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Just thought I'd update this post on what it means for stocks when we see a high degree of institutional participation in the US equity market .  Yesterday's reading was in the highest quartile, which has been associated with significantly above average returns over a next 10-day period.  Interestingly, we also saw an elevated equity put/call ratio, also associated with favorable next 10-day returns in SPY. Meanwhile, several of my cycle measures have been pretty toppy.   There are times when things line up and there are times when they don't line up.  A useful psychological exercise is to assume that, at some point, everything will line up.  What would you need to see for such a line-up to occur?  Anticipating potential price paths is a first step in preparing to trade them.  Being aware of when things aren't lining up is a great way to avoid overtrading. Further Reading:  When to Exit Winning Trades .

Above we can see SPY (blue line) plotted against a six-variable trading model that I developed using ensemble modeling .  When we have a positive score, the model is deemed to be bullish over a next 10-day horizon.  When we have a negative score, the model is deemed to be bearish.  The model is flat as of yesterday's close.  The model includes such variables as market volatility, breadth, buying/selling participation, and market cycle status.   When the model has been at a score of +2 or higher, the next 10 days in SPY have averaged a gain of +2.08%.  When the model has been at a score of -3 or lower, the next 10 days in SPY have averaged a loss of -.83%.  Between scores of +1 and -2, the next 10 days in SPY have averaged a small loss of -.08%.   The model has a couple of important implications for trading psychology: 1)  Out of the 573 days of my in-sample and out-of-sample periods, nearly half are scores less than +2 and greater than -3:  in other words, days with essentially no

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There are risk-averse traders who never make significant money.  There are risk-seeking traders who blow up.  Then there are smart traders who take calculated risks.  They make selective bets.  Like the skilled poker player, they know when they have a good hand and they know how and when to bet that hand. But to take calculated risks, you have to know how much risk you're truly taking.  Several factors impact the risks in your trading: *  The sizing of your positions - It's not uncommon for small traders to have big dreams and take positions that are unusually large for the amounts of capital they're trading.  Any trader can experience strings of losing trades merely by chance.  When position sizes are too large, those strings of losers incur a risk of ruin.  Once you're down 50%, it takes a doubling of remaining capital just to return to break even.   *  The volatility of your markets - Volatility can change dramatically from day to day, week to week, depending on th

One take on trading psychology says that we should control our emotional experience so that we stick to our processes and our discipline. Another take on trading psychology says that we should become better at listening to the feelings that represent intuition and gut feel for markets. This recent article, however, suggests a different approach altogether :  we become able to see and trade markets better when we can make mind shifts that allow us to experience markets differently . Like a car, we can make a mind shift by changing gears, allowing us to approach the world with more torque, greater intensity. Also like a car, we can achieve a mind shift by changing lanes, opening a new path. The key idea of the article is that what we see and what we can act upon is a function, not only of the information we process, but also the state we're in.  When we achieve a mind shift, we not only can process new information, but become better at processing old information in new ways. In short

When assessing the market, I find it helpful to treat strength and weakness as independent variables.  In other words, we can have markets in which many stocks are strong and few weak; many weak and few strong; few strong and few weak; and many strong and many weak.  The latter is possible when correlations among sectors and stocks are relatively low. Let's take the Parabolic SAR indicator system developed by Wilder.  One way I track market strength and weakness is to take a cumulative running total of Parabolic SAR buy signals minus sell signals for all NYSE issues (red line, above).  This has been helpful in capturing cyclical behavior in SPY (blue line). (Raw data from StockCharts.com ).   But we can also consider the buy signals from the system separately from the sell signals as proxies for market strength and weakness.  For example, since mid-2014, when I first began collecting these data, when we divide the sample into quartiles, we find that, after a single day of many new

There are those that follow their hearts when they trade. There are those that lead with their brains. One trades based upon seeing patterns play out in real time and having a feeling for those patterns. The other trades based upon analyses and having an understanding of how markets should respond. Both styles require an ability to tune out noise and focus on what is important.  Both styles require an ability to act on the information being processed. When we don't see opportunities, it can be tempting to look to others for answers: to see what patterns they are noticing, to check out their analyses.  At that point, we become externally focused, no longer attuned to our own information processing strengths. In challenging times, the challenge is to double down on our strengths and become more of who we already are at our best .  Looking outside ourselves for answers is the surest strategy for turning drawdowns into slumps. Further Reading:  The Two Brains of Trading .

