your trades, this may well be a problem for you. You would need to either limit your trading to certain times of day (which is what I do) or adapt your setups to the anticipated volatility for the times that you are trading.

My hope is that you can print out the above breakdown of volume and use this as a guide to let you know when large traders are active and when markets are likely to be dead. Such volume information has kept me out of many bad trades and alerted me to promising breakout and trending moves.

Here Are Wednesday's Blog Links, Indicators, and Market Views

The Most Dangerous Word in the Trader's Vocabulary

I'm convinced the most dangerous word in the trader's vocabulary is "should". Should can turn a winning day into a psychological loser, when a trader focuses on that move he or she should have traded. Should can make us miserable when we don't live up to our personal or financial expectations. Sometimes we focus so much on how we should trade or on how others tell us we should trade that we drift away from our own talents and interests.

But those sabotages are nothing compared to getting locked into views of how the market should be trading:

* The dollar is plunging, so we should get inflation and the market should drop!

* The market is in an uptrend, so we should rally today!

* We're in a growing deficit as a country; we're mired in Iraq; oil prices are skyrocketing, so we should have a bear market!

I can tell you this: I became a better trader when I started focusing on what the majority of stocks were doing rather than on what I thought the market should do.

On Monday, I thought we should get a higher market on Tuesday. When I saw that fewer stocks were making new highs in the morning even as the ES was moving to new price highs, however, I dropped the should and sold the open.

And, yes, I--like so many participants in the financial markets--lament the high debt, weak dollar, and rising commodity prices. But we have recovered from a steep decline, dollar flows into stocks are above average, and--as of Monday--well over 2000 stocks had made fresh 20-day highs. No matter how much I think the market should go down, it's not what the market data have been telling us.

"Should" puts my judgment ahead of the market's objective reality. And that's why it's the most dangerous word in the trader's vocabulary.

Trading Mentors and Coaches: A Resource Linkfest

In my recent call for this linkfest, I made the distinction between trading coaches (those helping traders with the emotional aspects of trading performance) and trading mentors (those teaching specific trading methods). Both have their relevance, but it's important to not confuse one with the other. This is why I wrote the post on when coaching works and when it doesn't. Many times, especially among newer traders, the frustrations of trading are simply due to a lack of understanding of markets and the absence of any methods that would confer a consistent edge. No amount of working on the mental game of trading can substitute for the knowledge and skill of the successful professional.

On the other hand, even the best trading methods can be undone by performance anxiety, overconfidence, and a lack of focus and discipline. When it is not possible to become your own trading coach, getting help from an experienced professional can be an excellent choice. Similarly, if you're not finding success in developing your own trading approaches, working with an experienced mentor--one who truly knows and trades markets--can be a great aid to the learning curve.

This linkfest consists of services that have been recommended to me either by the coaches/mentors themselves or by readers. It is not intended to be an exhaustive list, and they are not intended to be my personal recommendations (although I can vouch for a number of people on the list). Please use it as a starting point for your due diligence in selecting the services that will be most helpful to you. For additional resources that I've found useful, please check out the Trader Development page of my personal site and the resource list at the end of my recent book.


TRADING MENTORS

Ray Barros - Ray, based in Singapore and Hong Kong, has thirty years of trading experience and conducts an intensive mentoring course to provide correct tools and and skills for traders. He offers one-to-one teaching that assesses the trader's personality, develops individualized trading plans, and teaches the skills relevant to that plan. Ray has also written extensively on the markets and developed a number of unique technical trading tools that he teaches to traders individually and in seminars. My sense is that Ray takes a personal interest in his students and their success, aiding them in setting and reaching trading goals.

Woodie's CCI Club - Woodie (Ken Wood) has been an icon of trading over the past 29 years. He has pioneered and mastered the trading of patterns of the Commodity Channel Index (CCI), rather than price bars. He has been using a chat room to teach his methods for the past ten years and conducts affordable Trade-A-Long seminars to supplement his teaching. A motto of the site is "traders helping traders", and I've personally found considerable mutual mentorship on the site. To his credit, Woodie has used the site to raise over $80,000 for charities.

