Over the several years writing the TraderFeed blog, I've been pleased to feature the work of Henry Carstens, who is a designer/trader of trading systems and now the portfolio manager of his own hedge fund. Among the valuable resources on the Vertical Solutions site are a forecasting algorithm for predicting the week's low in the S&P 500 Index; a series of papers on trading and market themes; and tools for forecasting your P/L, given the metrics of your trading.
Most recently, Henry has laid out a new metric for assessing the performance of trading systems, which can also be applied to assessing one's own discretionary trading. He has developed a tool that employs this metric, that allows anyone who trades to enter in their data and evaluate their performance. Such ways of objectively measuring performance are valuable in institutional settings (where performance dictates capital allocations), but can also be helpful in self-evaluation and goal-setting. Great stuff!
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Sunday, January 18, 2009
Anxiety in Trading: Limiting Profitability by Micromanaging Trades
One of the most common trading problems I see is what I call micromanaging trades: managing positions on a time frame that is shorter than the one utilized to conceptualize the trade. Here are a few examples:
* A trader enters a position because of a pattern on a five-minute Market Delta chart, but exits the position prematurely (prior to hitting a profit target) because of a pattern briefly observed in the order book (depth of market);
* A trader is profitable in a trade designed to revert to the prior day's pivot level, but exits in a panic when the market moves a couple of points against him;
* A trader watching the market tick by tick on a swing position jumps the gun on a stop loss level, only to see the trade become profitable.
As I noted a couple of years ago, micromanaging trades generally occurs when the trader enters a state that is different from the one in which the trade was initially placed. Once the trade has become profitable, anxiety over losing the profits kicks in and leads the trader to falsely seek control by following the market's every wiggle. The anxiety mounts as even normal counter movements to the trade become amplified in the trader's mind, leading to decisions to abort the trade. At that point, we're really stopping out our anxiety level, not just the trade.
The post on fear of missing profitable trades is relevant here, as the fear of missing potential profits is similar to the fear of losing paper ones. What we're often afraid of is not merely the loss of potential gain. We're afraid of our own self-talk should we lose what we had. The traders who are most likely to micromanage their trades are those that are hardest on themselves when their trades do not work out. Instead of accepting that this is a game of probabilities and that losses and frustrations are part of the game, they personalize every loss and lost opportunity and turn their frustration on themselves.
Only an altered self-talk and an acceptance of adverse movement can give traders the peace of mind to stay patient and let their idea hit its target or its stop out point. That peace of mind is also necessary to sustaining an aggressive mindset in which traders add to ideas that are working out, devoting their maximum size/risk to their best trades. Micromanaging not only stops out winning trades; it prevents us from making the most of them.
Much anxiety can be quelled through proper risk management and by structured efforts to alter self talk. More on changing how we talk to ourselves and how that affects trading performance can be found in this post and its links. So often, the best way to manage a trade is to stay out of its way.
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* A trader enters a position because of a pattern on a five-minute Market Delta chart, but exits the position prematurely (prior to hitting a profit target) because of a pattern briefly observed in the order book (depth of market);
* A trader is profitable in a trade designed to revert to the prior day's pivot level, but exits in a panic when the market moves a couple of points against him;
* A trader watching the market tick by tick on a swing position jumps the gun on a stop loss level, only to see the trade become profitable.
As I noted a couple of years ago, micromanaging trades generally occurs when the trader enters a state that is different from the one in which the trade was initially placed. Once the trade has become profitable, anxiety over losing the profits kicks in and leads the trader to falsely seek control by following the market's every wiggle. The anxiety mounts as even normal counter movements to the trade become amplified in the trader's mind, leading to decisions to abort the trade. At that point, we're really stopping out our anxiety level, not just the trade.
The post on fear of missing profitable trades is relevant here, as the fear of missing potential profits is similar to the fear of losing paper ones. What we're often afraid of is not merely the loss of potential gain. We're afraid of our own self-talk should we lose what we had. The traders who are most likely to micromanage their trades are those that are hardest on themselves when their trades do not work out. Instead of accepting that this is a game of probabilities and that losses and frustrations are part of the game, they personalize every loss and lost opportunity and turn their frustration on themselves.
Only an altered self-talk and an acceptance of adverse movement can give traders the peace of mind to stay patient and let their idea hit its target or its stop out point. That peace of mind is also necessary to sustaining an aggressive mindset in which traders add to ideas that are working out, devoting their maximum size/risk to their best trades. Micromanaging not only stops out winning trades; it prevents us from making the most of them.
Much anxiety can be quelled through proper risk management and by structured efforts to alter self talk. More on changing how we talk to ourselves and how that affects trading performance can be found in this post and its links. So often, the best way to manage a trade is to stay out of its way.
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Saturday, January 17, 2009
Sector Update for January 17th
Last week's sector review found that the S&P 500 sectors were largely in a neutral mode, with the exception of financial stocks, which were in clear downtrend. Those financials, especially banks, led stocks further downward this past week, placing most of the sectors in clear downtrends, as measured by Technical Strength, my quantification of short-term trending behavior. Here's how we look as of Friday's close:
We can see that the two most defensive sectors, consumer staples and health care, are showing relative strength. Financial shares are extremely weak, and materials stocks are laboring under the burden of commodity weakness. Clearly the market is behaving as if the financial crisis affecting banks--and recessionary outlook overall--have not yet resolved.
Technical strength ratings for the basket of 40 stocks taken from the eight sectors above are published each morning before the market open via Twitter (free subscription). Comparing the ratings day-over-day provides a nice measure (along with Demand/Supply and 20-day highs/lows) of whether the stock market is gaining or losing short-term strength.
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MATERIALS: -300
INDUSTRIAL: -280
CONSUMER DISCRETIONARY: -120
CONSUMER STAPLES: -20
ENERGY: -200
HEALTH CARE: -80
FINANCIAL: -500
TECHNOLOGY: -120
INDUSTRIAL: -280
CONSUMER DISCRETIONARY: -120
CONSUMER STAPLES: -20
ENERGY: -200
HEALTH CARE: -80
FINANCIAL: -500
TECHNOLOGY: -120
We can see that the two most defensive sectors, consumer staples and health care, are showing relative strength. Financial shares are extremely weak, and materials stocks are laboring under the burden of commodity weakness. Clearly the market is behaving as if the financial crisis affecting banks--and recessionary outlook overall--have not yet resolved.
Technical strength ratings for the basket of 40 stocks taken from the eight sectors above are published each morning before the market open via Twitter (free subscription). Comparing the ratings day-over-day provides a nice measure (along with Demand/Supply and 20-day highs/lows) of whether the stock market is gaining or losing short-term strength.
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Deleveraging and Stock Market Margin Debt
Margin debt for NYSE stocks (above) is an excellent measure of investor sentiment, as it captures risk-seeking vs. risk-aversion in the stock market. Margin debt tends to expand in bull markets and contract during bear moves. Indeed, you could say that we have bull and bear markets to the degree that investors are willing to assume or unwind leverage.
In this period of deleveraging, margin debt has fallen precipitously as the chart above shows. We're now running the same level of margin debt as we had early in 2001. Nor is there any sign to date that the unwinding of leverage is moderating.
Going back to the start of my data series on margin debt (1944), we find that the 20-week average change is the weakest that it has ever been. Specifically, margin debt has been down by over 42% in the last 20 weeks. The nearest we've come to such unwinding of margin has been a 31% drop in 1946 and 29% drops in 2001 and 1988.
It is tempting to speculate that we might be near a bottom, given the historic flushing out of market bulls. My take on the data, however, is more cautious. This is looking like a deleveraging that is qualitatively different from bear markets of the post World War II period. It is difficult to see evidence of risk appetite among individual investors, and I am not detecting any great rush into equities from institutions. Indeed, the recent weakness among banking stocks suggests that, for all the alphabet soup of rescue programs, we continue to focus more on vulnerabilities in the economic system than potentials.
