Thanks to Trading Naked for the above graphic, and thanks to reader Todd who mentioned Jim Dalton's mentorship work on Market Profile in response to the recent post. There is nothing as practical as a good theory, psychologist Kurt Lewin once observed. What I like about Market Profile is that it is a good theory: a way of making sense out of market action. When I led a trading internship program in Chicago back in the day, Jim's book Mind Over Markets was the one required text. (See WindoTrader for a unique implementation of Market Profile). Once you understand markets as auction processes with bidders and sellers, shifts in volume and price over time make much more sense. Is it any wonder that a breakout from a trading range is more likely to continue to move away from the range if accompanied by higher volume and if it is occurring at times of day when liquidity is highest? Where has the market set value? When is a move away from value most likely to persist or reverse? Thinking in terms of auctions and the actions of buyers and sellers greatly illuminates market moves that otherwise might make little sense. Further Reading: Market Profile as a Best Practice in Trading
One of the themes emerging from the responses to the recent poll is the need for mentorship in trading. My experience is that this is a crying need among independent traders. At many money management firms, a junior professional with unique skills can join an existing team and add value from the start by applying those unique skills. That creates a situation where the junior professional can learn at the trader's side, both through observation and direct instruction. The best mentorship I have observed has come from trading teams. What is typically called "trader education" can provide useful information and perspective, but rarely has the ongoing element of deliberate practice needed for expertise development. Even at trading firms mentorship can be spotty, as traders are typically compensated for their trading, not their training of others. In my experience, Charles Kirk stands out as a dedicated mentor. He works with a subset of members to provide mentorship, but--in an inspired stroke--also requires advanced students to serve as mentors to the newbies. I have seen a similar dynamic at work at SMB, where there is considerable use of video resources on top of live mentorship from advanced students. Neither of these is free or cheap, but then again, neither is a quality education at any institution of higher learning. Many sites in the blogosphere do a good job of education/training, even if it's not the same as trading side by side with a mentor. Two that I've mentioned recently are Brian Shannon at AlphaTrends and David Blair at Crosshairs Trader; please feel free in the comments section to suggest others. I continue to believe that the development of virtual trading groups is a promising way to go for many enterprising independent traders. Connecting with just a few other dedicated learners and committing to sharing the learning can supercharge learning curves for all. The key is identifying the right fellow students: ones who are truly committed to be teachers as well as students. A valuable function of online communities is the opportunity to connect with like minded fellow travelers on the path of trading development.
It was late 1982, I had taken a tough hit in trading, and was more than a bit in the dumps. A friend asked me to a New Year's party, where I had way too much to drink. There I met a woman who wasn't yet divorced, had three kids, and was quite a bit older than me. Had I been in my right mind, I would have been friendly and quickly moved on to meet other people. But, in my haze, I talked with the woman, got her phone number, and last month we celebrated our 30th anniversary. Now that's a squiggly path! Trading offers its twisted paths of development as well. Rarely have I encountered straight lines to success.
