All posts in "Day-Trading"

Correcting Two Great Trading Psychology Mistakes

 

Too often, traders take in one piece of information after another, reading emails, scanning charts, reviewing research pieces, tracking news, and talking with other traders, and never get to the point where the information is transformed into knowledge.  Someone trading the stock of a company may compile all sorts of statistics and news items about that company, but those in themselves don’t ensure a knowledge of the company’s competitive advantages and disadvantages or its growth potential.  If someone gathered pieces of information about our lives, would they truly understand us?

We often hear that the heart of trading psychology is discipline and the control of emotions.  Other times, we hear that openness to and awareness of our emotions is crucial to enlightened decision making.  Both perspectives have merit, yet both make the mistake of assuming that trading psychology is basically about what and how we feel.  

Not so.

Every bit as important to our trading as our emotional psychology is our cognitive psychology:  how we process information and turn it into knowledge.  Indeed, I would argue that, as we move from beginning traders to experienced ones, emotion becomes less of a central focus for trading and information processing becomes more critical.  Lo and Repin, for example, found that traders responded to heightened market volatility with emotion, with inexperienced traders far more reactive than experienced ones.  Experienced, successful traders may or may not wrestle with emotional responses to a market scenario, but they will always be actively involved in processing that scenario and searching for opportunity.

Two cognitive psychology mistakes are common among traders:

1)  Not making the time to assemble information into knowledge – Key to knowledge is finding meaningful patterns in data and placing those patterns into a framework for understanding.  In my trading, I track statistics ranging from volume, breadth, sentiment, and buying/selling pressure, but it’s the integration of the data that contributes to understanding.  One form of integration is in the form of a mathematical model.  Another form is a conceptual framework that is grounded in the concept of market cycles.  If I get so caught up following the data that I don’t engage in integration, I will fail to perceive valid trading opportunity.  Equally problematic, I will tend to act on individual pieces of information that grab my attention without placing that information into proper context.

2)  Not playing to our information processing strengths when we generate trading ideas – Each of us is quite different in how we make sense of the world.  Some of us are quite mathematical and analytical, assembling views from the ground up.  Others are conceptual and qualitative, looking for broad patterns to derive a top-down view of the world.  My most native form of information processing is writing.  Quite literally, writing is my way of thinking aloud and generating an internal dialogue that places information into perspective.  Other traders accomplish the same thing by reading and taking notes; still others by engaging in multiple conversations.  Far too often, traders fail to reach their potential because they’re not accessing their cognitive potentials.  They are making sense of markets in someone else’s style, not their own.

I’ve recently begun an experiment in which I engage in very extended journaling, writing out my assessment of the most recent day’s market and where it fits into the broader picture of market cycles, but also writing out every single trade that I place, why I placed it, what worked and didn’t work, and what I have done well or could have done differently.  The depth of the journaling is far different from the typical end of day notes on trading and markets.  In practice, I keep writing and writing until I get to the point where knowledge results from the information.

It’s early days, but the method so far has been helpful.  One unintended consequence:  I find myself feeling more confidence in trades when I’ve processed the opportunity in greater depth, in ways that are most productive for my sense-making.

Further Reading:  The Two Brains of Trading

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Thu, 24 Nov 2016 11:51:00 +0000

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A Strong Market is One With Few Weak Stocks

 

A Strong Market is One With Few Weak Stocks

We often think of a strong market as one in which many stocks are making new highs.  Interestingly, a better indication of market strength has been the absence of weakness: few stocks making new lows.

One way I track this is the daily number of listed stocks making fresh one-month new highs and lows.  (Data from the Barchart site).  When the number of shares making monthly lows is in its lowest quartile since 2012, the next five days in SPY have averaged a gain of +.32%.  When the number of shares making monthly lows has been in its highest quartile, the next five days in SPY have averaged a gain of +.53%.  All other occasions have averaged a gain of only +.02%.  

The absence of new lows occurs when we’ve had a momentum rise that has lifted the great majority of stocks.  That has been the case recently.  That momentum tends to continue over the near term.  Conversely, when we make an important low, we see an expansion of fresh lows.  That tends to bring in value participants and strength over the near term.  Much of market strength can be traced to such momentum and value effects.

It’s but another example of how looking at different data in a different way can yield helpful trading insights.  Markets are ready to turn around when one or more sectors show weakness and we start to see an expansion of new lows, even as the index might be hovering near highs.  When there is very little weakness, we have an important clue as to strength.

