Core Ideas in Trading Psychology: Changing Our Problem Patterns With Brief Therapy Methods

One of the key themes running through the TraderFeed blog, as well as my books on trading psychology, is that changes in our behavior, thought, and emotion can be effected by relatively brief, targeted change methods.

All of our behavior–from our ways of thinking to our typical modes of responding to situations–is patterned. The sum of our patterns is what gives us our personalities. Many of our patterns begin as coping responses to challenges that we face early in life. For instance, if I find myself repeatedly hurt by others, I may learn to maintain a high degree of privacy and guardedness. Keeping to myself, I can’t get hurt.

Such patterns may be adaptive for the situations that we are in, but they become maladaptive once we enter different environments. Thus, the withdrawal that worked when growing up now becomes a liability in forming new, romantic relationships. By then, however, the pattern has been overlearned; it has been internalized as part of the self. As a result, I can find myself repeating patterns that bring unwanted consequences. Worse still, I can be unaware that I’m repeating those patterns.

The process of changing our patterns of thought, behavior, and feeling begins with becoming aware of our repetitive patterns and the consequences of those patterns. While such awareness will not, in itself, change us, it is a necessary step: once we clearly recognize what we’re doing, why we’re doing it, and how it is hurting us, we can step back and try to do things differently. If I see that I am hiding behind a wall of guardedness in relationships because of previous problems in relationships–and if I clearly perceive how that is holding me back from cultivating new, meaningful relationships–then I can try, little by little, to take down that wall. Many times, that breaking of the wall (the changing of our patterns) starts in the relationship with a therapist.

When problem patterns do not overwhelm a person’s life and prevent them from functioning in the world–and especially when those problems have been relatively recent and situational, not chronic and pervasive–it is usually the case that short-term, highly active and focused approaches to change can be effective in generating and sustaining change. These approaches fall under the category of brief therapy. Illustrations of how people can change problem patterns through such short-term approaches can be found in my Psychology of Trading book. A description of specific techniques drawn from the brief therapy literature, including behavioral, cognitive restructuring, and psychodynamic approaches, can be found in the Daily Trading Coach book. A more thorough coverage of brief therapy methods and research can be found in my co-edited volume on the topic.

Very often, repetitive patterns in behavior and relationships interfere with trading. At a simple level, they can interfere with our concentration and market focus. More broadly, however, those patterns have a subtle, destructive way of playing themselves out in our trading. The person who felt unappreciated by parents now takes on too much risk in markets to become successful and attract the desired admiration; the trader who experienced painful losses as a child now freezes up when markets move against him; the person who rebelled against authority and control in his early years now finds himself breaking his own trading rules.

When problems from your personal life are interfering with your trading, it is always the right strategy to stop trading and pour yourself into resolving those problems. This does not have to be with a trading coach: any competent psychologist schooled in brief therapy methods can help you understand your patterns, interrupt those, and replace them with more constructive ways of dealing with the world.

Then you can return to trading as a free person with full focus, ready to acquire and utilize a lifetime of skills.

For more on the topic of brief therapy, check out this post and its links on therapy for the mentally well. See also this post on coaching traders in real time.
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Core Ideas in Trading Psychology: Market Structure and Adapting to Market Change

A key idea running through the TraderFeed blog as well as my books on trading psychology is that markets play out the same patterns as people: they exhibit particular states, provide markers for when they are shifting those states, and change their behavior when transitioning to new states. (See The Psychology of Trading for a detailed presentation of states and state shifts).

The states exhibited by markets are range modes (periods in which value is established in a relatively narrow band of prices and price does not move far from this value area) and trending modes (periods in which value is established at successively higher or lower price levels until fresh supply or demand from longer time frame participants enters the market and creates a range equilibrium). Every market state can be described as a joint function of directional tendency and volatility. Thus we can have volatile and non-volatile range markets, and we can have volatile and non-volatile trending markets.

Because markets change states at multiple time frames, the time series of price changes in markets is non-stationary. That means that the mean price change (direction) and standard deviation of price changes (volatility) in one period can vary significantly from those in the next period. If we think of price movement as generated by a process, then non-stationarity means that there is not a single, unchanging process generating all price changes. Markets, like people, display “multiple personalities”: they behave differently when occupying different states.