So here's my question for readers: With so many online resources--books, blogs, tweets, charts, data, you name it--what more do you need for your trading success? What is the one thing that most help you in getting to that proverbial next level? And, specifically, what would you most like to see covered on this blog to help with your development? Please feel free to leave your ideas as comments (concise and constructive, please!) and I will make use of those suggestions in planning future posts. Thanks very much-- Brett
This last post in the Useful Trading Tools series covers an intraday measure of the percentage of NYSE stocks trading above their day's volume-weighted average price (VWAP). Previous posts in the series have looked at the upticks/downticks among Dow Industrial stocks; stock market breadth; unique data visualizations; volume data; and NYSE TICK. What makes the VWAP% helpful is that it is a real-time measure of breadth at an intraday level. In a trend day, we'll see the vast majority of shares either trading above or below their weighted average prices and stay at those elevated levels. In a range day, where we're likely to see sector rotation, we'll see more modest levels of VWAP% and often an oscillation above and below the 50% mark, as the above chart depicts. I get my VWAP% data from e-Signal. One can also construct VWAP% for Dow stocks only and for NASDAQ shares to get a sense for how large caps and tech-related shares are trading. It's a nice way to stay on the right side of the market: at a glance you can see if we're trading in a way that is trending and directional versus mixed and rangebound. Further Reading: Six Ways to Identify Trend Days in Stocks
Credit once again to Despair for that little piece of life wisdom. Optimism is great, but becomes a problem when it overshadows realism. On the Crosshairs Trader blog, David Blair makes the point that trading is all about "misses": being prepared to be wrong. What is important, he suggests, is envisioning--and preparing for--scenarios of both winning and losing. Stress inoculation is a psychological technique in which a person is exposed to negative or stressful scenarios and helped to cope with those before those scenarios actually occur. This has been used in the preparation of soldiers for battle and is a very useful exercise before getting into market positions. Visualizing what could go wrong and how you'd respond to it can make the difference between acting decisively in real time vs. being caught emotionally unprepared in the headlights. Indeed, once you figure out how to deal with a trade going south, you can even figure out where there might be opportunity in the situation. Ironically, it is by embracing the option of loss that we can free ourselves to identify the next round of opportunity. Further Reading: Inoculating Against Trading Stress
Just got back from an interesting visit and tour to the Two Roads craft beer brewery in Stratford, CT. What struck me from the tour is the degree to which the beermaking process has been automated and tightly controlled. From the proportions of the ingredients to the amount of time allotted to each process and the several step processes of cleaning the equipment, the manufacturing process is closely mapped and monitored. This makes the business an interesting combination of creativity--coming up with the right recipes, figuring out the most effective marketing strategies--and science. Indeed, it is this blend of inspiration and tight process control that makes the brewery successful. Much trading is like the homebrewing of craft enthusiasts. There are few controls on the process; each batch is likely to be unique. While this can make for fun tastings, it is unacceptable when one is offering a quality controlled product to the public. Once brewing becomes a serious commercial endeavor, it becomes process oriented, even as it retains creative inspiration. So, too, with trading. Putting observations together in unique ways and finding ways to trade those perspectives has a bit of creative art to it. But once the idea comes to life, there is a real science to trade sizing, structuring risk/reward, and constructing a portfolio. Professional traders differ from others the same way Two Roads differs from the average homebrewer: the rigor of execution ensures a high level of quality control. Further Reading: Reflections on Trading Process
Here's some interesting reading to take us into the new week: * Insightful New York Times article outlines how positive thinking about markets is associated with poorer returns and how positive thinking in our personal lives can lead to suboptimal outcomes; * Derek Hernquist offers a unique perspective on decision-making with trading tripwires; * Frank Zorilla on the significance of low volume rallies; * The importance of being data-driven and other great links from Abnormal Returns; * FinViz map shows that world-wide performance of equities was a bit mixed this past week;
This is a post about trauma and a unique way to overcome anxiety reactions after very stressful events. It is yet another way that I learned something about psychology from one of my animals, as we saw with Mali and Mia.
When we adopted Naomi, she was a traumatized kitten. She was visibly shaking in her cage and did not want to be petted or held. Once out of the cage, she hid under anything available and would not come out. Her level of fear was beyond anything I had seen in a cat. People clearly were a threat to her and she was always on guard. We tried everything to encourage Naomi to interact with us: soft voices, no sudden movements, reaching out with food, you name it. My first success was getting Naomi in our bathroom and then closing the door. Without a place to hide, she went behind the bathroom curtain and shook. I slowly moved the curtain away from her and she reached out to touch the moving curtain. I moved the curtain a little more and she again went after it. We continued this game for quite a while, with me giving her a little stroke, then moving the curtain, and Naomi going after the curtain. Interestingly, during the curtain game, she forgot to be afraid. She stopped shaking and was content to have me stroke her. This continued for a while until I picked Naomi up and put her on the bed (see above). She was very alert and wary. I placed my hand under the cover and moved it around. She immediately pounced on the hand. I scratched the sheet under the cover and she went after the sound. The game continued for quite a while--and for a number of days--until Naomi was comfortable being in the bed with us. To this day, she enjoys going after my hand under the covers.
