Trading With Patience

You've no doubt noticed that many markets have slowed down with the summer trade, creating narrow daily ranges and little follow-through on directional moves.  The word I most often encounter in trading journals is "patience".  In slower markets, there may only be occasional opportunities worth pursuing.  That means that a good, disciplined trader is often not trading.

What happens during these patient periods--the times of *not* trading--plays a huge role in trading success and failure.  The successful traders I work with use the down time to work on generating new ideas,building new analytical tools, and reviewing their performance.  The less successful traders cannot abide patience and turn trading into overtrading.  They have to have something to do and so they trade, even when an edge is not apparent.

The best traders turn the patient periods into alternative forms of stimulation.

The worst traders experience patience as boredom and find something to trade.

With the VIX below 11 and my "true volatility" measure (movement per unit of volume) at multi-month lows, I'm finding a lot of movement within ranges and then false breakouts from those ranges.  This makes trading very difficult for a momentum style.  A value-based style--buying short-term oversold and selling overbought conditions that break out of a range--has worked much better--especially when directional moves of the index are not accompanied by similar moves across major sectors.  Buying strength and selling weakness on average fail in the slower environment.

In a future post, I'll be reviewing Larry Connors' forthcoming book Buy the Fear, Sell the Greed.  It's an unusually practical trading book, with each chapter describing a specific source of edge and a backtested way of implementing that edge.  One of his tools is a short-term variation of the RSI measure originally developed by Wells Wilder.  During slow market times, I've been experimenting with the measure to exploit the behavioral biases Larry discusses in the book.  Such research is a great way to turn patient times into productive ones.  

Years ago I did an experiment where I showed people a chart and asked them to predict where the market would go from there.  The charts were identical, but half of the subjects saw a chart with a nice green up bar as the most recent bar and the other half of subjects saw the last bar as a good red, down bar.  Not surprisingly, those seeing the most recent green bar expected the market to rise and vice versa.

It's a great example of recency bias.  We overweight recent experience.  In slow, low volatility markets, there is a worthwhile edge in fading that bias.  That's a great lesson I learned during my patient period of not trading:  markets don't have to trend to provide opportunity.

Further Reading:

When Your Passion Becomes Your Poison

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Are Discipline and Patience the Cure for Overtrading?

A while back, a post explained why quiet markets reveal the best traders.  Quiet markets require patience, as they offer less directional opportunity.  For competitive traders eager to make money, that can be bitter.  Recall the group of 11 studies that documented how people have difficulty spending just 6-15 minutes by themselves with nothing to do.  Given a choice between doing something that caused pain to themselves and doing nothing, many of the subjects in the studies elected the painful activity.  It seems as though some action is psychologically preferable to none for many people.

It's not surprising then that quiet markets invite overtrading.  Sitting, staring at screens, and following markets tick by tick without actively trading is exceedingly difficult for many people.  The more successful traders step back from screens and engage in other aspects of trading process:  research and idea generation, performance review, etc.  The less successful traders convince themselves that they see directional patterns setting up in the tick by tick action and, in common parlance, "get chopped up."

What is equally difficult for many traders is the patience required to let trades work out.  This is what traders commonly call "the pain of gain":  restraining oneself from taking profits too early in trades that have not yet reached their targets.  To sit still while market gyrate invites the fear of missing opportunity.  To not act while trades are working invites the fear of reversal.  Both forms of non-action place traders in the situation faced by the subjects in the above studies.  

Many so-called problems of discipline in trading boil down to the lack of ability to tolerate inaction.  Traders do the wrong thing because they feel the need to do some thing--and they act that need out in markets.  

I do know quite a few traders who do not have this problem.  They are only too happy to step back from markets and allow ideas to work out.  Almost to a person, these traders are immersed in idea generation and the search for opportunity.  They are happy to step back from markets because they are stepping toward something they enjoy more than risk-taking:  the creative process of discovery.  

If what excites you about trading is risk/reward and making money, it's not surprising that quiet markets will be noxious ones.  If what excites you about trading is the puzzle-solving of uncovering opportunity, quiet markets become opportunities to do what you love best.

As long as there are things in life that call you more strongly than trading profits, no discipline and patience are needed to avoid overtrading.  If you're looking to get rich from markets, it helps to have a wealth of interests outside of them.

Further Reading:  How Do I Avoid Overtrading?
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Trading With Patience: Using Trading Metrics to Aid Trading Psychology

One of the themes from the trader performance book that is also a major focus of the new book on learning to coach yourself is the importance of keeping statistics on your trading. Recall that a cornerstone of the solution-focused approach is that working on weaknesses will at best take deficient performance and turn it to average. That can be helpful, but in itself will not make you a stellar performer. To get to that proverbial next level, you need to build on your strengths and become more consistent in drawing upon them.

But how can you build on strengths if you're not fully aware of what they are, and if you're not targeting them with positive goals that you work on daily? Keeping score of your trading helps you better understand what you do when you're at your best. It also helps you track your progress in living up to your performance ideals.

The notion of psychometrics is that trading statistics reveal trading psychology. How you trade is a reflection of how you think and feel. There is no better way of getting into your head than by getting into your trading account and examining what you're doing, what is working for you, and what isn't.

A great example of this occurred in my recent trading. I sliced and diced my recent P/L trade by trade and found one factor that reliably predicted my daily profitability: the time of entry of my first trade. If I traded very early in the morning session for my first trade, I was more likely to be unprofitable on the day than if my first trade occurred later. Indeed, by reviewing my results, I was able to determine that entries within the first ten minutes of trading drastically reduced my daily P/L performance.

Here is where psychometrics reveal psychology. The very early entries reflected a lack of patience on my part. I became wedded to a particular market scenario, and I was afraid of missing out on that move. Instead of waiting for market action to confirm my scenario, I tried to front-run the trend. As a psychologist, I know full well that in any dance with the market, you want the market to lead. My job is to follow market direction; not gratify my ego by predicting market action. But once my ego became attached to the anticipated move, all my fancy education and training went out the window.

So how do psychometrics help? Once I realized that my very early trading was hurting me, I created a hard and fast rule that I could not enter the market within the first 10-15 minutes of trading. I also created a psychological exercise for myself in which I could simply calm myself before the market open and visualize myself trading with extreme patience. During those exercises, I reminded myself that my opportunity was not limited to the opening moments of the day; that I was operating in an environment of plenty, not scarcity.

As a result, my batting average of winning to losing trades has improved and my equity curve, which took a dip, returned to a nice, positive slope. Equally important, I'm trading more in control, more at peace with myself. But it took a hard look at the metrics to bang sense into my head. I'm 54 years old, been trading since the late 1970s, have an advanced degree in psychology, and I'm still working on myself and working on my trading.

But that's what I love about the business: I'm working on myself by working on my trading.

