Quiz: what emotions significantly influence trader/investor behavior and thus significantly influence how markets move?

in the middle of july, i posted the following quiz:

• when the average trader makes a decision to enter or exit a position, one of two emotions is probably dominant in the traders decision making process...what are the two emotions that the average trader might be keying off of?
• i believe that i engage in this process, a lot, especially when i daytrade...
• disclosure: this might be a trick question...

the usual pairing of fear and greed may come to mind...however, while i continue to believe that greed may influence the average person's desire to get involved in trading/investing in the capital markets, i don't believe that greed plays much of an influence in the decision making process of entering or exiting a position...rather i continue to believe that fear, and more specifically 'fear of missing' (the move up) and 'fear of losing' (during a move down), significantly influences all 'non trading master's' decision making process... i know it does mine...about a month or so ago, JE and i had a great phone conversation about this...

the folks at traderpsyches appear to have a similar viewpoint:

"...Many traders and investors work off “fundamentals” – i.e. company prospects or economic data. Many traders work off “facts” i.e. the actual price something is trading at and the relationship of that price to prices gone before (some may not think these are enough but they are indeed facts – the S&P is trading right this moment at 984.50 and that IS a fact) and we all can get caught up in the two kinds of fear that drive the market – fear of losing and fear of missing out..."

if you are interested in exploring this line of thinking, then check out the traderpsyches blog...

thanks again to Me vs. WallStreet for posting a link to their site on his blog...

8/20/2009 post close update

• exited all NQU09 discretionary swing trading lots today: 1 @ 1607.50, 1 @ 1612.50, 1 @ 1617.50, for an average exit of 1612.50...
• this nets to +16.33 NQ points/contract with a holding period of 5 days...
• currently flat, looking to re-enter with 1 lot at limit 1607.50...
• todays daily range in the NQ was a bit narrower than i expected...
• great phone conversation with JE today...
• only made the time to rebuild one systemic swing trade model...
• no systemic swing trade entries were generated for today's close...
• happy to have finally booked some profits after the latest systemic swing trade stop loss...
• happy with my vcm daytrading process and results...

8/14/2009 post close update

• in my view the bulls are still in charge...the markets negative reaction to the lower than expected michigan consumer confidence, took us below 1600 on the NQ...however some mid afternoon nibbling by the longs led to what looks like a big squeeze of the shorts into the 4pm close, which then continued into the 415pm futures close...
• i remain long the NQU09 at avg price of 1606.25/contract...it closed at 1615.50...the position is currently +9.25/contract unrealized...
• i am still looking to sell the second lot at limit 1622.50, and the first lot at limit 1627.50
• if these levels get hit, i will then determine at what levels i will look to re-enter the NQU09 discretionary swing trade...
• FAS also showed late day strength, putting in a nice bottoming tail on its daily bar for the second day in a row...
• 'SB IDX' generated an entry signal for today's close...i will post a separate entry for this later...
• did some work testing the 'SB IDX' discretionary swing model on intraday time frames...nothing robust was found...
• next week i will test the 'SB SPY' and the 'SB NDX' models on intraday time frames...
• my fingers are crossed for JE as he starts trading his intraday ES model in realtime (http://myestradingjournal.blogspot.com/2009/08/off-hours-return-to-live-trading.html)

Disclosure: Long NQU09, long FAS.

***remember this is an illustration of what i am trading and my thinking...my trading plan may change without notice...this is not a recommendation for you or anyone else, to buy or sell this or any other security...***

7/28/2009 afternoon update

• no afternoon trades in the vcm daytrading account
• the NQ discretionary swing trade is in the money 10+ points (marked at the 4pm ny close of 1603)...my target continues to be 1625 for this lot...
• no systemic swing trading entry signals were generated at today's close...
• made significant progress coding a work around for a component of the ES intraday systemic model...overall there is still a lot of work to do, but progress is being made building the model's structure in the most robust manner that JE (http://myestradingjournal.blogspot.com/) and I can think of...
• oliver velez, a trading/teaching master, and founder of the daytrading firm i am with, is holding a conference call wednesday night at 415pm ny time...he will give his outlook on the market, review a few lucky conference call participants closed trades and evaluate stocks of your choice (http://www.vcmtrading.com/events.php#)...
• FAS -1% today...

