Trading Psychology Challenges - 1: Burnout

Author's Note:  The extensive posting on how to diagnose your trading problems is helpful background to this series on challenges in trading psychology.  Before seeking solutions to issues that impact trading, it's important to figure out whether those issues are trading problems impacting psychology or psychological challenges interfering with trading.  The above linked post can help you make that important distinction--as well as a few other, key ones.

It's not unusual to hear young traders declare their passion for trading and their complete focus on developing themselves as traders.  When I hear that, I worry.

Very often those same traders are ones that burn out when they hit inevitable stumbling periods in their trading.  They pour themselves into markets and when markets don't give them anything back, they have nothing more to give.  Quite simply, they're burned out.

There are a few tell-tale signs of emotional burnout among traders, including loss of motivation and energy; negative, hopeless, and/or resigned thinking; and a loss of interest in life activities.  When I have been in a burnout state, I have felt overwhelmed.  I can't find the mental or physical energy to take on another task or responsibility.  It's a complete sense of overload.

In that state of overload, it's impossible to focus fully, further contributing to missed opportunities and poor decisions.  Equally crucially, in the burnout state, we cannot engage in high quality learning.  We're merely coping with our experience, not actively processing and learning from it.  For these reasons, burnout can take the form of a downward spiral, as lower energy and focus contribute to further performance problems, which in turn drain us of energy.

Lack of productivity--working many hours, but accomplishing little--is often an early sign of burnout.  Negative attitudes are also an early sign.  Many times, burnout in trading leaves people with little energy for the rest of their lives:  relationships, family, exercise, etc.  This, too, becomes a downward spiral.  When we lack energy, it's easy to avoid activities that initially take effort, but that could ultimately renew us.

Here are three things we can do to address burnout when it appears and also prevent it from occurring in the first place:

1)  Take Breaks - We can exhaust ourselves simply by sustaining concentration for long periods without any form of renewal.  Taking breaks during the trading day can help us review performance and make corrections.  It can also help us relax, clear the head, and renew our energy.  The key to effective breaks is that they keep you active, but not in the way you're active in front of trading screens.  Physical activity, social activity:  These are stimulating, but in different ways than trading.  Changing gears helps you restore those willpower muscles.  This principle applies to weekends and vacation periods as well: those are longer periods of renewal.  When you are truly burned out, trying something different at work is the wrong answer.  Any "trying" will simply further exhaust you.  Taking a complete break from work allows you to return with energy and focus, attacking your situation with a fresh perspective.

2)  Build In Rewards Even When Trading Is Not Rewarding - I am consistently impressed with how the most successful traders find work-related rewards outside of P/L.  Many of them work in teams and thus reap the psychological rewards of developing junior talent and contributing to others.  Many of them conduct their own research efforts and thus find fulfillment via intellectual curiosity.  During a period of flat to down performance, those research efforts may target new edges in markets, providing a sense of opportunity.  In all of these cases, traders evaluate their performance on multiple dimensions, not just P/L.  They find intrinsic rewards in managing money and are thus less likely to burn out during frustrating times.

3)  Build In Rewards In Life Outside Of Trading - As I emphasized in a recent post, using free time as down time is often a mistake.  You want your time outside of trading to be "up" time.  That is, you want your time outside of work to be energizing and stimulating--giving you energy at times when you're feeling sapped.  It is this positive use of time that prevents temporary overload from becoming a downward spiral of burnout.  Romantic relationships, friendships, physical exercise, personal interests, travel--all of these are potentially energy-giving.  

If you find yourself unable to enjoy non-trading related rewards and unable to benefit from the breaks you take, consider the possibility that your situation is more than a burnout.  Depression takes many forms and affects a significant portion of the population on a 12-month basis.  Especially if you have a family history of depression, consider seeing a qualified professional for a diagnostic screening.  There are many evidence-based therapies and medications for depression that are worth looking into if burnout seems chronic.

The key is that true burnout is situational.  Once we re-establish an equilibrium in lifestyle, we quickly regain our psychological equilibrium.  Balance in daily activities--and in life overall--ensures that no one setback in life will overwhelm us.  A great formula for well-being is a diversified and full life portfolio.

Further Reading:  How to Light the Fire When You Are Burned Out

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Hedonic Adaptation: Taking A Break When You're Making Money

Consider the following scenarios:

* A person wins a lottery and is delighted to receive millions of dollars. Within a short amount of time, however, he adapts to the new financial status and is no happier than he was prior to the award;

* A person eagerly awaits retirement, but after being out of work for a while, feels no happier than when she was working;

* A person is quite happy to make his first six figure year as a trader, but the next year is frustrated at the same income level;

All of these are examples of what psychologists call hedonic adaptation. We quickly adapt to increases in our happiness, so that what initially brought joy now becomes the psychological norm.

This is quite relevant for traders, who may experience initial pleasure over gains in the markets, only to see the glow of the winnings fade. To recapture this glow, a trader may seek out further trades, much as a drug-dependent person might seek out subsequent highs after initial use.

An interesting study suggests that, when consumption is interrupted, people are less likely to experience adaptation, which in turn enhances the consumption experience. For instance, taking a break during a massage prevents a person from adapting to the pleasurable experience, heightening pleasure when the massage resumes. It appears that, during such a break, people recalibrate their emotional experience, coming back to a pleasurable event with a fresh perspective--much as a diner might freshen his or her palate between courses.