RELEVANT POST:

Ten Posts for Self-Coaching

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Friday, January 19th: Morning Comments

9:58 AM CT - OK; it's off to work as Trader Shrink. The AM illustrated a few important things. First is the importance of flexibility. The odds of taking out yesterday's lows in ES were quite high, and that was my initial leaning. When selling dried up early in the AM with only a modestly negative TICK and not many stocks declining relative to advancers, I entertained the reverse hypothesis: that we were not getting selling and that leaning to the long side was the way to go. The second principle illustrated is the importance of patience. It was a choppy morning session, and it was easy to get scared out of a good position. But as long as the overall dynamics of supply and demand were not shifting, patience was indicated. Finally, you can see how a drying up of selling (today relative to yesterday) often precedes an influx of buying. That's a pattern that sets up intraday as well as on a swing basis. Hope that's helpful; as I write, keep an eye on NQ--showing a bit of short-term relative weakness. Have a great weekend; update tonight on the Weblog.

9:44 AM CT - Finally! We couldn't muster selling and once again the semis (and DAX) led the way before we got a price breakout in NQ and ES. Notice how in this kind of market, you either have to be very short term oriented and take profits quickly or very patient and let a larger move unfold. As long as the dips in the TICK couldn't bring us to new price lows, staying with the long side leaning made sense. But it took real patience, given the chop. Back for a wrap up shortly.

9:31 AM CT - We continue to see very modest selling and recent strength in semis. I continue to lean to the long side as long as we don't see lower TICK lows. DAX has been a good leader this AM.

9:23 AM CT - Well, I've scratched two trades this AM, both on good ideas, but just no follow through on the market moves. We're oscillating around that 1435 area VWAP; advancers lead declines by only 100 or so issues--no real conviction, and that's not my best trading environment. In such a market, you want to identify the day's average trading price as early as possible and fade moves away from that region as buying/selling dry up. I find that you have to exit such positions quickly when profitable; it's very easy for your several ticks of profit to reverse--which is what happened on both my scratched trades. Still no real signs of selling conviction in the TICK, but buying is not sustained either, keeping us in the range.

9:06 AM CT - Lots of cross currents with the sentiment numbers; dollar strength interest rates up. Pullback after the rise, but I'm looking to see if we get lower TICK lows. If not, I'm leaning toward buying. Sellers have not shown conviction thus far.

8:50 AM CT - So far, lack of downside and upside conviction and volume tailing off, leading me to suspect rangebound day. Still anticipating test of lows unless I see evidence of meaningful buying.

8:41 AM CT - DAX strong, but I want to see ER2 buying before I'll commit long. If ER2 stays below its preopen range, I'm selling for test of lows.

8:24 AM CT - Forgot to mention; DAX has been strengthening through much of pre-opening trade and that's led to a bit of a bid now in the US indices. Something I'm watching.

8:19 AM CT - Not a big news day; Michigan sentiment numbers at 9 AM CT and that's it. We have options expiration today, so some chop and rangebound trade would not be unusual. We're trading at the lower end of yesterday's distribution, so I would not be surprised to take out yesterday's lows, especially if we continue to see underperformance from ER2 and NQ. My full market wrapup, strategy, and pivots for today are on the Weblog; I'd expect a test of the 1429 S1 level on ES if we start out with below average NYSE TICK readings. Overnight resistance is 1434; Thursday VWAP is 1435; inability to sustain selling in the AM should bring us to those levels, which would be consistent with rangebound trade. I'll be keeping an eye on early volume to handicap the odds of such rangebound action. The 1431 region is also overnight support. If you get some free time, check out the post on trader personality; some interesting findings from a recent pilot research study. Back after the open.

Market Psychology AM Update for 9/21/06

11:57 AM CT - You can see from movements in interest rates (down sharply) and the dollar (weaker vs Euro) that this economic news (weak Philly Fed) was not priced into the market. Those situations are the ones most likely to lead to stock market revaluations, and we're seeing that in the break below the AM (and yesterday PM) lows, with a distinct shift toward selling (negative TICK, dominance of volume at bid vs offer in ES). The 1322 lows represent important support; next support at 1328/9. Have a great remainder of the day.

10:04 AM CT - Well, so far it's a range bound market, oscillating between the overnight highs and yesterday PM lows, with a rough midpoint around yesterday's average price. So that leads me to look at the possibility of fading moves above and below the average that test edges of the range--as long as volume stays muted. The positive shift in TICK distribution continues, though NQ is a bit muted. I'll update again if any major developments; otherwise, my other life as a trading shrink beckons. Have a great AM. Update tonite on the Weblog.

9:50 AM CT - Sure enough; buy programs hit the Street at 9:45 and 9:46 AM. Notice the drying up of the negative TICK on pullbacks prior to that move. We've moved back to yesterday's average price and will see if we can once again test the highs.

9:42 AM CT - For the most part, we're seeing relatively small bid and offer sizes near the market in the book. In the past when this has happened, it's because locals sense the presence of larger institutions in the market and don't want their orders swiped. Could be a temporary phenomenon, but something I watch...

9:34 AM CT - Trying to put in a bottom here, following some buying interest at yesterday PM lows. Patience pays off...not always in profits, but often in keeping you out of bad trades. Chasing those lows wouldn't have worked out well thus far...

9:20 AM CT - I'm playing it very close to the vest here and seeing if we can bottom out (see selling dry up) in this 1332.50 region. I'm also looking carefully at ER2 and NQ to see if they break down below yesterday afternoon lows. Often those more volatile indices will lead the way on valid breakouts. Patience, patience.... :-)

9:17 AM CT - Financial and energy sectors look stronger within the S&P 500 than the other main sectors. Interest rates are down again. We've had relatively little positive TICK sustained, and volume at bid in ES continues to dominate. Testing afternoon lows from yesterday. Need to see volume at bid expand to sustain breakdown.

9:07 AM CT - We're retracing a fair amount of the afternoon gains following the Fed selling yesterday, especially in ER2. Volume has picked up, though not dramatically so, and volume at bid exceeds that at offer pretty handily in ES. TICK has deteriorated thru the AM so far. 1332.50 represents pretty important support; how we trade vis a vis that point and the TICK distribution during that time will determine whether we go back to retest previous days' lows or whether we stay rangebound for the day.

8:52 AM CT - Nice example of a typical trade I make: wait for the bulls to take their turn, buying to dry up, notice the lack of volume, and play for a reversion to the mean. Not all pan out, to be sure, but the basic trade idea is grounded in how the market is trading.

8:49 AM CT - Volume continues light, and so far we're not breaking above overnight highs. That's leaning me toward tests of that average price and ideas re: a range bound market today. Part of the light volume may be due to waiting for the 9am economic report, of course. So let's see how that shapes up.

8:40 AM CT - Volume on the low side, but skewed so far toward buyers, with a positive TICK and more ES volume at offer than bid. To sustain a break above the overnight highs, we need to see more participation. Failure to take out 1340 targets that average price from yesterday.