Disclosure: Long NQU09, Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

7/24/2009 afternoon update

• , NQoriginal NQ target of 1597.50 would have been hit by EOD...i need to continue working on the discretionary day/swing trading plan, so that it factors in more of my emotions...
• the way it looks now, what started out as a multi day NQ swing trade turned into a NQ daytrade...how did this happen? i did not expect the NQ to continue its upward climb so fast after yesterday's apparent exhaustion day...however, all major market indices filled their opening gap downs, and are again testing their recent highs...relentless buying pressure...i thought it more probable that if we were to test the highs today, a summer friday, that we would drop back down later in the day, and i could rebuild my position...wrong! it didn't happen that way...low probability behavior, in my view for the market to continue its run up today...
• i will still be looking to add long side NQ exposure on a counter trend move down...i am hoping that will happen sunday night or monday...if not, i am not sure if i will buy a break above the recent NQ high of 1604...
• S&P 1000 will probably be the next target....those still short the market, or under invested, may be looking at a break above S&P 1000 (just as they are now doing with S&P 950) as the next psychological target to adjust their positions...
• i wonder if the 'fear of losing' for the shorts and the 'fear of missing' for the longs will be at play on a break above 1000 on the S&P 500?? i say the answer is yes! we could see another strong ramp up on a break above S&P 1000 if the shorts and longs get real emotional...
• if i/you/we could book on average just 1 ES point per day/contract (net of commissions), that would be 252 points/contract/year...at the current ES level of 979 that would be 26%/year...all i/you/we have to do is figure out how to do that...what a great challenge! at 26% per year, financial security would be at hand...
• finished the R&D on a particular component of the systemic ES intraday model that JE and i are working on...just need to code it up...also ready to back test a few of the model's filters...
• great phone conversation with JE today (http://myestradingjournal.blogspot.com/)...i think he comes up with a new trading idea/concept every day!
• happy with my vcm discretionary day trading this week...looking to continue my approach next week...
• no systemic swing trading signals generated today....
• though i didn't fully follow my discretionary swing/day trading plan for the NQ, i am still happy to have booked 27 NQ points/contract today...
• have a great weekend everybody!!

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

7/23/2009 update

• continued to play opening gappers in my vcm account...went 4 for 4, with 3 shorts and 1 long...only generated 1 R though...
• market continues to be a beast to the upside...i am looking to build discretionary swing long side exposure during any counter trend move down, and just opened my first lot in the NQU09 at 1574.75 at 840pm (about 2% below today's intraday peak, and just above wednesday's intraday peak)...my bias is the next upside target for the S&P 500 is 1000, though it may retest the 950 breakout level before getting there...i am hoping it does retest the 950 area as this will enable me to get a bit longer for the next swing move up...though i am writing about the S&P 500, i am trading the NASDAQ 100 via the NQ...the NASDAQ 100 has led the major market indices higher, and it is my market proxy of choice...
• continued working on the ES intraday systemic trading model...JE has some terrific trading ideas (http://myestradingjournal.blogspot.com/)...we are hoping to build something that is very robust...so far so good, but there is a lot more to do...made progress today conceptualizing one of the model's components, and performed some statistical analysis to help determine its optimal implementation...still more to do here though....
• no entry signals for the systemic swing trading models were generated today....
• the FAS is up about 20% in my IRA, and is flat in the two custodial accounts...the custodial accounts got in a bit too early, but since these are longer term investments, i believe they will do fine...looking for about 100% return for the FAS within the next 9-15 months...

Disclosure: Long NQU09, Long FAS

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

Catching up; checking in with 'fear'

its been a few days:

