Thursday, February 23, 2017

When Technical Analysis Works and When It Doesn't



Above we see a chart of the ES futures going back to January 23rd (blue line) drawn from early this morning.  A new data point is plotted every time we see 500 price changes in the contract.  This means that the X axis is denominated in price movement (volatility) units, not in time units.  When markets slow down (such as during overnight hours or at midday), we draw fewer "bars".  When we see an upswing in movement, we draw a greater number of bars.  Thus, when nothing is happening in the market, nothing is really happening in the chart.

The lookback period going to January 23rd is one that I identified as a stable market regime.  In statistical terms, the distribution of prices over that period was stationary.  I run simple tests in Excel to compare volume and buying/selling distributions within that lookback period to identify when we have a stable regime.  Within stable regimes, we can use simple technical indicators, such as overbought/oversold measures, to help us identify candidate buy and sell areas.  The overbought/oversold measure in red looks at how price deviates from its 50-bar average in standard deviation units.

As a rule, in a stable regime, I want to be a buyer of higher price lows (oversold areas where price remains higher than at the prior oversold levels) and a seller of lower price highs (overbought areas occurring at successively lower price highs).  When the recent market is not stable (significant differences in participation and in the behavior of the participants), there is no a priori reason for believing that technical indicator readings drawn from the recent past will be relevant to the immediate future.  

What that means in practice is that using standard preset levels on standard technical measures to derive trading signals in all markets is a very inefficient process.  Much of the time, we'll be inappropriately extrapolating the past into the future.  When those strategies yield (predictably) random results, traders become frustrated and then look to trading psychology to cure their woes. Clueless coaches are apt to provide those traders with less than helpful advice to "follow your process" and stay "disciplined" in trading.  Slavish adherence to a random process will only yield consistently random results.

Technical analysis is like card counting in blackjack.  It works if there is a constant number of decks from which cards are drawn.  If the number of decks in the shoe changes randomly, knowing the number of face cards played in the recent past will not provide information about the number likely to show up in the future.  If there is a relatively constant set of participants in the marketplace and their buying and selling activity falls within stable parameters, we can make a reasonable inference as to the probability of forthcoming buying or selling.

The smart trader is not looking for where to buy or sell.  The smart trader is looking to see if the current market activity is stable relative to the activity of the recent past.  The smart trader watches the dealer and figures out when card counting truly yields a betting edge.

Further Reading:  A Dynamic Approach to Technical Analysis
.

Wednesday, February 22, 2017

Finding Opportunity in Difficult Market Conditions

In my recent Forbes article, I reflect upon traders that I see making money in these low volatility market conditions and identify four strategies that they are employing.  In each case, they look at markets in a different way to detect meaningful movement in seemingly choppy, difficult market conditions.  

What the article doesn't highlight is that the great majority of those traders had to go through challenging P/L periods to get to the point of embracing the strategies that have proven helpful.  They stayed on the dance floor long enough to find opportunity.  Many times, inspiration came from seeing what other traders were doing that was making money.  That inspiration led them to try new things in small ways, build familiarity with a new way of viewing and trading markets, and then build out those strategies.

In my most recent trading, I have been focusing on identifying stable market regimes--periods in which who is in the market and what they are doing has been relatively constant--and then identifying winning trading patterns specific to those regimes.  When I detect the current day's trading to fit within that regime, I wait for those winning patterns to emerge.  Those define opportunity for that particular market.  Another market may yield a very different pattern of opportunity and still others may yield none at all.  

Note how different this is compared to expecting one particular "setup" to work across all market conditions.  It opens the door to opportunity in a new way.

If markets are always changing, traders must always innovate.

.

Tuesday, February 21, 2017

Learning To Love Dealing With Your Haters

Perhaps you've heard the definition of a hater:  Someone who watches you walk on water and then announces to the world you're not able to swim.  The sad reality for all who aspire and achieve is that we occasionally deal with people who are threatened by the best of who we are and what we do.

A great friend is one who is sensitive enough to be there for you when you're down and secure enough to celebrate when you're soaring.  Haters are never secure, happy people.  They may show a great deal of interest when you're down, reveling in your setbacks with false concern, but they're remarkably silent when you have cause for celebration.

I deeply appreciate the trader who recently wrote to me about the topic of integrity.  He had heard a false rumor that I was fired from a hedge fund where I had worked--and that my firing was supposedly for reasons of improper behavior.  It meant a lot to me that the trader chose to share this with an email labeled "private and confidential"I let him know that I still worked at the fund, that I remained on good terms with the traders and managers, and that indeed I have never been fired (or disciplined for impropriety) on any job I had held.

Still, someone, somewhere had felt the need to start and spread a rumor.  Not because I had done anything wrong, but because I had achieved a measure of personal and professional success.