8:20 AM CT - We've been bumping up against yesterday's highs in the pre-opening. No great reaction to the Initial Claims numbers; 9 AM will be LEI and 11 AM CT will be Philly Fed. ER2 is most off its highs; NQ a tad stronger. Overnight support is 1335; afternoon support is 1332.50; 1340 is the overnight high. Normal expectations would be to test that high in AM trading; if volume is lackluster, expectations are to test the previous day's average price of 1336.25. We've absorbed selling quite well over the past several days, and that leads me to think we have yet to see the highs of this bull move. Still, it's hard for me to pound the bull table when we've made a 20-day price high on only moderate momentum and new high stats (see Weblog). Expectations over the next five days when we have 20-day highs and modest momentum/new highs are subnormal--no bullish edge since 2004. So my leaning is to let the market show its hand and be prepared to bargain hunt if selling kicks in and we get one of those transition patterns mentioned recently. Back after the open.

How to Break Our Worst Trading Habits

Surveying the traders at SMB, Bella recently reported that the number one problem they had during the past year was forcing trades.  That is, they failed to wait for trades to properly set up and instead tried to front-run the patterns they were trading.  Bella then offered three ideas for traders looking to improve their patience and reduce their forcing of trades.  Those ideas include journaling, studying your "Playbook" of best trades, and taking breaks to speak with other traders.  Note how all of these strategies involve getting one's nose out of the screen, stepping back, and gaining perspective.

What the traders are working on is self-control.  Generally, here's what happens when traders force trades:

1)  A situation occurs that the trader personalizes in some manner.  The market moves and the trader blames himself/herself for missing the move.  Or the trader is stopped out and is concerned about taking a loss.  The situation gets the trader P/L focused and self-focused and no longer market focused.  This is very important.  Psychological problems in trading typically begin with a shift of focus and a loss of market focus.

2)  The personalizing of the situation leads to an emotional reaction.  Generally that reaction is one of frustration, fear, or overeagerness/overconfidence.  That emotional reaction represents the body's fight or flight response to a perceived emergency and leads us to act rather than stay patient.  Once we personalize a situation, it's no longer about the trade.

3)  The emotional reaction leads to reactive decision-making.  Out of frustration or fear, we take trades we shouldn't, abandon good trades, etc.  Many times, when we review the situation after the market close, we wonder how we could have been so foolish.  The trading decision was not made for trading reasons; it was made to manage the crisis that we had talked ourselves into.     

Once we understand this three-step sequence, we can become more aware of our own patterns and disrupt them before they lead to poor decisions and actions.  For example, I know in my own trading that once I'm thinking about myself, my track record, my P/L on the day, I'm not in the zone.  At that point, the focus needs to shift from the market to my own processing of events.  By taking deep breaths, slowing myself down, placing the situation in perspective, and returning to the market with fresh eyes on opportunity, I prevent the initial problem from cascading.

Very often, we recognize our problem patterns by identifying signature negative thoughts and/or feelings:  ones that recur in market situations.  It's almost as if a script is playing itself in our heads.  When we view the script as the problem, not the market, we not only open ourselves to patience; we also create a situation where we can use our patient time to reinforce new and constructive ways of processing market outcomes.

Further Reading:  Perfecting the Pause in Our Trading
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The Greatest Psychological Mistake a Trader Can Make

When you take a look at a trader's journal, what do you typically see?  Many traders use journals to document the mistakes they make, often venting about the problems they are having.  In such cases the journals are little more than listings of problems that the trader has encountered.  It's the rare journal that takes the next step and turns the identification of problems into the creation of concrete, practical goals.

The greatest psychological mistake a trader can make is to stay problem focused.  By devoting attention to problems only, traders reinforce the notion that they are beset with problems.  It is important to address shortcomings in trading, to be sure, but if all you do is focus on problems, you miss out on the most important part of your development--all the things that you do right!  Elite performance is not simply a function of minimizing our weaknesses.  It is an outgrowth of our strengths.  We become successful by leveraging our talents and skills, not just by making fewer mistakes.

A little while ago, I conducted a review of my winning and losing trades.  The best predictor of whether one of my trades was successful surprised me:  it was the length of time since I had placed my previous trade.  When more time had elapsed between trades, it meant that I had waited for everything in my research to line up.  Those tended to be the most profitable occasions.  When I carried a pre-existing view to the next trade and did not wait for the view to emerge from the research, the trade was much more likely to fail.  Patience was a key, but it was more than patience at work:  I trade best when I truly understand what markets are doing.  My strength, as both trader and psychologist, is the capacity to understand.

I recently began a new blog for Forbes which will focus on specific psychological techniques for identifying and maximizing our strengths.  A wealth of research in the field of positive psychology provides us with tools and techniques for leveraging what we do best.  Addressing our mistakes and problems is great.  We can equally learn from what we do well in markets.  Who are we when we are trading well?  What are the best practices that lead to our best trades?  

When we reverse engineer our wins, we discover a blueprint for ongoing success.  I think you'll find the new blog to be a useful toolkit for self-coaching.

Further Reading:  The Source of Trading Success
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The True Reason Psychology Is Central To Trading

Traders have an enduring interest in psychology because they recognize the degree to which success requires change.  This occurs at two levels.  First, most fundamentally, markets behave in ways that run counter to normal human biases and tendencies.  If we simply follow our feelings and sell when markets look scariest and buy when they are most euphoric, we will lose money with alarming consistency.  If we seek the comfort of the herd and buy when others are optimistic and sell when they are pessimistic, we similarly court negative returns.  To trade markets successfully, we must wire ourselves as markets are wired--and that requires changes in how we think and feel.

A second level at which change is central to trading is that markets themselves are always changing.  Sometimes we observe momentum in markets; other times we experience mean reversion within trading ranges.  Sometimes markets are volatile and we can harvest large moves.  Other times, volatility is low and we must take what markets give us.  If we simply had to rewire ourselves to fit markets once and for all, that would be challenging enough.  To rewire ourselves as markets continually change requires unusual flexibility--and a capacity for continuous change.

This, most fundamentally, is why psychology is important to trading.  In adapting to markets, we must continually adapt.  We must change at a pace no slower than markets themselves change--or we will be left behind.

Once we realize the importance of change to trading success--and the need for relatively rapid and continuous change--the crucial question becomes, "How do we effect change?  How do we adapt ourselves to ever-changing environments?"

I address this issue in my most recent posting for Forbes.  It is little appreciated that there is a deep research literature on human change processes.  It goes relatively unnoticed to the general public because it has been conducted under the umbrella of outcome research in psychotherapy and counseling.  The study of how people make changes in therapy--and how they sustain those changes--has become a central theme of that outcome literature.  As the Forbes article makes clear, we change, not by motivating ourselves or trying to talk ourselves into thinking or behaving differently, but by absorbing new life experience.  