Indeed, the very experience of savoring an event may be a way of holding off hedonic adaptation and maximizing positive emotional experience.

This leads to the paradoxical conclusion that traders should consider taking breaks from trading when they're making money--not just when they're losing. By adjusting to the experience of making money, traders are likely to lose a sense of satisfaction and instead seek further (and possibly imprudent) gains through more (i.e., over) trading.

By taking a break during a winning period, a trader has the opportunity to savor the experience and reset his or her emotional barometer. Such a break does not necessarily mean stopping trading altogether during a period of high opportunity; that would be foolish. Rather, it means that fully experiencing the pleasure of gain might be the best way to mentally--and emotionally-- prepare for the next victory.

More:

Can Too Much Happiness Be A Bad Thing?

Happiness and Performance

The Importance Of Happiness

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Three Steps To Avoid Trading On Tilt

 

I hear many traders early in their development wrestling with issues of emotional, reactive trading.  Here are three practical steps that can help traders avoid going on "tilt":

1)  Plan Your Losses - Big expectations lead to big frustrations.  Every trade should be accompanied by a very specific idea of what would tell you you're wrong and how much you're willing to lose on the trade.  It's when losses surprise us and become too large that they're likely to create disruptions in our mindset.  Your goal should be to lose well, in the right way.  Focusing only on how much you want/need to make sets up surprise and frustration.

2)  Take Breaks - After large gains and large losses, it's easy for P/L to get in our heads.  Always take a break after a large trade, clear your head, and assess the opportunity set with fresh eyes.  It is just as important to reset after big wins as big losses.  Both can lead to taking trades for the wrong reasons.  Quick meditation exercises to increase calm and focus can be *very* helpful.

3)  Keep Trading Size Moderate And Consistent - Too much size creates unusual P/L volatility and that leads to emotional volatility.  Your goal is to be consistently profitable and then grow your size while you retain your consistency.  If you *need* to be profitable, that creates undue performance pressure and emotional distraction.  Drama = distraction.  You want no drama in your trading.

The greatest edge of all in trading is self-awareness.  Frustration happens to us all.  The goal is not to trade without emotion, but to be so aware of our emotions that we know when to step back from the screens.

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Further Resources:

Three Minute Trading Coach:  Taking Breaks

Three Minute Trading Coach:  Taking Your Emotional Temperature

Three Minute Trading Coach:  Shifting Your Trading Psychology

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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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Four Best Practices for Maintaining Your Focus on Markets

It probably was the wisdom of the unconscious mind at work that led me to post on the topic of preparing for the market day following the post on the challenge of market engagement. After all, you're most likely to stay engaged in market action if you have prepared for a variety of scenarios and are actively searching to see which will play out.

I joked in the preparation post that it's helpful to plan your inactivity as well as your activity. As we were in the middle of choppy, range-bound trade in the morning, that preparation proved invaluable in standing back, avoiding overtrading, and waiting for opportunity. That is why mental preparation is my number one best practice toward maintaining market focus. If you rehearse what the markets might do and how you would like to respond, it's almost as if you program yourself to do the right things in the heat of the trade.

Sometimes, even when we prepare for the day's trade, we get caught in the flow and react impulsively with poorly thought out decisions. Those impulsive maneuvers can cascade unless we actively interrupt them. For that reason, taking a break from trading is my number two best practice toward sustaining focus. During a break, you shift from being the actor to being the observer. You can evaluate what you've been doing, step away from the screen, and re-engage markets with a fresh perspective. The best traders I know don't spend every minute with their noses in the screen; they know that they need to pace themselves, sustain their attention, and keep themselves in a performance zone. Taking breaks accomplish those objectives.

So what do you do during your trading break? Slowing your body by regulating your breathing--breathing deeply, slowly, and rhythmically--interrupts the effects of frustration and anxiety. Focusing your attention on a single stimulus, such as music or a picture, clears your mind and helps you shift to a different state, where you can process information more effectively. These self-regulation strategies are my third best practice for sustaining engagement with markets. Biofeedback is an excellent self-regulation strategy, as it provides direct feedback to traders about when they are in and out of "the zone". With practice, traders can return themselves to an optimal performance state even after a frustrating blowup.

Finally, we're most likely to sustain engagement when we have a purpose that we're working toward. Goal-setting is my fourth best practice for maintaining market focus. As I stress in the new book, process goals are especially helpful in this regard, because you can control *how* you trade, even if you can't always control the outcomes of specific trades. For example, you might set a goal to hold your losing trades for less time than your winners. That goal gives you a purpose for the trading day, keeping your attention even when markets turn dull.

What these four best practices tell us is that an active mindset, in which we prepare for each day, set goals, step back to re-evaluate, and take measures to sustain our concentration, is the key to staying engaged with markets. When we lack preparation, goals, breaks, and self-evaluations, markets--and the emotions they evoke--are more likely to control us. There is a reason that sports teams prepare for big games, take time outs during games, set goals with coaches, and get pulled from games for a spell to rest and talk with coaches. You can't win the game if you're not in control of your performance.
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Using Your Body To Program Your Mind

One of the most common questions I get from traders is how to tune out thoughts and feelings that can sway our decision making.  Some of the common steps traders take to keep away fear, greed, and frustration include focusing exercises (including meditation) before the start of the trading day and taking breaks during the trading day to clear one's head.  What is interesting, however, is that, despite these steps, many traders continue to struggle with impulsive, reactive trading.

What is going on?