One of the exercises I've found most helpful for traders and portfolio managers is a thorough review of trading performance.  Many times, the ups and downs of profit/loss reveal biases and patterns in our trading.  Some of the patterns worth looking for include: *  How you trade after you've made money versus after you've lost money:  Do you trade more?  Larger?  Do you trade differently based on recent P/L?  Do you become risk averse after recent losses?  Does that affect your future P/L? *  How do you trade when you're taking more risk versus less risk?  Does different size/risk exposure cause you to trade differently?  Are you actually making more money when you're taking more risk?  *  What kinds of markets and market patterns provide you with your greatest profits?  Losses?  Do you trade selectively to maximize your best opportunities?  Do you overtrade markets that are not ones providing you with opportunities? *  What is your ratio of winning to losing trades

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So much of creativity is the ability and willingness to look and move in a direction different from the well-worn path.  After I wrote the most recent post on emotional creativity , I had the honor of speaking with Dr. James Averill who pioneered research in the area.  He made a very important point.  Much of the way the business world is structured (and I believe this includes the trading world) does not lend itself to emotional creativity.  If anything, emotions are dampened, not explored:  no one really focuses on identifying and cultivating unique emotional responses to daily challenges. I recall speaking with a successful trader who told me that he was excited about the opportunity in the marketplace.  I responded by saying that he was the first person I'd spoken with to tell me that.  Everyone else was lamenting the lack of opportunity in markets.  He said, "That's right.  I've always made my money going against the consensus!"  That was shortly before the

As Averill notes above, there are two views on emotions.  One, the most common, asserts that emotions are givens:  biologically wired.  A second view is that we can cultivate what we feel and how we express it.  That second view suggests that creativity is possible in our emotional responding as well as in our thought processes.  This emotional creativity is what enables people to adapt to situations and respond to them in novel and effective ways. Averill's work suggests that emotional creativity has three components : *  Preparedness - The ability to learn from the emotional experience of self and others; *  Novelty - The ability to experience and express unusual emotions; *  Effectiveness - The ability to express emotions honestly and constructively Research suggests that emotional creativity is different from emotional intelligence.  Emotionally intelligent people--those who can read and respond well to the emotional experience of others--are not necessarily emotionally c

One of the things I've found among successful traders is that they develop ways of looking at markets that:  a) are original and b) that make great sense to them.  The originality of their perspectives helps them see what others don't.  The familiarity of the perspectives helps them align their cognitive strengths (how they best process information) with their decision making.  Very often this means that successful traders trade with a signature style, not a generic one .  Working with mentors and researching markets and market patterns are very helpful in developing the raw materials for one's signature style. Above is a chart of the ES futures from August 22nd to the present (blue line).  Each data point represents 500 price changes in the contract; these are event bars, not time-based bars.  The red line is what I call the Power Measure.  It's a running correlation of price change and volatility.  In short, the Power Measure tells you when volatility is fueling direc

A great recent research article documents the role of "gut feel" in short-term trading.  Traders who are more self-aware with respect to their bodies tend to outperform those who lack such awareness.  Interestingly, if you read the report carefully, you'll see that a second variable predicted trading success independently of body self-awareness:  heart rate variability.  We've encountered heart rate variability before in explorations of biofeedback as a means to developing calm focus and increasing access to intuition.  The recent study hints at the possibility that these two factors indeed work in tandem:  the ability to sustain a calm, focused state during turbulent markets provides access to our gut feel, which in turn helps us sustain sensitivity to market patterns that emerge in real time. If this is the case, then access to our intuitive capabilities indeed can be trained and cultivated.  This may not help trading that relies upon explicit reasoning and analys

This was Mali at 2 AM this morning.  It's not much of a conflict when part of you wants to sleep and another part of you wants to cuddle a blind, purring cat.  The purr is worth a tired day!  It's all about staying focused on what's essential in life. In markets, it's easy to become focused on non-essentials.  We tell ourselves stories about the state of the world or the state of market charts.  Far more essential is what buyers and sellers are actually doing in markets.  Are there many buyers participating in today's market?  Many sellers?  What is the relative balance of buyers and sellers, and is that changing?  It's all about the auction process. So let's go to the data.  We'll go back to 2012 and look at every transaction in every NYSE stock each day.  Those occurring on upticks we will categorize as initiated by buyers.  Those occurring on downticks we will categorize as initiated by sellers.  The total number of transactions occurring on upticks

"I'm in a rut." That's what we hear when someone finds themselves doing the same thing and getting unsatisfying results. Trading can be in a rut.  Relationships can be in a rut.  We can be in a rut with respect to our social lives, our physical well-being, or our spiritual lives. A rut is a habit that has outlived its usefulness .  At one time, it may have had value.  Now we've outgrown it, but it remains a habit. Because ruts are habits, each time that we fall into the rut, we reinforce the wrong habits.  The rut grows a bit deeper and starts to look more and more like a grave. The best way to break habits is to create new ones .  The things we're doing now that are useful--that bring happiness, success, fulfillment--those are the things that we should be looking to habit-ize.   But do you want to know the true key to staying out of ruts?  It's to turn habit breaking into a habit .  If we get into a routine of identifying strengths and making them automat

