I recently had the pleasure of joining four accomplished colleagues in the psychotherapy world for a presentation on brief therapy for the American Psychiatric Association's annual meeting. One of the presenters, Dr. Seth Gillihan, was kind enough to pass along a copy of his recent book, Cognitive Behavioral Therapy Made Simple. It's a self-help text detailing specific, research-backed techniques for changing patterns of thought and behavior. As I read the book, I was struck by how relevant many of the exercises are for traders in financial markets. In this short series of posts, I will outline several common areas of challenge for traders and techniques for working on those, as outlined in the book. We will begin with procrastination, the tendency to avoid things that we know we need to do. Dr. Gillihan points out that many factors can contribute to procrastination, including fear of falling short in our performance and avoidance of discomfort. One common area of procrastination among traders is putting off the work of preparing for the trading day, whether it's completing a journal or laying out plans for the coming session. Some of the techniques Dr. Gillihan outlines in the book for overcoming procrastination are: a) Using a Calendar - The more specific we are about the work we want to do and when we want to do it, the more likely it is that we'll get the tasks done. I like scheduling daily activities for the same time each day, turning work routines into positive habit patterns. Scheduling activities a day ahead and reviewing the coming day's calendar in the evening helps prime us for action. For unpleasant tasks, I schedule a reward period following the completion of the task. b) Working in Shorter, Uninterrupted Segments - Dr. Gillihan points to what is known as the Pomodoro technique, in which work is broken down into 25 minute segments that are uninterrupted. This has the natural advantage of making a large workload more doable and it provides mini-breaks for renewing our energy and willpower. I use the breaks between work segments as mini-rewards, when I can take a snack, play with one of the cats, etc. c) Mindfulness - Many times procrastination results from distraction and (negative) thoughts about the future. We tend to avoid what we anticipate will be uncomfortable. By bringing our attention and awareness to the present through methods like meditation, we can remove mental clutter and focus on doing one thing at a time. Very often, breaking through and completing one or two subtasks can lead to momentum and completing a larger project. d) Self-Reminders - A powerful technique is to vividly remind ourselves of the negative consequences of behaviors we wish to avoid. This works well in alcohol treatment, where the mental rehearsal of the negative consequences of drinking helps a person avoid relapse and helps them reach out for support. Reminding ourselves that procrastination prevents us from being the best traders we can be can become a helpful prod toward action. Another technique that works well for me is a shift of environment. When I want to complete a difficult task, such as editing a writing project, I will bring my computer to a Starbucks or the food court of a large grocery store and I commit to not leaving until the work is completed. In the new environment, there are no other distractions (phone, emails, interruptions from people) and I find it easy to enter into a focused work mode. Sometimes the environmental shift is as simple as playing music in the background while I work, providing stimulation that doesn't distract. (I'm listening to JWeihaas as I'm writing this). Our actions play an important role in shaping our experience of ourselves. We cannot act as decisive traders if the majority of our time is spent in procrastination mode. Avoiding any single task may seem to have few consequences. A pattern of avoidance, however, reduces our productivity and effectiveness. Ultimately, we are either in control of the time and challenges of life or those control us. How we approach our efforts daily shapes the mindset that emerges in our trading. There is much to be said for using daily calendars as repeated experiences of efficacy.
Every day, I update dozens of spreadsheets with market statistics, many of which are not commonly found. My experience is that unique data contain the most durable edges. From the Barchart site, I track the number of stocks across all exchanges that make fresh one-month highs and one-month lows. Over the past year, when the number of stocks making new highs has been in the top half of its distribution, the next three days in SPY have averaged a gain of .22% versus .06% for the remaining occasions. When the number of stocks making new lows has been in the bottom half of its distribution (few stocks making fresh monthly lows), the next three days in SPY have averaged a gain of +.23% versus .05% for the other occasions. From the Index Indicators site, I track the percentage of SPX stocks closing above their five-day moving averages. Over the past year, when that percentage has been above 70, the next five days in SPY have averaged a gain of .46%, with 79% of occasions profitable. When the percentage has been below 30, the next five days in SPY have averaged a loss of -.13%. When we see broad market strength, has that led to further strength (momentum), or has it led to weakness (reversal)? Knowing the regime we're in can help us frame worthwhile hypotheses about market behavior. Those become good trades when we see short-term flows lining up with those ideas.