First, let's establish why this is important.  As the quote above suggests, when we quiet our minds, we gain access to our intuitive knowing.  There is nothing mystical about this.  Our pattern recognition represents a non-verbal level of knowing.  We engage in that form of information processing every time we drive a car or read a person in a conversation.  If we are busy talking to ourselves--engaging in inner chatter about missing trades, needing to trade bigger, losing money, etc--we by definition are not in our non-verbal processing mode.  We cover over our intuitive processing with our endless self-talk.  Quieting our minds provides us with access to what we know but don't necessarily know that we know.

So let's say we practice relaxation techniques prior to trading and teach ourselves to focus our attention and calm ourselves.  That way, when we become stressed and go into fight-or-flight mode, we can return to our exercises and regain our composure.

Sounds good, but it doesn't work that way.

The problem is that the state we are in when we are doing our exercises is miles apart from the state we're in when we're experiencing our fear and frustration.  We can't prepare for the heat of battle off the battlefield.  The skills simply don't transfer.  That is why behavioral therapists try to recreate stressful situations through imagery and gradual exposure while engaging in the self-control exercises.  We need to program our minds for when our bodies are going haywire. Otherwise, we perform the exercises fine prior to trading and during our breaks and then fall back into reactive processing when the fight/flight mode is upon us.

A technique that behavioral psychologists have found helpful is known as interoceptive exposure.  What this means is that we simulate the physiological state that is associated with the stress and then learn effective coping methods.  For example, someone with a panic disorder might go round and round in circles making themselves dizzy and lightheaded.  This simulates some of the physical sensations of panic.  In that state, the person practices their coping techniques, so that they can stay calm and centered despite those sensations.  When panicky feelings actually hit, they now are prepared for them and don't become stressed by their own anxiety.

It turns out that many of our problems are not due to initial stress and anxiety reactions, but to our getting stressed out about our stress!  This is known as secondary anxiety.  Through interoceptive exposure, we literally program our minds to stay focused and relaxed during those initial periods of stress.  Then, sure enough, the stress passes without causing us distress.

So how does this relate to trading?

I've recently begun a creative exercise that has been greatly helpful not only in trading but across a number of challenging life situations.  Each morning I do an aerobic workout on my treadmill.  The idea is to keep myself in an elevated, target heart rate zone for a certain period of time.  My Fitbit tracks my progress on that.

The unique part of the exercise is that, while I am working out on the treadmill, I practice my deep, regular breathing and focused imagery.  In other words, I get myself "in the zone" by quieting my mind while I'm sustaining an elevated heartrate.  Through daily practice, I've become quite good at entering that flow state during my time on the treadmill.  A side benefit is that the workout seems to go much quicker, and I more quickly find my second wind.  Once in the flow, I don't really feel fatigue.

The greatest benefit, however, is that the daily repetition literally trains and programs my mind to stay focused and calm--i.e., stay in the zone--while my body is aroused.  That fight or flight state begins with elevated heartrate and a speeding up of physiological functions.  By training ourselves to stay relaxed through the initial arousal, we can make that fight/flight state completely non-threatening.  There is no snowballing into secondary anxiety/stress.  Now, when a stressful event occurs in the market, I very naturally slow my breathing and enter the focused rhythm from the treadmill.  

This turns interoceptive exposure into a peak performance tool.

Most of the problems of trading psychology are state-dependent.  They are triggered by particular states of mind and body.  By training ourselves to engage in our best information processing while we are in the states that trigger us, we gain a level of control over ourselves and our trading that simply is not possible with casual self-help techniques.

Who knew?  Your aerobic workouts could become your best trading psychology workouts!

Further Reading:

How to Deal With Performance Pressure in Trading

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Trading Psychology Techniques - 3: Managing Your Energy

In the first post in this series, we took a look at the do's and don'ts of creating an effective trading journal.  The second post examined the importance of testing our trading ideas and truly understanding our edge in markets.  When you are on a productive learning curve and when you trade with an edge you understand, you are able to trade with energy and enthusiasm.  Yes, it's important to manage our risk and it's important to manage positions.  In our personal lives, it's important to manage our time and manage our homes and our savings.  Few of these things, however, provide us with energy and inspiration.  It's surprising how few people have reliable processes for managing and growing their energy.

Why is this important?

Energy is one of four key components of positive emotional experience.  The other three are happiness (doing what we enjoy); fulfillment (doing what we find meaningful); and relationships (doing things that bond us to those we care about).  It is difficult to imagine experiencing well-being without a good measure of energy and enthusiasm.  Indeed, research suggests that we are most likely to succeed at work and experience good health if we enjoy a high degree of well-being.

Energy comes from multiple sources:  intellectual stimulation; physical exercise; optimism and inspiration; novel experience; and more.  In a very important sense, energy comes from those other dimensions of joy, fulfillment, and connectedness.  When we are energized, we are most alert, most mentally switched-on, and most able to process information broadly, quickly, and deeply.  It is very difficult to be at our cognitive peak if we are run-down, bored, or otherwise in low energy states.

Perhaps most important of all, it is when we are energized that we have greatest access to our strengths in all areas of life.  Can we truly expect to succeed at trading if we are operating in less than fully energized states?

And yet that is often what I observe:  Traders become so concerned about not losing money, about poor performance, and about trading mistakes that their self-talk becomes profoundly de-energizing.  Think about it:  how often does your trading journal inspire and energize you?  How often is your self-talk during trading breaks optimistic and enthusiastic?  How often are you trading in states of high mental energy (concentration, focus) and high physical energy (aerobic fitness)?  Many times we have processes that guide us in risk management and trade entries/exits, but not in processes that keep us in the right state for peak performance.