Until we see some moderation in the decline in margin debt numbers, as occurred late in 2002 and early in 2003, it is probably premature to assume that bear market bounces are fresh bull markets.
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Friday, January 16, 2009
Framing Trades With Price Targets
The proprietary SPY target prices that I put out each AM prior to trading days via Twitter (free subscription here) are volatility-adjusted estimates of likely price movement. (See this post for further background). The pivot level is a kind of average price from the prior day's trade. In a range environment, the pivot becomes a price target as price fails to sustain moves outside the prior day's value area. Since 2000, about 75% of all trading days touch this pivot level.
The R1 and S1 levels are initial upside and downside targets for SPY; since 2000, SPY has touched either its R1 or S1 level about 75% of the time. The R2 and S2 levels are further away, with a 55% hit rate since 2000. In a market that opens strong, well above the prior day's pivot, we expect to take out R1 quickly and, if market internals look good (NYSE TICK, advance-decline, Market Delta), we then target R2 on temporary pullbacks.
The 30-minute chart above from today and yesterday marks both the pivot and R1 levels that were operative today (blue horizontal lines). We hit R1 prior to the market open, breaking above yesterday's trading range. Given such strength, we should have made a beeline for R2. Instead, price stalled, the NYSE TICK turned negative, and the leading sector of banking stocks turned down. The trader who recognized this early could see that we were likely to return to the previous day's range, making the pivot a likely price target. That one trade was enough to make your day, if you have the conviction and perspective to size the trade up.
By keeping the price targets and pivots in mind, you can frame promising market hypotheses and then update the odds of those working out by tracking leading sectors and market sentiment (stocks trading on upticks/downticks; volume trading on upticks/downticks).
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More Evidence of Lumpiness in Housing Inventory
A while back, I took a look at the distribution of housing inventory across the U.S. and found great disparities. Some regions of the country show little oversupply; others are completely glutted. This lumpiness of the data makes the housing crisis more difficult than aggregate numbers might suggest. It is not clear that lowering of mortgage rates, aiding select homeowners in avoiding foreclosure, and similar measures will be sufficient to create the demand for years worth of housing inventory in overbuilt market segments (resort areas, beach condos) when consumers are pulling back from even modest retail purchases.
Indeed, there is some indication that much of the recent demand for homes has been fueled by speculators who purchase homes in foreclosure. Should these speculators find that the housing market remains weak beyond their projections, we could get a second wave of selling, as a "shadow inventory" of homes comes to market.
Someone recently told me that my own local housing market in Naperville, IL is in relatively good shape because there is only about one year of inventory for sale based on 2008 sales figures. If, however, we break down the inventory by price (see chart above), we again see evidence of lumpiness. There is little inventory problem at the lower end of the housing spectrum; speculation in that market had centered on the luxury end, where there is more than 3 years of inventory. At year end 2008, annual sales of homes above $1,200,000 in Naperville were 36, but 114 homes were on the market. Stated otherwise, about 3% of housing sales in that market have been above $1,200,000, but 15% of the inventory is priced at that level.
In my looks at other suburban communities, from Washington to Florida, I have seen similar lumpiness in inventory. The high-ends of the market, which was where the money was, generated the greatest overbuilding. In an environment in which aging baby boomers are downsizing, consumers are retrenching, and home values are falling, it is not at all clear that there is the demand to meet such supply, leaving builders and local banks at serious risk.
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Thursday, January 15, 2009
Observing Market Sentiment Through the Lens of Credit Markets
The financial crisis continues, as banking stocks moved today to new bear market lows ($BKX; top chart). In the wake of zero interest rate policy, however, the search for yield has kept municipal bonds buoyant (TFI; second chart). We also saw nice runups among preferred stocks (PFF; third chart) and high yield corporate bonds (JNK; bottom chart), but both have pulled back as financial issues have retreated.
I recently stressed the importance of catching market themes that reflect the sentiment of dominant market players. The fixed income markets offer a nice view of investor flight to safety (Treasury bond price strength) vs. willingness to assume risk in search of yield. Recent action suggests that, in the face of uncertainty in the financial system, investors will reward safer sources of yield relative to riskier ones. Observing how these segments of the credit markets are trading during the day provides a worthwhile view on trends and turnarounds in investor sentiment.
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Viking Metal, Pattern Studies, and Market Weakness
Back after a few days on the road working with traders. Thanks to Taylor of Fall of Eden for the ride home; great guitar work for metal heads. The stock market decline has been relentless over the last week. There are a few bullish indications short term: Rennie Yang of Market Tells notes favorable expectations short-term as the result of six consecutive lower lows and a couple of other patterns; see also the pattern study from Ripe Trade. Nice call re: weak bounces from Quantifiable Edges. We're seeing some excellent studies from bloggers; I'll be making sure to note these in my Twitter posts.
So back to the relentless decline. As noted via Twitter this AM, we're seeing 2 stocks in my basket qualify as being in moderate uptrends with respect to the Technical Strength measure, zero stocks in neutral (non-trending mode), and 38 in downtrends. Of those 38 issues, 16 qualify as being in strong downtrends, including all the stocks that I follow in the financial sector. It has been very difficult for this market to find any kind of bid in the wake of resumed weakness among the bank and other financial stocks.
I'd encourage readers to review the post on market themes. These intermarket relationships have been particularly helpful in keeping traders on the right side of the market action lately. Weak financial shares, strong Treasuries, and weak commodities fit into a theme that speaks of both economic weakness and trader/investor sentiment.
Note, however, the continued rally among municipal bonds, especially high quality, intermediate-term. The search for yield continues, even amidst the risk aversion in equities. The way the risk aversion sentiment is likely to play out is relative outperformance of higher quality credit vs. junk. As yields on the shorter-term, good quality stuff come in, it will be interesting to see which impulse wins out among investors: the need for yield vs. the need for safety.
Has to be the best trade idea that just won't pay out: buying gold vs. USD. Zero interest rates and economic weakness notwithstanding, in a risk aversion mode, USD benefits. Even the best fundamental ideas just can't get traction if the trader/investor sentiment isn't there.
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So back to the relentless decline. As noted via Twitter this AM, we're seeing 2 stocks in my basket qualify as being in moderate uptrends with respect to the Technical Strength measure, zero stocks in neutral (non-trending mode), and 38 in downtrends. Of those 38 issues, 16 qualify as being in strong downtrends, including all the stocks that I follow in the financial sector. It has been very difficult for this market to find any kind of bid in the wake of resumed weakness among the bank and other financial stocks.
I'd encourage readers to review the post on market themes. These intermarket relationships have been particularly helpful in keeping traders on the right side of the market action lately. Weak financial shares, strong Treasuries, and weak commodities fit into a theme that speaks of both economic weakness and trader/investor sentiment.
Note, however, the continued rally among municipal bonds, especially high quality, intermediate-term. The search for yield continues, even amidst the risk aversion in equities. The way the risk aversion sentiment is likely to play out is relative outperformance of higher quality credit vs. junk. As yields on the shorter-term, good quality stuff come in, it will be interesting to see which impulse wins out among investors: the need for yield vs. the need for safety.
Has to be the best trade idea that just won't pay out: buying gold vs. USD. Zero interest rates and economic weakness notwithstanding, in a risk aversion mode, USD benefits. Even the best fundamental ideas just can't get traction if the trader/investor sentiment isn't there.