It's sad but true:  If you succeed in your trading, if you find happiness and fulfillment in your relationships and your career, if you build a loving and caring family, not everyone will be happy for you.  Some will try to bring you down.

Haters hate what they do not have.  They resent what they cannot themselves achieve.

So how can you learn to love dealing with haters?  

The greatest response you can give is to not allow yourself to be consumed with hate and rededicate yourself to the best of what has brought you to this point.  You double down on caring, loving, working hard, and being the best person you can be.  When I heard the rumor from the trader, I smiled, told the story to Margie, and quickly scheduled pro bono time to help a young professional in need.  I took extra steps to help my sick cat and get her a specialized, hard-to-find medication that could ease her symptoms.  The best way to do well is to do good.  The world is far too beautiful a place--and far too filled with opportunities to do well and do good--to be wasted in hate and envy.  You're truly in a good place when haters redouble your love of life.

Further Reading: A Unique View on Why Traders "Sabotage" Themselves
.     

Monday, February 20, 2017

Group Coaching: A Powerful Trading Resource

One of the things I'm most looking forward to in this coming Sunday's four-hour seminar at the New York Trader's Expo is the opportunity to conduct true group coaching with attendees.  It's surprising how little coaching of traders occurs in group mode, especially given the common overlap of concerns among traders.  I'm looking forward to the experience because of several powerful advantages of working in groups:

1)  In groups, there are opportunities to gain insights from other members as well as from the group organizer.  Take AA as an example:  much of the impact derives from the interactions of members to support, challenge, and enlighten one another.

2)  Groups, run properly, can be fun.  They lend themselves to interactive exercises and lively dialogue.  We tend to be most focused on what is most engaging.  Groups can actively engage us.

3)  The loyalty built within groups brings the best out in people.  I saw this when I ran group therapy sessions on the inpatient psychiatry unit of a hospital.  Members reached out in ways for others that they couldn't always do for themselves.

Perhaps best of all, groups can become phenomenal creativity resources.  Imagine a group of dedicated traders, each bringing their best trade of the week--and their best psychological practice--to the group meetings.  Everyone can play off everyone else, modifying the ideas, applying them to their own situations, and generating new best practices for the entire group.  When group members are passionate about what they do, that passion becomes self sustaining, fueling the development of new ideas and methods.  It's an important reason some traders choose to join trading firms rather than trade on their own.  It's an important reason solo traders maintain active networks with like-minded peers.

Think of basketball and football teams.  Think of AA.  Think of Special Forces units.  So often, groups push us in ways that we would never push ourselves.  Groups support us in ways we cannot support ourselves.  Groups give us feedback we'd never think of on our own.

(While writing this, I'm listening/watching MMJ doing their early Conan session.  From 2:45 on in the video, you can see how groups, passionate about what they do, make beautiful music.)

Look forward to some great music making this weekend!

Further Reading:  Joining a Hedge Fund or Prop Trading Group
.

Sunday, February 19, 2017

Trader Education: The Process of Becoming a Great Trader

Thanks to a savvy trader for passing along this enlightening news account of how coach Gregg Popovich is helping mentor his young talent through the use of game film.  Interestingly, the assignment is not to watch games but to watch specific performers who have the skills that the young players need to develop.  By watching the greats in action, the rising stars absorb their example, integrating what they do into who they are as players.

This observational learning occurs in many performance arenas.  Chess students study the games of the grandmasters and learn from each move made.  In medical school, students undergo a clinical education that teaches them how to care for patients.  The motto is "see one, do one, teach one."  First you observe experienced physicians in practice, then you do what they do with close supervision, and then you teach more junior professionals, thereby cementing your own learning.

No one pretends that you could become a chess grandmaster or a successful physician by simply sitting in a classroom or by randomly trying things out and hoping to hit upon success.  Professional development is a function of internalizing the performance of experienced masters.  We become what we repeatedly observe and study.

The power of observational learning helps explain why so many of the most successful traders have developed under mentors, often as part of teams.  The Tiger cubs trained by Julian Robertson are an excellent example of observational learning in practice.  When world class talents mentor promising students, the result is further world class talent.

As Bella at SMB observes, successful teams not only teach skills but also actively nurture talent with support and caring.  This is essential during rigorous and challenging training conditions.  It is a major reason why elite military groups, such as the SEALs, conduct their training and operation in teams.  Teams take responsibility for their members.  Many obstacles are overcome, not just through individual effort and determination, but through team spirit and dedication.

Do you want to know some of the best ways of distinguishing real trader education from the fake kind?  Look for teams, look for videotape, and look for the Gregg Popovich approach to mentoring, where you spend considerable time seeing one before doing one.  And do you want to see what makes for a future trading star?  It's the willingness of a Dejounte Murray to sit on the bench, wait his turn, and use that time to observe, observe, observe the greats and integrate that learning into his game.  