A process that manages and maximizes our energy would include at least five components:

*  Ways of taking breaks from trading that keep us alert and renewed;
*  Ways of preparing for trading that keep us positively and constructively focused;
*  Ways of interacting with other traders that keep us informed and inspired;
*  Ways of using our time outside trading to do things that excite and interest us;
*  Ways of using our time outside trading to stay physically fit and energized.

How many of these five cylinders are you firing on from day-to-day, week-to-week?

If re-reading your trading journals and re-viewing your trading day doesn't energize you, you know you're operating outside your peak performance zone.

Further Reading:

Trading With Energy

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Cultivating Winning Habits

While posting to the blog the other day, I noticed that TraderFeed is closing in on 4000 posts.  It struck me that 4000 is a large number.  If I wrote a blog post daily for 10 years, I still wouldn't accumulate 4000 posts.

Now someone observing that amount of writing might marvel at the level of motivation, passion, and discipline it takes to maintain such a blog.  In point of fact, however, motivation, passion, and discipline have little to do with the writing productivity.  And therein lies an important, but underappreciated reality for trading psychology.

The recent posts on turning success into a habit and the importance of small wins suggest that the right habits are crucial in cultivating a positive sense of self.  Many small wins, strung together, become winning habits.  When we have winning habits, we don't need to rely on discipline or passion or motivation to do the right things.  I take a shower every morning without fail.  No one lauds my motivation or my passion for cleanliness.  The truth is that taking a shower in the morning has become an automatic act...the day wouldn't feel right if not begun with a shower.

That makes sense from an evolutionary vantage point.  Habits enable us to do what we want/need to do in more or less auto-pilot mode, while saving limited attention and willpower resources for novel tasks and demands.  Because of that, we can engage in relatively complex tasks--driving in NYC traffic, for example--while carrying on a conversation with a passenger and watching for the next freeway exit.

A look at my recent blog posts reveals the times at which they were written (Central, US).  Going from most recent to older posts this month the times have been:  1:41 AM; 4:24 AM; 3:53 AM; 4:01 AM; 3:05 AM; 3:25 AM; 2:07 AM; 5:14 AM; 4:38 AM; and 6:40 AM.  You get the idea.  I start my day with writing, just as I start my day feeding my cats and taking a shower.  It's not the result of coaching, counseling, journaling, discipline, motivation, or any of those other staples of trading psychology.  It's the result of cultivating positive habits.   

We can create habits for productivity, habits for happiness--habits for most any positive outcome we care to generate, according to recent research.  Charles Duhigg, who wrote the excellent book The Power of Habit, suggests that there is a "golden rule" of habit change:  retain the cues that trigger a habit and the rewards that sustain the habit and find fresh, constructive routines to link these.  I used to write journal articles and books while at home, but I found that when I needed to take breaks, I inevitably drifted mindlessly to the refrigerator.  I got my writing done--and I put on the pounds to prove it!  That's when I hit on the idea of doing my writing at coffee shops and grocery stores.  My breaks consisted of coffee and whatever small snack I purchased--no more grazing at the fridge.

When I first began attending open AA meetings as a community psychologist in Upstate New York, I joked with a colleague that the members had retained their drinking habit:  they had simply replaced alcohol with coffee.  Little did I appreciate that habit truly is the backbone of 12-step programs.  Does AA seek to cure alcoholism with willpower, motivation, or planning?  Not at all!  Indeed, one of the prime tenets of AA is the member's declaration that they are powerless against alcohol.  It's not about willpower.  

So how to AA members overcome their destructive habit?  They start with 90 meetings in 90 days.  "Bring the body and the mind will follow," is a popular slogan.  By the time 90 days are over, the coffee urn has replaced the barstool and AA buddies have replaced the drinking ones.  One member put it very well:

"What I’ve learned is that taking action is almost always the gateway into feeling better. Rarely have I been able to think my way into different behavior or results, instead it’s only when I take action (especially when I don’t want to) that things begin to shift, and I begin feeling better.The program, like life, doesn’t work when I’m into thinking, only when I’m into action."

It isn't that we think ourselves into new action patterns.  Rather, new ways of acting create new ways of experiencing ourselves, which cultivate new--and potentially constructive--habits.  Doing changes our viewing.  Action, harnessed to routine, is a gateway.

Further Reading:  Turning Goals Into Habit Patterns
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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

Exercising Our Brains for Trading Success

I'm increasingly convinced that cognitive factors, and not just personality ones, differentiate the best traders from the rest.  It's not surprising that my recent post on a cognitive view of trading psychology has been the most widely read TraderFeed post in many months.  Trading psychology has long focused on emotions as the most important focus in trading performance.  The cognitive view says that it is how we process information that enables us to see patterns, understand relationships, and quickly act upon them.  Personality and emotional factors can certainly impact our information processing, but all the self-help techniques in the world won't help us if we're not wired for the kinds of trading we undertake.

Can we train the brain for trading success?  In other words, is it possible to systematically exercise and build those functions that enable us to perceive signals in noisy environments?