If you met Naomi now, you'd think she was a shy cat, but not a traumatized one. Somehow she went from reacting to people as dire threats to playing with them. How did that happen?
No amount of coaxing or bribery with food could get Naomi out of her shell. She only overcame trauma by tapping into a motivating stronger than her fear: her natural hunting instinct and curiosity. Making the environment more safe--by itself--did not break through her fear. Rather, she overcame fear by replacing it with a different emotional experience and processing the world through that new experience. This, then, is the Naomi Principle: strong negative emotions can best be overcome by replacing them with strong positive ones. The most efficient and effective way to reprocess emotional experience is through new and powerful emotional experience. This is why we hold funerals: the power of bonding with those closest to us can overcome the grief of having lost a loved one. Some years ago I underwent emergency surgery for a near-ruptured appendix. Interestingly, my recovery was accelerated by the fact that the person sharing my room had obvious emotional problems. I became so concerned about helping my roommate that my physical discomfort was an afterthought. As the recent post suggested, outsized and unplanned losses can have traumatic emotional repercussions. How do you overcome those and get back to trading markets normally? The answer is to tap into positive sources of motivation that are stronger than your fear response. After difficult losses, I will double down on research and investigate new markets, new patterns. Inevitably I'll find something new, something promising. Like Naomi, I'll pounce on it: my eagerness to learn takes over. Before long, I see something so promising that I have to trade it--and I'll return to markets with fresh perspective and resolve. The Naomi Principle recognizes that our deepest passions transform us, whether it is by tapping into our creativity, our spirituality, or our love for others. It is difficult to be traumatized and mesmerized at the same time. Bringing out the best within us goes a long way toward overcoming the worst we've been through. Further Reading: What It Means to be Free
The function of risk management is not only to preserve your capital; it's also to protect your emotional well-being. Traumatic responses to market losses are the unacknowledged dark underbelly of trading. As I suggested a while ago, few in the trading industry find it in their interest to discourage overtrading. If anything, the emphasis is on apps and ubiquitous links to make it ever easier to place trades. I have yet to find newsletter writers who will pound the table and emphasize that there is little opportunity in the current market. That is not the message readers want to hear if they want to trade--and you always have to please the customer...
Here's a nice checklist that covers some of the signs of trauma that I've seen among traders. No, that trauma is rarely at the level that one would see in the full-blown post-traumatic responses of war veterans. Rather, it's more subtle, as in overreacting to small drawdowns after having taken large losses, finding one's mood rising and falling with P/L, and impaired risk-taking. Oversizing one's positions and portfolio creates drama and drama can lead to trauma. If your trading is truly planned, with maximum losses anticipated and wholly acceptable, there should be little drama in your trading. Yes, drawdowns will be disappointing and annoying, but they will not throw you emotionally. They will not impair your next round of trades.
If you have experienced a drawdown and are finding it emotionally difficult to come back, you know that your psychological risk-taking has been excessive. Ideally, you want to be learning from your losses, not reeling from them. Risk management keeps you in the game financially, but also psychologically.
As I mentioned in the last post, Naomi (above) came to us as a traumatized kitten. She could not tolerate being near people. I can only guess what had happened in her past. Now she is a sultry beauty who sits next to me on the kitchen island while I respond to mail and research markets. How did she make that transition? The next post will look at ways of overcoming traumatic responses--in markets, and in other areas of life.