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Wednesday, January 14, 2009
Trading and Market Psychology: The Best of TraderFeed 2008 - Volume Two
Below are the standout posts from the second quarter of 2008; the first quarter's posts can be found here. Here are archives for the best of 2007 and the best of 2006.
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Tuesday, January 13, 2009
The Power of a Single Premise
Consider what your trading development would be like if you accepted the simple premise that, in some measure and on some occasions, you are already the trader you wish to become.
What if, at times, you already recognize market patterns, generate solid trading ideas, and manage risk well? What if you don't need to work on your trading problems at all and, instead, simply need to harness the influences that enable you to trade well?
What if everything you need to succeed is already part of who you are and what you do? What if the only change you require is to become more consistent with your strengths and competencies?
Would you still seek out advice from gurus? Would you still look for answers in the latest indicators and systems? Or would you devote yourself to becoming the best you can be--enacting the best within you--confident that the answers you seek have been part of you all along?
What if, at times, you already recognize market patterns, generate solid trading ideas, and manage risk well? What if you don't need to work on your trading problems at all and, instead, simply need to harness the influences that enable you to trade well?
What if everything you need to succeed is already part of who you are and what you do? What if the only change you require is to become more consistent with your strengths and competencies?
Would you still seek out advice from gurus? Would you still look for answers in the latest indicators and systems? Or would you devote yourself to becoming the best you can be--enacting the best within you--confident that the answers you seek have been part of you all along?
More posts for self-coaching are archived on the new site.
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Self-Efficacy and the Effective Coaching of Traders
One of my observations over the years is that the coaching of traders is most effective when it is goal-focused. A large body of research suggests that goal-setting facilitates improvements in performance by channeling and energizing efforts. As I noted in a recent post, "Effective goals must be important to the performer and must inspire commitment. While absolute outcome goals can be inspiring (such as setting a P/L goal for the year), more immediate process goals that pertain to day-to-day trading are most likely to generate feedback, review, and learning."
The role of goals in facilitating enhanced performance is consistent with the solution-focus outlined in recent posts. In solution-focused coaching, the idea is to identify and build upon strengths--including strengths that might be overlooked. No one is wholly dysfunctional; we do not fall into problem patterns all the time. Observing what we're doing when problems are *not* occurring often leads to solutions that reflect hidden strengths.
Coaching--including the self-coaching of traders and portfolio managers--is effective to the degree that it provides experiences of self-efficacy. In other words, whether a trader works on goal A or goal B may be less important than how he or she works on those goals. When a trader not only sets a goal but directs efforts toward reaching the goal over time, the result is an experience of oneself as efficacious. This experience enhances motivation and confidence, aiding future risk-taking and helping sustain the "flow" state of consciousness (the "zone") in which optimal performance can occur.
This is where the relationship between coach and trader becomes all-important. The coaching is most likely to be successful when the relationship affirms trader strengths, mirroring competencies and helping to sustain efforts at improvement. Such an emphasis is especially helpful to traders who are struggling with performance pressures, as the goal focus and the affirmative relationship help to sustain confidence and motivation during difficult times.
My general experience is that traders tend to set goals, but tend to be lax in structuring their work on those goals. How we pursue self-improvement is every bit as important as the ends we seek. We are most likely to internalize a positive sense of self--a sustained level of confidence and conviction--if we are generating experiences of efficacy on a daily and weekly basis.
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The role of goals in facilitating enhanced performance is consistent with the solution-focus outlined in recent posts. In solution-focused coaching, the idea is to identify and build upon strengths--including strengths that might be overlooked. No one is wholly dysfunctional; we do not fall into problem patterns all the time. Observing what we're doing when problems are *not* occurring often leads to solutions that reflect hidden strengths.
Coaching--including the self-coaching of traders and portfolio managers--is effective to the degree that it provides experiences of self-efficacy. In other words, whether a trader works on goal A or goal B may be less important than how he or she works on those goals. When a trader not only sets a goal but directs efforts toward reaching the goal over time, the result is an experience of oneself as efficacious. This experience enhances motivation and confidence, aiding future risk-taking and helping sustain the "flow" state of consciousness (the "zone") in which optimal performance can occur.
This is where the relationship between coach and trader becomes all-important. The coaching is most likely to be successful when the relationship affirms trader strengths, mirroring competencies and helping to sustain efforts at improvement. Such an emphasis is especially helpful to traders who are struggling with performance pressures, as the goal focus and the affirmative relationship help to sustain confidence and motivation during difficult times.
My general experience is that traders tend to set goals, but tend to be lax in structuring their work on those goals. How we pursue self-improvement is every bit as important as the ends we seek. We are most likely to internalize a positive sense of self--a sustained level of confidence and conviction--if we are generating experiences of efficacy on a daily and weekly basis.
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Monday, January 12, 2009
Intermarket Relationships: Thinking In Themes
Consider how the markets traded today:
* Treasury prices were up; yields were lower
* Stocks continued their tumble into the trading range of late 2008
* Commodity prices fell; most notably oil
* Consumer discretionary shares underperformed consumer staples stocks
* Financial and housing stocks underperformed the broad market
Broadly speaking, markets can trade in risk-seeking or risk-shunning ways. How traders treat Treasury debt relative to equities; how traders treat riskier sectors of stocks relative to more defensive ones; how traders anticipate economic growth or weakness in their pricing of commodities: all of these reflect themes in markets that tell you a great deal about the mood and sentiment of large market participants.
Catching those themes early in the trading session is quite helpful for short-term traders. Many ideas can be formulated simply by gauging how riskier assets are trading relative to safer ones.
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* Treasury prices were up; yields were lower
* Stocks continued their tumble into the trading range of late 2008
* Commodity prices fell; most notably oil
* Consumer discretionary shares underperformed consumer staples stocks
* Financial and housing stocks underperformed the broad market
Broadly speaking, markets can trade in risk-seeking or risk-shunning ways. How traders treat Treasury debt relative to equities; how traders treat riskier sectors of stocks relative to more defensive ones; how traders anticipate economic growth or weakness in their pricing of commodities: all of these reflect themes in markets that tell you a great deal about the mood and sentiment of large market participants.
Catching those themes early in the trading session is quite helpful for short-term traders. Many ideas can be formulated simply by gauging how riskier assets are trading relative to safer ones.
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Indicator Update for January 12th
Last week's indicator review concluded that, "We are clearly overbought and some degree of short-term pullback is expected. If, indeed, we have put in an important market low and entered a bull phase, the rise should be a multi-month affair, not a brief rally. New 20-day highs should continue to outnumber lows, and pullbacks should stay well above last week's price lows." We did, indeed, get that pullback and, while prices stayed above their prior week's lows, the decline was sufficient to return us to the trading range that persisted through much of late 2008. Sectors moved from a dominant uptrend to a mostly non-trending mode and money flows pulled back, though they stayed well off their bear lows.
We went from a very overbought condition in the Cumulative Demand/Supply Index (top chart) to a moderately overbought one; to keep the bull intact, we want to see successively higher price lows on Cumulative DSI pullbacks. In a good bull market, those pullbacks represent intermediate-term buying opportunities. Similarly, 20-day highs vs. lows pulled back over the past week (middle chart), but new highs continue to outnumber new lows, suggesting that we have not thus far killed off the bull. The Cumulative Adjusted NYSE TICK (bottom chart) has only modestly retraced its solid gains from the last week of 2008 and the first part of 2009, again suggesting that this, so far, is more of a correction of the bull move than a resumption of the bear market.
To sustain the bull market, we need to see new 20-day highs continue to outnumber 20-day lows and we need to see a resumption of strength among sectors, money flow, and NYSE TICK. A move below the 850 region in the S&P 500 futures would represent a violation of important support and would break the pattern of higher lows on market pullbacks. A move back toward new highs that expands the number of stocks making fresh new highs and brings the Cumulative TICK and money flow to new highs would be very supportive of the bull thesis.