Here's an interesting set of statistics.  During 2016, the correlation between today's volume and tomorrow's volume in SPY has been about +.68.  The correlation between today's true trading range and tomorrow's has been above +.60.  Both are in line with long-term averages.  The correlation between daily price change today and daily price change tomorrow in SPY is -.11.  In other words, the recent past tells us much more about who will be in the market and how much the market will move than which way the market will move. But wait, you might say, perhaps there is more consistency of price movement on an intraday basis.  During 2016, if we look at 5-minute bars for SPY, we find an almost identical pattern.  The correlation between the current bar's volume and the next bar's volume has been +.75.  The correlation between the current bar's range and the next bar's range has been +.69.  But the correlation between the current bar's price change and t

Stocks have traded in a volatile range lately, with significant moves frequently reversed.  This has proven challenging for those looking for trends. If we think of markets as auction processes, we can identify volatile and non-volatile markets based upon the amount of participation in the marketplace.  We can also identify trending and non-trending markets based upon the relative balance of buyers and sellers.   Our job is to read the auction process and adapt to the conditions before us.  We are in a very different environment than several months ago.  When we have a volatile range, we have large participants active as both buyers and sellers.  The move in rates and uncertainty over central bank direction has created a different auction process. How do we talk to ourselves about market conditions?  Do we frame the situation as a challenge and as a problem to be solved, or do we frame ourselves as victims of unknowable market forces and passively hope that things will change in our fa

We all know the saying, "No risk, no reward."  In markets especially, we cannot make money if we're not willing to take risks.  Frankly, however, my experience working with traders is that the greatest problem is not with taking risk, but with the intelligence of risk taking.  Traders take risks that, ultimately, they are not emotionally prepared to handle. I recall the trading days in which you could get filled on a long position at the market's bid price and either get out a tick lower or wait and see if you could get a larger gain when it traded at the offer price.  Most trades could be scratched that way and you got plenty of free looks at larger moves.  Once market making became algorithmic, that level of risk control--the hallmark of true scalping--became impossible.  The noise was simply too great for the amount of signal traded. The same has been happening at larger time frames.  The most common concern I hear from active traders is the "choppiness"

The last post took a look at the importance of prioritizing our goals and the activities that help us pursue our goals.  An excellent post from James Clear discusses the importance of habit formation, so that the changes we seek become internalized parts of ourselves and built into our daily routines.  The post cites evidence that such habit formation is most likely to occur if we structure our pursuit of goals, specifying what we'll do each day, when we'll do it, and how we'll do it.  Interestingly, however, we are most likely to turn our specific plans into habits if we focus on one goal at a time.  Doing one new thing the same way over many days is much more effective in developing new habits than trying to do many new things at once. Clear cites research that suggests it takes over two months of repetition on average for a behavior to become truly internalized and automatic.  That's a significant period of time (and commitment) and helps explain why relapse is so

An insightful post from @ivanhoff lists his takeaways from the popular book The One Thing , including the importance of focusing on the one thing that matters the most in terms of reaching your goal. Not goals.  Goal. Not many things.  One thing. That is prioritization.   Too often, we set multiple goals and never drill down and truly accomplish any of them.  We try different things to reach our goals, patting ourselves on the back for multitasking, when in fact we never become distinctively good at any of the things we're doing. In short, we take on too much and water down our priorities. The idea is focus like a laser on what you want to achieve and the best way for you to achieve it.  That's more than goal setting: it's commitment. If you don't have a singular, passionate, all-consuming commitment to a goal right here, right now, what will lead you to singular successes going forward?   If your work is tiring you, it's not inspiring you.  It's time to stop p

If you're losing money in your trading, there is an important question that can help you figure out your next steps.  This is important, because sometimes traders become so interested in stopping their losses that they don't first figure out what is causing them.  They look to psychology for answers, when it's their trading strategy that is flawed.  They hop from trading approach to trading approach, never addressing the psychological issues that are sabotaging whatever they're doing.  If you're losing money, something has to change, but how do you figure out what that something is? The question that helps sort out promising directions for those in drawdown is this:  Are other people, trading similar strategies, also losing money? That will tell you quite a bit.  If you were making money and suddenly go cold and others in the same markets, with similar strategies are doing the same, then you know that it isn't simply a psychological issue.  Everyone did not sudd

Imagine if weather reports only gave the expected average temperature across a whole country. You wouldn't want to be counting on that information when you were packing for a trip to Alaska or Hawaii, would you? Yet that's what reports about the strength of scientific results typically do. They will give you some indication of how "good" the whole study is: and leave you with the misleading impression that the "goodness" applies to every result. Of course, there are some quality criteria that apply to the whole of a study, and affect everything in it. Say I send out a survey to 100 people and only 20 people fill it in. That low response rate affects the study as a whole. You can't just think about the quality of a study, though. You have to think about the quality of each result within that study. The likelihood is, the reliability of data will vary a lot. For example, that imaginary survey could find that 25% of people said yes, they ate ice cream ever