I just learned that my podcast with Two Blokes Trading is now available for listening on their site. Among the many topics that we covered was the challenging issue of adapting to changing flows from day to day. In my post about three things to focus on each day in the market, one of the things I mention is especially relevant to this issue of adapting to market behavior. What is happening at each price level in the market? In other words, it's not enough to simply know who is in the market and what they are doing. We also benefit from knowing the prices at which traders are aggressively buying or selling. How can be do this? One tremendously valuable tool is Market Profile, where we can visualize the amount of volume traded at each price level through the day. This tells us where the market is establishing value and how trader activity builds or dries up as we depart from value areas. That is great information as we make sense of whether moves away from value are likely to continue (momentum) or die out (revert). Above, I've drawn a different kind of chart to illustrate how we can assess what is going on at various price levels in the market. The blue line represents the ES market during NY market hours on May 7th. Note that time is not on the X-axis. Rather, we're looking at the market in one-minute intervals from the lowest price registered during the day's session to the highest price. The red lines are the average high-low-close levels for the one-minute level of upticks versus downticks for all stocks. So what we're seeing is the net buying pressure (upticking) versus selling pressure (downticking) at each price level touched during the day. What we can see is that for most price levels and through most the day we saw net buying interest. There was not a very high level of buying pressure (readings above +500), but there was very little net selling pressure. When we retreated late in the day and touched the day's lows, however, this occurred with solid selling pressure, with readings below -500. That provides useful context for the coming day's session. If we should move higher, I will look to see if buying levels increase from what we saw the day before. If we test the day's lows, I will look to see if selling pressure is increasing or drying up relative to day previous levels. In other words, I'm looking to see if new buyers or sellers are entering the market and, at each price, I have a reference point to tell me how much buying/selling is additional and how much falls short of previous day's levels. As I am writing this during the premarket session the next day, we have dipped below yesterday's lows. Should we continue at or near those lows, I will be looking carefully minute by minute for uptick/downtick readings to see if the fresh weakness is attracting selling. I will also be looking carefully at each minute's volume relative to yesterday (and relative to typical volume for that minute) to determine if participation is increasing or decreasing. The big takeaway is that trading psychology is not only about *our* psychology. We can read the unfolding psychology of the marketplace by assessing the minute to minute behavior of market participants.
In an excellent post, Merritt Black, who coordinates the mentoring program for SMB Futures, illustrates how a trade that did not work out led to an especially good trade. There are many worthwhile takeaways from this post. First, if you look at Merritt's screenshots (he demonstrates trading ideas in a live chat), you can see that he is using Market Profile concepts (graphic displays of the accumulation of volume at key price areas) to identify key zones in which the market is establishing value. The morning session had traded lower, we consolidated in a range at lower price levels, and then we failed to take out the upper part of that range. That led to a good trade idea in which a trader could risk a move above that range to benefit from another leg down in the market. The market indeed does move to a new low for the day and then promptly rallies hard back into what was the consolidation range. We could not sustain the downside and now we're testing the upper end of that earlier range. That leads to a long trade, as bears are trapped, which turns out to be the day's best trade. Here are some worthy takeaways: 1) Notice how Merritt uses volume-at-price to create objective measures of where the market is setting value over a given time horizon. This provides a context for market moves, as we can determine where the market is breaking to new levels of value and where the market is returning to a value range. This context is very helpful in framing risk/reward for trade ideas. 2) Merritt's first idea, where he went short, made tremendous sense, but ultimately did not play out. That could have been a source of frustration, but instead it provided valuable information. The bears could not maintain the move down and that set up a trap to the upside. By accepting the "mistake"--the trade that did not work out--as information, Merritt was able to formulate an even better trade in the opposite direction. 3) When trades are formulated well, they can still fail to work out. Not all good ideas manifest themselves as winning trades. That means that risk management is paramount. If Merritt had risked too much on the initial breakdown trade, he never could have meaningfully exploited the reversal trade that followed. There is, however, one larger takeaway. Every day of trading provides a day's worth of review and learning. Many people trade the markets daily; not many rigorously review each day's trade. There is a reason sports teams watch videos of their games--and the games of their opponents. In reviewing past performance, we learn key lessons for tomorrow's performance. To paraphrase Coach Bob Knight, many people have the will to win. It's the will to prepare to win that defines the ultimate victors.