As always, I will update indicators each morning before the market open via Twitter. The last five "tweets" appear on the blog page under "Twitter Trader"; the full list can be found on my Twitter page, where readers can also sign up for a free subscription via RSS.
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Sunday, January 11, 2009
Stock Market Trends Are Still Not Quite Your Friends
I decided to take a fresh look at an old market pattern and see how the S&P 500 Index (SPY) has behaved since the start of 2007 under two conditions:
* When it is up both on a one-day and a five-day basis
* When it is down both on a one-day and a five-day basis
When the market has been up yesterday and over the past week (N = 163 trading days), the next five days in SPY have averaged a loss of -.97% (66 up, 97 down).
Conversely, when the market has been down yesterday and down over the past week (N = 155), the next five days in SPY have averaged a gain of .20% (86 up, 69 down).
What seems to be happening is that markets that are up or down most recently and over the last few days have short-term and swing traders leaning the wrong way. When they unwind their bets to protect their capital, they contribute to countertrend moves.
In the past, I've written about how to lose money in the stock market, including how to lose by buying into uptrends. Those lessons seem relevant in the current environment: it's when stocks look obviously strong or weak that markets are most likely to confound human nature and we are most likely to see countertrend behavior.
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* When it is up both on a one-day and a five-day basis
* When it is down both on a one-day and a five-day basis
When the market has been up yesterday and over the past week (N = 163 trading days), the next five days in SPY have averaged a loss of -.97% (66 up, 97 down).
Conversely, when the market has been down yesterday and down over the past week (N = 155), the next five days in SPY have averaged a gain of .20% (86 up, 69 down).
What seems to be happening is that markets that are up or down most recently and over the last few days have short-term and swing traders leaning the wrong way. When they unwind their bets to protect their capital, they contribute to countertrend moves.
In the past, I've written about how to lose money in the stock market, including how to lose by buying into uptrends. Those lessons seem relevant in the current environment: it's when stocks look obviously strong or weak that markets are most likely to confound human nature and we are most likely to see countertrend behavior.
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Money Flow and Economic Perspectives
As we can see from the top chart, cumulative money flow for the Dow 30 stocks has turned lower in the last week, but remains well above its December low. If we take a look at the four-day moving average of money flow (bottom chart), we can see that it has turned negative after a modest but prolonged stay in positive territory. Note that, like volatility for the stock market overall, flow numbers have grown more modest, both to the upside and downside. Bulls will want to see a shallow and relatively brief pullback in the four-day average before resuming a positive run.
The helpful online WSJ site data show that money flows for the week were strongest for the health care and technology sectors and weakest for financials. This very much fits with the observations of Technical Strength among the sectors. As always, I will be updating money flow numbers prior to each market open via Twitter (free subscription).
While on the topic of online WSJ, here are some links to valuable economic perspectives:
Overview of Fed actions
Calendar of Coming Economic Reports
Excellent Overview of Economic Data
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Saturday, January 10, 2009
Sector Update for January 10th
Last week's sector review found evidence of a clear upside breakout among the eight S&P 500 sectors that I follow and the basket of 40 stocks drawn evenly from those sectors. A sharp reversal this week, however, has returned us below the former resistance area in the low 900s and back into the prior trading range. This reversal is reflected across the sectors, as measured by the Technical Strength measure that quantifies trending:
Financial stocks clearly lag the group, with commodity-related weakness taking a toll on materials and energy shares. Overall, the picture is no longer one of trending; for the most part, we've returned to a range bound mode. Following the day-to-day trend ratings for the basket of stocks posted before each market open via Twitter (free subscription) has been very helpful in catching the unfolding weakness.
When we look at the proportion of stocks in each sector trading above their 20-day moving averages as reported by Decision Point (in parentheses), we also see deterioration in momentum relative to last week. Once again, it is clear that financial stocks are the weakest sector, significantly underperforming the other groups.
Not reflected in the sector data is the fact that small cap stocks have gone from a position of leading large caps to one of lagging. Among S&P 500 stocks overall, 58% of issues are trading above their 20-day moving averages as of Friday's close. Only 41% of S&P 600 small caps, however, are trading above their benchmarks. What this suggests is that, while weakness has been concentrated in financial and commodity-related shares, it has also affected the broader market. This is not the kind of action one expects following a bullish upside breakout, and it will have me following the indicator data closely this coming week.
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MATERIALS: -200 (52%)
INDUSTRIAL: -60 (68%)
CONSUMER DISCRETIONARY: -80 (65%)
CONSUMER STAPLES: -60 (43%)
ENERGY: -120 (68%)
HEALTH CARE: +120 (59%)
FINANCIAL: -360 (33%)
TECHNOLOGY: -100 (70%)
INDUSTRIAL: -60 (68%)
CONSUMER DISCRETIONARY: -80 (65%)
CONSUMER STAPLES: -60 (43%)
ENERGY: -120 (68%)
HEALTH CARE: +120 (59%)
FINANCIAL: -360 (33%)
TECHNOLOGY: -100 (70%)
Financial stocks clearly lag the group, with commodity-related weakness taking a toll on materials and energy shares. Overall, the picture is no longer one of trending; for the most part, we've returned to a range bound mode. Following the day-to-day trend ratings for the basket of stocks posted before each market open via Twitter (free subscription) has been very helpful in catching the unfolding weakness.
When we look at the proportion of stocks in each sector trading above their 20-day moving averages as reported by Decision Point (in parentheses), we also see deterioration in momentum relative to last week. Once again, it is clear that financial stocks are the weakest sector, significantly underperforming the other groups.
Not reflected in the sector data is the fact that small cap stocks have gone from a position of leading large caps to one of lagging. Among S&P 500 stocks overall, 58% of issues are trading above their 20-day moving averages as of Friday's close. Only 41% of S&P 600 small caps, however, are trading above their benchmarks. What this suggests is that, while weakness has been concentrated in financial and commodity-related shares, it has also affected the broader market. This is not the kind of action one expects following a bullish upside breakout, and it will have me following the indicator data closely this coming week.
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Trading and Market Psychology: The Best of TraderFeed 2008 - Volume One
I've completed the list of the best of the TraderFeed posts from the first quarter of 2008. I've also archived links for the best of 2007 and 2006. More to come!
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Thursday, January 08, 2009
The Single Most Powerful Step Toward Becoming Solution Focused in Trading
My recent post offered an overview of a solution-focused approach to working on one's trading. Many times, however, traders have difficulty figuring out how to get started with a solution-focused approach. Here's an exercise and a simple framework that can be quite useful:
Step One: On one side of a sheet of paper, write down all the things you most often do wrong as a trader--all your worst trading behaviors. It might help you to think about your most difficult periods of trading performance in the past year and then write down all your worst tendencies that contributed to those poor trading periods.
Step Two: On the other side of the paper, write down all your best practices as a trader: all the things you do best and that work for you. It might help you to think about your most successful periods of trading in the past year and then write down all your strengths and best trading behaviors.
How long is your problem list? How long did it take you to think of the entries and write them down? How long is your list of best practices? How long did it take for you to come up with them?
If you're like many traders, you're more in touch with your problem behaviors than your best practices. Indeed, many traders are stumped when asked to clearly identify their strengths.
If it is much harder for you to identify best practices than to identify problem patterns, then you know that you are problem-focused, not solution-focused. If you were a mouse, you'd only see the holes in the Swiss cheese and you'd never get a bite. It's our cheese, not our holes that nourish us as traders.
