Responding to Adversity – A Personal Account Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com
his past hursday !"#$%#&'(, ) traded traded poorly. ) didn*t lose a tremendous amount o+ money)*m pretty good about getting out when )*m wrongbut the money was not n ot what concerned me. -hat gnawed at me was that that ) was completely wrong wrong about the maret*s morning direction. Partly it was a problem o+ getting /married /married to an opinion0. ) saw that there there had been substantial weaness the prior day, and ) e1pected that to carry over to hursday*s hursday*s trade. -ith -ith each push up early early in the morning, morning, ) +aded the moves. Several trades brie+ly brie+ly went in my +avor only to see the maret bounce even higher. higher. Be+ore ) new it, ) was nicely in the red. Worse yet, I couldn’t figure out why. why. Remembering the medical advice ) had so o+ten given other traders/Above all else, do no harm0) paced it in +or the day. )t didn*t help matters that that my opinion was borne out in the a+ternoon trade. he errant e1perience led me to scan the maret to try to identi+y where ) had gone wrong. he +irst thing thing ) noticed was that the the vast ma2ority o+ stocs stocs that ) scanned were rising in the morning, morning, even as ) was trying trying to get short. ) thought to mysel+, mysel+, /Suppose ) constructed an indicator that told me how many stocs were in an uptrend vs. downtrend during the day. -ould shi+ts in in the trending behavior o+ individual stocs lead moves in the large inde1es30 A+ter a couple o+ mis+ires, ) +igured out a way to measure /trending0 on a short4 term basis and apply it to the large universe o+ S5P and NASDA6 stocs, including both small cap and larger cap issues. Below appears a chart o+ the indicator +or hursday*s hursday*s trade7
Notice how, early in in the morning, the 8 o+ issues trending higher !the red line( was steadily rising. -e then dipped and made a second high, but +ewer stocs by that time were uptrending !though at no point during the day were more stocs downtrending than uptrending(. he maret gradually rose to its high o+ the the day midday, but again +ewer stocs were participating in that upward movement. 9or the remainder o+ the day, day, the proportion o+ stocs trending higher steadily eroded, as did the S5P '&& price. :ad ) waited +or the proportion o+ stocs to discon+irm price gains in the inde1, my idea o+ selling would have borne +ruit. ;+ course, this is only one day, and ) need to go bac in time and see i+ this indicator similarly catches periods o+ strength and weaness in the maret. At the very least, it invites all sorts o+ research
)s there a threshold percentage o+ stocs that n eed to be trending in a direction to maintain that direction3 Do marets with a net positive but waning percentage o+ uptrending stocs behave similarly to marets with a net negative and growing percentage o+ downtrending stocs !and vice versa(3 -hen marets show a relative balance between uptrending and downtrending stocs !indicator near =ero(, do breaouts in the indicator lead or lag price breaouts in the inde1es3 :ow does the behavior o+ the indicator parallel the action o+ such measures as the N>S? )@3 )+ a large number o+ stocs tic higher, higher, but this does not cause a higher proportion o+ stocs to trend higher, can you conclude that you are getting a bounce in a downtrendand vice versa3 !his is actually the the best o+ all
his may or may not be a +ruit+ul direction +or research, and ) hope to report results on the -eblog -eblog over time. y point in this article, however, is not to tout a new measure. Rather, it is to loo at how traders respond to adverse outcomes in the maret. he most success+ul traders ) have wored with have two
)magine that you begin hearing a clattering noise under the hood o+ your car and sudden sluggish per+ormance per+ormance as you accelerate. @an you imagine chaling chaling up the aberration to /2ust one o+ those things0 that happen to cars3 -ould -ould you purposely +ocus on things about the car that you you lied3 ;r would you +uss and +ume +ume over your car*s behavior, stubbornly pushing the car to drive beyond its limits3 limits3 ;+ course not. >ou*d pull the the car over to the side o+ the road and loo under the hood. raders who respond to glitches in their trading without pulling over and without looing under the hood are doomed to eventual breadown. Do you review, in detail, trades that went wrong and systematically identi+y what you could have seen in the maret to avoid avoid the problem3 Do your trading +ailures push you to develop new insights into the maret3 )*m not taling about super+icial super+icial bullshit sel+4analyses, such as, /) wasn*t patient enough in my trading0, or /) needed to have hav e better discipline0. hat*s not looing under the hood. :ere*s what looing under the hood is7 >ou >ou sit there +or hours +iguring out a way to measure the short4term trending behavior o+ every operating company that trades, gathering the data, and then putting the data data in a +orm that maes maes potential success. And i+ that e++ort +ails, you +igure out why and spend another +ew hours re+ining the idea. -ould -ould you e1pect to win at chess without studying chess games3 -ould -ould you e1pect to +i1 cars without observing and testing the various systems3 Do great coaches and players win without observing tapes o+ their per+ormanceand tapes o+ their opponents3 -inners -inners respond to adversity with e++ortcreative e++ortcreative e++ort. Not all e++orts are rewarded by the marets, but lac lac o+ e++ort is always punished over time. arets are not always +air, butin the endthey are mercilessly 2ust.
$rett N# Steenbarger Steenbarger,, Ph#D# is Director Director of %rader %rader Deelo!"ent for ingstree ingstree %rading, %rading, ''( in (hicago and (linical Associate Professor Professor of Psychiatry and $ehaioral Sciences at S)N* )!state +edical )niersity )niersity in Syracuse, N*# N*# %he author of %he Psychology of %rading %rading WileyWiley- .anuary, /0012, Dr# Steenbarger has !ublished oer 30 !eer4reiewed !eer4reiewed articles and book cha!ters on short4ter" short4ter" a!!roaches to behaioral change# 5is new, new, co4 edited book %he Art and Science of $rief %hera!y is a core curricular te6t in !sychiatry training trainin g !rogra"s# +any of Dr# Dr# Steenbarger’s Steenb arger’s articles and trading strategies strateg ies are archied on his website, www#brettsteenbarger#co"