I've received a number of questions about my recent post on achieving unusually strong focus in trading and the Forbes article on which that post was based. I had outlined an unusual experience in which I used a meditation routine while tracking the ES market and then perceived the market action, not only unusually clearly, but in a very different way from my norm. It wasn't that I was simply seeing things better or even slower (which was the case). I was seeing the market differently. The closest I can come to describing the experience was that I was perceiving moment to moment shifts in volatility apart from any ideas about directional price movement. Instead of seeing price, I was *seeing* how volume was or wasn't moving price. I placed many trades in this mode, happily capturing small swings in the market and not thinking about PL or anything about my trading. It definitely felt like a "flow" experience, and more than a bit unsettling. We know that stress impacts performance, but rarely do we see how we perceive and perform completely free from stress, distraction, and the interference of self-talk. I've focused in the past on emotional creativity--the ability to adapt to situations with new responses--and I do believe that's important in changing our behavioral patterns. What I experienced with the meditation, however, was something different. It was perceptual creativity. I literally saw the market differently. Perceptual creativity is something we more usually associate with art. A skilled artist sees their subject in a fresh way and captures that vision through the paint brush (painter) or through movement (dancer). It is odd to think of trading as akin to art, but it may well be that it's the trader who sees what others do not is able to generate ideas and trades that others cannot see. My hypothesis is twofold: 1) We generate unusually high degrees of focus when we enhance one sensory modality at the expense of others. This is the common element in various meditation practices, as well as hypnosis. We enter a different zone when we shut off certain sensory modalities and concentrate on one. 2) In those very high states of focus, we achieve altered states of awareness that enable us to perceive the world around us differently. A good example of this are isolation tanks in which people float in salt water that is kept at body temperature. There is no light, no sound, and no sensation, as you can't really feel your body when surrounded by salt water of the same temperature. In that environment of sensory isolation, it is possible to achieve unusual focus and peace of mind. Interestingly, when I've stepped out of the tank, the world has *looked* different to me...more vivid...more alive. I feel separate from the world but experience a sense of awe in observing the world. That is altered, creative perception. It is the depth of the focus experience (which correlates with the duration of the meditation/hypnosis/isolation routine) that leads to the unusual state shift. It is eye-opening to experience, first hand, that emptying the mind leads not to the poverty of loneliness, but the richness of solitude. I strongly suspect that the intensification of focus within relationships (think of having a special dinner with one you love) is an important component of intimacy and connectedness. In a state of mental clutter, we don't truly connect with others; note how, even in a world of social media and online connectedness, a significant number of people feel lonely. Perceptual and emotional creativity keep relationships alive and renewed, and perhaps they also keep our trading fresh and adaptive.
My most recent Forbes article relates an unusual trading experience that I had last week. I greatly reduced the number of things I watched on my screens and adapted a meditation routine I have long used to tracking the ES market. This was contrary to my usual trading in a few respects. I was not working with any preconceived ideas about market direction (although I had reviewed all my research in advance) and I was not looking for trade "setups". My sole focus was focus. I immersed myself in market behavior the way I would immerse myself in the behavior of a distressed client I was speaking with in my work as a psychologist. What I can relate (and the Forbes piece details) is that the extreme level of focus completely changed my trading. I picked up on patterns I had not even considered in advance. It was the most unusual and powerful trading experience I have had in years. It was also the most profitable in years. There aren't many experiences I would describe as "life-changing", but this one comes awfully close. As a result, I have committed myself this year to literally relearn trading, with the central component being the creative perception and pattern recognition that come from enhanced focus. It is ironic that we fill our heads with more and different things to track in markets: various indicators, time frames, charts, chats, and so forth. It was only when I thoroughly emptied my head that I was actually able to *see* what was happening. I am all too aware that this sounds hopelessly mystical and subjective. If I didn't have the experience of doing my best work as a psychologist when I have been most highly focused on people, I probably wouldn't have believed what happened with trading under focus. It may well be that controlling emotions, enhancing discipline, and all the things traditional trading psychology talk about are effective only insofar as they improve our focus. By working directly on techniques to enhance our focus, we may best access our ability to process noisy market data.
