Trading Mentors and Coaches: A Resource Linkfest

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

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

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


TRADING MENTORS

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

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

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

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

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

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

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


TRADING COACHES

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

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

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

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


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

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

Hunter S. Thompson, Madness, and Trading

Yes, I was there for the infamous HST presentation at Duke University.  The backstory was that, after insulting his audience (he claims he hallucinated them as animated okra plants) , wrestling with his stage mike (he claims he hallucinated it as a snake), and tossing his bourbon onto the stage curtain, Mr. Thompson proceeded to meet with a smaller group of students on the university lawn and engage them in a completely sober and enlightening discussion.  Not all who rave are divinely inspired, but there was at least a touch of inspiration amidst the ravings that day.

Having an "edge" as a trader:  rarely has anything been so frequently discussed and so infrequently demonstrated.  We can demonstrate a trader's edge through a long-term, real-time track record of trading; we can demonstrate a strategy's edge through properly constructed backtests.  My preference is to trade a strategy that has displayed a historical edge and then let the track record display whether I have an edge in implementing it.  Like Hunter once said, it's fine to pray, but row away from the rocks.

Sometimes you don't really know where your edge lies until you go over it.  We like to think that trading what fits our personality will provide us with our edge, but that can be a socially acceptable way of justifying a failure to move outside our comfort zone.  Indeed, the whole reason psychologists get involved with traders is because trading one's natural predilections tends to mean trading one's perceptual and cognitive biases, acting out one's bad habits in markets, etc.

Getting on stage and imagining your audience consists of animated okra plants is considered crazy.  Sitting in front of a screen daily, trading away with no demonstrated edge, and justifying it all by "trading my personality" and "following my plan"...well, that's considered a career.  

Admittedly, going over your edge and seeing what lies on the other side is crazy.  It's a lack of discipline.  It's not trading your plan or being in your zone or beating one's breast with manly pronouncements of conviction.  And what if what lies over the edge is *not trading*?  Well, perish the thought: that would show a lack of passion for trading, and we all know how necessary that is for market success (and high commissions).

I once decided to play it brutally straight and, in a first meeting with a client, calmly explained that the strategy he was trading was based on randomness and a simple backtest would prove that.  That, I suggested--more than any psychological problem--was responsible for his trading woes.  Needless to say, the backtest was not requested and neither was my coaching.  Throwing bourbon on people's stage curtains is a great strategy for getting yourself ejected from the auditorium.

So what brought all this on?

Let's go out on the lawn and get back to basics.

The time series of any market consists of a linear component and one or more cyclical components.  When the linear component is near zero, we have a range-bound market.  When the linear component is very strong, we have a trending market.  When we have more than one significant cyclical component, we have a noisy, choppy market.

When we see a stable time series, what we're really seeing is consistency of linear and cyclical components.  When the world changes in material ways, those components change and we shift from one regime to another.  What makes trading so difficult is that the strategies that work well when linear components dominate are not those that work well when cyclical components dominate--and once a strategy works well, a shift of regime can undermine its efficacy.

Trends change their slope; cycles change their frequency and amplitude:  it's tough to trade your personality when the market is changing its own.  Trading fixed "setups" in changing markets is perhaps a setup in ways that are unintended.

In the current stock market, there is a strong positive linear component (uptrend) and a strong low-frequency cycle superimposed on it.  That regime has persisted for some time.  In such a regime, my "edge"--short-term trades of 1-3 days based on backtested predictors--has not been a particularly good edge when traded real time.  Why?  In essence, I'm trading a short-term cycle, when a short-term cycle is not dominant.  I'm trading my personality and my predilection, not what the market is giving me.  To borrow a phrase from a savvy trading friend, short-term strategies "get run over" when lower frequency cycles and strong trend components are highly dominant.

In other words, my dogma has been run over by my karma.

If I take what the market is giving me, I'd trade a helluva lot less often and align the trades with the most significant components of the present regime.  So, I've gone over my edge to see what's on the other side.  I'm trading the direction and time frame suggested by the components that account for the lion's share of market movement.  That means I'm not daytrading, I'm not swing trading, and I'm not watching screens nearly as much.  

I'm just making more money.

Further Reading:  Preparing to Win
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Trading Psychology Techniques 2: Testing Your Trading Ideas

In the first post in this series, we took a look at the do's and don'ts of keeping a trading journal.  This post tackles a very different skill essential to trading success:  testing your trading ideas.

You might be asking WTF?!.  How is testing trading ideas a trading psychology technique?

The sad truth is that a substantial portion of trading (and trading psychology) problems stems from trading sheer randomness.  Traders convince themselves they see a pattern in price action, earnings, macroeconomic data releases, indicators, etc. and they act upon that pattern without testing its validity in any fashion whatsoever.

I recently met with a trader who was frustrated over losing money.  The trader described a trade where one price bar made a lower high and lower low than the bar previous on increased volume.  He inferred that a decline was underway, waited for an uptick to enter, and then stopped out when his entry bar took out the highs of the previous two bars.  He complimented himself on his risk management (i.e., honoring his stop out level), but said he was frustrated because his "setup" didn't work.  He concluded that he needed to be more "patient" with his entry and wait for weakness within the current bar before entering his position.

My approach to helping the trader was a bit unorthodox.  I downloaded data for his symbol and created a database in Excel.  I coded with 1's versus 0's all instances in which the current bar made a lower high and lower low than the bar previous on increased volume.  I then assessed the forward returns (over the next 1-10 bars) for the "setup" group versus all other occasions.

There was no difference whatsoever.

The pattern being traded was not predictive.