Further Reading:  Strength and Weakness as Separate Market Dimensions

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Wed, 23 Nov 2016 10:39:00 +0000

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Living Your Ideals and Other Great Ideas to Start the Week

 

*  Every serious trader is a leader, running a trading business.  Would you want to work for the business you’re creating?  Would you follow yourself as a leader?  Would you allocate your hard-earned money to someone who manages their trading the way you do?  Inspiration follows from aspiration: We are most energized when we live up to our highest ideals.

Great weekly perspective from Jeff Miller; excellent focus on what’s really important for markets.  A useful way to read Jeff is to make it a point to visit the sites he links to in his posts.  Enhancing your information set is essential to enhancing your ability to recognize opportunities and turn those into successful trades and investments.

*  Here’s a useful post from Adam Grimes on how to calculate volatility in Excel.  Every weekend I work on a new research project.  This weekend I took a hard look at the volatility of buying and selling activity in the stock market by tracking the volatility of upticks and downticks.  There was a distinct tendency for returns in SPY to be superior when buying and selling volatility have been high; returns to be subnormal when buying and selling volatility have been low.  More to come on this topic.  Recently, we’ve had relatively high volatility readings for buying and selling, helping fuel the current rally.

*  Another excellent site for perspective is Abnormal Returns.  The most recent links include valuable views on the recent decline in bonds.  AR is a very useful way to discover sites that enrich your thinking about markets.  

*  A feature I like on Stock Twits summarizes the message volume and sentiment for stocks and ETFs.  Small caps have been on fire since the election, and message volume for IWM has been high.  Interestingly, though, 45% of participants have been bullish on IWM and 55% bearish.  We’re hovering near highs for the broad indexes, but I’m not seeing frothy sentiment so far.  My “pure sentiment” measure, which takes recent price change and volatility out of the equity put/call ratio, has been surprisingly bearish during this rally.

Have a great week trading!

Brett

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Mon, 21 Nov 2016 09:47:00 +0000

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What Do You Do After a Big Winning Day?

 

What Do You Do After a Big Winning Day?

A little while ago, a trader who has been quite successful this year sent me a draft of his trading plan for the new year.  Shortly after, he had his best day of the year.  I have little doubt that he’ll use information from the winning day to help him build on his strengths and hone his goals for 2017.

That’s what winners do.  They learn from what they do wrong, they learn from their successes, and they translate their lessons into plans and actions.  A big winning day is a double win if you can figure out what you did well and replicate that success going forward.  Maybe the big day was a function of a particular type of market action that you recognized early on.  Maybe the big day was a function of researching great trade ideas.  Maybe the big day was a function of sizing up a position you had prepared well and saw clearly.  

Suppose you catalogued your top 10 trades of the year, where you fired on all cylinders, making the most of your trading process.  What patterns of success would you discover?  What best practices could you identify that you could bring into the new year?

Good traders celebrate after a win.  Great traders treat wins like losses and learn from both.

Further Reading:  How to Become a More Confident Trader

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Fri, 18 Nov 2016 13:24:00 +0000

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Trading Model Update: Finding Edge in the Market

 

Above is an update of my ensemble trading model, which combines individual predictive models for SPY over a 10 day horizon.  The individual models include measures of buying and selling pressure, institutional participation, volatility, breadth, sentiment, and cycle status.  The best signals occur at +3 and above and -3 and below; we currently stand at +2, with a mildly bullish bias.  We had +3 readings on 11/1 and 11/2 and, despite considerable election-related volatility since then, we stand meaningfully higher at this point.  

At present, breadth has been expanding, in no small part due to the strength of small cap stocks since the election.  We have also seen selective strength among sectors, most notably the financial and industrial sectors deemed to benefit from the new administration.  Stocks making fresh three-month highs have expanded to their greatest level in many months.  It’s exceedingly rare for such expanding breadth to suddenly reverse and morph into a bear market.  Rather, these momentum phases of a cycle tend to fade away, with decreasing volume and volatility and divergences of new highs, as value investors no longer perceive value and pull back from segments of the market.  I would expect the model to turn bearish should volume and volatility pull back and should we see diminishing institutional participation on any further strength.