• the 'SHOE July Pre OE' long model was closed on Monday at 4pm, and generated a loss of about 1.7%...
• still stressed about the systemic swing trading models being out of sync with the market...i know there is nothing i can do about it and that is helping a bit...still its been nice not having any open systemic positions the past few days...i needed a break from the 'uncertainty associated with an open position'...
• doing some joint development work with JE on an ES intraday trading model (http://myestradingjournal.blogspot.com/) ...some concepts appear robust and limited testing bears that out...continued refinement of additional concepts and then more involved testing...working with JE has been a great experience in and of itself...
• discretionary daytrading at vcm (http://www.vcmtrading.com/#) has been going pretty well since the beginning of last week...i have been focusing on trading opening gappers...so far the results have been good...the things i am most proud of are cutting my losers short and taking the small loss, as well as exiting a trade that wasn't moving in the direction i was anticipating after a reasonable period of time...i still need to work on letting my winners run some more...over the past 8 trading days, the dollar value of the biggest winner has been greater than the dollar value of the biggest loser, so this is step in the right direction...but perhaps the bigger thing is to decide if i am going to R base the opening gap plays or scalp them....so far its been a blend of both: start a small position with a known profit target, add to that position when certain setups occur, and then calculate the R based stop...even had a good back and forth chat room exchange this am with the chat room moderator (trading/teaching master to the nth degree), who helped clarify my thinking about certain concepts...
• from this weekend's quiz (http://stbsmb.blogspot.com/2009/07/quiz.html) : when the average trader makes a decision to enter or exit a position, one of two emotions is probably dominant in the traders decision making process...what are the two emotions that the average trader might be keying off of? JE had a funny response...the insight i had this weekend is the two emotions are not the usual fear and greed pairing, but rather 'fear of losing' and 'fear of missing'...'fear of losing' leads to them selling into a down market, 'fear of missing' lead to them buying into an up market...when these traders act on either of these emotions, it tends to drive the market further in the direction of the current trend...i believe this is what is playing out now...the shorts have been madly covering over the past week on the failed head shoulders pattern in the S&P 500...under invested longs are scrambling to get more upside exposure and continue to drive the NASDAQ 100 to new swing highs...'fear of losing' and 'fear of missing'...
• can it be that 'fear' is the driving force in the market?? leading to under performance for the trading novice and to out performance for the trading master?? i am aware that fear plays a role in my trading performance, but perhaps i have underestimated its influence...
• is mastering fear one of the requirements to achieving trading mastery?

Trader Education

My good friend JE over at the 'ES Trader' (http://myestradingjournal.blogspot.com/ ), recently blogged about the value of 'trader education' and Don Miller's new trader training program. This post has generated considerable interest with other trader's and bloggers posting their comments on these two topics.

I felt compelled to add my two cents on 'trader education' and my experience with VCM's (Velez Capital Management's) 'Trade for Life' Program(http://myestradingjournal.blogspot.com/2009/07/don-millers-jellies-group.html). Here is a copy of what I posted:

je,


since i am not familiar with don miller's trading method or his training program, i cant speak to their pro's and con's...

however i do want to speak on the value of a trading education...

i do believe that trading can be taught...i believe some people would be better students than others, like with any skillset...i also believe some people would be better teachers than others, especially when it comes to trading...

as you know, i am a prop trader with velez capital management's 'Trade for Life' program...i paid a fee ($9000) to learn the discretionary daytrading and swing trading methods vcm teachs, and to get access to vcm's capital...their training model and their prop trading model is working for me...

some of the highlights of vcm's training/trading model include: i can retake the 2 day training seminar every month for the rest of my life for free...i can retake their online trading lab every month for free for the rest of my life...i get access to their twice daily update every day for the rest of my life...i get daily access to two different chat rooms that are monitored by very advanced traders, some of whom are significantly advanced, and who generate trading gains nearly every single day...i get to network and share ideas with other vcm prop traders via 2 vcm facebook sites...i get access to vcm's capital every day for the rest of my life...the better i trade, the higher the % of profits i get to keep, and the more access to capital i get...i love the model of their training/trading program...

yeah, i paid $9000 up front, and now the price is up to $12,000, but for this kind of education and access to capital, it is almost cheap...i have literally booked millions of dollars of gains trading the markets since 1996, and have booked millions of dollars of losses since 1996...so paying $9000 for professional training and access to capital when i was looking for help and another means to generate a trading earnings stream, was a no brainer for me...

again, i cant speak to the pro's and con's of don's training program or his trading method...i can say the vcm training/trading program works for me...i am still a pretty poor discretionary day trader on a technical basis, but i am making progress...however, the psychological training that is an informal part of their training has significantly helped me become a better systemic swing trader when it comes time to execute my models...

