There are about ten thousand ways a trade idea can go wrong. You don’t have to trade very long to seemingly encounter most of them in your first handful of trades! The goal, of course, is to manage behavior and to collapse all of those possibilities to a few scenarios and cases that will result in consistent action from the trader. A look back at a trade idea: shorting XLE At the end of last week (9/30/22), we were looking at some really great short setups in Energy stocks. Now, we knew these were potentially problematic trades. Energy has been a clearly leading sector since the first quarter ..read more

I’ve been thinking and writing a lot about uncertainty lately—and about making decisions with incomplete information. Over the past two years, we’ve all had to make decisions in an uncertain environment as the world struggles with Covid. There are many other lessons and parallels from other areas of life, but I want to focus this discussion down on financial markets. Rethinking black and white categories can give traders a better view of reality, a more accurate grasp on truth, and likely improve bottom line trading performance. The nature of trading decisions Making money, over the long run ..read more

One of the interesting developments of the past ten years is the gradual death of the “life hack” approach. This is a good thing. The reason this movement has died is because most “hacks” simply don’t work. But if you’re trying to develop a trading approach, you need to be careful because life hacks are alive and well in the trading community—and they still don’t work! What is a lifehack? I’m not an internet historian, but it seems to me that lifehacks really sprang on the scene along with the internet. Once it was easy to put up a webpage, people starting sharing cute little tips and tricks t ..read more

I took part in an interesting exchange in a Facebook group last night, in which a trader was asking “should I buy puts or calls for the spy or qqq?” This trader, by his own admission, was a consistently losing trader. The question began with something like “I’m going to try depositing money one more time because options are a gamble, but…” I just happened to see the question and tried to help this struggling trader. My point was that he was asking the wrong question. “Do I buy puts or calls for an index?” I was surprised at the gap in communication that followed; this trader was completely una ..read more

How do we learn? For most things, a pretty simple plan works: do something and evaluate the results. Make some changes to what you do, and see how the results change. If your results get better, do more of the thing. If your results get worse, go the other way. Of course, I’m oversimplifying, but that is a good, solid plan that works… except in the market and in trading. This is one of the reasons that it’s so hard to learn to trade—results are only loosely connected to actions. A wicked learning environment We call this, formally, a “wicked” learning environment. Compare trading to other ende ..read more

Trading can be emotional. The market often has volatile moves and it seems new highs or the end of the world are just around the corner. In this environment, it’s natural for traders to be emotional. Of all the emotions traders deal with, regret is probably the most common. In fact, I often joke that the default emotional state of a trader is regret. Consider some examples: If you miss a move, there’s obvious regret. If you have a trading system that only trades certain types of patterns or market environments (and you should), you’ll regret not being able to trade other environments. If you ..read more

Creativity is, for me, right at the heart of our growth as humans. In this post, I’ll share some ideas for connecting with your own creativity and bringing the power of a new perspective to problem solving. Right away, we run into a problem. “Creativity” is a problematic word. Given my background (formal training and first career as a professional musician/composer), creativity means, to me, creating something new. Maybe it’s a significant variation on something that has been created before, or maybe it’s something the world has never seen before. This is certainly one aspect of creativity. W ..read more

So, it’s January 14th and I’m writing my first blog of the year. There’s an important lesson here: habit, momentum, and daily rhythm are important. I have come to believe the power of habit is one of the most-neglected truths of the human experience. Too often, we want to do something, we have great goals, but year after year passes and we don’t quite get there. Self-help literature has many solutions, and as this body of work has matured in recent decades, the verdict is clear: most of these solutions don’t work. You can plan at any time horizon, you can create vision boards, you can engage ..read more

What is different and what stays the same? This is one of the key questions traders who trade on different timeframes or in different markets face. We often hear the argument that a technical tool or pattern works just the same on any market or any timeframe, that we can analyze a currency chart the same way we analyze a stock chart or a commodity chart. People who make this claim invariably are what I would describe as casual chartists—people who simply look at charts, maybe draw some lines, imagine some Fibonacci levels, and call out targets. Who never makes this claim? People who do actual ..read more

Continuing from my last post, I want to explore how emotion influences our thinking and bias. Humans are not (purely) rational In my trading and investment work, one of the things I stress is that all human decisions are made from a combination of reason and emotion. Even if you think you are being purely rational, there is always some element of emotion in every decision. Making good decisions usually means that we are focusing on the rational element, and that we do not let emotion come to the forefront. Of course, not every bad decision is an emotional decision—reason can fail, we can have ..read more