Meanwhile, the model components contributing to the modestly bullish current reading include sentiment, institutional participation, and buying pressure.  In a nutshell, sentiment (adjusted for volatility and recent price movement) has been unusually bearish; participation has been quite high; and a growing proportion of that participation has been channeled toward buying.  Those dynamics have had me in the mode of buying dips.  Equally important, the model readings have prevented me from fading strength, which I’ve seen a number of traders doing, perhaps caught up in a bearish bias related to the election result.  The psychological value of a well-constructed trading model is that it imposes the discipline of patience.  Instead of assuming that I have an edge in trading, the model tells me when the market is affording edge.  That’s an important distinction that takes a lot of ego out of trading.  Once we realize that edge is a function of opportunity set in the market, we can flexibly adapt to changing market conditions.

Further Reading:  Quant Models and Trading Psychology

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Sat, 12 Nov 2016 12:11:00 +0000

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Mastering Trading Psychology: Free Webinar Today

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Mastering Trading Psychology: Free Webinar Today

We would never choose to trade in a noisy and polluted physical environment, and yet many times we find ourselves trading in the psychological equivalent.  When we are distracted, frustrated, and filled with negative thoughts, we unwittingly create an environment that works against our success.  That is why successful traders work on themselves and not just on their trading.

At 4:30 PM EST today, I will conduct the second webinar this week, this time focusing on psychological best practices and specific techniques for dealing with the psychological challenges of risk, reward, and uncertainty.  The free webinar is hosted by John Locke and team; a link for registration can be found here.

One unique aspect of the webinar is that I will be conducting most of it as a group coaching, where participants can bring their questions and challenges and I’ll provide specific help in addressing those.  Hope to see you there!

Brett

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Thu, 03 Nov 2016 11:27:00 +0000

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How Productive Are You During The Trading Day?

 

How Productive Are You During The Trading Day?

It’s been a good thing that I’m doing two webinars this week focusing on different aspects of best practices of the best traders I’ve known.  (Next webinar is at 4:30 PM EST tomorrow).  Reviewing the practices of successful traders helps me put into perspective what works in markets and what doesn’t.  Time and time I’ve found that to be the case: in teaching others, we cement our own learning.

One best practice that came out in yesterday’s session was the quality of time spent *not* trading, particularly when markets are open.  When I think about really good traders I’ve worked with, the great majority don’t spend their entire trading days staring at screens.  Rather, they identify opportunity in advance, do their trading, and then move on to other productive activity, including researching new strategies and opportunities.  Like any good company, the best traders spend significant time on research and development and reviewing/improving their own performance.  That’s what keeps them learning, growing, and adapting to changing markets.

It’s sad to say, but many traders spend so much time trading that they never do the things needed to truly master their craft.  Peak performance requires time deliberately working on performance.  A useful exercise is to look at your research and development pipeline and see if you’re really moving the ball forward in your growth as a trader.  If not, it might be useful to work on articulating your processes away from screens in as detailed a manner as you plan your trading time.

Further Reading:  How to Use Your Calendar to Become More Productive in All Activities
Get The #1 Daily Trading Journal: TTW 30 Day: My Trading Journal

Published at Wed, 02 Nov 2016 13:02:00 +0000

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Best Trading Practices: Trading Psychology Webinar

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By edar from Pixabay

Best Trading Practices: Trading Psychology Webinar

How do successful traders generate, express, and manage their best ideas?  What best practices can you take away from your own successful trading?

After the market close, at 4:30 PM EST, I will be conducting a free webinar hosted by the SMB Options Tribe.  A good amount of time will be devoted to your questions about raising your trading game through best of breed trading practices.

Here is a link for joining the webinar; hope to see you there!

Brett
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Published at Tue, 01 Nov 2016 09:39:00 +0000

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Winning At Trading By Being Different

 

Winning At Trading By Being Different

I love Porter’s quote; it summarizes so much of what I’ve found in working with traders.  The really good ones deliberately choose to be different.  They look at things others don’t look at; they view the world through multiple lenses.  This enables them to find unique opportunities.  

There is a great post from Ivanhoff Capital that summarizes the trading strategies of a successful money manager.  In that post, you can see how James Mai is playing on a multidimensional chess board, viewing markets short-term, long-term, and through the lenses of price change and volatility.  He has a clear idea of where and how markets misprice risks, and he is willing to make many small, losing trades to find a limited number of large winners.  I heartily recommend you read his ways of viewing markets, just as a way of appreciating how a successful trader deliberately chooses to be different.