DLC Profiles - Jim Dalton and Terry Liberman provide individualized and small group learning experiences grounded in Market Profile. They emphasize the entire cognitive process of learning--perception, intuition, and reason--and stress the role of study and practice in the development of mastery. Jim is one of the pioneers of Market Profile, with considerable trading and industry experience. Terry is a developer of innovative Market Profile software (WINdoTRADEr) that facilitates volume analysis within profiles of varying time frames. They also offer a newsletter, articles, and Webinars to support the education.

Linda Bradford Raschke - Linda, one of Jack Schwager's Market Wizards, has been conducting chat-room based education for years. She currently maintains two rooms: one devoted to futures, the other to stocks. I've known Linda for years and have been impressed with her integration of trading psychology into her teaching of trading methods. She also offers basic online services that illustrate setups, provide proprietary scans, and enable access to the transcripts of the daily chat room sessions. Guest educators provide supplementary learning experiences.

Alexander Trading - Joe Mertes and Tom Alexander direct a one-on-one mentoring program that lasts 12 months. The core methodology of the instruction is Market Profile, with an emphasis upon identifying trade location for optimal reward-to-risk opportunities. The instructors, with over twenty years of trading experience each, actively trade their own accounts and have started a fund for accredited investors. They also offer newsletters and conduct educational seminars and Webinars.

Daytrade Team - Founders Landon and Andy Swan and Head Trader Nick Fenton offer subscribers real-time alerts of trading setups, as well as an online trading room. A variety of alert systems are offered, including ones for daytrading, swing trading, and options trading. The online trading room provides real-time commentary and trading, with integrated chat from members. Andy Swan has his own blog and has been trading actively for over 10 years. He's currently developing a new venture: mytrade.com.

Trade Mentor - Bob Lang and Price Headley provide mentoring in such areas as charting techniques, trend identification, and specific trading strategies for options and futures. They also cover trading psychology topics, such as journaling and maintaining discipline. Their mentoring is available on a one-to-one basis through phone consultation and in-house instruction.


TRADING COACHES

Doug Hirschhorn - Doug holds a Ph.D. in psychology, with a specialization in sport psychology. He is co-author of the book The Trading Athlete: Winning the Mental Game of Trading and has extensive experience working with traders in proprietary trading firm and hedge fund settings. He is also a regular columnist for Trader Monthly magazine. Doug works with traders to help them modify destructive trading behaviors in both focus group and one-to-one formats. He also offers seminars, Webinars, and digital downloads. Doug has an impressive bio and I've been proud to work with him in several settings.

Trader Psyches - Denise Shull leads a consulting firm in the arena of trader and trading psychology, teaching traders to deal with impulsivity. The programs, including self-directed workshops and advanced coaching, are based on a systematic approach to the reciprocal relationship between reason, analysis, emotion, and trading results. Two consulting modern psychoanalysts, Dr. Gene Kalin and Dr. Deborah Greene Bershatsky, assist in client coaching through a theory and approach distinctly different from Freudian psychoanalysis.

John Forman - John brings a history as an athletic coach to his work with traders. He also has a strong background in trader education through his role as editor with the Trade2Win site and through his book The Essentials of Trading. John writes a trading education blog and offers coaching services to traders. His emphasis is two-fold: education (helping traders understand the ins-and-outs of markets) and development (helping traders identify the trading approaches best suited to them to develop a comprehensive trading plan). In addition to individual coaching, he offers trading courses through his site.

Dr. Janice Dorn - Dr. Dorn brings a background as a trader and as a physician to her coaching work. She conducts personal and group coaching, as well as live and Web presentations. Her website offers free articles and updates. Dr. Dorn also publishes a newsletter that deals with trading and behavioral neurofinance.


One last piece of advice: With the exception of Woodie's club, these services are offered on a commercial basis and many are not cheap. Traders, especially newbies, need to keep a close eye on their overhead. Investigate before you invest your time and money in these resources; get details, references, and concrete indications that the services will specifically address your interests and needs. A service is only a resource if it offers what you're looking for.