I believe the answer is yes, and I will go one step further by proposing that an important element that differentiates successful traders from less successful ones is the quality of their screen time when they are following markets.  The successful traders actively exercise the cognitive functions relevant to their trading while they are preparing for the day, while they are tracking markets, and while they are trading.  Their routines act as a kind of mind gym, building such functions as the capacity for focus, speed of pattern recognition, and the ability to translate perception into action.  The successful trader's daily routine is an excellent cognitive workout.

The less successful trader might look at the very same markets and patterns, but gets a shitty workout.  Their focus is often divided among online chatting, watching markets, taking breaks, speaking with traders, and reviewing their P/L.  They never engage in any single cognitive activity for long enough--or with enough intensity--to get a proper workout.  As a result, the less successful trader does not develop cognitively in the way that the successful trader does.  The successful trader becomes a better information processor simply because they are spending more time--and especially more quality time--in the activities that build perception, concentration, and decision-making.

I'm currently evaluating a brain exercise system called brainHQ, which has been supported by a range of published research.  That research suggests that regular exercise of brain functions can improve our processing speed, memory, attention span, and more.  I find it quite possible that programs for training traders will increasingly turn to brain fitness tools as a way of helping developing traders become more cognitively fit for trading.  How many aspiring athletes would star on the field if they never utilized tools to develop their strength and aerobic conditioning?  How many traders can we expect to find success if they're not actively exercising their brains for the right kind of decision-making?

Further Reading:  Training Our Brains For Trading Success
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Why Your Trading Psychology Exercises Don't Work

 

In the most recent Forbes article, I make the case for mastering our trading psychology by literally engaging in brain training. When I refer to brain training, I am not talking about online exercises or apps that walk you through visualizations, breathing exercises, etc.  Rather, I am talking about directly measuring our body's functioning and training ourselves to control those measures through real time biofeedback.

Over the past two weeks, I have conducted focused experiments with heart rate and heart rate variability, electrodermal activity, and brain wave patterns, using the Fitbit Sense and Muse S units that I referenced in the earlier article.

Here are a few observations that were unexpected:

1)  Taking a Break Doesn't Necessarily Break Our Stress - When I feel stressed and take a break, calming myself and deepening my breathing, I succeed in taking my attention from what is troubling me and I feel more settled, but my body has often not recovered. My heart rate remains elevated, my electrodermal activity and heart rate variability still record stress, and my brain waves are not calm.  Simply taking a break and saying nice things to oneself feels good when we've been frustrated, but may not significantly aid performance.

2)  Less Stress Does Not Equal Greater Focus - This has been dramatic in my experiments thus far.  I can remain still, breathe deeply, and engage in calm imagery and that will reduce my heart rate over time.  (It takes longer than most of us allot to trading breaks.)  When I measure my brain waves, however, they do not show that I'm more focused.  Indeed, to achieve high focus readings with the brain waves, what I need to do is concentrate, not relax.  Interestingly, when I do a meditation routine and do it well, it helps my stress measures (i.e., I'm more relaxed), but my brain waves don't register as being in the zone.  A few minutes of a meditative exercise is very different from mastering the discipline of meditation.

3)  A Few Minutes of High Focus Changes Our Psychology - Most of us are familiar with the feeling of being calm and unstressed. That relaxed state can be helpful in winding down from a period of trading.  A highly focused state feels quite different.  When I'm unusually focused (and the brain wave feedback registers such focus), I feel a slight tension in my forehead and I feel distanced from the world around me.  It doesn't feel relaxed, as one might feel after an alcoholic beverage.  It feels quiet and I feel separated from the world, more like an observer than a participant in what is going on.  Perception is different in this mode, clearer and not at all distracted.  I'll have more to say about this in the next Three Minute Trading Coach video, but my sense is that I see markets much better when I'm highly focused than when I am simply stress free.

So what does all this mean?  Perhaps we're managing our trading psychology the wrong way.  Perhaps we're trying to de-stress when we need to be intensely focusing.  Perhaps we are setting up our trading days and processes in ways that increase distraction and actually prevent us from achieving the focus needed to quickly process evolving market patterns.  Our efforts at improving our trading psychology might not work because we're focusing on our feelings rather than strengthening our brains.

Further Resources:

Mastering Your Trading Psychology

Wiring Our Brains For Trading Success

The Three Minute Trading Coach YouTube Channel

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Developing Your Trading Psychology Process

Many traders work on developing a trading process that captures what they define as opportunity and how they want to implement that opportunity. 

How many traders have a process for trading psychology?  As I note below, this will be the topic of an upcoming four hour seminar for traders at Trading Expo.

A trading psychology process is one in which we systematically engage in the activities that place us in a peak performance mindset.

That means we need to study our mindsets and identify the factors that aid our performance and factors that hinder.  Once we identify what helps us be in the right mindset for trading, we can begin to assemble those elements into repeatable processes.

One of the keys to success is creating processes that are so intrinsically rewarding that you will *love* engaging in them.  That is what helps you engage in the right activities daily, and that is what creates positive habit patterns.

Some of the elements of peak performance that I've observed among successful traders include:

*  Pre-trading rituals to prepare for various market scenarios;
*  Meditation, biofeedback, self-hypnosis and similar activities to increase our focus;
*  Mental rehearsal of plans for the day;
*  Physical exercise to be energized for the day;
*  Taking breaks to renew concentration and stay in the right mindset;
*  Constructive self-talk through the trading day;
*  Looking at markets through multiple lenses to see fresh sources of opportunity and threat.

It's when we assemble these kinds of practices into daily routines that we take control of our trading psychology.