Trader education has just scratched the surface of the potential of observational learning.  

A thought experiment:  What if you recorded your trading and regularly reviewed your best trades?  What if you were in a classroom of developing traders and everyone regularly reviewed each other's best trades?

Perhaps so few traders succeed because most are so busy trading that they never sit on the sidelines and absorb the lessons from successful traders.

Further Reading:  Four Pillars of Trading Process
.

Saturday, February 18, 2017

Fake and Real Education in Trading

We've heard a lot lately about fake news, both from the political right and left.  The truth is that it's difficult to report truth, objectively.  Too often agendas slant what we present, turning what should be enlightenment into persuasion or, at worst, propaganda.  A credible academic journal presents studies supporting and not supporting various ideas, allowing the data to speak for themselves as much as possible.  No one would read an academic journal that only published information supporting specific views, suppressing contrary evidence.

In trading, we see a great deal of web content, seminars, webinars, and books offered as "education".  Too often, this is fake education, in that it promotes a particular agenda that is marketed by the writer.  How often have we seen something offered as education that starts with a tease and ends with a sales pitch to get interested students to purchase a service or product?  That's an infomercial, not information.  It's not education; it's advertising.

So what is *real* trading education?

*  Real education educates.  You come away with specific information and/or skills that you didn't previously possess.  

*  Real education is on the cutting edge.  It provides new information and new skills.  It does not merely repeat what has been written many times previously.  If what you encounter in a book or webinar could have been encountered three years ago, thirteen years ago, or thirty years ago, it's rehashing, not educating.

*  Real education is grounded.  It draws upon actual research and actual practice.  It is not mere opinion or preference.

*  Real education stands on its own.  It is not a throwaway lead-in for commercial products or services.

As many of you know, I teach in a medical school.  I value the education and training of medical students and residents, and I especially respect the continuing education of practicing physicians.  Without continuing education, a physician is locked in old information and old practices and become stale.  Patients suffer.  Without quality continuing education, traders--and their capital--suffer the same fate.  Education is far too important to be left to fakery.

True continuing education for experienced traders is the next great frontier in trader development.  Not rehashings of worn out technical trading patterns, bromides about discipline, or trading tales from old timers.  Real, actionable education based on real research and real practice.  It's an important part of what distinguishes a profession from a hobby.

Further Reading:  Toward a Curriculum for Traders
.

Friday, February 17, 2017

When Trading Problems Are More Than Trading Problems

Consider the following situations that I've encountered recently:

*  A trader was concerned about his inconsistent performance.  He asked for help with sticking to a set routine.  When I gathered background information, it turned out that he had significant symptoms of depression and a family history of depression.  Because he did not have a full-blown major depressive disorder, he assumed that his inconsistencies of mood and energy level were simple lapses of discipline.

*  A trader asked for help with overtrading.  He took too many trades, especially when he became frustrated.  His impulsive decision making was costing him money.  He wanted to find a way to achieve greater discipline in his trading.  His history documented a lifelong pattern of attention-related problems and poor frustration tolerance.  He had been diagnosed with attention deficit disorder in grade school but stopped taking medication and assumed he had outgrown the problem.

*  A trader showed good trading results, with superior risk-adjusted returns.  He did not take meaningful risk, however, and as a result never made much money.  Despite encouragement from his manager, he found it difficult to increase the size of his trades.  His early adult history included episodes of social anxiety and psychosomatic problems related to anxiety.

In each of these cases, the trading problem was the result of a larger problem.  The trader approached the problem as if it was a trading issue when in fact it required professional attention.

Not every problem that impacts trading can be solved by goal setting, writing in journals, and placing motivational post-it notes on a computer monitor.  Sometimes a trading problem is a manifestation of a much broader problem.  No amount of talking with a trading coach can properly address issues of depression, ADHD, or anxiety.  If you examine your history and find problems that have occurred outside of your trading, perhaps those need to be considered as possible causes of your trading concerns.  The right diagnosis and the proper help can be the best thing you could do for your trading.

Further Reading:  Best Practices for Dealing With Drawdowns
.

Thursday, February 16, 2017

Five Key Questions Traders Need to be Asking

Here are five helpful questions that traders too rarely ask:

1)  What was the price path of what I was trading *after* I stopped out of the trade?  Does my exit execution actually add value?

2)  What has been the price path of what I've been trading after I entered the trade?  Does my entry execution have positive expected value, or am I better off entering in a rule-based, mechanical fashion?

3)  When I've added to trades, what has been the P/L just for those added pieces?  Does adding to trades truly add to my profitability?

4)  What has been the price path of trades I decide to not take because of lack of conviction?  Does my conviction in an idea truly correlate with the profitability of trading that idea?