Above is a two-day chart for Monday and Tuesday's SPY trade. A number of traders I spoke with missed the market drop, fearful of "chasing" prices when they had been reversing. The key identification in Tuesday's trade is the rising relative volume to the downside. Recall that relative volume tracks the volume for each time period (in this chart I'm using five minute periods) and compares it to the average volume for that same time period. So, for example, a relative volume reading of 0.5 means that we're only doing half the normal volume for that specific time of day. A reading of 2.0 means that we're doing twice the normal volume. Notice how, as Tuesday moved forward, relative volume expanded well above 1.0, particularly on market selling. This started to occur well before we saw the waterfall decline in the afternoon. The increased relative volume told us that participation was increasing to the downside. This participation represents directional participants who move size and thus can lead to momentum and trending moves in the market. The steadily rising relative volume tells us that we're picking up participation as we're going lower. Selling is by no means drying up. That is a market where you can afford to "chase" prices lower. Simple tools like relative volume are very helpful for identifying opportunity in the market. If volume is shrinking, it's unlikely that moves will extend. Breakouts from ranges with increasing relative volume suggest that traders are indeed accepting new levels of value. Who is in the market is a key ingredient in how you should trade.
On Wednesday morning, 8 AM EST, I'll be doing a webinar with the good folks at Two Blokes Trading. Brandon sent me very good trading psychology questions that we'll be addressing during the session. (By the way, check out the excellent podcasts on their site.) One question I particularly liked asked, "As a retail trader, what is the most effective way to emotionally detach yourself from a trade? Is this even a good thing to try and do?" Here is my answer--it's a little tricky: To be successful, you *have* to be emotionally detached from your trade. To be successful, you *have* to be emotionally connected to the market. Let's explore: To the degree you are attached to something, that thing owns you. That is why we have to be so very careful with our attachments. Two people are attached in a good marriage and, yes, they own each other. Something is lost of me if I do not have my partner. Any trade, however, is merely a probabilistic bet. Would I attach myself to a relationship if my wife was faithful 75% of the time? Of course not. I have to stay detached from my trades and their outcomes because I know that there will always be occasions when the odds fail to play out. I own my trades--I take ownership for them--but I cannot allow them to own me. That is very different from staying emotionally attached to the market itself. That emotional attachment is similar to empathy: you're not just observing market activity, but *feeling* it. As a psychologist, I have to be fully attuned to the person I'm working with. I can't be distracted with thoughts about myself, how much money I'm making from my sessions, etc. In that emotionally attuned state, I can pick up on subtle shifts in tone of voice and shifts of topic that tell me what's going on with the other person. Similarly, when we are emotionally open to markets and focused on them, we can identify subtle shifts of buying and selling that alert us to opportunities. That attachment to the market is vital to pattern recognition. When we lack that degree of emotional connection, we become tone-deaf to the market's communications. Later, we look back on poor trading decisions and wonder what we were thinking. Emotionally detached from our trades and emotionally focused on the market--that is not an easy balance. The common element is that we remove our egos from trading. To the degree that you're wedded to an outcome, you can't be fully immersed in the process.
Interesting research that I summarized in a recent article finds that the single most powerful factors determining the success of romantic relationships are acts of kindness and giving. Conversely, relationships that end poorly are characterized by sarcasm, contempt, and negativity. When we give, we encourage gratitude in others, and that gratitude leads others to then also engage in acts of generosity. What is less appreciated is that this same dynamic plays itself out in the trading world. Within the trading teams I've worked with at SMB, for example, results are dramatically better when team leaders coach junior traders and when those developing traders support the trading of their mentors. "Each one teach one" is a virtual mantra for successful teams: everyone provides value to one another. Conversely, the poorest results I've seen at trading firms are achieved when developing traders are left to their own devices to "figure it out". No giving and no receiving means a slower turning of idea wheels and a more tortured learning curve. I see this dynamic among individual traders as well. The successful ones cultivate networks of peers to share ideas and encourage one another. It is not by coincidence, for example, that the Investors Underground live chatroom is also instrumental in Traders4ACause, a group that uses trading education as an opportunity to "give back". When traders operate in a culture of giving, they are inspired to also be givers. Everyone wins. Here's a great metric for your trading: Who are you making better and how well are you doing it? In giving value, you attract the right people and that, in turn, provides you with more and better resources. Some of the best ways of working on our trading is to contribute to the trading of others. Some of the best ways of working on ourselves--enhancing our health, well-being, and success--is contributing to others.