Many of the market patterns described by technical analysts, including breakouts, double tops and bottoms, etc., represent transitions from one state to another. Some of the best profit opportunities occur in markets when traders behave like psychologists: reading patterns and transitions and timing actions accordingly.

A major reason that traders do not succeed is that they fail to read market structure–the states that markets are in–and thus are not sensitive to the shifts in structure that mark transitions between trending and non-trending modes. This leaves traders placing stop loss points and profit targets at levels that do not reflect the market’s most recent levels of directionality and volatility.

Skilled, experienced traders learn to sense shifts in market states and thus recognize when trends are slowing down and turning into periods of consolidation; when range markets are heating up and ready to break out. When new participants enter the market and influence the pace of state change, as in the case of algorithmic trading occurring at short time frames, this can disrupt the implicit learning and pattern recognition of even those skilled traders, necessitating new periods of observation and internalization of patterns.

Failure to restrain risk during such periods of structural change in markets is a major reason why traders who made money consistently during one market epoch fail to sustain success during later periods. The challenge of trading is not only to learn market patterns, but also to adapt to new patterns as the drivers of price change (the themes dominating markets, the participants active in markets) shift over time.

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Knowing More Regarding Increasing Digital Options Operators Posted By: bbrij873

Digital Options trading now is not a modest, ground-breaking investment path accessible just from some on-line trading portal. Plenty of Gold Options portal for us have appeared this year along with white classification capabilities. So it seems like we might see many more Forex Options websites appear of the initial stages in the nearby prospect. Nowadays binary options have moved from a modest and emerging venture to a widely reachable online trading experience, and what it implies for the daily dealer?

This can be one of fine thing or appalling thing, depending on the type of Digital Options dealer you are. Also, if you like the reaction of going through a huge store walkway and having alternative from over 60 alike tomato sauces, then the prospect seems shining for you. It seems that in a small time, you may have a ample range of places to select from to have your Forex Options and Digital Options account. And nobody is preventing you from starting many.

We all are familiar with the vital laws of delivery and demand. Rivalry causes guys to seek new means to entice consumers by decreasing prices, perking up excellence and building up innovative goods and facilities.Digital Options Forex Options Gold Options

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One Good Trade: One Good Trading Book by Mike Bellafiore of SMB Trading

Kudos to Mike Bellafiore, one of the principals at SMB Trading, for his forthcoming book One Good Trade. I recall when Mike first talked with me about writing about a book covering the proprietary (“prop”) trading world. I thought it was a fantastic idea. Prop trading firms have traditionally been quite secretive about what they do and how they do it. Mike has lifted that lid, offering a variety of lessons that new and experienced traders can benefit from.

One Good Trade is filled with anecdotes of real traders facing real challenges in learning and mastering markets. Mike covers the fundamentals of trading success, from discipline and hard work to keeping daily work plans and mastering basic trading plays. He also explains how traders are hired at prop firms and the mistakes that lead many of those traders to fail.

Intraday traders will benefit from the hands-on trading material that describes selecting stocks “in play” and reading the tape to gauge when supply and demand come out of balance. The latter portion of the book covers what traders need to do to sustain their development, including training innovations that SMB has pioneered.

The book is written in an engaging way and, hands down, is the best inside look at intraday prop trading that I have encountered. I’ve had the pleasure of working with Mike and partners Steve Spencer and Gilbert Mendez and can attest to their commitment to training traders. Some of the work they are doing in video-based training is, in my opinion, state of the art. But best of all, One Good Trade offers uncommon trading wisdom. From Mike:

“There is nothing to ‘get’ as a trader. What works one month may not the next. Trading set ups you crush one year may be extinct the next. As prop traders our job is to recognize present patterns and exploit them. But we also must have the humility to accept that these patterns might change at any moment. And when they do we must find new patterns. We must adapt.”

One Good Trade is one good resource for adapting to markets.