Here Are Tuesday's Blog Links, Market Indicators, and Pivot Targets

Dow Returns Following Extreme Money Flow Days

My recent post found that there have been above average returns since 2005 when we have had 20-day periods of very strong or very weak dollar volume flows in the Dow 3o industrial stocks. But how about a single day of extreme dollar volume flow? Do very strong institutional flows into or out of stocks during a single session affect near-term returns?

I went back to June, 2004 (N = 711 trading days), which is currently as far back as I've taken my money flow database. I calculate Relative Dollar Volume Flow by comparing dollar volume flows to their 200-day moving average. When we have had very strong inflows (Relative Dollar Volume Flow > 2.0; N = 60), the next three days in the Dow Jones Industrial Average (DIA) have averaged a solid gain of .20% (39 up, 21 down). Conversely, when we've had very weak flows (Relative Dollar Volume Flow < -2.0; N = 50), the next three days in DIA have averaged a strong .35% (32 up, 18 down). By contrast, all remaining occasions in the sample average a three-day DIA gain of only .05% (318 up, 283 down).

I will continue to investigate. So far, it appears that money flow data are mediating a momentum effect when flows into stocks are strong and a reversal effect when flows out of stocks are weak. When flows into stocks are strong, strength is likely to be followed by further strength. When flows out of stocks are strong, this represents a broad risk aversion and is followed by superior returns. Weak flows may be more typical of consolidating markets and thus yield subnormal returns over the short run. Clearly it would be interesting to see if these patterns hold during bear market periods and if they hold for individual equities.

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Going With The Money Flow

The more I dig into research regarding dollar volume flows in and out of stocks, the more impressed I am by what I find. I recently mentioned the fly in the bearish ointment: the fact that money flows have been above average for the Dow 30 industrial stocks for 14 of the prior 20 sessions. As noted in today's Weblog perspective, when flows have been strong over the past 20 days in the Dow stocks, the odds of a rising Dow over the next 20 sessions have been quite good. This morning's rally has been consistent with that leaning.

Recall also my post picking an individual stock with superior dollar volume flow characteristics: HCR. That issue is currently trading quite a bit higher on talk of a takeover. It appears that the spikes in money flow did indeed represent footprints from savvy institutional investors.

I will be presenting far more research related to dollar volume flows, both for the broad market and for individual sectors and stocks. In the interim, check out these links, kindly brought to my attention by an alert reader. Here we have Wall St. Journal data on falling stocks with positive money flows; rising stocks on negative flows; and sector flows. These are updated hourly and might be worthwhile starting points for stock screening.

Stock Market Psychology: Perspectives From Dr. Harrison Hong

There is much traders can gain from an understanding of the best academic research into markets. I recently posted links to four insightful articles from Dr. Andrew Lo at MIT. Here are some gems from Dr. Harrison Hong and colleagues at Stanford:

* Where Stock Market Psychology and Pricing Intersect - This overview article quotes a number of researchers regarding how investor/trader beliefs affect the pricing of assets, with varying degrees of rationality among participants.

* Do Industries Lead Stock Markets? - This article finds that specific industries lead price movements in the broader movement over an intermediate time frame. This appears to be due to the ability of industry movements to forecast economic developments that are slow to impact stocks overall.

* Disagreement and the Stock Market - This is a very thoughtful review article that investigates the roles of trading volume and investor disagreement in generating market returns.

* Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers - This article shows how trading and investment decisions are like epidemics: they spread from one money manager to another.

* Gone Fishin': Seasonality in Trading Activity and Asset Prices - Here the authors find a seasonal pattern over the summers due to reduced short-term trading.

Money Flows in the Stock Market: Reversal or Continuation?

I recently posted on my use of momentum, strength, and sentiment data to assess whether markets are gaining or losing directional tendency. If there's a fourth leg to the table, it would be volume. In particular, I have been impressed by the relative dollar volume flow data and their ability to distinguish strong from weak markets. My recent post found that dollar volume flows into the Dow 30 industrial issues have been positive, although reduced from the strong levels of late 2006.