So, about that trading psychology seminar:

On February 26th, I'll be at the New York City Traders Expo and will offer a four-hour workshop on the best practices of best traders--and how we can implement them in our own trading.  The beauty of a four-hour workshop is that we will have ample time for coaching:  applying the ideas to our specific situations and finding ways to create processes we will so love that we will naturally make them daily routines.

The bottom line is that trading psychology has to be something we do, not just something we think about.  I look forward to working with you on the doing!

Further Reading:  Four Pillars of Trading Process
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Five Trading Virtues: Best Practices for Traders

My recent post focused on common mistakes that traders make. I thought I would address the reverse issue and offer five "best practices" I've noticed among good traders:

1) Preparation to start the day and week: Having a clearly formulated strategy to guide trading decisions;

2) Keeping score: Using a trading journal to structure learning, document progress, and sustain positive motivation;

3) Managing risk and maximizing opportunity: Trading with more risk/size when trading well and clearly seeing opportunity and pulling back risk when drawing down, trading poorly, and perceiving little opportunity;

4) Taking breaks: Stepping back from markets periodically to gain fresh perspective, reformulate views, and tweak strategies;

5) Treating trading as a business: Limiting overhead, having a clearly defined plan to move toward profitability, focusing on distinctive areas of strengths and opportunity.

So much of what makes traders great is what they do between market sessions, how they do it, and how much of it they do.
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Market Psychology AM Update for 9/13/06

10:36 AM CT - Very much a range bound market to this point. We finally got that move to AM highs above yesterday's highs after a local-driven shakout; we need NAZ, ER2, and TICK in upside gear to sustain those new highs. Have a great rest of the trading day.

9:45 AM CT - The erosion of the NAZ and ER2, along with the weakening volume at offer vs bid prevented the ES from breaking those highs. Always a danger sign when you see huge offers act as a brick wall to a rise. We're back to targeting that average price for the day if we take out the early AM lows. Off to do some work with traders; update tonight on the Weblog. Have a great day.

9:30 AM CT - Big offers holding market down at that 1325.5 level. Need to see good buying take those out to get the anticipated new highs. Lots of jockeying among locals here.

9:22 AM CT - Market trying to make a bottom at 1324 area. Watching order flow carefully.

9:16 AM CT - Not too much has changed; the TICK distribution remains positive, despite some resistance at that 1326 level and some recent TICK weakening. Russell and NAZ looking a bit heavy here. I'm watching carefully to see if selling dries up here or accelerates. As long as we stay above the early AM lows with a positive TICK distribution, I'd expect to take out that 1326 level and test the recent bull swing highs at 1327.75. A break below the early AM lows targets that 1320 average price from yesterday. The MDY trade worked out fine; I'll report on my Odds Maker work on my personal site for the next couple of days.

9:02 AM CT - Clearly the IWM short did not work out; in general, I hate taking trades that early in the session, because I don't yet have a good feel for who's in the market, how volume is distributed, etc. Odds Maker allows traders to filter that out. We got drying up of buying at the 1326 level in ES and that would have been a discretionary point to take profits on the MDY long trade. That one closes out at 9:12 AM. I'm going to work further with Odds Maker to refine signals and their timing before doing anything further in real time.

8:51 AM CT - Solid volume, volume at offer exceeding volume at bid for ES, and a positive TICK distribution. Similar to yesterday. That's why you'd take buy setups short-term more seriously than sell ones. We're getting that test of ES highs from yesterday; let's see how the volume distribution breaks down as we get up there.

8:42 AM CT updated 8:47 AM CT - Buy signal 30 min hold in MDY from Odds Maker 137.65; unfortunately Blogger problem prevented me from getting out quicker. Again for observation only. The IWM trade flew in the face of order flow, which supports my idea of filtering these trades for how the market is actually handling volume and orders at the time.

8:40 AM CT - Early volume decent, less strong so far than yesterday. Pretty flat in advance decline ratio; TICK a bit on the positive side. So far, nothing to dissuade me from an eventual move to test yesterday highs. I'll let the Odds Maker signal play out for observation only; close out at 9:02 AM. Given the positive TICK thus far, it's not a signal I would normally take.

8:32 AM CT - 30 min sell signal in IWM from Odds Maker 72.17.

8:20 AM CT - If you haven't yet read the blog entry on sport psychology and trading, I'd like to (humbly!) recommend it. I think the ideas are important. As the update noted yesterday, we had an uptrend day yesterday on the heels of the breakout move, and recognizing that early was a key to taking a little money out of the market. The odds are in favor of us taking out yesterday's nearby high of 1326.25; we're also looking at resistance at the 1327.75 area. The overnight range has been muted, and the VIX is back to below 12, so it would not be a surprise to see slow, range bound action. The first upside target is the 1325 area; to the downside, we have the overnight lows around 1323 and the 1320 average trading price from yesterday. Catching early strength/weakness for tests of these levels can frame early trades. I'll be watching for the Odds Maker setups. Back in a little while.

Morning With the Doc - 10/31/06

11:24 AM CT - That TICK distribution has taken a negative turn, and we're testing yesterday lows in ES. Note that we are not making lows in the other major indices. It would take a drying up of selling to have me testing the upside here, however. The weak dollar and falling rates are not signs of economic robustness and macro traders obviously did not step up to the plate and buy this AM after the numbers came out. While I keep the longer-term research in mind, it will take a pronounced upward shift in TICK and participation lifting offers by large traders to have me buying again today. It's not an exciting way to trade, but over the years it's preserved capital for me. Thanks for the interest; I'll do another morning session later in November.