Note of disclosure: No one at Wiley or SMB requested this review or knew what I was going to write in advance. I do not accept reimbursement for the reviews I write. According to the Wiley website, One Good Trade is scheduled for release in August, 2010.
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Core Ideas in Trading Psychology: Reading Market Psychology With Volume and Price

An important theme throughout the TraderFeed blog is that reading the psychology of markets is a core trading skill. Markets, like people, behave in patterns. Those patterns shift over time, with shifts accompanied by markers that accompany changes in state: changes in direction and changes in volatility.

The first important state marker to be able to read is volume. Volume tells us *who* is in the marketplace. Volume also correlates highly with volatility. When volume jumps, it tells us that institutional participants have become more active. When volume dries up, it tells us that the market is dominated by market makers: the liquidity providers. Is a news item or price movement to a new level significant? Volume will typically provide us with an answer: events are significant if they can attract the participation of large traders. It is their revaluation of assets that creates market trends.

What is most important about volume is relative volume: the degree to which current volume diverges from recent volume. If we want to know if the volume from 11 AM to 12 Noon is high or low, we should compare it to the median volume posted during that hour. If we want to know if today’s volume is high or low, we should compare it to the most recent median volume. Because relative volume is so closely connected to volatility, reading volume and its shifts provides important clues as to how far markets can go for or against us. That is useful information in setting stop loss points and profit targets.

Equally important, the astute trader wants to see the total volume that transacts at each price over the course of a trading day or week. The range at which the lion’s share of volume has transacted defines a market’s value area. Many trade ideas–at short and longer time frames–can be formulated by handicapping the odds that a market will return to a value area (if higher or lower prices cannot attract volume) or that a market will accept prices higher or lower than value (if those prices attract volume). The former situation defines a range market in equilibrium; the latter defines a trending market. In the former market, traders make money by fading strength and weakness; in the latter, they make money by going with market direction.

It is the oscillation of price between range and trending modes across a variety of time frames that defines the market’s complexity, as market participants reveal their sentiment: either accepting value or redefining it.

The astute trader can also read the psychology of markets by seeing whether volume is dominantly transacted at the market’s bid price (suggesting that sellers are willing to take lower prices to get out of their trades) or at the market’s offer (suggesting that buyers are willing to pay up for higher prices to get into trades). This measure of sentiment, which is effectively gauged by the Market Delta tools, can be tracked over time to see if buyers or sellers are becoming more or less aggressive.

We can also track market sentiment to see if more transactions across the broad stock market universe are occurring on upticks vs. downticks. When buyers are more aggressive, we will see more transactions occurring on upticks; when sellers are more aggressive, we will see more transactions occurring on downticks. This measure of sentiment, captured in the NYSE TICK, can be tracked over time to reveal whether sentiment in the market is waxing or waning.

When we read these shifts in sentiment over time and combine them with a reading of shifts in relative volume, we can determine whether the largest market participants are becoming more or less bullish. That will tell us if volatility (volume) is expanding with direction (sentiment) and whether moves to new price levels are likely to result in market trends.

Much of the skill of reading these shifts is placing market dynamics at a shorter time frame within the context of the longer time frame. What is a trending market at the short time frame may be a movement within a range at the longer time frame. A breakout at the short time frame may be trend continuation at the longer time frame. Context rules. A great deal of developing a feel for markets is a recognition of the patterns that occur as market participation (volume) and market sentiment (direction) shift, with longer time frames exercising impact over shorter ones.

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Bulls and Bears – oh my!

Anyone who has flicked through the financial channels on their cable TV box without really stopping to listen to what is being said will probably be occasionally confused by references to “bulls” and “bears”. These terms are common parlance in trading situations, and can be heard or read in any market analysis if you stay tuned long enough. They are not references to sports teams, nor to a traveling zoo visiting a trading floor, but rather to styles of market.

A “bull” market is, in short, a market on the rise. It is characterised by a great deal of investor confidence, which can carry on for an indefinite period of time. When a currency breaks its resistance level, it is expected to continue rising, to move with a singularity of purpose. This is much like the way a bull is characterised. Additionally, it triggers herd behavior, as more and more investors will join in and invest more. The term “bull market” is therefore a good definition of a market behaving confidently.