Do you wish to become a more patient trader?  You can write in your journal, and you can attach sticky-note reminders to your screen, but ultimately you will become a patient trader when you experience yourself as a patient person.  That means using your non-trading life to cultivate patience, placing yourself in roles that push you to be the patient person you wish to become.  Perhaps your child is having trouble with math in school and you can act as a patient tutor.  Perhaps your home needs curb appeal and you can grow and maintain a garden.  Doing things with patience, one small step at a time, builds the patient identity.  So it is with all the changes we seek to make.

We will never become greater risk-takers in markets if we approach life with risk aversion.  We will never be organized and disciplined in trading if we are scattered in our daily lives.  Everything in life, approached properly, is an opportunity to exercise the capacities we most require in our trading.  This is how becoming a better trader is a path to becoming a better person.

If we can move one stone at a time, make one small change here and now and another one the next day and yet another the next, before long we will have moved a mountain.  What the research on change tells us unequivocally is that we change when we internalize new ways of doing and viewing and we internalize those new ways through repeated, fresh experience.  Every day is an opportunity to move a stone, in our trading, in our relationships, in our lives.  We can become the best traders possible by cultivating trading strengths in our personal lives.

Further Reading:  The Most Powerful Change Technique Of All
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When Your Passion Becomes Your Poison

A while back, I asked the question:  Does your trading psychology have a dark side?

It's an important question.  So many times, it's not our weaknesses that trip us up, but the misdirection of our strengths.

Consider the motivated, eager, passionate trader.  He becomes so pumped up that he pounces on the first "setup" or idea to come his way, only to lose meaningful money minutes and hinder his subsequent efforts.  That very passion has become his poison.  Enthusiasm, taken to an extreme and not directed, breeds impulsivity and overtrading.

The risk prudent trader can become risk averse.

The active trader can become overactive and distracted.

The competitive trader can become frustrated and unfocused.

The creative trader can flit from one idea to another, one system to another, never developing expertise.

The disciplined trader can become rigid and unable to adapt to a change in the market.

In all these cases, strengths can become vulnerabilities.

This helps explain why so many common approaches to trading psychology don't work.  When we try to reduce or eliminate our problems, we find it difficult to stick to those efforts because those problems spring from our strengths!  We naturally gravitate toward what we do well and what speaks to us, so it's not surprising that we find ourselves repeating problems despite advice to the contrary.

So how do we use our strengths and ensure we don't abuse them?  The key principle to keep in mind is that we best channel our strengths by cultivating their opposing, balancing qualities--and then integrating the two.  The more we draw upon a single strength, the more we need to develop a balancing strength.  A good example would be the aggressive trader.  He or she reaches a new level of development by blending patience with aggression.  The blending of the balancing strength--patience--with the original strength creates a new, higher-level capacity.  The potentially crazed warrior becomes a self-controlled, lethal sniper.

Yet another example of using a balancing quality to channel a strength would be for the introverted, analytical researcher to develop a social network and identify when positioning runs counter to tested models.  The blending of the research focus and the ability to read sentiment creates an entirely new opportunity set, where it becomes possible to take advantage of situations where the crowd leans the wrong way.

Notice in these examples, by cultivating a balancing strength and integrating it with a strength and passion we already possess, we create something new.  We create opportunity.  Strengths only have a dark side when they are overutilized and unbalanced.  Cultivating balancing strengths can literally take our game--personally and professionally--to new levels.

Further Reading:  How to Identify Your Greatest Strengths and Virtues

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Keeping Your Time Frames Consistent

With volatility at lows for the year (VIX is below 24) and S&P 500 (SPY) volume also at annual lows, we're seeing quite a few choppy directional moves. This morning, we took out the lower end of the overnight range after the weak earnings reports, but firmed at the open and moved promptly back into the range. We then took out the highs prior to the earnings news before again reversing and moving back into the late pre-opening range.

Such trade either requires great patience--waiting for prices to ultimately hit a target that takes volatility into account--or great nimbleness, taking the moves that markets give you rather than assuming that breaks out of ranges will necessarily continue. Where traders often fall short is by conceptualizing trades (and targets) on a longer-term basis (requiring the patience), but then managing the trades short term. This gets them exiting good ideas at the worst possible times, as markets reverse against them on the way to ultimately hitting their targets.

Contrast that scenario to the patient trader who uses such reversals to scale into positions that are working longer-term.

I'm seeing some profitable traders simply trade hit and run style and take profits when we take out a near term level. That can work well also. But if you are going to hit and run in taking profits, it's important to do the same with losses. Setting targets on one time frame and managing them on another is a recipe for disaster. (See this post for more on the topic).
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Executing Good Trades: Avoiding Getting Chopped Up in Trading

Several readers have asked questions regarding how to execute trades to achieve a favorable risk-to-reward level. This is a most important topic; I find that many traders are losing traders, not because they fail to detect market direction, but because they fail to execute good trades that exploit that direction. Most often this means that they enter long trades after significant strength has already materialized and vice versa. By the time they chase the move, it's natural for a retracement to occur. Aware of the need to cut losses, they bail out after the retracement--only to see the market move their way eventually.

That's a big part of what traders mean by getting "chopped up". Very often, getting chopped up means getting direction right, but executing poorly.

I like using the NYSE TICK to guide my execution. If we're in an uptrend, for example, we should see TICK pullbacks at successively higher prices. I will look for the most recent notable price low and then will wait for a several minute pullback in TICK. If that pullback cannot move price below the most recent low, that becomes a spot where I consider either entering a long position or adding to one.

Should we actually break below that most recent low subsequently, that would stop me out. As a result, the distance between my entry point and the most recent low is my defined risk. The defined reward is the distance between my entry point and the next relevant target. (Price targets are posted each AM prior to the market open via Twitter). As long as the distance to the target exceeds the distance to my stop by at least a 2:1 factor, I'm willing to take that trade.

The key to making this execution approach work is being patient enough when you're a buyer to let sellers "take their turn"; when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend; their exits will help your position. Much of execution boils down to patience and letting buyers and sellers *show* you that they cannot move markets higher or lower.

I'll be posting examples later this week. Thanks for the queries. In the interim, see this post on trade execution and this trading example. Note that these ideas are relevant for swing trades as well.
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Morning With the Doc: 10/18/06

12:54 PM CT - Quick note for anyone still logged in. Semiconductors led the way down and now are not making new lows even as we've seen new lows in the major indices. Just something to keep an eye on.

10:12 AM CT - Well, it's time for the sound and light machine--a nice cognitive break in the virtual state. We're looking to test the lows; it wouldn't surprise me if we're putting in one of those "transitional structures" for a low. That usually takes some time, however, so I'm in no rush to sell lows or jump in and buy strength. If we see volume pick up as we approach lows and large players hitting bids, then we've got a different story indeed and that 1369 average price becomes the immediate target. Some days like today work out well and you get your piece; other days aren't so profitable. The main thing is to find an edge, stick with it even as the market seems to be going against it, and then take advantage when order flow starts lining up with the research. Thanks for joining me for a morning with the doc. Feel free to email with questions. I'll do this again if there's interest. Have a great morning.