The single thing you can do to begin a solution focus is to identify best practices after each of your successful trading days. These best practices may be grouped by category, such as:
The key is to stay on the lookout for what works for you. Every successful trading day should contribute to your best practices catalog. Once you generate a list of best practices, each of these becomes an ideal for you to live up to. Indeed, every best practice can become a concrete trading goal that keeps you grounded in your strengths. After all, you can't live up to your best if you're not aware of what you do well.
Best practices become goals; goals become routines: The great individual turns excellence into habit. This is key to successful self-coaching.
Step One: On one side of a sheet of paper, write down all the things you most often do wrong as a trader--all your worst trading behaviors. It might help you to think about your most difficult periods of trading performance in the past year and then write down all your worst tendencies that contributed to those poor trading periods.
Step Two: On the other side of the paper, write down all your best practices as a trader: all the things you do best and that work for you. It might help you to think about your most successful periods of trading in the past year and then write down all your strengths and best trading behaviors.
How long is your problem list? How long did it take you to think of the entries and write them down? How long is your list of best practices? How long did it take for you to come up with them?
If you're like many traders, you're more in touch with your problem behaviors than your best practices. Indeed, many traders are stumped when asked to clearly identify their strengths.
If it is much harder for you to identify best practices than to identify problem patterns, then you know that you are problem-focused, not solution-focused. If you were a mouse, you'd only see the holes in the Swiss cheese and you'd never get a bite. It's our cheese, not our holes that nourish us as traders.
The single thing you can do to begin a solution focus is to identify best practices after each of your successful trading days. These best practices may be grouped by category, such as:
Best Practices for Generating Trading Ideas
Best Practices for Executing Trade Ideas
Best Practices for Risk Management
Best Practices for Managing Positions
Best Practices for Exiting Positions, etc.
Best Practices for Executing Trade Ideas
Best Practices for Risk Management
Best Practices for Managing Positions
Best Practices for Exiting Positions, etc.
The key is to stay on the lookout for what works for you. Every successful trading day should contribute to your best practices catalog. Once you generate a list of best practices, each of these becomes an ideal for you to live up to. Indeed, every best practice can become a concrete trading goal that keeps you grounded in your strengths. After all, you can't live up to your best if you're not aware of what you do well.
Best practices become goals; goals become routines: The great individual turns excellence into habit. This is key to successful self-coaching.
More Solution-Focused Resources:
Building Self-Efficacy With a Solution Focus
My Book Chapter on Solution-Focused Brief Therapy (p. 85 ff)
Here is the Book Chapter as a Post
How Traders Can Become Their Own Therapists
Overcoming Market Panic
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Building Self-Efficacy With a Solution Focus
My Book Chapter on Solution-Focused Brief Therapy (p. 85 ff)
Here is the Book Chapter as a Post
How Traders Can Become Their Own Therapists
Overcoming Market Panic
Wednesday, January 07, 2009
Keys to Solution-Focused Trading
Many traders seek assistance for the problems they encounter in markets. They are focused on the holes in their trading: the areas where they are failing to achieve their goals. They think about their problems, they set goals to correct their problems, they work on their problems, they discuss their problems. In a nutshell, they become problem focused. The more they focus on their deficits, the more they feel deficient. Ironically, their efforts at self-improvement only serve to reinforce a negative, problem-based view of themselves.
A different approach is what is known as a solution-focused approach to change. Instead of focusing on what is going wrong, you focus on goals: what you want to go right. Once you identify--in concrete, positive terms--what you'd like to be doing differently, then you can focus on occasions in which you are already achieving those goals, even in small measure. Instead of asking a trading guru, for example, where you should place your stops or time your entries, you review your own trading records and identify occasions in which you *did* place your stops or time your entries effectively. This enables you to reflect on these positive instances and develop solution patterns out of the things you're already doing correctly.
Solution-focused change works because it builds on a person's existing strengths, affirming competence and finding answers to problems that are valid for each individual. The key is to look for exceptions to problem patterns: specific instances of trading when you *don't* make the mistakes that trouble you, and when you *do* trade well. These exceptions become the foundation of solutions that can be rehearsed over time, in mind and in one's trading practice.
The simplest journal I recommend new traders keep is simply to identify--each day--one thing that you did wrong that you'd like to correct the next day and one thing that you did right that you'd like to build upon tomorrow. The reason for this journal format is that it balances the problem emphasis with a solution focus. If you only improve your deficits, at best you'll go from deficient to average. The elite performers in any field identify their strengths, build on those, and find ways to compensate for and work around weaknesses.
In some measure, in some ways, you're *already* the trader you want to be. Once you realize that, it's only a matter of crystallizing your strengths, turning them into habits, and building your consistency. Greatness is more than the relative absence of problems; it's the purposeful cultivation of one's most distinctive capabilities.
A different approach is what is known as a solution-focused approach to change. Instead of focusing on what is going wrong, you focus on goals: what you want to go right. Once you identify--in concrete, positive terms--what you'd like to be doing differently, then you can focus on occasions in which you are already achieving those goals, even in small measure. Instead of asking a trading guru, for example, where you should place your stops or time your entries, you review your own trading records and identify occasions in which you *did* place your stops or time your entries effectively. This enables you to reflect on these positive instances and develop solution patterns out of the things you're already doing correctly.
Solution-focused change works because it builds on a person's existing strengths, affirming competence and finding answers to problems that are valid for each individual. The key is to look for exceptions to problem patterns: specific instances of trading when you *don't* make the mistakes that trouble you, and when you *do* trade well. These exceptions become the foundation of solutions that can be rehearsed over time, in mind and in one's trading practice.
The simplest journal I recommend new traders keep is simply to identify--each day--one thing that you did wrong that you'd like to correct the next day and one thing that you did right that you'd like to build upon tomorrow. The reason for this journal format is that it balances the problem emphasis with a solution focus. If you only improve your deficits, at best you'll go from deficient to average. The elite performers in any field identify their strengths, build on those, and find ways to compensate for and work around weaknesses.
In some measure, in some ways, you're *already* the trader you want to be. Once you realize that, it's only a matter of crystallizing your strengths, turning them into habits, and building your consistency. Greatness is more than the relative absence of problems; it's the purposeful cultivation of one's most distinctive capabilities.
For More On Solution-Focused Change, Check Out:
A Solution-Focused Linkfest
Finding Solutions to Trading Problems
Solution-Focused Self-Coaching
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A Solution-Focused Linkfest
Finding Solutions to Trading Problems
Solution-Focused Self-Coaching
Trading Coach Blog and Other Wednesday Potpourri
* Trading Psychology Resource - As you browse through the new Trading Coach blog, you'll see that I'm developing it into a resource archive for traders. During 2009, there will be theme-based linkfests, as well as supplemental resources for the new Daily Trading Coach book, which is due out in March. Once I've posted the Best of TraderFeed posts for 2008 (all "best of" posts will be archived to the new site, as well), I will return to writing my free online book, "An Introduction to Trading." The free book will focus on trading methods and will be written one post/chapter at a time.
* Twenty-Day Strength - Tuesday was notable in that we had 3289 new 20-day highs across the NYSE, ASE, and NASDAQ, as opposed to 119 new lows. New 65-day highs were less elevated: 632 vs. 55 lows. That is the highest level of new 20-day highs that we've seen since I began collecting these data in September, 2002. Interestingly, since that time, we've had 42 occasions in which new 20-day highs have exceeded 2000. Twenty days later, the S&P 500 Index (SPY) was up 30 times, down 12 for an average gain of only .01%. Across all other occasions, the average 20-day gain was .19% (936 up, 590 down). Interestingly, when we conduct a median split of the occasions when 20-day highs were strong based upon whether 65-day highs were elevated or not, we see a difference. When 20-day highs *and* 65 day highs have been elevated (N = 21), the next 20 days in SPY have averaged a gain of 1.65% (18 up, 3 down). When 20-day highs have been elevated but 65-day highs have not (as was the case yesterday), the next 20 days in SPY averaged a loss of -1.62% (12 up, 9 down). This reflects worse outcomes when 20-day highs spike during longer-term bear market conditions.