In a recent video, Don Miller talks about the perils of information overload--something traders weary of headline-driven moves can appreciate. The single most common theme I'm hearing from traders is getting "chopped up" by irregular market behavior. Consider this: if we add up the average true ranges for the past 14 trading sessions, SPY has moved 29%--even as it has closed flat over that period. Lots of movement, little direction. What I find during these periods is that many traders, frustrated by the lack of good moves in what they look at, start looking at more and more things, trying to find the next catalyst, the next trades. They create their own information overload by failing to filter information. To put it succinctly, as markets get noisier, their thought processes also get noisier. More frantic looking for ideas, more frantic stopping out of trades, more frustrated self-talk. Here's a psychological principle you can count on: As conditions become more challenging and dangerous, peak performers respond with increasing mental quiet and focus. That is what happens in the emergency room; that is what happens in the fourth quarter of a playoff game; that's what happens on the 18th hole of a close golf tournament. As a psychologist, if I meet with someone who talks seriously about suicide, I become laser focused on the conversation. I'm processing every word carefully, filtering my internal noise, because every word matters. When I was a rookie, learning therapy in grad school, the mention of suicide would make me frantic, searching for the right things to say and do. The key difference is that, under stress, experienced performers double down on observing and listening. They become more quiet, more focused. Just like the sniper. Just like the surgeon. The rookie performer never enters "the zone" because attention and thought are frantically jumbled, flitting from market to market, from self to market to P/L and back to self. This past week, I noticed a great trade in which the market (ES futures) was stretched to the upside and could not sustain further buying at the NY open. I was focused on the market's behavior second by second, seeing buyers and sellers interact and watching the price behavior of the market's sectors. It soon struck me that the buying was exhausted and that selling was taking over. That led to a great trade. We like to talk about "idea generation", but the reality is that the idea came to me; the only thing I generated was an open minded state of enhanced focus. How different that is from when I enter the day with a fixed opinion about the market's direction and completely miss how the market is actually trading! The problem is not a noisy market; it's making the market's noise our own. It's amazing what can come to us when we focus and filter...all performance training is a training of the capacity to act decisively when we are in the zone.
All true performance activities bring stress. That is because true performers care about winning. There may be external pressures to win, but for the best, there are always internal pressures. Elite performance demands that we push the envelope and attempt to perform at our best. That demand--that stress--can be a great motivator. Stress in itself is not a negative. It is an inherent part of any activity in which near-term outcomes truly matter. Sometimes it is important in life to minimize stress, particularly in areas that aren't central our most important life activities and goals. For example, when I fly for work or vacations, I select the flights that have the best on-time percentage to their destinations. That greatly minimizes the probability of delayed or canceled flights. Margie and I recently found a two-year certificate of deposit with a yield very close to the yield on 10-year Treasuries. For our savings, that's good enough. We don't want to have to be concerned with price movement for that portion of our money. Reducing sources of stress in more peripheral areas of life helps us stay focused on the most central areas of life. It is in the central areas that we experience the need to do well and the demands of performance. That is why it can be stressful to be a parent, a trader, or an entrepreneur. Many retired people lose those central areas of life and experience few performance demands. That is not necessarily a blissful life. Happiness--doing fun things--is not enough for many people. We also need fulfillment, and challenge is one important source of fulfillment. How we handle stress determines whether it will be a motivator or a source of dis-stress. A great way to turn stress into distress is to make performance activities our only or main source of fulfillment. Then we have much more than PnL on the line. Our entire sense of self can feel jeopardized. Often, it's not the trading that is stressing us out. It's our investing our sense of worth in our trading results. If you can experience yourself as a successful, fulfilled person even when your PnL is not moving higher, you know you are well diversified emotionally. If you can't experience yourself positively during times of drawdown or flat performance, no tweaking of your trading will address that underlying vulnerability. We can perform well when trading is important to us and when that importance pushes us to continually learn, adapt, and improve. We can perform quite poorly when trading is all-important and outcomes control our sense of self. A great way of reducing trading stress is to improve fulfillment outside of trading.