9:57 AM CT - I'm out and now it'll take new setups to get me in. Wrap up in a few.

9:53 AM CT - You can see why it makes sense to scalp around a core short position; that way you're not highly exposed during bouts of short covering such as we just had. When declines in the TICK no longer yield significant price declines--ie. don't produce new price lows or lead to divergences among sectors,--that's when I bail out altogether. Otherwise, I keep a little skin in the game. Wouldn't surprise me to see us try to put in a low around here, setting up a trading range. But let's let the market do the talking... :-)

9:41 AM CT - Hopefully you can review all this after the close and see how the moves have evolved. Notice that, once the downmove is in place and the TICK distribution is shifting down, bounces in the TICK provide opportunities to add to short positions. It also allows you to do what I like to do, which is scalp around a core position: add to shorts on bounces, take profits on moves to negative TICK, and let a core position ride. Money mgt very important, but what made me money today is patience and confidence in the research. That's the takeaway lesson for the day, IMO.

9:30 AM CT - Watching for bounces at lower TICK peaks as potential opportunities to add to the short position. Stop moved to break even. Having a few more blogger issues; may affect frequency of posting.

9:20 AM CT - I'm playing with the idea that we've seen our highs for the day. Given current volume, I estimate the day's range should be above 1o ES points, so I'm thinking we could go lower here. I'm short a few Russells and will add Spooz on weakness. A break below the pre-announcement lows of ES 1372 would likely bring in added selling.

9:08 AM CT - We've rejected those highs around and what we're seeing is that when the buyers take their turn and drive TICK up, it sets up more selling. TICK has been eroding, but by no means is showing broad based selling. Rather, we're seeing continued elevated volume and large participants in the stock indices selling into rallies. These are not just locals--too much volume sustained for that. It leads me to believe that we've made a higher high as part of a broader topping process, not as a new bull leg. Following the discipline and not chasing the highs paid off. No sustained positions here; just scalp bounces in TICK mode.

8:55 AM CT - Notice how SMH has once again served as a leader and the heaviness in the Russell alerted us to waning strength. TICK remains above zero; let's see what the buyers can muster. Semis continue to lead the downside. TIKI has shown program selling as NQ and SMH have sold off.

8:50 AM CT - My TIKI data show very little or no program selling thus far this AM. Not a market to sell into for anything other than a little scalp. Conversely, given my research, the highly elevated TICK and advances/declines are not tempting me to chase highs. Patience isn't exciting, but it's kept me in the game since the late 1970s. Russells looking heavy; let's keep an eye on that too. If semis and Russells stop making new highs on buying spurts in TICK and ES volume lifting offers, that's when I might start nibbling on the short side.

8:42 AM CT - In Market Profile terms we're trading above value, so we want to see if this attracts business or attracts sellers for a return to the value area. So let's keep an eye on volume. Five min volumes are much above average, suggesting that, indeed, we are seeing new business and the bulk of this is buying interest: lifting offers in ES and high TICK. Note, however, that semiconductors are relatively weak, and they're often a leader. Let's keep an eye there and on NQ. Thanks to Brian Shannon, BTW, for mentioning the AM feature; his Alpha Trends website is one of the best purely educational trading sites out there. Advances lead declines by 1687 issues--very strong. Not a market I'd fade until I see more distinct weakness in TICK, volume in ES at bid, etc.

8:34 AM CT - Reminder: we have crude inventories reported later this AM. We open with positive TICK (sustained readings above +250 show distinct buying interest) and advancing stocks leading declines by 840 issues, as we make an effort to surmount the Monday highs. I don't short the market for sustained positions as long as the TICK distribution is positive. Market Delta shows net volume at offer rather than bid. Odds of sustaining new highs are good as long as this continues.

8:08 AM CT - We continue to see strength; the proportion of ES volume trading at the offer vs. the bid is solidly bullish thus far. We're now at those rally highs, so we'll see if they act as resistance. My strategy is to go with new highs only if momentum is quite good (persistent high NYSE TICK) and if the majority of sectors are participating in the rise. Otherwise, I think we could see selling into those highs. I remain flat. Blogger continues to give some problems this AM, so my updates after the open may be more infrequent than I would ideally like. Back after the open.

7:40 AM CT - Core CPI was in line, CPI a little weaker than expected, housing starts a little better than expected. Net, net? So far, gyrations, but no dramatic directional move in the dollar or interest rates. Dollar a bit firmer vs. Euro, rates a bit higher. What does that tell us? As long as the dollar and rates stay pretty much where they were yesterday, it means that the economic news has not given us any fundamental reason to change our estimates of value. The ES and Russell futures jumped on the news above their afternoon highs, but have settled back somewhat; NQ is weaker and did not advance above the afternoon high. In ES, 1372 represents the low prior to the release; 1371.25 is the overnight low. Both are above the day's average price of 1369. If we stay above that 1372 mark on early selling, I'd expect a run at the highs. A move below 1371.25 would represent fresh selling and would initially target that 1369 price. A large part of my AM preparation is constructing what if scenarios, waiting for buyers and sellers to take their turns in early trade after the open, and then go with the scenario that best fits my research. That research has me leaning to the sell side on buying that dries up and that cannot make new highs, but I can't be too much of a bear if selling cannot push us below yesterday's average price. In these situations, I tend to be cautious: I'd rather wait for things to line up and place one good trade than try to make things happen with multiple trades that have dubious edges. The need to trade is the enemy of the need for profit. Back in a bit.

7:28 AM CT - Lots of Blogger problems this AM; if you don't see regular updates after the open, you'll know why. We're in a narrow range ahead of big numbers shortly: core CPI expected at .2%. I'll post after the release and update the prep for the open. My overall framework is based on the research from the last Weblog entry: weak short-term, up after that. Keep an eye on interest rates and the dollar after the release: if they break new ground, the odds are increased that we'll do the same in stocks. Back shortly.

Are You Taking Enough Risk In Your Trading?

 

This is going to be a little technical, but please bear with me.  It is super important to your trading.

Imagine a variable that captures danger at one end of the spectrum and opportunity at the other.  Now imagine that life offers most of us a relatively normal distribution of dangers and opportunities, such that we mostly experience small risk and small opportunities in day-to-day life, but once in a great while encounter very large dangers and very large opportunities.  Such a normal distribution of outcomes looks like this when we plot it:

In such an idealized model, we encounter really large dangers roughly 2% of the time and really large opportunities similarly.  Over two-thirds of the time, we're dealing with modest opportunities and dangers.

Odds of 2% seem quite low, but over an annual period, we're likely to encounter a handful of really big risks and really big rewards.  On over 240 of those days, there will be no truly great opportunities or dangers.

Sounds a lot like trading, doesn't it?  