I'm reading a fair amount of bearish buzz on bulletin boards/forums and also hearing from bearishly inclined readers of the blog. While the sentiment is not quite as emo as after the late February drop, it does give me pause. What has me even more skeptical of the near-term bear case are those dollar volume flow data. The market corrections we've seen of late have been preceded by sustained periods of below-average dollar volume flows among the Dow stocks. We're not seeing that at present. Indeed, out of the last 20 trading sessions, fully 14 have seen above average dollar volume flows (i.e., daily flows greater than the 200 day average).

Let's take a look at the recent historical data. As of Friday, we're up over 3% on the Dow over the past 20 trading sessions. Going back to the start of 2005 (N = 553 trading days), we've had 74 occasions in which the Dow has been up more than 3% over a 20-day period. Ten days later, the Dow has averaged a gain of only -.02% (39 up, 38 down). By comparison, the average ten-day gain in the Dow over the entire sample period has been .29% (343 up, 210 down).

When we divide the strong Dow periods by dollar volume flows, however, a distinct pattern emerges. When the Dow has risen by more than 3% over twenty days and we've had solidly above average dollar volume flows, as we've had recently (N = 37), the next ten days in the Dow have averaged an impressive *gain* of .49% (27 up, 10 down). When the Dow has been similarly strong but we've had relatively weak dollar volume flows (N = 37), the next ten days have averaged a loss of -.53% (12 up, 25 down).

In short, rising markets with strong money flows have tended to continue their ascent. Rising markets with weak flows have tended to reverse. I will be investigating this pattern with other averages and over other time periods. For now, for me, it's a fly in the bear's ointment. Going forward, I'll update relative dollar volume flows for the Dow stocks in the Trading Psychology Weblog.

Stock Market Sentiment and Short-Term Cycles

My recent posts have tracked stock market momentum and new high/new low strength as they relate to short-term market rises and declines. This post completes the trifecta by looking at yet another Trading Psychology Weblog measure, the Adjusted TICK, over the period from March 13th through this past Thursday's market.

Recall that the NYSE TICK is a sentiment measure, tracking the number of stocks trading at their offer price minus those trading bid. The Adjusted TICK subtracts from each one-minute TICK reading the average TICK value over the prior 20 trading sessions and then cumulates the resulting values into a single end-of-day index. This index tells us if traders are more or less inclined to buying or selling relative to the recent past. (A zero Adjusted TICK reading thus means that we have an average sentiment level relative to the past 20 days of trade).

Notice that we tend to see a drying up of negative Adjusted TICK values at market bottoms and a drying up of buying at market tops. This very much fits with the momentum and strength data shown in the recent posts. When we have extreme Adjusted TICK readings--positive or negative--there tends to be follow-through of price movement during the following trading session. Very low Adjusted TICK readings--ones that are neither very positive nor negative--are more common during balanced, range-bound market days.

Combining views from the momentum (Demand/Supply), strength (20-day Highs/Lows), and sentiment (Adjusted TICK) measures provides me with a three-dimensional perspective on two crucial market questions: Are we gaining or losing steam to the upside? Are we gaining or losing steam to the downside? Viewed otherwise, I'm attempting to answer the question of whether the market is likely to move directionally (trend) or oscillate around a mean value (bracket).

That is why I post these indicators every day to the Trading Psychology Weblog. It is also why I post key price levels: pivot-based targets and the daily volume-weighted average price. I am using the momentum, strength, and sentiment data to help me handicap the odds of hitting these price targets during the next trading session. Trending markets will break their previous day's high/low and test the R1/S1 target. Bracketing markets will revert back toward the value region represented by the prior day's average price.

Developing a hypothesis about how the market is moving--and then updating that hypothesis with real time measures of momentum, strength, and sentiment--provides at least one good trade idea per session. We'll either take out the prior day's high or low or revert back to the prior day's mean. My personal trading approach is to identify and ride a portion of that move, finish the trading day by 10 AM CT, and get on with the business of life.