* Attention Bloggers: Twitter Links - I continue to encourage bloggers to send me URLs to posts that would be of special relevance and uniqueness to TraderFeed readers, so that I can link via Twitter. (My email address appears under the "About Me" section of the blog page). Among the posts of particular interest would be those related to trading psychology; research-based posts; and posts with unique analytical content/perspectives. Over 1500 traders now subscribe to the Twitter service, and a larger number of readers pick the posts off the blog page. This provides me with a way of linking to--and recognizing--the good work out there. Thanks, and thanks also to readers who send me interesting article links that they stumble across!
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* Twenty-Day Strength - Tuesday was notable in that we had 3289 new 20-day highs across the NYSE, ASE, and NASDAQ, as opposed to 119 new lows. New 65-day highs were less elevated: 632 vs. 55 lows. That is the highest level of new 20-day highs that we've seen since I began collecting these data in September, 2002. Interestingly, since that time, we've had 42 occasions in which new 20-day highs have exceeded 2000. Twenty days later, the S&P 500 Index (SPY) was up 30 times, down 12 for an average gain of only .01%. Across all other occasions, the average 20-day gain was .19% (936 up, 590 down). Interestingly, when we conduct a median split of the occasions when 20-day highs were strong based upon whether 65-day highs were elevated or not, we see a difference. When 20-day highs *and* 65 day highs have been elevated (N = 21), the next 20 days in SPY have averaged a gain of 1.65% (18 up, 3 down). When 20-day highs have been elevated but 65-day highs have not (as was the case yesterday), the next 20 days in SPY averaged a loss of -1.62% (12 up, 9 down). This reflects worse outcomes when 20-day highs spike during longer-term bear market conditions.
* Attention Bloggers: Twitter Links - I continue to encourage bloggers to send me URLs to posts that would be of special relevance and uniqueness to TraderFeed readers, so that I can link via Twitter. (My email address appears under the "About Me" section of the blog page). Among the posts of particular interest would be those related to trading psychology; research-based posts; and posts with unique analytical content/perspectives. Over 1500 traders now subscribe to the Twitter service, and a larger number of readers pick the posts off the blog page. This provides me with a way of linking to--and recognizing--the good work out there. Thanks, and thanks also to readers who send me interesting article links that they stumble across!
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Tuesday, January 06, 2009
Defining Profit Targets and Formulating Targeted Trading Plans
In a past post, I wrote about how I use pivot-based support and resistance points to establish price targets for trade ideas. The basic approach is to define potential targets in advance and then use unfolding price/volume/indicator action to handicap the odds of hitting those targets. For example, once I see the Cumulative NYSE TICK trending higher, I will enter a long position to hit the R1 and R2 price targets. (Please consult that earlier post for details re: conventional ways of calculating the upside R1/R2 and downside S1/S2 targets).
In general, I've found those conventional ways of calculating targets to be helpful, but not optimal. My current methods of calculation are based on historical analysis going back to the year 2000. Since that time, the P pivot level from the previous day has been touched by the market during regular trading hours about 75% of the time. The market touches the S1 *or* the R1 level calculated from the previous day's data about 75% of the time. The market touches the S2 *or* the R2 level about 55% of the time.
Let's say that SPY opens near its pivot (P) level. The market chops around in the first half hour of trading and then moves briefly lower on negative economic news at 9 AM CT. The NYSE TICK, however, goes only modestly negative and quickly bounces back to positive territory, as SPY moves above P. Noticing the upward trend in TICK and the themes of risk-seeking across related asset classes, I wait for the first pullback in TICK that stays above P and then go long SPY with a target of R1. If TICK turns negative and we move below P--a sign of a range day--I will stop my position with a modest loss. If we continue to see buying interest, I will consider adding to the position on the way to the target(s) on pullbacks in TICK.
Should the upswing occur with strong TICK on enhanced volume, the odds of hitting R2 are enhanced, and I will leave at least a piece of the position on to hit that target. Because volume is closely correlated with volatility, keeping tabs on relative volume--how today's volume compares with the 20-day average--is quite useful in estimating the odds of hitting R2 or S2.
My newer, proprietary way of calculating P, S1/S2, R1/R2 adjusts the targets for the market's volatility, so that I'll naturally seek more modest moves in slower, narrower markets and larger moves in more active, volatile markets. Because I target the exits in advance, I'm better able to gauge the risk/reward of each trade by comparing how much I'm willing to lose in the trade (the distance to my stop point) with how much I stand to gain. This makes the target points very useful in trade planning.
For traders who might be interested, I'll begin posting the SPY target levels for the day's trading each morning as part of my Twitter service. Also included in the morning Twitter posts will be the usual indicator data (new highs/lows, Demand/Supply, % stocks above moving averages, Technical Strength readings for the basket of 40 stocks). By comparing the most recent day's data with the data from the prior day, you can gauge whether the market is gaining or losing strength day over day. As a rule, I'll look for strong/strengthening markets to hit R1/R2; weak/weakening markets to hit S1/S2; and mixed/range markets to revert toward P.
Future posts will illustrate the use of these target calculations in trade setups. The morning indicator and target data will appear under "Twitter Trader" on the blog page prior to the market open, or you can subscribe via RSS free of charge.
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In general, I've found those conventional ways of calculating targets to be helpful, but not optimal. My current methods of calculation are based on historical analysis going back to the year 2000. Since that time, the P pivot level from the previous day has been touched by the market during regular trading hours about 75% of the time. The market touches the S1 *or* the R1 level calculated from the previous day's data about 75% of the time. The market touches the S2 *or* the R2 level about 55% of the time.
Let's say that SPY opens near its pivot (P) level. The market chops around in the first half hour of trading and then moves briefly lower on negative economic news at 9 AM CT. The NYSE TICK, however, goes only modestly negative and quickly bounces back to positive territory, as SPY moves above P. Noticing the upward trend in TICK and the themes of risk-seeking across related asset classes, I wait for the first pullback in TICK that stays above P and then go long SPY with a target of R1. If TICK turns negative and we move below P--a sign of a range day--I will stop my position with a modest loss. If we continue to see buying interest, I will consider adding to the position on the way to the target(s) on pullbacks in TICK.
Should the upswing occur with strong TICK on enhanced volume, the odds of hitting R2 are enhanced, and I will leave at least a piece of the position on to hit that target. Because volume is closely correlated with volatility, keeping tabs on relative volume--how today's volume compares with the 20-day average--is quite useful in estimating the odds of hitting R2 or S2.
My newer, proprietary way of calculating P, S1/S2, R1/R2 adjusts the targets for the market's volatility, so that I'll naturally seek more modest moves in slower, narrower markets and larger moves in more active, volatile markets. Because I target the exits in advance, I'm better able to gauge the risk/reward of each trade by comparing how much I'm willing to lose in the trade (the distance to my stop point) with how much I stand to gain. This makes the target points very useful in trade planning.
For traders who might be interested, I'll begin posting the SPY target levels for the day's trading each morning as part of my Twitter service. Also included in the morning Twitter posts will be the usual indicator data (new highs/lows, Demand/Supply, % stocks above moving averages, Technical Strength readings for the basket of 40 stocks). By comparing the most recent day's data with the data from the prior day, you can gauge whether the market is gaining or losing strength day over day. As a rule, I'll look for strong/strengthening markets to hit R1/R2; weak/weakening markets to hit S1/S2; and mixed/range markets to revert toward P.