10:53 AM CT - Well, that's where stops come in handy. It's disappointing to scratch a couple of promising trades, but I don't know of any way to pursue the large gains without risking some of those profits in hand. But when we saw fresh selling drive the Russells and TICK down, that was the cue that we could not sustain the uptrend. Tonight I'll review my decision making and probably kick myself for not more proactively recognizing that we were in a rangebound market oscillating around that average price. That would have allowed for taking of profits as we traded above 1383 and stalled out. I've been trading since the late 1970s and continue to learn, continue to make mistakes, continue to search and re-search patterns. My longer term picture remains intact, but we'll need more participation to the upside to make that happen. Volume really tailed off as the morning wore on, and we could see some rangebound and slow trade ahead of economic numbers later in the week. Have a great one.

10:36 AM CT - Trade has slowed down and we're seeing those runs up and down initiated by the locals. I will not add to positions in that environment, but so far I'll need more concerted selling to take me out of the positions. The TICK distribution for today continues to look favorable relative to the last two days and note that, so far, we've held above yesterday's lows. Still, the 1383.25 average price is acting as a magnet on prices and we'll need volume to vault us to new value areas. I hope today's session has shown you a bit about money management, framing trade ideas, framing when to stay in trades vs. pull out, and how to coordinate a longer-term perspective with a shorter one. Arguably, I've gotten too caught up in the big picture today and missed some short-term trades. My hope is that you can learn from my mistakes as well as my wins. Have a great rest of the day.

10:25 AM CT - I have not added to positions on this pullback, as stocks in the basket have been weak and NQ is looking heavy. I could get stopped out at breakeven here, and that would just put me back in the mode of assessing the market, developing new ideas, etc. Back in a few.

10:05 AM CT - Stocks in the basket still look OK; a few making 5 min lows here. As long as those TICK pullbacks are shallow and occur at higher price levels, they are candidates to add to positions. But if we get aggressive selling (hitting of bids with size) and very negative TICK, that's a different matter altogether. I'll update at least once more before calling it a morning.

9:58 AM CT - Stops raised to breakeven. No sense letting good trades turn into losers. All part of the money mgt. I added the Russells because of the positive shift in the TICK distribution. Russells correlate about .78 with TICK. I keep all sorts of stats like that in my head to aid decision making. I might be a piggy here, but I think we have a shot to break the day's morning highs and get a flurry of buying as a result. So I'm holding on here and not taking profits. If I do take profits, I'll take off one unit at a time when TICK gets extended and if stocks in the basket aren't doing a good job making new highs.

9:50 AM CT - Added Russells to the position. Tight stop 772.2.

9:45 AM CT - Note the strength in energy issues. Why? Weak dollar: oil is dominated in dollars. Ditto gold. Not good, not good for the longer run, even though the big traders are lifting offers and the TICK has shifted dramatically upward. I've raised my stop to the day's lows (note that I'm giving this trade plenty of room to breathe, as it's designed to be held overnite) and will add to positions when selling bouts fail to take us to new lows. In a nice trending market (which this isn't so far!!), retracements of the TICK back toward zero (or modestly negative) make good candidates for entries. I'll see how we hold up in price on the next such retracement before adding to the position, quite possibly with Russells.

9:40 AM CT - I'm not gonna lie. Having my initial position go under didn't bother me particularly. Seeing the dollar tanking and bond yields plummeting makes me really uneasy. That's traders anticipating recession, folks. We've gotten some nice buying, expansion of TICK, and stocks in the basket making fresh 5 min highs on a broad basis, returning the core position to breakeven. Now let's have sellers take their turn and see if we can hold at higher lows in TICK and price. That would get me adding to the position, but I still don't like that falling dollar.

9:28 AM CT - This is where money management is crucial. I took a small position with one unit of capital. I divide my trading capital into 4 units. If I'm wrong by buying (and my position *is* under water at this time), my losses won't be extreme. If the market is proving me right, I have plenty of opportunity to scale in. At present, it's not that we're seeing heavy selling so much as the absence of buying in the face of the weak economic numbers, rising bonds, etc. Declining issues only lead advancers by about 250 issues. But there's no way I'll add to the long position until the TICK distribution turns positive with readings over +800.

9:17 AM CT - I have a small core position long at this point and it's mainly playing for that edge over the next 5 days, as mentioned on the Weblog. As long as the TICK distribution stays more positive today than yesterday (and yesterday was stronger than Friday) and as long as we stay above yesterday's lows, I'll look for the Friday-Tuesday sequence as a transitional structure creating a market bottom. If we get fresh selling and extended negative TICK, I'll be stopped out. A few issues in the basket are perking up and showing new highs, but we need to see large traders lifting offers to confirm the long idea.

9:05 AM CT - Ok, we see signs of a bit of weakness, rates coming down, Euro strong against the dollar, some selling of stocks, but TICK holding up well. Basket of stocks making more 5 min lows than highs, large traders not hitting bids in force. I've been nibbling long as TICK went negative, but we need to stay above yesterday's lows to make this a longer term buy.

8:54 AM CT - Selling so far is modest in the TICK and volume continues strong. More than just locals in this market, and that usually leads to good movement. We're seeing some hitting of bids in Market Delta among large traders; that's kept me out of the long side. New 5 min lows in my basket have dominated new highs recently. The basket's weakness has kept me out of the long side as well. Patience, so far. Let's see how those numbers look and develop an idea from there.