This is the first picture we have of Naomi, our second youngest rescue cat. She had been traumatized at an early age and it took a great deal of work to bring her out of her shell. A future post will tell all about Naomi and what she taught me about bouncing back from adversity. After I wrote the post on doing well and doing good, I realized that I had come up with a pretty good litmus test for whether performance activities are worthwhile or not. The worthwhile ones make you better across many areas of life: they teach you life lessons and give you positive energy. Raising Naomi gave me sensitivity and patience. She pushed me to be a better human being, because that was the only way to pull her from hiding. The wrong performance activities--and especially the right ones pursued the wrong way--consume your energy. They bury the best within you. Trading can be an energizing, meaningful performance crucible, but pursued addictively it becomes a destroyer of capital and families. When Naomi looks at me now with love in her eyes, I feel a pride in being a part of bringing her out of her trauma. You want your trading to make you feel the same way: proud of the person it pushed you to become. Further Reading: Turning Frustration Into Pride
In response to the post on making peak performance a lifestyle, one reader asks insightful questions: does commitment come from belief in the possibility of change?
if
yes, then if you lack belief (due to years of trying and failing
without knowing what you were doing wrong and without knowing what you
need to do differently and how to do it) AND your years of experiencing
failure have made you think and feel like you are a loser who will never
win...
how do you dig yourself out of that bottomless pit?
if
you are in the unfortunate position of internally feeling like a
failure, how do you develop enough belief that you can improve yourself?
It is indeed difficult if not impossible to make changes if the belief in the possibility of change is not there. The key to the reader's dilemma is "years of trying and failing without knowing what you were doing wrong and without knowing what you need to do differently." In the post on finding your niche, I suggested that traders often experience failure because they place their capital at risk before they have truly identified their performance niche. Another post on performance niche makes a similar point: ...success is achieved when we find markets and styles of trading that take
maximum advantage of our skills and talents. That keeps us focused on
markets and absorbed in them, enabling us--over time--to internalize
their patterns.
Many, many times, traders do not live up to
their potential simply because they are trading markets and methods that
do not draw upon their strengths. Without that fit, they are not
absorbed in what they do; frustration replaces focus and learning
suffers.
What we know from performance research is that, when our inborn talents, acquired skills, and deep interests line up, we experience an accelerated learning curve. A learning curve that fails to take off is often useful information. The successful longer-term investor might very well be a failure at rapid intraday trading. Someone who has a deep knowledge and feel for commodity market trends and fundamentals would stumble attempting to trade chart patterns in stocks. When I was teaching at the medical school in Syracuse, I recall working with students who felt like absolute failures in their surgery clerkships, only to later shine when performing in family medicine or psychiatry. Trading, like medicine, consists of many specialties, many potential niches. The answer to my medical students was not to put years into struggling with surgery: that would have not have helped them or their patients! Rather, the answer was to explore other specialty fields and see where there was a fit. Being a failure at one type of activity is an invitation to try others. Different time frames, different market instruments--all can be practiced on sites such as Zolio. Once you're back on a learning curve, you'd be surprised how quickly enthusiasm can return. Further Reading: Deciding to Give Up Trading
Some would have it that there is little ethical good in trading, implicitly or explicitly accepting the premise that what is good is what we do for others. This creates a schism between doing well--earning profits in markets--and doing good. Not a few traders in my experience have been caught in that dichotomy, undermining both their trading and personal success. Wealth, Ayn Rand once observed, is the product of our capacity to think. There is no surer road to ruin in markets than to follow the herd. It is the independent mind, the capacity to see what others don't, that brings trading and investing success. As markets continually evolve, success requires that we evolve with them. Who among us has not known the once-successful trader who now cannot make money in changed markets? Trading requires not just the ability to make ourselves, but also the capacity to continually remake our viewing and our doing. Once we see trading--or any great performance field--as a crucible for self-development, then there is no schism between what makes us good and what makes us successful. My capacity to make decisions in fast market conditions has often come in handy in difficult family circumstances. Principles of risk management that inform my trading have also helped me hold winners and exit losers in career opportunities. Recognition that I cannot digest everything in markets daily has pushed me to find like-minded others and build mutually rewarding collegial relationships. I have learned to become a more patient parent and spouse by markets that required my patience. Any performance domain is a gymnasium that gives us the opportunity to exercise the best within us. The right workouts help us earn the status of the 1%--in our relationships and careers, as in our bank accounts. Further Reading: Objectivism and Trading