we will all pay our market tuition one way or another...the teachers at vcm suggest it will take anywhere from 18-48 months for someone to fully understand the methods and be able to execute them consistently...however, some will never make it...just like the students who drop out of their vocational, undergrad or grad school program...so if someone is a quick learner and is on the 18 month track, then the current upfront vcm tuition rate of $12,000 comes out to about $32/trading day for daily training and access to capital...this sounds pretty cheap to me...

overall, i guess trading is not for everyone...but for someone who is inclined to trade, and can find someone they trust to train with, then the odds of success can only increase for that trader...trust is the key word here...i like to believe that vcm will still be here 3, 5, 10 years down the road...i have no reason to believe they wont, but who really knows if they will...so far, they have been everything i hoped they would be...

whether don's training and trading model will work with his students remains to be seen...i hope that don and his students are very successful...vcm's training and trading model is working for me, and i am very happy to be part of their organization...

i do think trading education can work, but it has to be with the right students, the right teachers, and the right program...

adam

Asleep at the Switch: 'NDX Summer Rally' generated a Long Entry Signal on 6/25/2009 and I missed it!

My 'NDX Summer Rally' System Trading Model generated a Long Entry Signal on 6/25/2009 and I missed the original entry. How did this happen? This model can only generate 1 signal/year, and while I have fully automated the Entry Signals for models that may generate multiple entries/year, I have not done so with models that only generate one signal/year. I manually review the once/year models weekly and noticed my error yesterday afternoon.

However, the NDX traded back down to its original entry price yesterday, so I was able to enter it then.

The concept for this model is the NDX tends to put on a rally starting sometime towards the end of June and finishing somewhere in the middle of July. Why does this happen? Who knows. Perhaps it has something to do with EOM and EOQ window dressing and then perhaps a run up into Q2 earnings announcements. In any case I have modeled it.

One of the things I really like about this model is that its Money Management Stop is very tight, currently at 1.3% below the Entry Price. If the supposed summer rally fails to happen or peters out quickly after it begins, this stop protects me from the big loss.

The trade generated from this model in 2008 was stopped out, so the model is trading just below its all time high (see Equity Curve chart above).

Here are some of the model's Performance Statistics:

• Model Tracking Vehicle=NDX
• Start Date=11/1/1985
• Number of Trades=23
• Average Trade Return=2.50%
• Win Rate=48%
• RAWAL (Ratio of the Average Win/Average Loss)=4.7
• Profit Factor=4.34

Notice the Win Rate is less than 50%, currently at 48%. How can a Strategy that is profitable less than half the time make money? The RAWAL is huge at 4.7. This means the Average Win is 4.7x the Average Loss. Every loss the model generated is from the tight stop.

In addition to the Money Management Stop, this model also has a Trailing Stop, which has been hit once during the life of the model. JE (http://myestradingjournal.blogspot.com/) and I talked last week about using Trailing Stops. Two of my models utilize them and perhaps more would benefit from them. Testing the other 33 strategies to see if they would benefit from a Trailing Stop is a reasonable Research Project.

Disclosure: Long the NQU09.

Disclosure: The performance results shown above are for Model analysis purposes and do not include commission or slippage. The model is built on data from the NDX, but I trade the model with the NQ e-mini. Actual trading results from the NQ usually differ from the model results of the NDX, with the NQ showing somewhat weaker performance data. Nonetheless, I still trade this model with the NQ and when executed according to the plan, it has generated consistent profitability for me.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

The Holy Grail of Trading

What is the Holy Grail of Trading?

Is it that one strategy that never loses?

Is it that one Indicator that never fails?

OK, OK, we know (hopefully) these don't exist.

Maybe its the way Warren Buffet invests in companies? He is one of the most successful investors in world, so he obviously knows what he doing.

Maybe its the way George Soros fearlessly trades the FOREX market?

Maybe its the way Bill Ackman of Pershing Capital astutely navigated this historic bear market?

Maybe its the way Jim Simmons works with his team of 50+ PhD's at Renaissance Technologies to scientifically model and trade the global capital markets?

At least we know its not the disgraceful and treacherous way Bernie Madoff went about his business, to the ruin of all those that trusted him.