8:41 AM CT - Remember that strong volume generally correlates with high volatility, so if our 5 minute volume readings stay high, I'd expect decent market movement this AM and today in general. I'm also tracking the net NYSE TICK, which has been positive so far; the volume at offer vs. bid in Market Delta (also positive so far); and the net new 5 min highs vs. lows in Trade Ideas (pretty even at this point). Note how the new highs/lows kept me from chasing the opening upmove. Staying out of bad trades is as important as making good ones. I'm flat and may well stay that way until the numbers come out; sellers taking their turn.

8:35 AM CT - Solid volume to open, particularly considering we're awaiting some numbers. We're seeing solid net lifting of offers among large traders, and that's showing up in a positive NYSE TICK and advancing stocks solidly leading decliners by over 600 issues. We've taken out yesterday's highs in NQ and Russell; so far the bullish bias is playing out. My basket of stocks is showing some issues making 5 min lows even as ES made its opening run, so I'm waiting for sellers to take their turn.

8:30 AM CT - Here's what I'm looking at on my screens: e-Signal tracks the NYSE TICK, TIKI, DAX, Russell, NASDAQ, and ES futures, along with sector ETFs. Trade-Ideas is tracking fresh five-minute highs and lows in my basket of stocks (see the Trader Performance page for details). Market Delta is tracking volume at the bid and offer and is alerting me to what large traders are doing. I also maintain a cumulative volume at price histogram on Market Delta that gives a rough reading of where our value area is at, a la Market Profile. That's it. The value area is approximately between 1381.75 and 1384.75. The big question for the open is whether we can get quick buying pressure to sustain us above that range, or whether we'll return toward the average price around 1383.25.

8:10 AM CT - Couple of quick announcements before the open. My new book, Enhancing Trader Performance, will be shipped in the next week. Initial comments from reviewers have been very positive; it's the first book I know of that tackles the issue of how traders can develop systematic programs of training for success. Also check out the Chicago Mercantile Exchange's free panel presentation on Peak Performance Electronic Trading this Thursday (11/2) at 2:30 PM CT, which I'll be part of. Registration is required; the session will be live at the Merc auditorium, but also Webcast for those unable to attend in person. I also want to offer a note of thanks to Brian Shannon, another trader devoted to the training of traders, for giving his blog readers a heads up on this morning's session. Brian's innovative use of video as a teaching tool, on his blog and in his online classes, is worth checking out. For other unique training tools, check out what Charles Kirk is quietly doing with the portion of his site devoted to members, in which he makes his trades, results, and trading journal available for readers. Also take note of what Howard Lindzon, Trader Mike, and others have put together in the video world with Wallstrip. Back after the open.

7:45 AM CT - The ECI report came in pretty much in line, and we're not seeing any radical moves in bonds, stocks, or the dollar as a result. Monday's average trading price was 1383 in the Dec. S&P emini futures, and we're trading above that level. Note that the Russell futures are closer to yesterday's highs than either the ES or NQ. With ES, we're looking at Monday highs of 1387 and lows of 1378.75. Given the bull bias of my research, my initial trading plan is to buy bouts of selling that hold above the Monday lows in anticipation of taking out Monday highs. A great setup would be to see early selling scare off bulls but hold above yesterday's lows, completing one of those transitional market structures spanning Friday through today. If that occurred, I would probably leave a piece on for a potential several-day move that would test the recent bull highs. My plan B kicks in if we get fresh selling pressure, perhaps as a result of those 9 AM CT economic reports. Fresh selling that breaks yesterday's lows with broad participation would target the cluster of daily lows we've seen in the 1369-1369.75 region and would flip me to the sell side. The important point here is that you rely on research for a leaning, but you don't get so wedded to that opinion that you ignore how the market is *actually* trading. I will start the morning flat. Back before the open.

7:00 AM CT - In my haste, I forgot to mention the Employment Cost Index report at 7:30 AM CT, which tracks the cost of labor. A very strong figure would be taken as inflationary and would likely lead to a jump in interest rates and pressure on the Fed to tighten monetary conditions. With economic reports before the open, I like to note the high-low range of the overnight market prior to the report and then the high-low range after the report until the open. That is a quick gauge of whether the report has fundamentally altered market participants' estimates of value. If the news is truly news, we should see a considerable adjustment in the bonds and currencies.

6:50 AM CT - Good morning and welcome to the Halloween AM session, in which we'll track markets and take a look at decision support for traders. Here are three reading assignments prior to the market open: 1) Take a look at my latest Trader Performance page entry in which I explain how I track intraday new highs and new lows with my basket of 17 stocks. I'll be referring to this during our AM session; 2) Note the research reported on the Trading Psychology Weblog. This is one reason I have moderately bullish expectations over the next several trading sessions; and 3) Check out the excellent Briefing website and click on their economic calendar, and then click on the economic reports due out today. At 9 AM CT, we'll have consumer confidence and Chicago PMI. The markets will be looking for signs of economic strength to see if we might get future rate hikes and interest rate firmness. Keep an eye on bond yields and the dollar when those numbers come out. If we get major moves in those markets, the odds are greatly enhanced that we'll see a trending move in equities, as markets price in fundamental, new information. All things being equal, we've been seeing sustained strength across a broad range of sectors and that normally leads to upside follow through in the near-to-intermediate term. But this is Halloween, and we could get some tricks along with promised treats. Back before the open.