A recent post suggested that our trading success is highly dependent upon our ability to leverage our information processing strengths. One of our most basic modes of processing information is our internal dialogue: the self-talk that we engage in throughout our waking hours. It turns out that the quality of our internal dialogue is a critical element of our information processing. It's only rarely, however, that we work on improving our self-talk. Now, on the surface, it makes little sense that we talk with ourselves. Why write ourselves memos and calendar reminders? Why review plans in our heads or comment to ourselves, "Good job!" or "What were you thinking?" How is it that we interact with ourselves as we would interact with others? The answer is that we possess at least two information processing systems. One is a fast, reactive system that helps us respond to situations in real time; the other is a slower, deliberate system that enables us to see larger pictures and plan for those. Both are necessary for dealing with the real world. We want to be able to plan a strategy for a football game, but we want to react quickly to changing conditions on the field. Coordinating our two "brains" is a key element in performance success. Imagine being in a self-driving vehicle. It reacts to obstacles and traffic changes faster than we could. There's only one problem. It doesn't know where to go. We have to program the destination information. We have to align the fast, reactive mode with a bigger picture. When we talk to ourselves, we program our GPS; our slower, deliberate, rational mind communicates with our quicker, reactive, pattern-recognizing mind. Trading journals are a form of internal dialogue. Our overt self-talk during the trading days is a form of internal dialogue. Step back for a moment and think about you talk to yourself during the trading day. How well are you programming your GPS? A key piece of progress for many traders is turning their pre-market preparation into active, effective internal dialogue. That is a major factor in transforming good intentions into concrete, actionable plans. Imagine planning for the day by reviewing recent market behavior, dominant market themes, news events: out of those you generate a view that you will trade if you see it playing out. That is well and good, but now imagine going an extra step and generating *multiple* scenarios and laying out plans for each. Then, as you walk through the new day, you update each scenario and flexibly move to the ones that are displaying higher odds of playing out. That gives you more ways to win. But now take it a further step and imagine not just writing out the multiple scenarios, but actively talking them aloud with a peer trader, responding to feedback about the scenarios, and listening to your subsequent dialogue. Still further, imagine taking your scenarios and actively *talking to yourself aloud* about those, saying to yourself, "Brett, if you see X occur, you need to be doing Y. If you see A occur, you need to shift your thinking to B...etc". Imagine talking to yourself with real feeling about those plans, the way a coach on the sidelines would talk to you. We retain information better when we encounter it multiple times. We retain information better when we encounter it in multiple, different ways. We think it, write it, discuss it, talk it to ourselves with feeling--all of these help the programming of our GPS. The speed and quality of self-talk is something I see among successful traders: they are very good at programming themselves and quickly changing their programs. This is something I'll be discussing in detail during Wednesday's free webinar.
So now the secret of my working with traders gets out...it's the Brooklyn Brown Ale after the market close! Mike Bellafiore at SMB recently released a video about our upcoming free webinar on maximizing your learning process as a trader. The webinar is hosted by Wealth365 and will be held this coming Wednesday (April 11th) at 5:00 PM Eastern time. Mike's video captures a number of the topics we'll be covering; here is the link to register for the event. What I find in working with traders is that their progress--and, specifically, their ability to adapt to changing market conditions--are highly dependent upon the quality of their learning processes. In a nutshell, traders often do not process market-relevant information in a manner that is consistent with their cognitive strengths. This holds back their learning, and that holds back their profitability. I first encountered this dynamic when I ran a counseling service for medical students in Syracuse. Many students sought the service because of "academic stress": they were not doing well in their courses and were worried about failing courses, not getting a good residency, etc. The traditional approach to helping these students was to provide "stress management" techniques. These were helpful in managing the symptoms, I found, but did not address the cause of the problems. The medical students were good students--they got into med school for a reason--but they had very distinctive and different learning strengths. Some students were great at taking notes and learning from those. Others learned best in groups, discussing the material. Still others had to rework the lectures and readings and create their own charts and diagrams to assimilate the information. And the students who performed best had multiple ways of processing the information from lectures and clinical rounds. Encountering the information in many modalities--hearing it, writing it, discussing it, visualizing it--helped the students retain the information. Just as important, processing the information in multiple ways allowed them to better access the information when it was tested in different ways: through multiple choice questions, essay questions, clinical presentations, etc. This is key; please pay attention: Because each market day is different, it tests us in different ways. Sometimes it asks a multiple choice question; sometimes it asks for a lengthy essay. If we only process information in one way, we will only be prepared if markets pull for information in that particular way. We lose flexibility. It is in active, varied processing that we learn faster, deeper, and more flexibly. This idea, which we don't typically encounter in the trading psychology world, is a total game changer. It's not just about trading your plan, listening to your emotions, staying focused, etc. Those are all necessary for success, but not sufficient. If you're not immersing yourself in market information in ways that are aligned with your cognitive processing strengths, you will always be underprepared relative to your potential. In my segment of the webinar, I will discuss specific strategies for improving our processing of market information and supercharging our learning. Look forward to seeing you there! Brett