Here Are Sunday's Blog Links and Market Perspectives

TIKI, Inefficiency, and Stock Market Reversals

Friday's AM market: First a volume/momentum extreme, then a price low, then failure of selling sentiment (as assessed by the TIKI, the TICK measure for the Dow 30 stocks; in red) to produce new price lows (ES futures; in blue). Throughout this bottoming process, selling volume dries up. Then buyers are emboldened and lift offers, taking price and volume higher.

In many variations and over different time frames, this sequence of events plays itself out in the S&P emini market. Seeing price, volume, and sentiment on a single screen helps you observe when large sellers are aggressively hitting bids and driving the market lower and when selling dries up and sentiment can no longer produce price lows. The key is observing these sequences so many times that you begin to recognize them as they're forming.

Now I'll get back to the weekend and enjoy some silence. Have a great one--

Brett

Pain and Gain in a Trader's Development

One of the most important steps traders can take to improve their craft is to intensively review their performance. If you think of every trader as a trading system, then it makes sense to see how the system has behaved over a year's time. This will reveal both weaknesses and strengths, aiding in the formulation of goals for self-development.

My favorite form of performance review is also my most painful. Every year I complete my income taxes--by hand. That means that I write out every single trade that I placed during the year in chronological order, along with its profit/loss (P/L). This past year, that meant reviewing approximately 240 trades, roughly one a day.

Yes, there are ways of capturing this information electronically to avoid the hand-numbing task of writing each transaction, but I choose the old-fashioned method. Writing the trades out makes me reflect on them: "What the hell happened here?" and "What was going on in the market then?" Writing the trades makes me sensitive, not only to their P/L, but to their sequencing: How many runs of winners and losers did I have? How far did I draw down during the year? How well did I trade after I had a losing period? What happened following winning periods?

Other important questions that arise during the income tax exercise have been: How many winners and losers did I have? Did that change over time? What was the average size of my winners and losers? How did the size of my largest winners and losers compare?

Such review is a powerful learning mechanism. Recall the world-class trader I recently described. I'm convinced his daily reviews have helped him make that movement from competence to expertise.

So why do so few traders conduct such intensive reviews?

Quite simply, it really is painful. Every mistake--every lapse of judgment and discipline--is laid bare. Too, the review starkly reveals how successful or unsuccessful you truly were. Such review forces us to face the question: What was the return on my investment of time in trading? I suspect many traders would rather not know. They'd rather comfort themselves with vague assurances that they're "working on things" and "learning". They prefer filling out a few emotive lines in a journal and calling that review.

But with the pain comes gain. My past reviews found that a handful of large losing trades were greatly reducing my P/L for the year. No longer. I became so disgusted looking at large losing trades that I simply cut them out. Out of 240 trades in 2006, none lost anywhere close to 1% of my total trading capital. My largest drawdown the year--from equity peak to trough--was on the order of 2%. I was profitable, not because I made so many great trades, but because I stopped losing. And I stopped losing when I started hating losing. And I only *really* hated losing when I had to write it down, face myself in the mirror, and truly feel the pain and disgust with how I was interfering with my own success. That emotional connection is critical to the process of change.

You'll never hear me prattle about positive affirmations and turning positive images into reality. It's the hard, painful looks in the mirror that have brought me progress as a trader. Maybe that's why I've always admired alcoholics who truly work their AA programs, conducting fearless moral inventories and making amends for their pasts. I also admire the soldier who stands steadfast before his commanding officer's critique and responds, "No excuse, Sir!", with resolve to rectify mistakes. I respect companies like Toyota that scrutinize every weakness of their production processes; bodybuilders that relentlessly focus on each muscle group for development; and NASCAR pit crews that meticulously film and review each stop, in hopes of shaving a mere fraction of a second from routine maintenance.

In times of peace, Nietzsche wrote, warlike individuals turn upon themselves. They create their own discomfort...and thereby generate the motivational thrust for new rounds of self-improvement.

They find their gains in pain.

Here Are Saturday's Blog Links and Market Views

Stock Market Strength And Short-Term Price Cycles

I recently posted on the topic of momentum and short-term market cycles. In this post, we'll look at market strength, as measured by 20-day new highs and lows, and those same cycles. Both of these are indicators tracked daily in the Trading Psychology Weblog, so that you can easily follow whether markets are gaining or losing momentum and strength.