The personality trait of extroversion tends to be associated with risk-seeking.  To some degree, the trait of openness to experience also plays into risk appetite.  Think of a skier who goes after the largest mountains and steepest slopes.  That person is focused at the far right end of the continuum, seeking to capture the greatest opportunities.  Of course, in extreme sports as in trading, seeking those rare huge opportunities can also entail taking significant risks. 

The personality trait of conscientiousness is associated with risk-prudence.  The highly conscientious driver will not exceed the speed limit on highways and will only ski the safest slopes.  That person will generally never have the thrills of extreme sports, but will rarely have bone-crushing accidents.

OK, now we get to the juicy part:

Early in our development as traders, risk-prudence is paramount.  We cannot win the game unless we stay in the game.  At firms where I work, such as SMB Capital, the initial goal is not to become a hugely profitable trader.  The goal is to become a consistently profitable trader.  In skiing terms, the consistently profitable trader is one who can master small hills, then somewhat larger hills, then small mountains, etc.  It is the repetition of success--the consistency of successful experience--that builds confidence and inner security.

Imagine if we were simply risk-seeking and began our trading career by placing large bets.  Inevitably we would also encounter large losses and that would shatter our development of confidence and inner security.  (Recognize that, in trading, risk is relative to the size of our portfolios.  If I limit my daily losses to $1000, that may seem like modest risk-taking, but not if I'm trading a $10,000 account!)

The path toward becoming a highly profitable trader is first becoming a consistently profitable trader.  It is consistency of process, mindset, and selection of opportunity that provides us with the emotional capital to go after larger rewards.  I cannot emphasize this too highly.

However, there is a danger that the comfort and security of being consistently profitable can lead us to never go after those larger rewards.  Think of an entrepreneur.  The successful new enterprise requires consistent profitability, but what if the entrepreneur never takes the larger risks of opening new stores, developing new products, or forming new partnerships?  The entrepreneur might end up as a profitable local businessperson, and that might be fine for them, but they will never grow the kind of business that they could eventually take public.

In becoming that consistent trader, we can so emphasize conscientiousness that we never take the greater risks that are associated with larger rewards.  In poker, it would be like being dealt three aces and still placing modest bets.  Once in a while, life--and markets--present us with those 2+ standard deviation opportunities that come along 2% of the time.  When we stand aside on those occasions, we ensure that we will never reap great rewards.

So there it is:  greatness, in any endeavor, is a distinctive blending of general risk-prudence and selective risk-seeking.  Greatness is staying in the game, adapting, and winning--and then pouncing on occasional unique opportunities.  The mindset of consistent winning is what provides the resilience of big winning.

Now you see why I emphasize trading psychology methods that increase our access to intuition and implicit knowing.  Very, very often, it is that intuitive knowing that alerts us to the larger opportunities, those 2% of occasions when we're meant to take larger swings.  Consistent trading will not help us if we do not also cultivate consistent openness of mind.  Most of the time, the military sniper lies in the weeds and takes little to no risk.  But once in a while, the high value target appears and it's worth taking the shot that may alert the enemy.  The mindset while in the weeds is calm focus and patience, but also extreme openness to and readiness for the high value opportunity.  

So much of the challenge of trading psychology is the challenge of sniping:  blending consistency of shooting and the patience of waiting with the aggressiveness of taking the risks associated with special opportunities.  Once you have learned and mastered the patterns associated with consistently profitable trading, it's time to master the intuitive knowing that alerts us to the greatest rewards.  In my next video, I'll outline a method for cultivating and acting upon this knowing.

Further Resources:

How To Become A Significantly Profitable Trader - Video

Where Does Our Trading Edge Really Come From? - Video

A Radical Method for Quieting the Mind

How We Turn Our Talents Into Actual Trading Edges

Taking The Risks Of Accountability

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Making Each Day a Learning Experience: Trading Lessons From the Morning Sessions

I've now been conducting the morning sessions, tracking the equity index markets in real time, for a while. My goal is to make every trading session a lesson that will move me forward in my craft. I decided to go back and pull out a few of the more important lessons from those morning sessions. These cement important trading ideas for me and, hopefully, for you as well as we start a new trading week:

Sunday, January 7th, 2007: In my personal site, I try to summarize the market data I'm looking at each day and how I'm putting the data together into an initial framework to start the day. This site summarizes some of the research I conduct to identify possible trading edges, mostly from 1-5 days out. The reality of trading, however, is that such preparation only gives you initial hypotheses and plans. The real skill of trading comes in when markets open and you have to analyze shifting patterns of supply and demand as they emerge. In my own trading, I follow several variables very closely (one-minute data):

* Whether volume is higher, lower, or equal to average volume for that time of day;
* How the most volatile market sectors (small caps, NASDAQ, semiconductors) are trading relative to the large cap indices;
* How interest rates, currencies, gold, and oil are trading during equity trading hours;
* NYSE TICK (number of stocks trading at offer vs. bid) and shifts in the distribution of the TICK;
* Volume of contracts executed at the market bid vs. ask for the ES futures;
* Whether a majority of sectors are participating in moves in the ES futures (I look at Spyder sector ETFs for much of this info);
* Value area (Market Profile) from the previous day's trade and how volume expands or contracts as we trade outside that area;
* Levels of support and resistance from the previous day as well as the current day, to identify potential trading ranges and levels we're likely to test.

If you were to watch me trade, you'd see me continuously shifting from one window/screen to another, monitoring these variables. At some point a pattern becomes clear and I get an idea of shifting demand/supply that will lead us to test a particular market level. That becomes the basis for a trade idea, particularly if it is in line with my prior research. I average 2 trades per day, mostly in the AM, and averaging 20 minutes in holding time.

Monday, January 8th, 2007: The main thing to take away from the AM trading session is the importance of flexible thinking. We started off with some research that suggested we were likely to take out the Friday lows. As the selling progressed early in the morning, however, it was apparent that many sectors were not participating. That suggested that it would be a mistake to chase those lows and, indeed, made sense to watch for reversals. Perhaps the most important mental shift was from "downtrend" thinking to "rangebound" thinking, with the AM lows and the 1420 resistance area forming the range. Having that range in mind enabled me to get on board to the long side when heavy selling could not bring us to new daily lows, but the range also alerted me to be aggressive in taking profits when the buying ran into a wall of sellers.

Tuesday, January 9th, 2007: That's a good lesson for the day: when you see the TICK hitting negative values, but the index can't make new price lows, it's generally an early sign that sellers can't move the market any further: that buyers are finding value at those levels. That doesn't necessarily mean that buyers will enter the market in force, but it's usually a good bet that you'll get enough buying to move the index back toward a prior high for a short term trade.

Monday, January 15th, 2007: It's not unusual to see a breakout move begin in one of the more volatile indices before strong buying shows up in the Dow or the S&P 500. I've found that helpful on occasions for timing. I also like to follow the DAX as a potential leader of the S&P 500 early in the AM. Most helpful of all is filtering the Market Delta charts so that they only post trades of a certain size or greater. You then can see how many large traders are in the market and whether they're predominantly buying or selling. That is *very* useful in handicapping the odds of reaching a pivot support or resistance level.