So here we have a situation where the trader is diligently working on his trading psychology (keeping a journal, observing his losing trades, making plans for improvement), but his psychology is not the primary problem.  His  frustration and discouragement stem from the fact that the ideas he is trading lack a foundation in objective reality.  Imagine if a person played roulette at a casino and placed bets on numbers corresponding to the birth dates of family members.  That person then becomes frustrated and stressed because his system is not working!

(To take the analogy further, imagine a "gambling coach" who emphasizes to the roulette player that he needs to maintain a calm focus and stick with his system in a disciplined manner.)

How many traders trade sheer randomness, only to have mentors and coaches insist that there is an "edge" and that the key to success is faithfully following the system?

That is not just bad trading.  It is a clear waste of time, energy, and resources.  When someone trades randomness and can't obtain results, they *should* get upset!  What is delusional is continually getting one's hopes and confidence up and "working on trading" by tweaking utter randomness.

There is, however, a more subtle problem associated with the lack of testing for ideas.  The great majority of traders aren't really crazy, though I may occasionally question their sanity.  They realize that their ideas are untested, and they can't truly explain *why* the patterns they trade should produce an objective edge in the marketplace.  As a result, they never develop confidence in what they do, even when the ideas are seemingly working out.  It is the cognitive grasp of why trading signals are valid that leads to the development of true conviction.

There are two ways of testing trading ideas:  1)  backtesting over multiple independent data samples (to make sure any single backtest isn't spurious) and 2)  establishing an objective track record in simulated and real-time trading that demonstrates, over multiple time periods and market conditions, results significantly better than random.  Ideally, the first way of establishing the value of an edge leads to the second, so that backtests are validated in real time.  

The bottom line is trading ideas that you've worked with and tested provides an unparalleled--and reality-based--foundation for your trading psychology.  Testing also tells you what doesn't work--and that can lead to a deeper understanding of hidden edges.  Sadly, there are many traders who insist that they will succeed in their trading through sheer passion and willpower, when in fact they display all the signs of a trading addiction.  You would never purchase a car without giving it a test drive; your trading deserves nothing less.  It is not enough to rely on the promises and claims of peddlers offering the next best trading scheme.  Test before you invest your precious time and money.

Further Reading:

The Dangers of False Knowledge

TraderFeed Home Page and Index

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Cyclically Adaptive Trading (CAT)

The recent post highlighted the challenge of short-term trading returns over the past year and, indeed, since 2009.  In this post, I will sketch how I am addressing those challenges in my own trading.

When traders refer to the difficult trading environment, they often make reference to "choppy" or "noisy" markets.  Usually their next sentences lament the "algos" and their impact upon markets.  I find these to be expressions of frustration, not constructive formulations of trading challenges.  Invariably, those lamenting choppy markets dominated by algos that "manipulate" markets engage in their venting--and then go back to trading as they've always traded...and continue to lose money.  

A key to understanding the recent poor returns of short term traders is to appreciate that these traders don't merely lack an edge; they have a negative edge.  What they are doing, which largely falls into the category of trend/momentum trading, is systematically not working over time.  Waiting for high Sharpe trends to return to markets has not been a sound business model.  But perhaps we can trade in a way that benefits from anti-trending/mean reversion as well as momentum.

In coming months, I will be rolling out an approach that I refer to as Cyclically Adaptive Trading (CAT).  The core idea behind the strategy is that all markets contain linear, directional elements (trends) and cyclical elements.  On a given time frame, a "noisy" or "choppy" environment is simply one in which the cyclical aspects of market behavior dominate the linear ones.  Note that any market cycle itself has linear (rising and falling) components and range bound ones (topping and bottoming).  Very often, what is a trend on one time scale is a portion of a longer-term cycle.  The interaction of cycles over multiple time frames creates challenging irregularities, as markets switch between mean-reverting and trending phases.

The idea of CAT is that you trade the market's personality, not your own.  Instead of trading the time frame and style you happen to prefer, you trade the cycles setting up in markets.  Because there are multiple cycles at work at any one time and because the dynamics of the current cycles are influenced by the activity of prior cycles, we can identify dominant cycles in real time and adjust trading parameters to those.  This is the adaptive element in cyclically adaptive trading.  The reason so many traders are failing is that they lock themselves into preferred time frames and trading styles.  An adaptive approach is one that trades momentum/trend when we are in the rising and falling phases of cycles and one that trades in a value/mean-reverting manner when we are in the topping and bottoming phases.  We trade longer-term when longer-term cycles dominate and shorter-term when we see those "choppier" conditions.  Trading one time frame in one style systematically fails over time in markets possessing strong cyclical elements.

(A corollary is that, to the degree you identify yourself, say, as a directional trader or a short-term trader, you are probably losing money.  Someone who limits themselves to trading one facet of market cycles is like a baseball hitter who specializes in hitting fast balls.  If you get enough of those guys on a team, it doesn't take the opposition long to put breaking ball and off-speed pitchers on the mound.)

A second major idea behind CAT is that cycles are self organizing:  recent cycles impact the creation of new cycles which interact to generate other, different cycles.  There is no single periodicity to cycles that can be traded mechanically and, indeed, I have doubts that cycles even exist in chronological time.  Markets move in event units of price movement and volume: as participants enter and exit markets, they impact cycles in ways that impact future price behavior.  In other words, cycles are a function of the behavior of market participants, not a function of the passage of time on a clock. Our job as traders is to adapt to the market's clock and trade in market time, not our time.

The trading I am rolling out is based upon an advance I've made in tracking the self-organization of cycles over multiple event time horizons.