5)  How does my P/L behave after I've had a string of winning trades?  A string of losers?  Does recent performance affect my trading, and--if so--is that impact positive or negative?

Tough to come up with answers for better trading if we're not asking the right questions.  

Perhaps the best question of all:  How much time do you spend studying your trading vs. studying the markets you trade?

Further Reading:  Preparation and Success
.

Wednesday, February 15, 2017

What In The World Are You Trading?

The beauty of financial markets is that, quite literally, you can trade almost any publicly listed asset in the world.  If you want to buy stocks in India, Brent crude oil, Japanese currency, or a curve spread in European interest rates, it's very doable.  Despite this historic access to global assets, something unheard of for the public just a few decades ago, we find traders locked into trading the same things, the same ways.

Too often developing traders focus on finding the right trading signals and setups; some hidden formula for making money.  The reality is that trading success is as much about what to trade (and when) as how to time market tops and bottoms.  The past six months in the U.S. stock market have been quite bullish, but notice from the excellent chart from Finviz that sector performance has varied widely over that period.  If you were trading interest rate sensitive utilities and consumer shares or healthcare issues, you barely made money if at all.  If you were trading financial shares, such as banks, you likely killed it.

What you trade is as important as how you trade.

Some years back, a successful trader I knew well found it difficult to make money trading stocks because volatility had declined.  He scanned the universe of commodities and found several that moved similarly to stocks when stocks were volatile.  He began trading those commodities and--lo and behold--he started making money again on a sustained basis.

When I recently visited SMB, I met with several traders who were achieving unusually positive results.  I quickly calculated their Sharpe ratios and found that, not only were they making significant money: they were doing so with excellent risk/reward.  It was clear in speaking with them that they had leveraged technology to identify stocks with the right kind of movement, that provided the best opportunities for that day.  Had they traded the exact same patterns in large cap energy or retail shares, they would have struggled for profitability.  

A macro portfolio manager who I recently worked with also had achieved consistent profitability with excellent risk-adjusted returns.  The strategy involved tracking macroeconomic data in detail and identifying which economies were accelerating and decelerating.  The portfolio then went long the growing economies and short the weakening ones.  Results were not only positive, but completely uncorrelated to the major market indexes.  All because that trader looked in places in the world that others were ignoring.  While the great majority was focused on the U.S. President's policies and trading only U.S. currency and rates, the successful trader was long some Latin American assets, short others; long some Asian assets, short others.

If your trading results have been subpar, consider the possibility that your problem may not be psychological and may not even be with your methods.  Instead, you could be like the gold prospector who is digging where everyone else has been mining.  If you wanted to successfully mine for gold, you'd conduct geological surveys, inspect the land, and go somewhere promising where no one else was looking.  Purchasing better equipment and doubling down on your "passion for mining" can't help you if you're digging in the wrong places.

Further Reading:  Reflections on Opportunity
.

Tuesday, February 14, 2017

How Trading Success Happens

When I first began working with traders, my central insight was that trading is a performance activity.  What makes for trading success is not so different from what makes for success in other performance fields, whether they be performing arts, athletics, chess, or surgery.  In each of these fields, the star performer begins with certain inborn talents and then refines those through a process of training, mentoring, and coaching.  Training and mentoring build knowledge and skills and accelerate the learning process.  Coaching provides guidance and helps performers channel their talents and skills to where they can be most successfully applied.  Long before elite performers acquire fame or fortune, they spend long hours in becoming.  Their focus is on improvement, the refinement of skills, and the development of new ones--not on the the trappings of success.

There are few, far too few, places where developing traders can benefit from the thoughtful integration of training, mentoring, and coaching.  It's one reason I've been such a fan of the building of teams within trading firms.  Those teams enable senior traders to benefit from the work of junior traders, and they provide hands-on learning, mentoring, and coaching for those juniors.  The learning takes place on the desk, just as an athlete's learning takes place on the field--in practice and during games.

No one expects an athlete to develop by reading books, taking classes, or practicing on their own.  No one develops as a performing artist by writing in journals and trying out different songs or plays.  In performance fields, aspiring performers learn from experienced performers and those knowledgeable about the performance domain.  Medical students are trained at the bedside by practicing physicians; chess players hone their talents in academies run by chess masters and grandmasters.

If I were looking to become successful in the trading world, I would learn some skills and/or develop some area of expertise that would make me valuable to a trading team or firm.  I would then contribute my skills to that team and learn everything they're doing that makes them successful.  Over time, I would integrate my abilities and experience with what I've learned to develop my own path to success--and then I would cement that learning/development by serving as a mentor for a new generation of juniors who could in turn make me better.

I've worked with many individuals, many trading teams, and many trading firms.  That is how success happens.

Further Reading:  The Foundation of Trading Success
.