“Bear” markets, on the other hand, are the exact opposite of bulls. Where prices fall and the investor mood is negative, the support level may be broken and the price will continue to fall. The most common explanation for the terminology here is that when a bear attacks its prey, it tends to do so by striking downwards. For a true bear market to be declared, a majority of currencies need to fall, however a single currency can be described as behaving “bearishly”.

%r – Williams Percent R Indicator Posted By: David Duty

Larry Williams originally used a ten-day interval, and plotted where the current price compared to that interval. He used it to measure conditions of overbought and oversold. The overbought region is the area below 20% and the oversold region is the area above 80% – with the ability to invert the values it can be looked at in the same manner as other overbought/oversold indicators We use the traditional method, not the inverted in our discussions. Choosing the time period which the indicator looks at the interval for the indicator is crucial to finding the optimal sensitivity.

Interpretation: Williams’s basic rule is simple. When the %R reaches 20% or lower it is interpreted as a sell signal, and conversely when the %R goes to 80% or higher a buy signal is activated.

Changing the sensitivity of the indicator to work for you is essential to making the study a better tool. The longer the period for the %R, the less sensitive it will be. The indicator will move less but will be more smoothed. A number of technical traders use a value that is less volatile, in other words a larger value.david duty futures trading Williams % R Indicator common sense commodities forex trading

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Using Twitter for Reader Updates

As noted a little while ago, I am in the process of winding down the TraderFeed blog. My continued thanks to supportive readers; I do intend to keep the blog up as an archive for future reference. In addition, before winding down altogether I’ll be finishing my series of posts on “core ideas in trading psychology” and will assemble a “best of” set of links for 2010 (along with the links from prior years).

One enjoyable aspect of the blog has been linking to mainstream media stories and posts from other blogs that shed light on markets and trading. Going forward, I will use Twitter to link to particularly insightful material; you can follow the Twitter stream here. My new work will prevent me from directly commenting on markets–there’s just too much room for perceived breach of confidentiality given that I’ll have access to all trading at the firm–but I will look forward to highlighting good resources when I find them.

Unfortunately, for the same reasons of confidentiality, I will not be able to respond to market- or coaching-related emails going forward.

Thanks for your interest and understanding–

Brett
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Core Ideas in Trading Psychology: Reading Market Psychology Through Intermarket Themes

One of the most fundamental indications of market sentiment on a day to day basis (and over time) is the degree to which traders favor riskier assets over safer ones. If traders are anticipating economic weakness, they will tend to place their money into the more stable currencies and stock markets of developed nations, and they will tend to retreat to the relative safety of high quality debt (Treasuries, AAA rated corporate bonds). If traders are anticipating economic strength, they will tend to place their money into the faster growth regions of the world (developing nations’ stock markets and currencies) and will seek out the higher yields of lower quality debt. In an expanding world, traders expect demand for commodities to rise and will be buyers of oil and metals; in a world of anticipated economic contraction, commodities become relatively unloved assets.

Market psychology also plays out in traders’ preferences for particular sectors within the stock market. If they anticipate economic expansion, they will want to own growth oriented sectors: small cap issues, tech stocks, and consumer discretionary shares. If they are betting on economic contraction, safer large cap stocks become attractive, as do sectors that can sustain demand during hard times: health care, utilities, and consumer staples stocks.

In the shifting patterns of relative strength and weakness, we can infer market psychology. We tend to forget the denominators when we look at stock prices: everything is valued in dollars. By changing the denominators, we can see what is relatively strong and weak: a great deal of perspective comes from shifting denominators.

When we integrate sector and intermarket themes with the earlier mentioned shifts in volume and sentiment, we can develop a rich understanding of how traders and investors are feeling and where they are placing their bets. This is valuable information for shorter and longer time frame traders alike.

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Oil Price in Euros: Yet Another Economic Challenge for Europe

Here I used a pair of ETFs: the oil ETF USO and the euro ETF FXE to estimate the movement in the price of oil denominated in euros.

Because of the weakness in the euro and the firmness of oil prices, we see that oil has moved up about 50% since the bear lows in March of 2009. With the recent drop in the euro and rise in oil prices, we see that the price of oil in euros has been moving steadily higher thus far in 2010.

With many European economies being energy importers, not producers, such a rise in oil prices can only provide headwinds to economic growth in the eurozone.
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