Here are some of the things I’ve been thinking about:

The two areas in trading that separate the men from the boys (so to speak) are:

1.) The ability to divide environmental perceptions in half and process them separately. First I ask myself what I am feeling and in doing so I acknowledge and honor the feelings so that they don’t cry out for expression on the chart. Then and only then I ask the market what it is telling me. (I used to combine these two observations; I used to subconsciously deny how I was feeling because I knew it was wrong to let my feelings dictate a trade and so the feelings were bleeding into my technical observations because I had not acknowledged them and honored them.)

2.) The ability to execute according to #1 as if I am even or in the black when I am in the red. If during my 90 minutes of trading (09:30 -
11:00), I’m in the red, usually the feeling is something like “I’m afraid! I want to be in the market! I want to be in a trade!”

re A.N.N.A.:

I realized it’s not enough to intellectually understand ANNA. I had to write my own version of the ANNA software for my own internal hardware. When I learned to ride a bike, even though I’d observed someone else doing it and they told me how, I still had to write the program in my own head about how to balance and pedal. It couldn’t be just an intellectual understanding.

re trading plan rules:

I think that if you need strict rules, you’re not ready to trade cash. Strict rules mean that you’re not in control of your emotional feedback
in a live market. I’m not tape reading and I have general ideas about where I get in a trade (ideally the pullback at the end of a trend) but
I don’t have strict rules because it seems trading is an art not a science.

-Trader Diagnosis

It basically infuriates me when I hear the other talking heads talking about what stocks to buy during the exact moments that the index futures are making new multi-year lows. Why do people do this? Is it to try to make people feel better? To look smart? To feel smart? Just for TV because that is what the proverbial investors want to hear?

Bear markets mean lower lows and lower highs … and we are in a bear market until we get higher lows. and higher highs … which is decidedly NOT today.

At least Charles Payne on Fox Biz talked about SDS – one of the short ETF funds.

On one hand the world gives credence to “you can’t market time” (well what do they know) and on the other they all do the same thing us short-term, high frequency traders do which is go nuts over “missing out.” Yet missing out on the bottom is a great thing – regardless of your timeframe. The market has this funny tendency to trade at a price, reverse from it and then go back and take a look – kind of like a criminal goes back to the scene. Everyone gets a second chance to get in at a safer spot – after the market has shown its hand – and this is true in ANY timeframe.

But back to rocket surgery Mario and all of the other experts who want to tell people what to buy – this is a bear market. How can you sleep at night knowing that people will listen to you and buy what you say – maybe even today?

It seems like it would go without saying but it doesn’t. A key to making money as a speculator is knowing what combination of market factors you are looking for – and then waiting for the elements to converge. This starts with knowing what your factors are…. can you describe them? In enough detail so that I could trade them? Making these decisions outside market time – and then knowing when your unconscious pattern recognition is augmenting your plan is a big key in Psych Cap.

It is very easy to think that we trade the chart or the probabilities – but in fact we trade against other people’s choices in response to the price movement.

It is then easy to say “well how do I tell the difference?” Ask yourself the question “what is everyone else doing given what has happened in the most recent timeframe that I trade.” In fact, go further and write an short essay about who you are trading against. Once you have a visual in your mind, it becomes easier to avoid getting caught up at the worst kind of moments in market action.

Today a very sophisticated systematic (quantitative) trader said “Discretionary trading wasn’t around before the 1980’s.” I am still stunned. Maybe he is 22 years old or something…. but can anyone explain this to me? He might have met “money managed in a discretionary manner” but still…….

…that is always how Fed afternoon strikes me. All of us short-term, high-frequency traders staring at the screens ready at least to watch the fireworks. Sometimes I find myself laughing at 2:14:30 Eastern time. Some of us love it (me) and some of us think it is insane (me too) but we watch …. wait and watch and then maybe play.

I wonder really – how many “day-traders” there are. Does anyone really know? New York magazine has an article this week about the return of “professional traders”. It sounds exactly like the scene at Schonfeld when I left in 96 to run my own desk of the same in NYC.