What I've found is that there are major mindset differences among developing traders that play an important role in their eventual success or failure. Here are several of the mindsets that I see among those who find success in markets: 1) They are market-focused, not self-focused - The successful traders focus on markets, opportunities, and ways of exploiting those opportunities. They dig for ideas and they love the digging. The less successful traders focus on themselves, their P/L, what they did right and wrong, etc. In their self-focus, they are not fully immersed in markets and learning. They are all about outcomes and not the processes needed to generate those outcomes. 2) They are positively focused, not negatively focused - The successful traders learn from winning trades and learn from trades they missed. When they're losing money, they're still actively learning and taking away positive lessons. The less successful traders talk a great deal about how markets aren't giving them opportunity, are choppy, are difficult, etc. We tend to pour ourselves into what we enjoy. Part of what makes developing traders successful is having fun at what they're doing and thereby immersing themselves in the growth process. 3) They are open-minded and flexible, not rigid - There is no single formula for trading success, but there is a formula for trading failure. The failed traders are fixed in their views and their approaches. They never adapt. They are perma-bears or perma-bulls. They look at things the same way regardless of market conditions. The successful traders are quick to shift from one area of opportunity to others as conditions change. They actively process the information that would tell them their view is wrong and can promptly exit or even flip their positions. You know the kind of people who go online and argue and shout and spew venom at whatever political figure, cause, TV show, sports team, or person they don't like? *That* is who makes a shitty trader. A drama mindset cannot be a disciplined, focused mindset, and it's ultimately not a constructive mindset. A winning mindset is all about generating light, not heat.
It's been very interesting since February. Some traders have picked up performance dramatically; others have been struggling to adapt. Here are a few observations regarding those who have found their stride in the somewhat volatile and/or rangy environment: * Preparation - What a differentiator. Some traders send me their journal entries every day. Others more occasionally or not at all. Some journals are detailed with extensive reviews of individual trades and lessons learned. Other journals are general and purely self-focused. Some journals contain concrete goals and plans for the next day's or week's trading. Other journals are entirely backward looking. One successful trader routinely takes breaks during the trading day and creates multiple periods of preparation, which create multiple opportunities to learn from mistakes and adapt trading accordingly. The investment in preparation--before the market open and after the close--is highly correlated with success. * Flexibility - The successful traders have moved to different opportunity sets since the market volatility. The less successful traders spend considerable time bemoaning "choppy" markets. The adaptive group sees plenty of opportunity in markets. The less successful traders want the market to fit their style of trading. Higher idea velocity combined with sound risk management means that traders who sees more opportunity will have better odds of participating in larger trades. It is often a handful of bigger winners that account for a meaningful proportion of overall profits. The best way to have few big winners is to generate few worthwhile ideas. The best tool for generating ideas is open-mindedness: looking at more new things and looking at old things in new ways. Bouncing ideas off others is a great tool for fresh perception. * Offense and Defense - The traders who have had the hardest time lately have had the least staying power in their ideas. They want their positions to move significantly in their favor and very little against them. That is a formula for stopping out on noise. I recently spoke with a successful trader who spends considerable time and effort hedging his positions and making sure he has multiple independent positions at all times. The balance allows him the freedom to let his ideas play out. Another successful trader has been careful about sizing trades initially and aggressive about adding to them as market behavior confirms the trade thesis. The winning traders are able to play offense because they emphasize defense. In short, the traders who have performed best in the recent market environment have been those most energized. They have used the altered environment to find new opportunities and change what they're doing. They embrace change--in themselves and in the markets.
Is there, perhaps, a greater reason and purpose for your pursuit of financial markets? Something more than PnL? *Are markets your path for learning self-awareness and self-control? *Are markets your path for learning to appreciate and detect the complex order in the world? *Are markets your path for understanding the world deeply and creatively? *Are markets your path for overcoming ego and self-absorption? This is the paradox of trading: It is a supremely materialistic pursuit that requires the greatest of spiritual virtues. Pursued properly, trading refines the heart, brain, and soul. I recently published one of the only full articles on the spirituality of trading. It's a topic some of us may be uncomfortable with, even as it addresses the issues we're all familiar with. What if it's not just about controlling and learning from your emotions and becoming a better analyzer of market patterns and themes? What if trading is about developing ourselves--all of our selves? Achieving in the material world by refining ourselves spiritually: I believe this is one of the most promising frontiers of trading--and performance--psychology.