Some sources of insight into market cycles can be found in the early technical works of George Lindsay and Terry Laundry.  Important quantitative perspectives and tools have been offered by John Ehlers, who introduced the notion of adapting technical trading systems to dominant cycle periods.  Relevant TraderFeed posts appear below, and I will be posting more as I formally roll this out in my trading.

Further Reading:

The Dynamics of Market Cycles

Trading Market Cycles 

A Unique Measure of Market Cycles

Using Cycles to Trade Trends 

Reading Market Cycles

Trading Techniques

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Developing Your Uniqueness as a Trader

 

We commonly hear that a key to trading success is being disciplined and remaining grounded in a robust process.  That is true, but it is only part of the truth.  If we're disciplined in doing the same things as other people, we will simply be more consistent in achieving mediocre returns.  Having worked with many traders and trading firms over the years--and especially having participated in the recruitment of traders at those firms--I can say with confidence that distinctively successful traders view markets in distinctively unique ways.  They don't just have better answers; they ask better questions.  Unusually successful traders simply look at different things than average traders and look at markets in different and distinctive ways.

An important start toward cultivating our uniqueness is acquiring fresh data sets.  In trading the overall stock market, one data set that I have found to be promising is the percentage of stocks within each sector trading above various moving averages.  (Data from the excellent Barchart.com site).  So, for example, I track the percentage of stocks within the energy sector (XLE), consumer discretionary sector (XLY), consumer staples sector (XLP), health care sector (XLV), etc. that are above their respective 20-day moving averages.  This information tells us, not just if the overall market has been strong or weak, but which parts of markets have been particularly strong or weak.

Collecting new data enables us to ask new--and sometimes much better--questions.

So, for example, what have we seen going forward in the overall market (SPY) when consumer discretionary stocks greatly outperform or underperform consumer staples stocks?  Is there unique information in relative breadth strength and weakness?

Sure enough, when the percentage of consumer discretionary stocks above their moving averages has been much greater than the percentage of consumer staples stocks over the past three years, we see notably weak returns over the next five trading days in SPY, but particularly strong returns over the next 20 days.  Interestingly, this is a pattern we also see following unusually strong breadth thrust moves in the overall market:  a tendency to consolidate/pullback in the next few days, followed by upside momentum.  It makes sense that a relative breadth thrust among consumer discretionary stocks would display such momentum, as investors are counting on the kind of economic growth that sustains discretionary spending.

By contrast, when a large percentage of utility company stocks have been trading above their 20-day moving averages, the next 20-day returns in SPY have been negative, compared with solidly positive returns when few utility company stocks have been trading above their 20-day averages.  The flight to the safety of yields has not been a promising medium-term indicator of returns for the overall market.     

How about when traders aggressively move into small cap stocks?  When the number of stocks in the SP 600 small cap index trading above their 20-day moving averages has been quite high, next 5-10 day returns in SPY have been negative, before subsequently going significantly higher.  Once again, this is a pattern similar to that observed with general breadth thrusts.

And the current market?  We've seen solid breadth among the industrial stocks (XLI) with the great majority of shares trading above their 20-day moving averages.  Interestingly, over the past three years, that has led to short-term follow-through in SPY, but relatively weak returns over a next 20-day period.  And recent breadth strength among real estate stocks (XLRE)?  That, too, has been associated with relative weak SPY returns over a next 20-day horizon.  Those developments, on top of recent narrowing of outperformance by XLY over XLP has me cautious on the market.  Notice how the patterning of strength and weakness across sectors provides multiple perspectives on overall market performance as well as the performance of each sector.  When the weight of historical evidence lines up with what we're seeing in current price action, we have the makings of a promising trade.

This is but one example of how we can develop distinctive returns by studying distinctive market information.  I also collect databases of stocks making new highs and lows on a one- and three-month basis; stocks displaying buy and sell signals on various technical market indicators; etc.  All are ways of understanding when moves tend to reverse and when they tend to continue.  Trading success starts with looking at unique things, asking unique questions, and relying on objective data for answers.

Further Reading:

Trading With Breadth, Strength, and Momentum

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Focusing on Opportunity

 

10/13/2025 - TraderFeed will be on vacation while I ramp up my research platform and apply it to these markets.  I look forward to sharing insights and experiences.  

Friday's market was a dramatic reminder that relying on visual inspection of chart patterns and technical indicators for trading has its limitations.  Once important news comes out, market participation changes (volume, volatility) and the patterns that had shown up in previous trading can no longer be counted upon.  For example, previous oversold levels that could be counted upon for bounces now might simply lead to further downside.  

The key takeaway is that *who* is in the market defines the nature of trading opportunity.  When volume and volatility expand due to increased institutional participation, only historical analysis of similar periods can provide insight into trading opportunity.

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10/10/2025 - One thing I've been able to appreciate from my breadth-based research is that opportunity is not distributed evenly in the market.  There are periods in which backtests show little to no edge going forward, and there are periods when the backtests show a very distinct historical bias toward directional moves.  These periods of opportunity are generally ones in which multiple backtests of market behavior conducted over different time frames line up--and those then line up with current price action.  An example would be a market that shows a bullish edge from 3-5 days out and also for 20+ days out.  Intraday, there is selling that cannot push prices to a fresh low, so that we get short-term oversold readings at higher price lows.  

These opportunities are not common, but they are unusually promising and profitable.  Sizing all positions equally (i.e., taking the same risk in great opportunity markets and modest opportunity ones) is inefficient.  Invariably, when I come across a very successful trader, I find someone able to:  a) significantly size up researched high opportunity trades and b) effectively manage the downside risk of these trades.  A meaningful percentage of their weekly and monthly profits comes from a relatively small percentage of their trades.