Any way – like always it pays to have a plan – and to acknowledge the anxiety that goes along with 2:16 pm. The latter makes the former go much smoother.

If you ask a neuroeconomist about the markets, they will say markets are NOT risky. In fact, they are 100% certain that risk is not the issue in markets.

What you say? Isn’t that the whole point – judging risk? Well yes… but, well actually no.

Let me explain. To a neuroecon type risk = known probabilities i.e. like in poker, chess or artificial experiments where you know there are 50 red balls and 50 green balls in a jar. In other words, if precise probabilities can be determined, it is risk.

If precise numerical probabilities can not be determined – the market – then it is uncertain or ambiguous and our brains react a whole lot differently. Knowing this is a huge mental edge.

Why? All of our methods for investing or trading – all of the tools we use to make decisions to buy or sell are only about approximating risk. This leaves us in the situation where we intellectually think we have determined precise probabilities but in fact, our unconscious brains knows that we have imprecision, we are missing variables and someone else might know more.

According to a series of studies, our brain then does a few things automatically – 1. It assumes a lower reward probability? 2. It handles the information using a higher level of feeling-based information.

In other words, if you really think about it, the way our brains interact with market data is a set-up to not follow our set-ups, trading or investing plan. Understanding this however can actually help -? through the awareness that a trading system is only an approximation designed to provide precise probabilities where none exist. In other words, we are fighting the architecture of our brains.

What tools can we use – developing an appreciation for psychological capital – which inherently includes our emotional foundation. The brain also tends to expect the same result from the next decision as you got from the last which is logical if you are just a brain trying to perform your job.

The conduit throughout all of this is what we sense, feel and emote – understanding that emotion and logic are two sides of the same coin and working within the brain’s design raises any one trader’s odds of extracting consistent profits from an inherently ambiguous system that operates on the fuels of hope, confidence and fear.

Uh…. up almost 1000 points at the relative speed of light?

The pace of the markets has changed a bit wouldn’t you say?

In other words, take a quant driven hedge fund, add an intraday momentum algorithm, put a server at the exchange and HOLD ON for dear life. For now let’s call this “quants on the run.”

Being one to use speed and rhythm in addition to price and volume to read the markets it is a bit like being on the world’s newest and fastest roller-coaster … but it also gives enormous opportunity to catch a? trend and make a day, week, month or year…. and lots of very sophisticated traders are trying to do just that.

…something to keep in mind

Wow – what a chopfest. … which I have heard is the sign of a bottom. I could really see and feel the fight for value – with about equal players on both sides. Hard NOT to get aggravated in that and even harder to apply the “well if it can’t go down, it must be going up” idea. …. although that did work finally in the last 10 minutes of the cash markets.

Now we know what a range bound day looks like in this market. THAT is something to think about.

Of course you are panicky. I mean who wouldn’t be? Do we have any experience with major US companies, banks in particular, going out of business one right after the other? Have any of us lived through this? Even if you were alive and remember the crash of 1929 or the depression that followed it, you didn’t experience it in a 24 hour news cycle where each 12 hours brought the next major name to either its demise or the brink of disaster. This is scary stuff…

and it would be ultimate in irrationality NOT to be afraid.

But alas there is a difference between feeling fear and jumping out the window.

This idea is central to making the best decisions – whether you run a big hedge fund or your own modest trading account. Feelings, thoughts and actions are three separate things. The best way to decide on the most rational action is to experience and analyze the feelings that are being induced in you by the market’s behavior.

Oftentimes taking an action is simply a way to reduce the discomfort of a feeling. Instead, try to figure out what you are feeling and what is really driving it? If you allow yourself to go through this process of “emotion analytics”, it will become much much easier to choose actions that make the most sense.

Turn off the tv when they tell you to calm down … the quickest way to calm down is to give your feeling their due-listen. Attempting to ignore them only makes them more intense.