Future posts will illustrate the use of these target calculations in trade setups. The morning indicator and target data will appear under "Twitter Trader" on the blog page prior to the market open, or you can subscribe via RSS free of charge.
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Trading and Market Psychology: Best of TraderFeed 2007 - Volume Four
This is the last of the 2007 "best of" installments, covering the fourth quarter of the year. The best posts from earlier in 2007 can be found here; the best posts from 2006 are here.
Knowing Your Strengths
Emotional Balance in Trading
Identifying Your Edge
The Cognitive Development of Traders
Ten Short-Term Trading Guidelines
Regret and Trading
Keys to Emotional Resilience in Trading
How to Change Yourself
Self-Evaluation and Success
Preparing for the Day's Trade
Four Common Trading Problems
Trade Like a Card Counter
Finding Your Voice as a Trader
Considerations RE: Trading for a Living
Common Stresses Faced by Traders
Stress and Cognitive Regression
The Psychology of Scarcity and Abundance
Self-Confidence and Performance
Six Positive Trading Behaviors
Signs of Burnout
Cultivating Self-Awareness
Trading and Anxiety
Turning Setbacks Into Goals
Trading Myths and Questionable Assumptions
Achieving Emotional Self-Regulation
When Trading Performance Declines
Predictors of Coaching Success
Greatness, Happiness, and Performance
Physical Exercise, Self-Efficacy, and Well-Being
Living a Purposeful Life
The Brain and Trading Performance
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Emotional Balance in Trading
Identifying Your Edge
The Cognitive Development of Traders
Ten Short-Term Trading Guidelines
Regret and Trading
Keys to Emotional Resilience in Trading
How to Change Yourself
Self-Evaluation and Success
Preparing for the Day's Trade
Four Common Trading Problems
Trade Like a Card Counter
Finding Your Voice as a Trader
Considerations RE: Trading for a Living
Common Stresses Faced by Traders
Stress and Cognitive Regression
The Psychology of Scarcity and Abundance
Self-Confidence and Performance
Six Positive Trading Behaviors
Signs of Burnout
Cultivating Self-Awareness
Trading and Anxiety
Turning Setbacks Into Goals
Trading Myths and Questionable Assumptions
Achieving Emotional Self-Regulation
When Trading Performance Declines
Predictors of Coaching Success
Greatness, Happiness, and Performance
Physical Exercise, Self-Efficacy, and Well-Being
Living a Purposeful Life
The Brain and Trading Performance
Monday, January 05, 2009
Risk Seeking or Risk Averse: The Mood of the Markets
One of the most basic issues that I try to identify at the start of trading days is the mood of large market participants. Are they risk seeking, buying stocks, commodities, and corporate debt, or are they risk averse, taking money out of equities and parking it into Treasuries? As we can see from the charts above, in recent days investors have been aggressively buying stocks (SPY; top chart); selling Treasuries (lifting 10-year yields; middle chart); and buying oil (bottom chart).
When recessionary worries were dominating markets, we saw aggressive selling of stocks and oil and strong buying of Treasuries. That sentiment has been unwinding in recent days. By seeing how asset classes are trading during the day, we can infer speculative sentiment among "macro" traders and investors and gain important clues as to risk appetite for the instruments we are trading.
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Indicator Update for January 5th
Last week's indicator review concluded, "The low 900 area continues to serve as important resistance for the S&P 500 Index; a break above that level accompanied by strong sector participation and new high strength would be an important signal for longer-term bulls." We did, indeed, see such an upside break, as strength became evident among the indicators and stock market sectors and indexes. Indeed, the sectors are now clearly in a bullish mode, having broken from their multi-week trading range.
The Cumulative Demand/Supply Index (top chart) is quite stretched to the upside, but note that we're seeing a pattern of higher highs, with pullbacks remaining above the zero level. That persistence is typical of bull market action. During bull phases, pullbacks in the DSI toward a neutral area typically signal good entries for swing positions to the long side.
Note how we've also seen a sizable increase in new 20-day highs vs. lows (second chart), indicating broad participation in the market rally. The Cumulative Adjusted NYSE TICK (third chart) has moved solidly to new highs; note the increase in its slope, as buyers lifted offers in size during the market breakout.
Money flow for the Dow Industrial issues, while not at new highs, has been moving steadily higher (bottom chart) over the last two weeks.
We are clearly overbought and some degree of short-term pullback is expected. If, indeed, we have put in an important market low and entered a bull phase, the rise should be a multi-month affair, not a brief rally. New 20-day highs should continue to outnumber lows, and pullbacks should stay well above last week's price lows. Particularly supportive of the bull move would be a relatively flat corrective period in which the former resistance around 900 in the S&P 500 Index becomes support. A move back into the trading range, particularly on high volume and weak NYSE TICK, would pose important questions for bulls.
A review of last week's indicator data that I post each morning before trading days via Twitter will clearly show the evolution of the market's strength. These data are particularly useful in identifying whether markets are strengthening, weakening, or remaining range bound. This can be helpful in keeping traders from fighting trends--or assuming trends when none exist. The data can be observed on the blog page under "Twitter Trader" or are available via free RSS subscription.
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Sunday, January 04, 2009
Sector Update for January 4th
Last week's sector update found continued range bound conditions for the eight S&P 500 sectors that I track with the Technical Strength indicator of short-term trending. With the break above key resistance in the low 900 level on the S&P 500 Index, the Technical Strength readings looked quite different by Friday's close:
Clearly the trend has turned up across the sectors, though Materials and Financial shares lag the group. The strong bounce among Technology and Consumer Discretionary shares suggests that recovery themes may be trumping recessionary ones to start 2009.
When we look at the percentage of stocks in each sector trading above their 20-day moving averages, as assessed by Decision Point, we can see the distinct intermediate-term uptrend following the breakout. Even among the two lagging sectors, the great majority of issues are trading above their 20-day averages.
While the sectors are extended relative to those 20-day averages, we are nowhere near overbought with respect to longer-term 50- and 200-day averages. If indeed we have put in an important bottom in November, we should be able to support a rally that would eventually take us into overbought territory on a 200-day basis.
Note that I update Technical Strength figures each morning before trading days via Twitter; RSS subscription to the indicator and link updates is free.
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MATERIALS: +40 (86%)
INDUSTRIAL: +320 (98%)
CONSUMER DISCRETIONARY: +400 (95%)
CONSUMER STAPLES: +360 (93%)
ENERGY: +380 (100%)
HEALTH CARE: +460 (95%)
FINANCIAL: +20 (83%)
TECHNOLOGY: +320 (96%)
INDUSTRIAL: +320 (98%)
CONSUMER DISCRETIONARY: +400 (95%)
CONSUMER STAPLES: +360 (93%)
ENERGY: +380 (100%)
HEALTH CARE: +460 (95%)
FINANCIAL: +20 (83%)
TECHNOLOGY: +320 (96%)
Clearly the trend has turned up across the sectors, though Materials and Financial shares lag the group. The strong bounce among Technology and Consumer Discretionary shares suggests that recovery themes may be trumping recessionary ones to start 2009.
When we look at the percentage of stocks in each sector trading above their 20-day moving averages, as assessed by Decision Point, we can see the distinct intermediate-term uptrend following the breakout. Even among the two lagging sectors, the great majority of issues are trading above their 20-day averages.
While the sectors are extended relative to those 20-day averages, we are nowhere near overbought with respect to longer-term 50- and 200-day averages. If indeed we have put in an important bottom in November, we should be able to support a rally that would eventually take us into overbought territory on a 200-day basis.
Note that I update Technical Strength figures each morning before trading days via Twitter; RSS subscription to the indicator and link updates is free.