The chart above takes us from March 13th through April 12th in the ES futures. (The last bar is the preopening futures for April 13th; the bar labeled H is the futures performance while the market was closed for the Good Friday holiday). Alongside each daily bar are two numbers. The top figure is the number of stocks on the NYSE, NASDAQ, and ASE making fresh 20-day highs. The bottom figure is the number of stocks making new 20-day lows.

A strong or weak market should expand new highs or new lows. It's when we see a stalling out of new highs or lows that reversals are more likely to occur, as market movements become more selective.

Note from the chart above how an expansion of new lows precedes price weakness in the S&P futures. Note also how an expansion of new highs often precede market rises. This is very useful information in anticipating market turns.

On the other hand, when we have strong expansions of new highs or new lows, I generally look for price movements to show continuation the next day. That is very useful in framing occasions to hold onto trades overnight, particularly during strong markets that have followed oversold conditions.

You can see from the chart one reason I am concerned about the recent market. Although we're hovering near multiday highs, we're seeing an expansion of new lows among stocks. This suggests that the market rise is becoming increasingly selective.

The new high/new low data are also useful in comparing the strength of one short-term cycle to the previous one for a longer-term trend perspective. If the market is in a longer-term uptrend, each successive short-term cycle should show expanded new highs. Conversely, a longer-term downtrend will expand new lows from one short-term cycle to the next. When one cycle fails to expand on the one previous, we often lapse into a longer-term consolidation, which frequently precedes trend change on that longer time frame.

Finally, tracking both momentum (Demand/Supply) and strength (New Highs/Lows) provides a multifaceted view of whether markets are gaining or losing the ability to sustain a trend. In my next post in the series, we'll examine how Sentiment enters the picture for a three-dimensional market view.

Dollar Volume Flows Into The Dow Industrial Stocks

I thought I'd update my research with Dollar Volume Flows. Here is the Dow Jones Industrial Average ETF (DIA) plotted against the relative flows for the 30 individual Dow stocks. Recall that the relative flows track how many dollars have come into the Dow stocks over the past ten sessions compared with the past 200 sessions. More on dollar volume flows can be found here.

What we see is that, for the Dow stocks as a whole, flows have been positive, but below the levels seen during the stock runup from July to February. My concerns for this market are twofold: 1) We appear to be tracing lower highs in money flows; and 2) Bounces in money flows are not pushing the Dow to new highs. I would call this a yellow light; not a flashing red alarm. It simply tells us that institutions are not putting money to work in the Dow stocks following the recent decline the way they had been previously.

Among the Dow stocks, we see outright negative flows over the past ten sessions in DIS and MSFT. Flows into XOM have been particularly strong on an absolute basis. On a relative basis, the last ten sessions have shown greatly improved flows into HD and INTC. I'll be keeping my eye on housing and semiconductors as a result to see if this represents bargain hunting among institutions. Another stock with significantly improved flow over the past ten sessions is WMT.

In short, we are seeing positive money flows into the Dow stocks, not outright net selling. The pace at which large traders and investors are putting their cash to work in these issues has slowed--something I'm keeping a close eye on.

Here Are Friday's Blog Links, Market Indicators, and Pivot Targets

Large Trader Behavior During A Stock Market Reversal

Several readers asked me about the market reversal this morning. Here's a Market Delta chart of the morning turnaround. As always, within each (10 min.) bar at each price are two numbers. The first is the volume transacted during that time when that price was the market bid. The second is the volume transacted during that time when that price was the market offer. Note that the price levels are colored green if volume at the offer exceeds that at the bid (net buying interest), and the color is red if volume at the bid exceeds that at the offer (net selling interest). On the bottom, X-axis, we have two numbers for each bar. The first is the total 10-minute volume in the ES futures. The second is the difference between the volume at the offer and the volume at the bid during that 10-minute period.

What makes this chart unique is that only trades of 200 contracts or more are charted. I'm only looking at what the large traders are doing.