The key to this success is the ability to *objectively* define the very high opportunity opportunities and patiently wait for these to appear.  Despite the large opportunity, the successful trader maintains the ability to manage risk effectively even when trading very large size.  This is the essence of trading like a sniper, with controlled aggression.

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10/8/2025 - Starting Monday, I will be taking a break from regular posting on TraderFeed to set up my breadth-based trading platform and begin trading the patterns I've been observing in my research.  What I can share is that what many traders don't look at--how money is flowing from certain sectors of the stock market to others--is associated with non-random returns over time periods most traders don't look at (20+ days out).  An edge is not something that is present or not present in the market, but something that evolves as flows shift from day to day.  Our job is to understand and follow that evolution.  A major problem in trading psychology is myopia:  we so focus on the present that we lose sight of the edges from days and weeks ago that are impacting how markets trade now.  Every trading day occurs within a context.  We lose vital information when we only look at the day and miss the larger context.

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10/7/2025 - I've been speaking with trading coach Agnieszka Wood and an active member of the Australian Technical Analysts Association about the idea of an enriched format for coaching traders that could provide greater opportunities for performance improvement.  In the medical world, it's common, when a patient enters a hospital, for multiple physicians to collaborate on their care.  Each physician has a distinct specialty and they combine their areas of expertise to create a well-rounded treatment plan.  Every patient benefits from this collaboration, and the physicians gain the opportunity to learn from one another.

Why not bring this model to the coaching of traders and create greater opportunities for change?  Traders would meet with multiple coaches in a group setting and would bring their questions and challenges to the team of coaches.  One coach, for example, might focus on how changes in the trader's psychology could help their trading.  Another coach might emphasize trading improvements that could help the trader's psychology.  Because the team coaching is conducted in a group session, it is affordable for traders and also allows traders to learn from the questions of others and the multiple responses of coaches.  It's a dynamic learning environment: active and interactive.

We create greater opportunity when we innovate--in trading and in all areas of life!

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10/6/2025 - I am getting a number of emails asking for help with trading discipline.  The traders feel that they can identify opportunity, but then violate their rules/stops/trading plans in the heat of action.  They recognize that opportunity is only opportunity if we can act upon it in a planned, disciplined manner.  They are asking for advice that will help them instill such self-control.

The key psychological principle here is that trading rules must be internalized as trading habits before we can pursue meaningful risk-taking.  In other words, we have to:  a) define the rules for our trading that reflect our best practices; b) turn those rules into checklists and step-by-step templates for action; and then c) repeat the application of these best practices again and again in practice/simulated trading and then in small-size trading until they are internalized as automatic habit patterns.

We do not gain discipline by exercising self-control; we achieve discipline by turning desired behaviors into habit patterns.  Then we can act upon opportunity consistently.

The mistake many developing traders are making is that they're trying to make money--and take meaningful risk--before they've truly internalized their best trading practices.  Until they build robust habit patterns around their best trading, they will be vulnerable when market events distract them.

Of course, the other reason for practice/simulated trading is to try things out, learn from our successes, figure out what we do best, and capture that information as best practices.  If we attempt to trade before we fully understand what goes into our successful trading, we will fall victim to impulsive decision-making.

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10/5/2025 - No amount of changing your bait, casting your fishing rod differently, and improving your mental outlook will help you catch fish if you're fishing in the wrong body of water.  Many traders experience frustration in their work, not because of any intrinsic emotional problems and not because they need to tweak their entries/exits, but because they are not focusing their trading on the areas of greatest opportunity.  If what you're trading isn't moving much, no switching of technical indicators, trading styles, or psychological exercises will help you make significant returns.

Consider the U.S. stock market this past month.  Look at returns in semiconductor stocks (SMH) over that period; then look at returns in consumer staples shares (XLP) over the same period; and then look at regional banking shares (KRE).  Participants in those markets were fishing in very different ponds.

A major source of movement in the stock market comes from rotation from one group of sectors to others, as institutions pursue investment themes.  Catching these rotations is a great way to find the best fishing ponds.  It's important to make sure we're playing the right games before we work on improving the game we're playing.  

How Large An Edge Do You Need to Succeed at Daytrading?

In past posts, I have tried to capture what separates market pros from the less successful traders. I've also stressed the importance of tracking the market pros in short-term trading. There are many factors that contribute to trading success. Some of those are psychological; others relate to skills and talents and how those match up with the markets we trade. This means that, to become a trading professional ourselves, we inevitably wind up working on both ourselves and on the markets we trade.

But how much of an edge does a professional trader need for success? Allow me to relate an incident from this past week that nicely illustrates an answer to this question.

Not infrequently, traders will write to me and share their trading ideas and methods. Over the years, I've learned quite a bit from these interactions; they've been personally rewarding and often helpful to my trading. This past week, a gentleman who had been following my morning market comments on the blog shared his trading methods with me, indicating that he thought they would aid my timing. My initial impression of his methods were that they were sound. While I cannot share the specifics of his approach, suffice it to say that it can be described as a short-term trend following methodology with unique ways of defining both entries and price targets.

He shared with me specific examples of his setups and I could see that his trading was highly structured. I mentioned to him that he might want to actually backtest his ideas and integrate them into a formal trading system. Toward that end, I referred him to someone I consider to be a wizard at developing and testing trading ideas: Henry Carstens. Mr. Carstens is a successful trader in his own right and has many years of experience testing out systems in different time frames and markets. He is also a professional of consummate integrity and would never rip off people's ideas or develop a curve-fit system and pawn it off as a viable trading strategy.