Traders have long used journals as performance tools. A trading journal is a great way to track your ideas about markets and also track your development as a trader. Finding the right format for a journal is important, as a journal for your market ideas might be quite different from a trading performance journal. The common goal of all journals, however, is to cement important observations and facilitate reflection and creative thought. When we take ideas out of our heads and commit them to screen or paper, we become thinker, writer, and reader. That enables us to process information more deeply and in multiple ways. I am a big fan of using Evernote as a platform for journaling. Evernote enables you to write journal entries online, store them in the cloud, and access them from just about any device. Because Evernote stores pictures, videos, web content, and even handwritten information, it is a great way of turning a journal into a multimedia learning tool. For example, you could cut and paste news articles about a market into a journal entry, annotate with your own comments and observations, and include relevant charts of that market. One of the most useful features of Evernote is that it allows you to tag content and acts as a searchable database. That allows you to pull out all entries on a particular stock or all posts that pertain to a given topic, such as overtrading. You can even use your phone as a scanner, take pictures of something from your trading screen, and save them to your Evernote journal. Want to share your journal for coaching and mentorship? Group journals enable multiple people to contribute to a single journal, or you can grant access to your journal to trusted colleagues. Used properly, a multimedia journal can be a great productivity tool and a powerful prod to creativity. Further Reading: Formatting a Trading Journal
Abnormal Returns recently highlighted an insightful quote that suggested that market discussions should be evidence-based when it came to the issue of predictability. My sojourns through quantitative approaches to markets have taught me that predictability is itself a market variable. Some market periods and some market time frames are more predictable than others. Such predictability waxes and wanes over time. The greatest statistical edge may be on a short time frame at one point; later, it will be over a longer horizon. The problem with many trading approaches is that they are like blind men in the elephant parable. They touch one part of the market elephant and assume it's the whole. In the ideal world, one would be a daytrader when the day timeframe held the greatest edge, a momentum trader when there was evidence of momentum persistence, an investor when there were unique opportunities over long holding periods, etc. Like the blind men, when we limit ourselves to single trading timeframes, assets, and holding period, we impose our assumptions and distortions and fail to see the whole. One can study predictability elegantly by constructing rigorous trading systems for particular assets, time frames, lookback periods, etc. (See Adaptrade for a particularly useful system-building tool). What you'll find is that sometimes it is impossible to construct a statistically significant model without running hundreds of tests with dozens of variables and thereby overfitting the data. (Check Marcos Lopez de Prado's work on backtesting to better understand the issue of overfitting). For other markets or time frames, one can identify robust systems that didn't require undue complexity in construction.
Treating predictability as a variable changes a lot of things: what you trade, when you trade, how you trade--and how you prepare for trading. If you think markets offer constant opportunity over all assets and occasions, you'll constantly trade. If you perceive that opportunity is distributed irregularly and asymmetrically, then the most important part of trading is identifying opportunities when predictability is on your side.
Past posts in this series have looked at stock market breadth, unique data visualization, volume information, and the NYSE TICK. In this next series post, we'll look at the Dow Jones Industrial Average equivalent of the NYSE TICK: the TICKI. TICKI represents the number of Dow 30 shares trading on upticks vs. those trading on downticks at each moment of the trading day. Its distribution is far noisier than NYSE TICK, as the Dow shares trade frequently and often as part of basket trades executed by institutions. Indeed, one of my favorite uses of TICKI is to examine the frequency of extreme values: +20 or above vs. -20 or below. For a great majority of Dow stocks to be upticking or downticking at the same time, there must be baskets of trades hitting the market on the buy or sell side. This is a nice way of tracking the sentiment of large market participants. If we see many significant positive readings, we know they are lifting offers and executing on the buy side; many significant negative readings suggests a hitting of bids and selling pressure.