And how do traders learn these different ways of thinking?  By being exposed to other traders who perceive and exploit unique opportunity.  When an early career trader is brought into a trading firm, the single best predictor of his or her success is the degree of mentoring that occurs at the trading desk.  When new traders are left to their own devices to sink or swim, they frequently sink.  When traders are brought on as trading assistants and learn their way from the ground up through a mentor, they absorb ways of thinking about markets.  Smart training programs allow their new talent to rotate from one trading desk to another, so that they absorb a variety of ways of thinking about markets.

This is why I occasionally post on research I’m doing, creating such measures as “pure sentiment“.  I’m illustrating a way of thinking, whether you follow that particular measure or not.  

After all, learning from example is why developmental efforts from plumbing to psychotherapy to medicine are structured as apprenticeships.  We learn by absorbing the wisdom and experience of masters and then by integrating that learning into our own, unique style.  We can deliberately choose to be different by exposing ourselves to different talent and ideas.

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Published at Mon, 31 Oct 2016 09:19:00 +0000

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What It Takes To Truly Trade In The Zone

What It Takes To Truly Trade In The Zone

Greg Louganis’ quote speaks a vital truth about peak performance.  Many of us seek mindfulness through meditation when we are still, in a quiet environment.  Peak performance demands something yet greater: the maintenance of the clear, mindful “zone” while we are in motion–that is, while we are performing.  

A major challenge for traders is that we become so market-focused and caught up in chats and news flows that we lose the zone.  We become frenzy in motion, not meditation in motion.

The recent article I wrote for Forbes addresses this dilemma and offers a unique solution: using a simple calendar app to sustain deliberate practice and the peak performance mindset.

Imagine being a trader and reviewing your performance and setting goals each week.  Now imagine turning the wheel faster and creating rapid review and goal-setting processes each day.  Quite simply, to use a gym analogy, you’re getting more reps than the person who comes into the weight room only occasionally.  Learning has the potential to become elite development when every day of performance also serves as targeted practice.

Why is this important?  It’s because there is a mutually reinforcing relationship between peak performance and peak emotional experience.  It is when we push our boundaries and expand our competence across all areas of life that we are most likely to experience happiness, fulfillment, energy, and closeness with others.  And it is when we are most energized by positive experience that we’re most likely to channel that energy into meaningful development.

Many traders sense that it wouldn’t take much to bring them to that next level of performance.  I suspect they’re right:  they just need more and better reps in life’s gym.

Further Reading:  Turning Your Calendar Into A Peak Performance Tool

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Published at Sun, 23 Oct 2016 23:24:00 +0000

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Are You Operating in Peak Performance Mode?

Are You Operating in Peak Performance Mode?

How many of the following apply to you?  Please answer true or false to each item:

I’ve clearly and visually mapped out my trading process, from the ways I collect information and generate ideas to the ways in which I express those ideas as trades (and as constituents of a portfolio), enter and size positions, manage and adjust positions while they are open, and exit trades.     True     False

I’ve clearly and visually mapped out my personal process to maximize performance, from how I sleep, eat, exercise, socialize, and utilize my non-work time to sustain a peak state.     True     False

I explicitly keep score in written fashion, not just with my profits and losses, but with each component of my trading and personal processes to see what I’ve done well and what I can improve in process terms.     True     False

I use my trading and personal process scores to explicitly identify written goals for improvement and the concrete steps I will commit to in order to achieve these goals.     True     False

I keep a written scorecard of my performance vis a vis each of my goals to track my progress and, if necessary, make adjustments in how I pursue the goals.     True     False

I use my scorecard to make ongoing adjustments to my trading and personal processes, so as to turn initial improvements into ongoing habit patterns.     True     False

Every trader goes through losing trades and losing periods.  When we’re not in peak performance mode, losing money is a fail.  In peak mode, losses become First Attempts In Learning.  Peak performance mode is our way of committing ourselves to growth and improvement; it’s our way of becoming accountable to ourselves.  Merely writing in a journal does not ensure deliberate practice and ongoing improvement.  We become better by keeping score in process terms and continually refining our personal and professional processes.

Further Reading:  The One Trading Drill That Can Improve Performance

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Published at Sat, 22 Oct 2016 10:48:00 +0000

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