Tuesday, January 16th, 2007: Notice that measures such as TICK and volume at bid/offer tell us about supply and demand, but volume levels relative to average for the time of day tell us about volatility: how much movement we can expect from given supply or demand. Because we don't have strong buying or selling in the TICK (the Adjusted TICK is negative on the day, but not at extreme levels) and we don't have above average volume, I don't expect a large move on the day and, indeed, anticipate more of a rangebound market. The key is monitoring these variables in real time to identify as early as possible what type of market we're likely to be in and which price levels we're likely to hit.

Thursday, January 18th, 2007: I like to cement a lesson from each trading day. Perhaps the takeaway for today is that 85% of all days in ES are *not* inside days. That ratio is well over 90% when we have above avg volume. Once you know that, it's a matter of handicapping the odds of taking out either the prior day's high or low. Once we saw selling in those leading sectors and breaks to new lows, and once the TICK turned down and we got sellers hitting bids in size, we had a nice trade in ES toward Wednesday's lows and S2.

Friday, January 19th, 2007: The AM illustrated a few important things. First is the importance of flexibility. The odds of taking out yesterday's lows in ES were quite high, and that was my initial leaning. When selling dried up early in the AM with only a modestly negative TICK and not many stocks declining relative to advancers, I entertained the reverse hypothesis: that we were not getting selling and that leaning to the long side was the way to go. The second principle illustrated is the importance of patience. It was a choppy morning session, and it was easy to get scared out of a good position. But as long as the overall dynamics of supply and demand were not shifting, patience was indicated. Finally, you can see how a drying up of selling (today relative to yesterday) often precedes an influx of buying. That's a pattern that sets up intraday as well as on a swing basis.

Thursday, January 25th, 2007: Takeaway for today is this: transacting at the bid vs offer, which is what I'm tracking with the NYSE TICK, Dow TICK, Market Delta, etc, is a very short-term measure of trader sentiment. When we don't see buying sentiment following a nice up day, it makes sense to think about a transition to range bound trade and a reversion to the prior day's average prices. An absence of buyers (sellers) often precedes an influx of sellers (buyers), but it pays to wait for the latter, pick price levels, and take the high percentage trades.

Friday, January 26th, 2007: The lesson I want to stress for today's session is position sizing. We had huge odds of taking out yesterday's lows, creating a very favorable edge. Once selling started appearing in the market, you have to participate with all the size you can muster. You can lose money on 2 or 3 small trades, make money on one high odds trade with size, and wind up the day/week a solid winner. Your position size should reflect your confidence in the trade. Yesterday I mentioned putting small size on when you're feeling out a market. Today it was time to press the advantage. Those odds don't come along every day.

Tuesday, January 30th, 2007: In general, once you identify a candidate morning low, it makes sense to put in an initial position and use pullbacks in the TICK as opportunities to add to the position, as long as the TICK bursts take you to successive price highs. If you can't hit your price target and the buying sentiment (TICK, volume at offer) isn't moving you higher, then you have to entertain the hypothesis that you're in a trading range environment and take what you can from the market.

Wednesday, January 31st, 2007: As long as we can trade 15,000 contracts or so every five min in ES, there should be some movement for the short-term trader. It's when we get below 10K per five min period that things get deadly slow and I stop trading. I've found keeping those volume levels by my side to be helpful. Let's me know when it's worth playing, when it's not. The main thing is whether or not volume is above avg or not for that particular time of day. When well below avg, not worth trading.

Wednesday, December 6th, 2006: I would have loved to have seen a more exciting day for our morning session, but as always we take what the market gives us. My research suggested subnormal returns going forward and my read of the volume and TICK suggested a range bound day. That had me shorting early in the session when we traded above the prior day's average price. That was a very nice trade idea, but it paid out only moderately, which again clued me into a slow, rangebound day. When I saw institutions jump into the market and the TICK distribution go positive, I decided to enter in the direction of the market trend from the last two days as long as TICK stayed healthy. I knew that such a trade was flying in the face of the rangebound thesis, but my risk-reward was pretty good. As it happened, the market did slow down and I had to bail out with a small loss when the TICK no longer looked healthy to me. The main thing for today was using research and market data to figure out what kind of day it was likely to be and then to frame trades patiently rather than chase moves that reverse.

Wednesday, November 22nd, 2006: After each day of trading, I like to evaluate what I did right and wrong and use those to frame goals for the next session(s). What's clear to me from today is that I need to stick with my basic method of exiting positions: entering with enough size that I can take quick profits on one piece but let the other piece breathe and take advantage of a possibly longer move. I was too much in the mindset of "This is pre-holiday; just take what the market gives you". As a result, I didn't benefit as much from the patient, good entries as I should have. The point is to always be learning. Figure out what you do well and extend it. Adjust what you're not doing well. Today I did entries much better than exits.

Tuesday, December 19th, 2006: There's a difference between a good losing trade and a bad losing trade - A good losing trade provides you with information about the market. My initial short position was a good trade, riding the market's weakness in a short-term downtrend. When the trade reversed and took me out with a small loss, that was concrete evidence that buyers were attracted to value below 1430 in the ES. By waiting for the next round of selling in the TICK, I was able to ride this strength for a decent winner when the ES returned to the top of its preopening range. A bad losing trade results from a failure to take all the facts into account. The only information it provides is a heads-up to stay grounded in the market's volume flow before entering a trade. My last trade ignored solid buying in ES, even as the Russell was pulling back. That's not the kind of market weakness that should justify a short position. The large traders were not hitting bids in the most liquid of the indices. By jumping on a trade that had worked for the past two days before checking all the facts, I made a bad losing trade.

Monday's Blog Links, Pivot Levels, and Market Perspective

Best Practices In Trading: Getting To The Next Level

 

6/14/2026 - With the recent release of the latest Market Wizards book, my latest project is a review of all the Market Wizards books alongside a review of books written by accomplished traders.  This is known in academic circles as a "literature review" and the goal is to capture the state of knowledge in a field and also identify questions/issues that remain unanswered.

It's clear that the Wizards trade very different markets and trade in very different ways over very different time frames.  To use an analogy, great singers don't sing the same songs and they don't sing the same way.  Something else makes them great.  There's a talent element, and there's also a process they've gone through to cultivate that talent and build the necessary skills and experience.

What we see among the Wizards--and what I believe gets them to that next level of performance--is immersion in markets.  They don't just work hard; they live and breathe markets.  And it's not that they live and breathe trading; rather, they absorb themselves in the pursuit of opportunity.  This is apparent in the interview with Mark Minervini in the Stock Market Wizards book.  He is fully immersed in the hunt and, yes, he has his trading methods and his ways of managing risk and reward.  What makes the Wizards truly special, I believe, is the degree to which they internalize what they do.  It is not unlike an Olympic athlete or world-class concert pianist who are immersed in practice every day.