Literally within hours, Henry coded the trading ideas and tested them over the past five years of market data. The system was profitable every single year. Incredibly, close to 80% of the trades were profitable--and that was with no optimization whatsoever. But what was the edge? Henry reported that, after slippage and commission were properly factored in, the system had an edge of one tick.

That's it.

The trader who corresponded with me was a bit disappointed. That doesn't sound like much of an edge, he said. Henry and I begged to differ. Here's why.

An intraday trading strategy generates a fair amount of overhead in commissions and slippage. If you wind up buying the market's offer price and selling the bid, you lose a tick right there. At a retail commission of, say, five dollars per contract per round turn, you generate annual commissions of roughly $1250 per contract just trading once per day.

Let's say, for argument sake, that you have a $100,000 portfolio and that you'll trade 10 lots once per day in the ES futures. If you lose a tick per trade on execution/slippage, you'll be down ($12.50 * 10 contracts * 5 days per week * 50 weeks per year) = $31,250 per year. At the aforementioned commission rate, you'll be down $12,500 per year. So right off the bat, you're in the hole by over 40% of your initial portfolio value. And that is *before* we consider other trading overhead, such as expenses for computers, software, online connections, redundant systems, etc.

Given this reality, you can see why my definition of a competent trader is one who is consistently able to cover his or her costs. To cover one's trading overhead actually requires a high degree of profitability, and most traders can't do that.

[Please note how rarely the trading industry acknowledges this basic economic reality and ask yourself why.]

So when Henry said to our trader that his system averaged a tick of profit after slippage and commissions, he was saying that--without any tweaking whatsoever--your ideas are more than competent. Indeed, if we use the example of the $100,000 portfolio that trades 10 lots in the ES market, that system would return $31,250 per year, or about 30% annually. On a year in and year out basis, the world's best hedge fund managers would be proud of such a return on capital.

But now suppose that our trader decides to ramp up his trading and access the greater size and lower commissions afforded by a proprietary trading firm. With round-turn commissions per contract of well under half a dollar, it suddenly becomes feasible to trade hundreds of contracts per position. Even with the fees and 50/50 profit split that is common at many prop firms, our trader with a one tick edge trading 200 contracts per position will have a very respectable six-figure annual income.

And if you consider a manager at a hedge fund handling a portfolio worth $500 million, you can just imagine the returns that a single tick of net profit per transaction would bring. It's not the size of the edge, but the frequency with which the edge can be exploited--and the size with which it can be exploited--that makes the trader a living. Most of the pros that I've personally known and worked with *don't* have a huge edge in absolute terms. But they have an edge that they can exploit frequently and with size.

I hope this helps to explain why undercapitalization is probably the greatest barrier to success in trading. If, say, our trader begins with a portfolio of $20,000 and trades two lots rather than tens, that same sound trading methodology would yield profits of a little over $6000 a year. That's actually a very respectable performance in percentile terms, but it will hardly make anyone a living.

To hope to make a living from a $20,000 portfolio, the trader in our example either has to have a huge edge after all costs or has to trade with maximum leverage and frequency to exploit a smaller edge. That is simply asking too much of any trader. No one sustains that kind of edge with regularity year after year--not even the top portfolio managers--and no one ultimately can survive the lack of risk management that results from trading maximum size with maximum frequency.

When traders are undercapitalized, they have to swing for the fences, and that's generally what kills them. As with most businesses, you need a certain amount of capital to invest in your trading to make a living from it. Even our trader with a $100,000 portfolio is not going to sustain a family on the income from a very sound trading methodology.

So what kind of an edge do you need to succeed at daytrading? Like a gambling casino, you don't need a large edge. You just need to replicate that edge with enough money and enough frequency to add up. That requires sound trading ideas and a sound capacity for executing them. In my next post, I will outline several features of the trader's successful system that should be part of every trading pro's playbook, whether they trade mechanical systems or discretionary ideas.

My thanks to the trader who corresponded with me and to Henry Carstens for contributing to the ideas in these posts.

Blog Links and Market Views for Saturday

Trading Psychology Diagnosis: Identifying the Root of Trading Problems

Every trained physician knows that diagnosis precedes treatment.  We have to understand what is going wrong before we attempt any kind of solution.  Auto mechanics engage in the same process: they listen to the engine, look under the hood, and run tests before they identify problems and begin to fix them.  

Too often, traders attempt solutions for their trading problems before they've truly understood the sources of those problems.  Equally often, mentors and coaches of traders offer their solutions without actually going through a thorough diagnostic process.  In this post, I will model for you a way of thinking that can help you identify what might be going wrong with your trading.  This way of thinking is anchored by several important questions.

Question #1:  Is there actually a problem here?

This may seem like a strange question.  You've just drawn down; you've been frustrated in your trading.  Of course there's a problem!  The issue, however, is a bit more subtle.  Any successful trading is still a probabilistic enterprise.  Hit rates and Sharpe Ratios don't grow to the sky; people are fallible and markets embed a fair amount of uncertainty.  As a result, losing periods are inevitable and frustrations will be encountered.  Just as we expect baseball hitters to strike out every so often and football quarterbacks to throw incomplete passes on occasion, we can expect losing trades.  A trading approach with a 60% hit rate could be phenomenally profitable, but it will still encounter strings of losing trades with regularity.

What this means is that we begin the diagnosis by examining a meaningful sample of past trading, not just the last few days or trades.  A frequent day trader making many trades a day might look at the month's results and compare with results from the past year.  A longer term trader might need to assemble data over a year or more before confidently identifying a problem.  In other words, to identify a problem, it's necessary to see that recent results fall short of past ones and that recent drawdowns are not similar to past ones.  That requires a proper historical view.