Because TICKI is so noisy in its moment to moment readings, I keep a cumulative sum of the one-minute average high-low-close readings. That TICKI Sum measure is depicted above, relative to yesterday's S&P 500 Index (SPY). What you can see is a persistent bid to large cap shares through the session, even as the NYSE TICK was flattish to down on the session. Buy programs in the large caps were going off, but the buying was not across the broad stock universe. That was a nice tell for a mixed market. It was also why I didn't believe we'd sell off significantly during the day session.
There are many uses of NYSE TICK and Dow TICKI data. For instance, very short-term intraday traders can use pullbacks in these measures to help time the execution of buy and sell trades. In an uptrend, you want to buy pullbacks in TICK and TICKI--especially when you see pullbacks occurring at higher price levels. The reverse logic applies to downtrends. When you see very few significant high and low readings, you know that institutional players are not dominant in the market and we are much less likely to have a volatile, trend day. Among the high frequency data available to traders, I find the TICK and TICKI to be most useful in gauging market participation and sentiment. Somewhat related information is also found in the Market Delta measure, which I'll be writing about shortly. Further Reading: Dow TICK and Market Patterns
One important performance variable that isn't tracked often is the variability in a trader's risk-taking. Opportunities are not distributed perfectly evenly over time: some markets offer more opportunity, some less. As a result, the skilled trader will vary risk-taking as a function of the opportunity set: sometimes trading actively and in size, other times pulling back from trading. What traders refer to as "overtrading" is the result of an inability to regulate decision-making by opportunity set: taking risk when rewards are quite uncertain. "When are you mostly out of markets?" is a question I like to ask. The ability to not trade is itself a performance edge when it helps traders hang onto their gains during times of market uncertainty. This is yet another area where having a full and rich personal life becomes important to trading success. If all you have to sustain you psychologically is your trading, it is going to be difficult to not trade. If you have a full and rich life outside of trading, then it is much easier to take risk when rewards justify the effort--and put trading aside otherwise. It's great to have a passion for trading; better to have a passion for successful trading. And sometimes that means engaging in other passions and refraining from marginal trades. Further Reading: Addictive Trading
Here's a nice graphic I noticed on Matthew Porter's site, taken from Jeff Janssen's work with athletes. The idea is that change is a function of commitment--and very little change occurs without deep emotional buy-in. One of the most frustrating aspects of change efforts is the desire for change, but the lack of true buy-in and follow-through. (Consider New Year's resolutions as case in point). This is also a key challenge for managers in organizations: it's not too difficult to elicit compliance from employees, but it's rare to inspire commitment and the sense of compulsion.
Porter makes the excellent point that we can assess our level of commitment across the many aspects of our lives, from our physical and spiritual development to our relationships and productive work. Think of each of these aspects as a potential source of energy, self-affirmation, and growth. When we are committed, push our boundaries, and extend ourselves in each of these areas, we gain an awareness and inspiration that can feed the other areas of life. This is one more way in which positive life experience radiates across personal and performance domains.