Constant working out produces unusual strength.  The market greats have such a passion for what they do that they are always working out.  Average traders are forever looking for the next video, the next secret trade setup, the next secret sauce.  Their very search for easy answers tells you that they lack what it takes to be a Market Wizard.

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6/12/2026 - Getting to the next level of trading performance doesn't necessarily mean getting bigger and bigger.  Very successful traders get broader and broader and find opportunities in different markets and different regions of the world.  There's a way of getting broader, however, that I especially notice among teams and traders that have excellent risk-adjusted returns.  They not only make money, but do so consistently.  They are able to make money in different market environments.

Many traders define opportunity as directional movement.  When markets are not trading in trends, they assume that those markets are "noisy", "choppy", and untradeable.  Nothing could be further from the case.  Two sets of opportunities appear in slow and choppy markets:

1)  Movements in relative value - Traders will be long one instrument and short another closely connected one to take advantage of occasions where one moves too far relative to the other.  For instance, the entire stock market may be trading in a range, but value stocks (SPYV) will be strong relative to growth stocks (SPYG).  This can occur when weak buyers are getting out of the growth names.  Buying growth stocks and selling value stocks, adjusting the pair for volatility, profits from occasions where the two groups get more in line.  The overall market can go up or down, but as long as your pair moves the right way, you profit.  This is a common strategy in interest rate markets when central banks are not in play.  Flows will take one bond higher relative to a nearby instrument and the RV trader can play for the two to come back in line.

2)  Cyclical movement - Many markets that aren't trading in trends display dominant cycles.  These can be intraday, short-term, and longer-term.  Often there are cycles within cycles, which greatly aid in entry and exit execution.  John Ehlers' work is particularly helpful; an amazing set of resources can be found here.  My experience is that even trending, directional markets display cyclical elements.  Understanding those is very helpful in timing.  Conversely, truly choppy/noisy markets are often dominated by short-term cycles, which can provide opportunities for active traders.

A true sign of mastery is the ability to sit back, see how a market is trading, and then utilize the tools to take advantage of the environment.  Frustrated traders frequently lack those tools.

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6/11/2026 - A marriage lasts for decades and flourishes, not because there aren't problems and challenges, but because there is such a deep sense of love that the setbacks simply become opportunities to collaborate and approach things in new and different ways.  We can see in the Market Wizards books that the great traders fall in love with markets and cultivate unique approaches to finding and managing risk and reward.  They truly *love* what they do, which is why they pursue it passionately.  It is out of that love that they dig and dig and discover what others miss.  

It's tempting for new traders to look for answers from others and simply try to copy their techniques.  No Market Wizard has reached their status by copying other Wizards...greatness cannot be found in following the same "setups" and indicators that others look at.  Copying others cannot bring the passion and meaning of finding one's own edges that express the deep fit between who you are and what you do.

Your true edge is an expression of who you are:  how you see and act upon things.  When we fall in love with what we do, setbacks are not threatening.  We succeed because of commitment, not because of "motivation".

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6/10/2026 - Often, it's the less sexy parts of trading that lead to the greatest performance improvements.  It's great coming up with new trade ideas and opportunities and that is essential to success.  What gets many traders to the next level, however, is work on the execution of their ideas.

Once you figure out that the market is likely to move in a particular way, how do you enter that trade so that your reward is maximized relative to your risk?  Good execution is the beginning point of sound risk management.  Also, when we have sound execution criteria, we achieve clarity in the trade, which is essential to a positive trading psychology.

I have found it to be helpful to get into a long trade *after* I believe the market has found a bottom and to go short *after* I believe we've seen a top.  That means that sound execution is based upon how the market is behaving.  It's not based on our predictions.

For instance, the market will be strong, get to an overbought point, and then sell off.  The sell off occurs on weak breadth, which means that the majority of stocks retreat from their highs.  I then look at the very short-term indicators of buying/selling to see if the subsequent buying fails to bring us to new highs and fails to bring the majority of stocks meaningfully higher.  For example, we will get a bounce in the NYSE TICK and we will get to an overbought point on an intraday measure such as RSI with prices failing to make new highs and that is where I want to sell.  The prior high is a natural stop level and the market is telling me that the buyers are no longer in control.  

The advantage of such execution is that we know clearly where we are wrong and can get out quickly, easily, and without too much of a loss.  We can also use medium-term oversold levels to identify areas for taking at least partial profits and we can use subsequent weak bounces to add to our position, using prior highs as trailing stops.  

Our work on execution gives us a sense of control and understanding, both essential to a winning mindset.  As noted below, the right strategy is necessary but will not win without the right tactics.

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6/9/2026 - The most successful people I've worked with in markets combine strategic thinking--a vision of the big picture--with tactical thinking, a sense for here-and-now opportunity.  This is not so different from success on the battlefield, where a sound strategy is necessary, but must be implemented tactically:  in the right way at the right time.  Similarly, a basketball team will pursue a strategy to take advantage of an opponent's weaknesses, and will look for tactical situations to press this strategy.  

Pursuing short-term opportunity without a grounding in strategy leads to small gains punctuated with periods of getting run over.  Pursuing a good strategy without the patience to wait for the right tactical implementation leads to getting shaken out of good ideas.  

The successful market participants are investors--they are invested in ideas--and they are traders:  they know how and when to press those ideas.  

Success is one part vision, one part patience.  When the strategy doesn't line up with opportunity, the great trader can wait.  When the strategy and opportunity align, the great trader can go for it.

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6/8/2026 - In this series of posts, we'll take a look at best trading practices that contribute to long term success.  The first best practice is utilizing time effectively when you are *not* trading.  There are always slow periods in markets, and there are always periods when you just need to let your trades play out.  During those periods when you're not trading, how productive is your time?  Do your activities during slow portions of the day and before and after market hours contribute to your trading success?

The best traders I've worked with are actively engaged in markets when they are not trading.  They are looking for--and testing--new trading edges.  They are talking with other traders and picking up on market sentiment and news they might have missed.  They are reading research reports; they are conducting their own studies; they are reviewing fresh market opportunities.  In short, the best traders are just as immersed in idea generation as they are in placing and managing risk.

Many, many traders crave stimulation and can't tolerate any feeling of inactivity and boredom during the day.  That leads them to trade when they have no documented edge.  Such overtrading is not a function of fear and greed.  It results from the need to fill a void: the need for excitement.  The best traders have well-developed lives outside of market hours and don't need markets to provide them with stimulation.  They are free to use their time searching for fresh ideas and researching new edges because they find the discovery process itself to be stimulating.  They also get stimulation from their personal activities and relationships and don't need to get it from taking risk in markets.

A great way to identify excellent traders is to see what they do when they are not trading.  Productive non-trading time builds the mindset...and ultimately builds the trading.