When traders assume that a problem exists without a sufficient historical analysis, they run the risk of tinkering with methods that work and making those methods worse.  This is very true when traders begin to trade systems.  They become discouraged when the system has a (normal and expectable) drawdown, so they begin to change the system, front run the system, etc.--only to turn the setbacks into protracted slumps.

Sometimes traders are taking too much risk--trading position sizes too large for their actual loss tolerance--and those strings of expectable losing trades create a "risk of ruin" situation.  In such a case, the trader can look at hit rates and average win/loss statistics and determine whether the problem is in risk taking or if the actual performance of the trading methods has changed.

All of this is a strong argument for keeping detailed performance metrics on your trading.  Only by comparing recent performance to past performance can you understand if you truly are improving in your trading or having an actual problem.  If you're a beginning trader, then you would compare your recent returns to the returns you achieved in simulation mode.  (For more on trading metrics, see this post; also this post.  A detailed treatment of trading metrics can be found in Chapter 8 of The Daily Trading Coach). 

Question #2:  If there is a problem present, is it associated with a change in the market(s) you're trading?

My first hypothesis when I encounter a trading problem (my own or that of an experienced trader) is that the problem has occurred for a reason, and that reason is related to a change in how markets have been trading.  Because of those changes, the methods that had been working no longer command the same edge.  

A great example of this has been the recent decline of volatility in the stock market.  Many, many traders who made money from momentum and trend trading have suffered during this low volatility period because moves no longer extend and, indeed, tend to reverse.  That, in turn, leads to frustration and discouragement.

The key tell for when trading problems are related to changes in markets is that people trading similar strategies are also experiencing performance difficulties.  This is one reason it's important to have a broad network of trading colleagues, even if you trade independently.  If the great majority of traders trading similar styles are also experiencing drawdowns, you can safely assume that not everyone has turned into an emotional basket case at the same time.  

Performance indexes for various hedge fund and CTA strategies are available from industry sources and can help identify when certain approaches are winning and losing.  For example, the Barclay's short term trading index (STTI on Bloomberg) tracks the returns of professional money managers trading short term momentum and trends.  The performance of those managers over the past year or two has been dismal, again related to the collapsed volatility of markets in the wake of low interest rates around the globe.  

If your trading problems are widely shared and can be linked to shifts in how your markets have been trading, no psychological exercises in and of themselves will solve the problem.  Nor is it a solution to put one's head in the sand and hope that markets will "turn around".  Rather, the answer to the trading problems is to adapt to the new environment and search for fresh sources of edge that can complement one's traditional trading.  For example, one might find mean reversion or relative value strategies that nicely complement one's directional/trend/momentum trading.  The combination of trading approaches truly diversifies returns and produces a smoother P/L curve.  (See Trading Psychology 2.0 for a detailed presentation of adapting to changing markets).

Question #3:  If there is a personal problem present, is it--or has it been--present in non-trading parts of your life?

Here is a very, very important issue.  Many personal issues, such as anxiety, anger, depression, attention deficits, and impulsivity, show up in trading, but not exclusively within trading.  For example, a person might have trouble with patience and frustration in personal relationships, and those same problems crop up in his relationship with markets.  Similarly, a person might have self-esteem problems in life that then show up as negative thinking patterns during periods of market losses.  When the emotional patterns, thought patterns, and behavior patterns that interfere with trading are also occurring and interfering with other aspects of life, that is a strong indication that simply working on trading will not be sufficient.  It makes sense to seek professional help.

The great majority of psychological challenges can be dealt with via short-term approaches to counseling and therapy.  Research suggests that problems such as relationship difficulties, depression, anxiety, and anger can benefit significantly from cognitive, behavioral, psychodynamic, interpersonal, and solution-focused approaches. (A thorough review of research and practice in this area can be found in the textbook that I have co-edited.  A new edition will be coming out late this year).  The key to brief approaches to therapy is that they are highly targeted and make active use of exercises and experiences during and between sessions.  

In situations in which the psychological problems have been longstanding, when there has been a family history of similar problems, when those problems have been severe (significantly impairing important areas of life), and when those problems have been complex (impacting many areas of life, as in drug or alcohol abuse), longer-term approaches to helping are generally indicated.  Attempting short-term approaches to help for more significant problems runs the risk of relapse.  When problems have been longer standing, severe, and complex, it often is the case that more than one form of help is required, such as medication help in addition to therapy or group sessions (as in A.A.) in addition to counseling.  In such instances, it is very helpful to have a thorough assessment from a qualified mental health professional.  If there is meaningful depression and/or anxiety, a workup from an experienced psychiatrist is helpful, as safe and non-habit forming medications often can play an important role in addressing the problems.

Depression, anxiety, attention deficits, addictions, bipolar disorder, relationship problems--these impact a high percentage of people in the general population.  Traders are not exempt from these general problems.  Assuming that an emotional issue impacting trading is necessarily a trading issue may prevent you from getting the right kind of help.  No amount of writing in a trading journal will rebalance neurotransmitters in your brain or solve the conflicts you bring to your marriage.  When you see the problems affecting your trading also affecting other areas of your life, it's a strong indication that a more general approach to change will be needed.

Question #4:  If the problem you're facing occurs uniquely in trading settings, do you need psychological coaching or do you need further mentoring of your trading?