So if its the way Buffet or Soros or Ackman or Simmons trade, then why don't we just hire them to manage our money?

Well, if you are reading this, then perhaps it never occurred to you to have someone else manage your money. Or maybe we let some hedge fund guy or mutual fun gal do it for us, and they didn't perform up to their benchmark or our expectations?

But ultimately, I say its because we want to trade the market ourselves and have a crazy notion that we can do it as well if not better than these trading masters.

So if we are going to do it ourselves, we better have an edge, a plan so to speak. And we have to be able to execute this plan. If we don't then the capital markets of this world will eat us, eat us alive.

I suggest the key, the Holy Grail of trading, is to have a trading plan that fits our personality. In the end, if we are the ones that are going to push the buy and the sell buttons, then these actions must be derived from our own cognitive analysis of market behavior and then supported by our emotional intelligence of our internal process.

Yesterday, JE wrote in a very personal manner, about the struggle to find a trading strategy that fits his personality (http://myestradingjournal.blogspot.com/2009/06/off-hours-two-year-anniversary.html). In my view, developing a trading plan that fits our personality is the key to trading survival, success and ultimately mastery. For me, 13 years into this game, it continues to be a work in progress.

Here is a copy of my response to him:

*******************************************************************************

JE, great post and follow up comments...

i strongly agree that the key to trading the markets, the holy grail so to speak, is to have a trading plan that fits the trader's personality...

there are hundreds of trading strategies available fully detailed in books, magazines, online, etc...if all we had to do was pick one and trade it, we would all be millionaires in due time...however nearly all of us fellow traders are not...

why?

i think the key is whether or not we can psychologically/emotionally trade the plan....

can we take the trade when the signal is given?

can we exit at the defined profit target?

can we take the stop loss?

can we withstand the periodic drawdown?

can we sleep at night?

can we recognize our fear, our anxiety, our greed when the position is on, and still trade the plan, even if it means continuing to feel these emotions?

can we deal with the uncertainty of an unknown outcome?

i pose these questions because i believe they are essential emotional/psychological markers of our ability to be truly successful traders...

to achieve trading mastery, we have to answer 'YES' to each question...

currently, this is the center of my work as a trader, and it's a bitch...

adam

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'NB #2 SPY' Generated an Exit Signal for Wednesday's Close

'NB #2 SPY' Generated an Exit Signal for Wednesday's Close. The position was held for 1 Day as is directed by the model. The Money Managment Stop was not hit. The position generated a profit of about 0.8%, very close to the average trade return of 0.7%.

The position had been up nearly 2% by late morning but then pulled back prior to the FOMC announcement at 215pm. Market participants found things to dislike about the announcement and the SPY continued to drop and just about filled its opening gap up. A rally during the last 45 minutes brought the SPY back up to close about 0.8% higher than yesterday.

A bit of a roller coaster but with System Trading this is par for the course. Once the model has been built, the 'plan the trade' portion is complete and I can put my IQ on the shelf. Once an entry signal is generated and the position is put on, I have to pull my EQ off the shelf and 'trade the plan'. Now, no matter what kind of ride the market goes on and no matter what my emotions may go through, I have to follow the rules of the plan.

I was not happy to give back the near 2% intraday gain, but there was nothing I could do about it except to 'trade the plan'. Needless to say, I was happy to see the EOD bounce back to decent profitability. Interesting how my 'happiness' was strongly corelated to how this position played out. I bet my 'happiness curve' would have been higher and steeper if I was not monitoring this position minute by minute today, but rather playing with my son and/or hanging out with my wife. I think one of the skills I need to continue to develop is to emotionally detach myself more and more from the outcome of any individual trade, knowing that if my overall System Trading Portfolio is full of robust trading models, then the profitability will come over following 12 months. Currently, I would give my System Trading Portfolio a B+ for robustness. Emotionally digesting the Portfolio's robustness and profitablity is a work in progress.

However, I did greatly enjoy the telephone conversation I had with my trading friend JE (over at http://myestradingjournal.blogspot.com/). He found a unique way of using the ATR Volatility Bands that I developed and have written about. It just goes to show that the creative process knows no bounds, and what one has not concieved of, another has already put into motion. Nice job JE!