In a recent blog post, I emphasized that it is what sets our soul on fire that leads to sustained learning. We experience the exercise of our unique strengths as particularly meaningful and rewarding. That's what sets our souls on fire. It's also what we learn with pleasure. The rewarding, pleasurable aspect of learning cements lessons for us and drives us forward on our learning curves. There is a huge implication of this line of thought: We can best improve our odds of trading success by structuring our development processes to maximize the intrinsic rewards of learning. Please let that sink in. We can greatly accelerate our growth as traders by structuring our learning in the right ways: focusing on the right skills, but also focusing on the right ways to work on these skills. We learn via mastery, not via randomness or frustration. Improving our curriculum--our learning process--is the single greatest thing we can do to increase our odds of getting to that proverbial next level of performance. Many times we struggle with trading because we are not on a developmental path that allows us to learn with pleasure. We focus on the wrong things--we don't draw upon our actual strengths--and so we unwittingly fight learning every step of the way with frustration and distraction. At 5 PM on Wednesday, April 11th, Mike Bellafiore of SMB Training and I will be presenting a free workshop as part of the Wealth 365 online conference event. That workshop will cover two vital areas of trading development: 1) specific skills to work on; and 2) ways of structuring the learning to maximize our learning curves. Mike and I work together with developing traders at a prop firm and we see what has led to success and what has not. In this workshop, we will share that experience so that you can greatly improve the effectiveness of your learning. The entire Wealth365 event is free; you can register here. I look forward to seeing you! Brett
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Friday's trade in the ES futures/SPY presented an excellent lesson to traders. We opened strong, moved lower, and then traded within a range through the morning and early afternoon. During that initial portion of the day, there were good short-term swings to participate in for nimble traders who were focused on the minute-to-minute action. The larger trade occurred in mid afternoon, with the breakdown from the range. This occurred on high volume with very negative NYSE TICK readings, indicating a broad market selloff. Indeed, that breakdown took us to lows of the day. To see that trade, however, required a bigger picture view of what the market had been doing the last several days and how it had formed a range early in the day. The key identification was that the market was *already* oversold and yet could not sustain a rally above its opening high. The focus to see what is happening on shorter time frames move-to-move and the flexibility to move to higher time frames for a larger picture is a combination that I see among successful traders. As I mentioned in my recent article, this represents the ability to continually frame hypotheses about the market and update those based upon unfolding market behavior. If the shorter-term market behavior is a text that we read with focus, the larger picture is a context that requires flexible perception. Quite a few traders I've spoken with have been frustrated. With the recent volatility, they perceive opportunity, but their results have not reflected this. My sense is that two problems account for this: * Short-term traders are so busy focusing on the immediate swings that they miss the larger patterns, such as Friday's break from a range; * Longer-term traders are so busy focusing on possible trends that they enter at poor levels and get stopped out by the market swings. What I saw working on Friday was the flexible switching from microscope to telescope, as the short-term movement constructed a longer-term pattern and opportunity. More successful traders have been better at constructing hypotheses, validating and invalidating them, and moving on. They demonstrate a higher idea velocity, but also display a rigor in implementing those ideas. Actively talking ideas aloud in a team context is one way to turn the idea wheel quicker, with accountability and rigor. Building a trading process that implements rapid review on multiple time frames is a great way to exercise and strengthen our cognitive processing.
One of the most important articles I've written was recently posted to Forbes. It examines the odds of sustained trading success and the factors that raise those odds. It turns out that trading success requires: a) personality strengths; b) cognitive strengths; and c) a developmental process that leverages those strengths in finding good risk/reward opportunities. Great performers--great actors/actresses, great athletes, great musicians--are great at some-thing. When we're great at something, we intrinsically enjoy exercising those talents and skills. That intrinsic excitement drives and supercharges our learning process. Elite performance never came from standard learning efforts. It's what sets our soul on fire that leads to deep and sustained learning. What sets your soul on fire, in and out of markets? Most likely, that's the performance path to pursue.
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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