Note that large traders started lifting offers once we got below 1443. We got a nice bounce and then, on the next pullback at the 9:20 AM CT bar, we can see that selling volume among the large traders really dried up. That led to a fierce rally that reversed the morning decline, with significant lifting of offers among large traders. On the subsequent pullback, we hit a negative TICK reading below -650, but note that volume at the bid among large traders was *very* modest. From there we moved steadily higher.

Quite simply, large traders bought the lows and stopped selling the market after the initial decline. We don't know all the reasons why, but I'm not sure that 's necessary. All we need to know is where the institutions and large locals are doing their business within the bid/ask matrix. That reveals quite a bit about their sentiment. And it's something the vast majority of traders, looking at simple bar charts and candlesticks, never detect.

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Stock Market Momentum And Short-Term Price Cycles

In my most recent Trading Psychology Weblog entry, I describe the structure of short-term market cycles. This understanding is very important in framing hypotheses for the next day's trade, which is why the Weblog tracks market momentum and strength daily. While I appreciate the kind comments readers have given this blog, the most important day-to-day trading information I have to provide is actually on the Weblog.

To illustrate the relationship between stock market momentum and short-term cyclical behavior, I've summarized the S&P 500 futures market (ES) from March 13th to the present. Each daily price bar is accompanied by two numbers: that day's Demand reading (on top) and Supply reading (on bottom). Take a moment to study those numbers. You'll see an important pattern: Demand tends to top out ahead of price during rising markets; Supply tends to bottom out ahead of price during market declines. This provides us with a useful heads-up for swing changes in the market.

(Note: The H in the chart represents futures action during the market holiday when stocks were not open. The last bar in the chart represents pre-opening futures action for 4/12 before stocks began trading).

Demand and Supply, as I've noted in past posts, are indices that I construct to summarize the number of NYSE, NASDAQ, and ASE stocks that close above (Demand) and below (Supply) the volatility envelopes surrounding their short- and medium-term moving averages. To contribute to Demand, a stock must have strong upside momentum; to contribute to Supply, a stock must have strong downside momentum. Days in which Demand or Supply is strong tend to be trending days. Days in which Demand *and* Supply are low tend to be range bound days. When Demand or Supply is expanding, I look for the trend in place to continue. When Demand *and* Supply are waning, I look for consolidation. When Demand *and* Supply are very low, I look for a breakout move.

Bull swings lose momentum before they become bear swings.

Bear swings lose momentum before they become bull swings.

Broad momentum market moves tend to consolidate in momentum.

Low momentum markets yield breakout moves in the short run.

Because momentum generally peaks ahead of price, it pays to hold overnight following momentum breakouts, particularly to the upside.

If you watch diligently, you'll see these patterns replay themselves in different variations. You'll also see how these shorter-term cycles become nested within longer-term market trends.

Tomorrow, we'll take a similar look using new high/new low data in place of Demand and Supply and explore some of those longer-term trends.

Here's Thursday's Weblog: Pivot Targets, Indicators, Blog Links

Strong Opinions, Flexibly Held: Lesson From A Morning Trade

One of the first pieces of progress I made as a trader was looking at enough patterns that I could develop strong opinions regarding when demand or supply was shifting in the market. The second, more important step of progress came when I developed the ability to hold those strong opinions flexibly. This morning, I thought I saw the negative TICK readings strengthening when I placed a trade to buy ES at the first arrow. I took a bit of heat in the next two minutes, then watched the market rally...and stall...and stall. Positive TICK readings (green on chart) were not moving price higher. That inefficiency occurs during weak markets, not ones ready to make solid rebounds. I took a small profit and flipped my position (second arrow), covering into the subsequent heavy volume at the bid (third arrow).

Years ago, I wouldn't have made that second trade. I would have stuck with my initial long and then watched a small profit turn into a loss before covering. I would have had a good idea, but not the ability to flexibly modify or overturn that idea. To hold an idea strongly enough to act upon it--and risk money on it--but not so strongly that you're wedded to it: that takes an ability to assess and reassess markets on an ongoing basis. You want to identify with those ongoing assessments, not with any single opinion. There is strength in flexibility.