Here again is an important distinction.  Especially for newer traders, frustrations and other emotional problems arise in trading simply because they are still young on their learning curves.  What they need is not simply emotional coaching, but guidance from experienced mentors who can help them correct trading errors and more consistently apply trading skills.  Even experienced traders can encounter drawdowns and frustrations because they are making trading mistakes that a mentor can pick up.  I recently worked with a trader who was very discouraged because of a drawdown that occurred simply because he was not closely monitoring correlations among his positions.  What he thought were several independent trades turned out to be versions of the same trade once the central bank indicated a possible policy shift.  He lost money because he was too concentrated in that one, converged trade.

This is yet another reason why it's very helpful to be connected to networks of peer traders.  Many times such relationships offer mutual mentoring that can address situational problems and mistakes in trading. 

When drawdowns and disruptions of trading are more psychological and situational, several psychological approaches can be helpful, including behavioral methods (exposure therapy) for anxiety and performance pressure; cognitive restructuring techniques for perfectionism, overconfidence, and negative thought patterns; and solution-focused approaches to identify and expand one's own best practices.  (Specific applications of these methods can be found in The Daily Trading Coach; the creation of best practices is a major topic within Trading Psychology 2.0; an overview of cognitive and behavioral techniques for improving trading performance can be found in Enhancing Trader Performance).

Behavioral techniques are skills-building methods that you practice in real time, during problem situations.  You literally are teaching yourself new skills and new habit patterns.  For example, a very simple behavioral technique would be to take a break during trading whenever you feel anxious, frustrated, bored, or discouraged.  You quickly recognize that you're not in the right mindset for trading and you take a break from the screens.  During that break, you might engage in other skills-building activities, such as relaxation training to slow oneself down and reduce tension.  Behavioral methods are typically practiced outside of trading hours so that the skills become automatic in real time, when problems crop up.  

Cognitive restructuring methods are techniques that you use to identify and challenge patterns of negative thinking that can distort your emotions and interfere with sound decision making.  Many traders, for example, become highly self-critical when they miss a trade or when they take a loss.  This can interfere with their focus on the next opportunities.  In cognitive restructuring, keeping a journal helps the trader become more aware of his or her thinking and challenge that thinking when it's harsh and negative--or when it's overconfident!  

Solution focused techniques are ones that examine what you are doing during your best trading, both in terms of trading practices/processes and psychological self-management.  The goal of solution focused work is to "do more of what works" and become more consistent so that best practices can turn into repeatable best processes.  Trading Psychology 2.0 contains 57 best practices contributed by myself and other traders; the chapter on Building Strengths also embraces a solution-focused approach to identifying what you do best and building your trading around it.

The bottom line is that how you work on your trading should reflect the diagnosis you make of your trading challenges.  Sometimes we encounter challenges because of tricky markets; sometimes because of our psychology; and sometimes those challenges are just a normal part of risk and uncertainty in markets.  In this post, there are quite a few ideas tossed out.  For more information on those, you can simply Google the relevant topic by entering "Traderfeed" and the topic of interest.  Thus, enter into the search engine "Traderfeed solution focused" and you'll see quite a few posts relevant to that topic.  If you want even more depth and detail, the above book references will be useful.

In an upcoming series of posts, I will identify 20 top challenges that traders face and highlight specific approaches to work on each of those.  Yet another series will look more into detail into evidence-based techniques that help traders and when to use those.  All of this is part of a grander plan to eventually link all the posts into a free, user-friendly, comprehensive online encyclopedia of trading psychology.  

Thanks, as always, for your interest and support--

Brett

An Introduction to Trading

Dear Readers,

A little over 30 years ago, I placed my first trade in the financial markets. With only a little over $2500 in my account--my fellowship stipend as a graduate student in psychology covered my basic living expenses--I traded 100 shares of stock in an effort to learn the ropes. Back then, I taught myself to read financial statements and to select companies with good earnings. (Value Line was a favorite resource). I taught myself some rudimentary technical analysis and began following the work of Joseph Granville in an effort to learn market timing. Many of my basic ideas about trading can be traced back to those early days of learning the ropes.

So now here I am three decades later, finishing my third book on trading and working with trading firms on three continents. I've written over 1700 posts for this blog alone and blasted over 3300 Twitter messages. It's been a fun ride, tracking the psychology of traders and the psychology of markets. But now it's time for other challenges. I'm developing and testing a trading system, with plans of going live within the month. If that works out, I'll be developing related systems, with the aim of trading a basket of ETFs across different asset classes--a kind of personal hedge fund. I look forward to sharing those findings online.

As I develop these systems, I've had to think and rethink my ideas on trading and markets. It's always healthy to examine assumptions and clarify your logic. There are so many more resources available to traders and investors today than 30 years ago: more books, more seminars, and--of course--the online medium. Despite the flood of material, however, I'm not sure that the guides for beginning traders are any better now than they were when I was a graduate student. And many of the decent guides out there are well beyond affordability for someone who is in the situation that I faced during my earliest phase of learning.

So I'll be starting a new series of posts on this blog and aggregating them on my trading coach site. The posts will be on the simple topic of "An Introduction to Trading". My goal will be to explain, as best I can, my approach to markets and my understanding of them. Over time, these posts will accumulate and become a free electronic book that explains trading for new and developing traders. There will be no hype, no promises of get-rich-quick, no pretenses to guru status, and no sales of coaching or seminar services. I'll just share what I've learned over 30 years. Readers will be free to comment and add to the posts and link other resources, so that the book can be a truly collaborative effort. Over time, I'll illustrate principles from the book with examples from the current markets.