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Trading and Market Psychology: Best of TraderFeed 2007 - Volume Three
Here's the latest installment in the "Best Of" series, covering the third quarter of 2007. The earlier best posts from 2007 can be found here and the best of 2006 is here.
Steps Toward Joining a Prop Firm
Underconfidence and Overconfidence in Trading
Using Imagery to Accelerate Behavior Change
Ten Principles of Short-Term Trading
Winning Trades vs. Making Money
Trading and Learning Styles
Assessing the Learning Styles of Traders
One of My Best Market Posts
Trader as Entrepreneur
When Traders Lose Confidence - Part One, Part Two, Part Three
Five Steps Toward Self-Coaching
Very Important Post on Trading and Pain
Life Lessons From Mali
Trading and Emotional Well-Being
Our Moods and Our Trading; Here is a Mood Questionnaire
Our Emotional Style
Coping Strategies; Stress and Coping; Coping and Intuition; Assessing Your Coping Style
Improving Your Coping
Goal Setting for Traders
How Problem Patterns Develop
The Importance of Emotional Experience in Change
Making the Right Decisions Under Conditions of Fear
Using Emotion to Change Emotion
Making Cool Decisions With a Hot Head
Ayn Rand, Objectivism, and Trading
Trading and Worry
Trading With a Philosophy
Somatic Markers During Trading
The Psychology of Losing
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Underconfidence and Overconfidence in Trading
Using Imagery to Accelerate Behavior Change
Ten Principles of Short-Term Trading
Winning Trades vs. Making Money
Trading and Learning Styles
Assessing the Learning Styles of Traders
One of My Best Market Posts
Trader as Entrepreneur
When Traders Lose Confidence - Part One, Part Two, Part Three
Five Steps Toward Self-Coaching
Very Important Post on Trading and Pain
Life Lessons From Mali
Trading and Emotional Well-Being
Our Moods and Our Trading; Here is a Mood Questionnaire
Our Emotional Style
Coping Strategies; Stress and Coping; Coping and Intuition; Assessing Your Coping Style
Improving Your Coping
Goal Setting for Traders
How Problem Patterns Develop
The Importance of Emotional Experience in Change
Making the Right Decisions Under Conditions of Fear
Using Emotion to Change Emotion
Making Cool Decisions With a Hot Head
Ayn Rand, Objectivism, and Trading
Trading and Worry
Trading With a Philosophy
Somatic Markers During Trading
The Psychology of Losing
Resilience: Behind the Spirit of a Warrior
I had a different post planned from this morning, but I'm linking Karl Rove's latest article in the Wall St. Journal, because it speaks volumes about resilience.
A Navy SEAL posted to Iraq was hit by enemy fire and required multiple surgeries, including reconstructive surgery for wounds that took off part of his cheek and nose. "Yet he didn't feel sorry for himself," Rove observes. "He was full of charisma, confidence, cockiness, and joy. After all, he confided, when you're a wounded SEAL, the world's best doctors want to operate on you so they can brag about it. Besides, he explained, he was just showing that a SEAL really could catch bullets with his teeth."
That soldier eagerly looked forward to returning to the battlefield. "My team needs me," he explained. On his hospital room door, he wrote a message explaining that no one should feel sorry for him, because he received wounds doing a job he loved, in the service of a country he loved. His room was a place for "fun, optimism, and intensive rapid regrowth", he wrote; anyone who was not in that mindset should go elsewhere.
Think about how this soldier held onto his sense of elite specialness even through his pain. Think about how he held onto his deepest values during a period of loss, frustration, and uncertainty. Think about how he stubbornly held onto optimism, willing himself to recovery. Now think about how we can live up to his example through our far less life-threatening periods of loss and frustration in the markets.
When you've trained so hard for something that you experience yourself as elite; when you believe so deeply in what you're doing that you refuse to give up; and when you are so committed to others that you will never let them down, you can be an otherwise ordinary human being and yet accomplish extraordinary things.
RELATED POSTS:
See the last two sets of links in my Best of 2006 series.
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A Navy SEAL posted to Iraq was hit by enemy fire and required multiple surgeries, including reconstructive surgery for wounds that took off part of his cheek and nose. "Yet he didn't feel sorry for himself," Rove observes. "He was full of charisma, confidence, cockiness, and joy. After all, he confided, when you're a wounded SEAL, the world's best doctors want to operate on you so they can brag about it. Besides, he explained, he was just showing that a SEAL really could catch bullets with his teeth."
That soldier eagerly looked forward to returning to the battlefield. "My team needs me," he explained. On his hospital room door, he wrote a message explaining that no one should feel sorry for him, because he received wounds doing a job he loved, in the service of a country he loved. His room was a place for "fun, optimism, and intensive rapid regrowth", he wrote; anyone who was not in that mindset should go elsewhere.
Think about how this soldier held onto his sense of elite specialness even through his pain. Think about how he held onto his deepest values during a period of loss, frustration, and uncertainty. Think about how he stubbornly held onto optimism, willing himself to recovery. Now think about how we can live up to his example through our far less life-threatening periods of loss and frustration in the markets.
When you've trained so hard for something that you experience yourself as elite; when you believe so deeply in what you're doing that you refuse to give up; and when you are so committed to others that you will never let them down, you can be an otherwise ordinary human being and yet accomplish extraordinary things.
RELATED POSTS:
See the last two sets of links in my Best of 2006 series.
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Saturday, January 03, 2009
Tracking the Volume of Individual Trades in ES Futures
I was taking a look at the distribution of volume for the ES futures for trades during the first half of Friday's trading session. Of particular interest:
* Trades of 20 contracts or more made up about 7% of all trades, but accounted for about 56% of all volume in the ES contract;
* Trades of 10 contracts or more constituted a little less than 15% of all trades, but comprised a little over 70% of all volume;
* One-lot trades accounted for slightly under 50% of all trades, but only about 8% of total volume;
* Trades of 100 lots or greater accounted for only about .6% of all trades, but about 15% of total volume.
Many professional traders trade in lots of 100 contracts or more, but it is rare for these traders to execute trades in such large blocks. Rather, they employ clerks and/or automated algorithms that commonly break their blocks into smaller pieces of 10 contracts or more. While it is possible that a run-of-the-mill retail trader might be executing 20 contracts or more at a time, that is the exception, given high retail commissions. More often, these larger trades are placed by prop traders or are part of larger block executions from institutions.
Where are large trades hitting the market? At breakout levels? At the bid? At the market offer? Early in the day? By tracking *who* is in the market and when, we can infer important sentiment trends and shifts in the stock market.
RELATED POSTS:
What Every Short-Term Trader Should Know
Reading the Market
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* Trades of 20 contracts or more made up about 7% of all trades, but accounted for about 56% of all volume in the ES contract;
* Trades of 10 contracts or more constituted a little less than 15% of all trades, but comprised a little over 70% of all volume;
* One-lot trades accounted for slightly under 50% of all trades, but only about 8% of total volume;
* Trades of 100 lots or greater accounted for only about .6% of all trades, but about 15% of total volume.
Many professional traders trade in lots of 100 contracts or more, but it is rare for these traders to execute trades in such large blocks. Rather, they employ clerks and/or automated algorithms that commonly break their blocks into smaller pieces of 10 contracts or more. While it is possible that a run-of-the-mill retail trader might be executing 20 contracts or more at a time, that is the exception, given high retail commissions. More often, these larger trades are placed by prop traders or are part of larger block executions from institutions.
Where are large trades hitting the market? At breakout levels? At the bid? At the market offer? Early in the day? By tracking *who* is in the market and when, we can infer important sentiment trends and shifts in the stock market.
RELATED POSTS:
What Every Short-Term Trader Should Know
Reading the Market
.
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