The risk is not just lack of commitment, but also one-sided commitment. Imagine someone who goes to the gym religiously and only works out the upper portion of his body. He is deeply committed to having the most sculpted pecs, the largest biceps, etc.--all the while ignoring his weak back, flabby stomach, and spindly legs. He might portray himself as a deeply committed person, but his one-sided development makes him grotesque and unbalanced. Eventually, his poor development will even take a toll on his upper body workouts once his weak back gives out, his lack of aerobic fitness catches up to him, his social isolation leads to reduced mood and energy, etc. How many traders who loudly proclaim their passion for trading are like that guy in the gym? It's only a matter of time that their lack of personal, physical, social, and spiritual development handicaps and sabotages their performance efforts. So how committed are you across life domains? How much energy are you getting from your physical development? Your intimate relationships? Your professional relationships? Your spiritual life? Great things can happen when peak performance becomes a lifestyle and multiple facets of life reinforce and renew one another. Further Reading: The Essence of Elite Performance
My recent post emphasized the importance of being an adaptive trader. One of the most valuable tools in staying adaptive is learning from your losses. If markets were unchanging--if they only followed a single regime, a single set of rules--then losses would be the result of poor rule-following. Discipline is necessarily the greatest virtue in a static world. If, however, markets are not static and their underlying rules shift over time, then losses can take on a different meaning. We can trade in a fully planned and disciplined manner and still lose money. That is because the markets themselves have changed. When regimes shift, losses can become valuable information: they are telling us that what worked in trading before is no longer working. That is a wakeup call to revisit assumptions and develop a different trading approach. This is one reason why risk management is so important. We are not omniscient. There will always be times when we are imperfect in anticipating regime shifts in markets. That fallibility ensures that we will always have drawdowns. We cannot adapt and bounce back if those drawdowns take us out of the game. Good risk management means that we assume position size and portfolio risk at levels that we can tolerate should markets change their tunes. It is very difficult to use losses as information and adapt to changing markets if we are traumatized by drawdowns. Once we accept that the world is a dynamic, changing place, we become free to embrace drawdowns. They are there for a reason; they can teach us something. It's easy to lose the lessons in drawdowns if we respond to losses solely as threats. Further Reading: Risk Management and Trading Psychology
Above we can see the performance of the S&P GSCI commodity index over the past several years. It's an interesting chart and helps explain why commodities traders have not had an easy time of it recently. You can see that the volatility of prices--as well as the trend--have been crushed in a steady grind. Momentum and trend traders are likely to perform poorly in such an environment. From 2009 to early 2011, however, those traders probably did well, as volatility and trend had ramped higher. It's a great illustration of how markets--and even asset classes--can shift "regimes". They play by one set of direction and volatility rules in one environment and then follow a completely different set of rules in another. Any trader who conducted historical studies in the GSCI to anticipate future price patterns was at risk of extrapolating from a past to a greatly changed present and future. You could imagine that a trading system based on yesterday's regime could backtest wonderfully and then fail miserably once the market trades by a different set of rules. If good trading simply were a matter of planning and exercising discipline in following plans, many more people would succeed at it. Disciplined plan-following works well when regimes are relatively constant. Once markets start playing by a different set of rules, however, the challenge is to adapt--not just double down on rigidly following old strategies. Realized volatility in the stock market has percolated higher of late. Is this part of a regime shift or do the old market rules apply? Can we extrapolate from the past--say 2013--to anticipate market movement in the near future, or do we need to figure out the new market rules before making inferences? I spent a good chunk of my weekend reworking my regression models for stocks precisely because I detected the underlying rules were shifting.
What builds a career of trading success is the ability to recognize change and adapt to it. At some point there will be a volatility breakout in GSCI and commodities will become a very different performance game. It's the adaptive trader that will recognize the game shift early, avoid getting run over, and profit from emerging trends. It helps to have conviction in your trading, but longevity requires flexibility in conviction. Further Reading: Adapting to Shifts in Market Regimes
In coming days, I'll be posting on the topic of integrating quantitative approaches to trading with qualitative, discretionary approaches. I find that good things can happen when talented, experienced discretionary traders can further their edges with well-backtested market patterns. Historical research tells us what has happened in the past given a set of circumstances. The pattern recognition of the discretionary trader sheds light on whether such past patterns are indeed playing themselves out in the present. Shoutout to Larry Connors for finding The Whole Street, a useful compendium of quant-related blog material. The site also has a blogroll with many promising sources of quant insight.
A site I'll be playing with in the near future is Paststat, which tests a wide range of trading patterns. Are there other quant-oriented sites that you've found helpful in your research and trading? Please share via comments; thanks! Further Reading: Historical Patterns in Markets
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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