As a graduate student, I would have loved to have read a primer on trading that explained and illustrated basic concepts, emphasizing patterns and principles of supply and demand. Thirty years later, I'm getting around to writing the text as a wholly online, Web 2.0 production. I look forward to this new challenge. Thanks as always for your interest and support--

Brett

Two Key Questions to Ask When Emotions Affect Trading

Traders most often contact me when they feel that emotional factors are interfering with their trading performance. Their hope is that resolving these problems will help their bottom lines. But how can they begin to achieve such resolution? A good start is to address two key questions:

1) Do the problems that affect your trading also impact other areas of your life? - Let's say that you find yourself overtrading and taking too much risk relative to your planned exposure. You realize that these lapses of discipline are costing you money and creating significant frustration. The key question to ask is whether these lapses also occur in other spheres of life: in managing personal finances, in failing to follow through on personal responsibilities, or in impulsive decision-making regarding career, relationships, and the future. If so, then you know that this is a general problem that is spilling over into trading. Working with a psychologist or other licensed therapist or counselor could be the best way to go, as this is not uniquely a trading problem. Alternatively, if the problem truly is unique to trading, then it is probably triggered by situational factors related to how you are trading. Relying on a trading coach to review your trading practices and address these factors can be promising.

2) Do the problems primarily result from poor trading, or are the problems a primary cause of poor trading? - This can be tricky to sort out, because the direction of causality often goes both ways. Many times, poor trading practices--such as trading excessive risk--lead to emotional fallout, such as frustration, anxiety, or even depression. Working on changing emotions might be helpful, but the root cause--the faulty money management--needs to be addressed. Conversely, there are times when emotional problems, such as performance anxiety, get in the way of trading plans and trading results. It is very helpful to examine trading problems in a step-by-step fashion, to see where emotions are affecting trading and to see where trading is creating emotional pressures.

The most difficult emotional interference in trading occurs when longstanding emotional patterns and conflicts spill over into handling the risk and uncertainty of trading. A rebellious teen with unresolved control issues with parents can easily grow up into a trader who rebels against rules and plans, undercutting his own trading. A person who has been traumatized by losses of loved ones may find it difficult to handle financial losses. Someone who never learned to regulate anger and frustration as a child may now find these emotions derailing sound decision making in markets. When the past is intruding into the present, affecting emotional well being and trading performance, sound psychological assistance--even the short-term methods of brief therapies--can be very helpful.

When, however, skills haven't been learned and a trader lacks a true edge, then trading may be causing emotional frustration and anxiety. Many traders try to front run their learning curves, putting capital to work before they're ready, creating stress and distress in the process. Psychology is vital to good trading, but you need to trade well to sustain a sound psyche.

RELATED POSTS:

Therapy for the Mentally Well

Programming Your Own Experience

Trading Discipline Linkfest

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Best Practices in Trading Psychology: Consistency, Innovation, and Balance

 

Traders I've observed over the years who have achieved consistent success display three important qualities:

1)  They trade with repeatable processes, so that their trades are planned and not reactive.  They have clear, structured ways of generating ideas, and they have clear structured ways of finding optimal expressions of their ideas; sizing positions based on those expressions; and managing the risk of those trades.  What we do repeatedly becomes relatively automatic:  it becomes part of us.  A great way to minimize emotional, reactive trading is to follow trading practices that are well-defined.  If we can capture what we do as a set of rules, we have the makings of a checklist that can guide our decision-making in the heat of the moment.  A huge part of developing as a trader is finding coaches/mentors who can guide you in the discovery of the trading processes best suited for you.  What are your personality strengths?  Your cognitive strengths?  Those will help determine how you generate ideas and manage the trades based on those.  Ideally, the rules and practices that comprise your planned trading are derived from your trading successes, not simply borrowed from others.  

2)  They are always finding new ways to win.  Consider a basketball team.  They practice a range of offensive plays and defensive alignments.  They might run the ball against one opponent; they might move from a zone defense to man-to-man for another.  A big part of coaching is helping a team adapt what they do best to exploit the opponent's vulnerabilities.  Similarly, markets are ever-changing and the drivers of market behavior shift over time.  The best traders evolve.  The goal is not simply to find a trade an "edge", but to exploit ever-changing edges in dynamic markets.  The best traders will explore and research, just like any successful company that conducts R&D to meet the needs of a changing marketplace.  Successful traders will push the comfort zone and look for advantages over time frames, markets, and strategies that are unfamiliar.  If we're not challenging and scaring ourselves periodically, we're not growing.  

3)  They achieve a balance between work and life.  Over the years, I've seen many successful traders burn out.  Their burnout is not necessarily limited to their trading; they sometimes blow up in their relationships or in their physical health.  It's romantic to think about work as our passion and being involved day and night in our quest for success, but that is not what makes for a sustained, successful career.  The goal is to find a lifestyle that sustains energy and passion over time.  That lifestyle typically includes activities for physical well-being and the emotional well-being of relationships.  It is not clear to me that we can sustain our love for markets and trading if we cannot sustain love in our lives.  It is not clear that we can sustain our energy and passion for trading if we cannot sustain physical energy in our lives.  An Olympic athlete knows the importance of staying in peak conditioning as part of training and preparing for success.  Each of us needs to find the peak conditioning in our lives that can sustain our best efforts in markets.

Approaching our trading in the right way is the best way to cultivate a positive trading psychology.  It's not that you'll magically trade better if you're in a better frame of mind.  Rather, you'll be in your optimal mindset when you approach trading the right way.  

Develop routines based on your strengths.  Push the boundaries in finding fresh opportunity.  Live a full life that maximizes your energy and mindset.  Identify what you do that is truly great and build upon that.  You are not meant for a life of mediocrity.  Have the vision to dream and the practical sense to pursue that dream, step by step.

Further Reading:

Greatness in Life and Trading

What is Your Path to Greatness?

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