Book review of 'Market Mind Games' by Denise Shull..

There is a popular misconception amongst many traders that they would be better off if they could just somehow shed their emotions and become emotionless androids. Whilst of course this is unfeasible, this sentiment is ignorant of the fact that emotions lie at the very core of our ability to make good decisions. In this book, Denise Shull contends that if one could learn to observe their emotions and develop their ability to read them, then they could learn to use them constructively to the huge benefit of their trading performance.

'Market Mind Games’ is a superb addition to the ever increasing body of work on the psychological aspects of trading and investing: Denise is brilliantly able to bring in aspects of psychology, finance, neuroscience and philosophy and combine them into a coherent set of observations and theories, whilst intertwining these with real insights from Denise’s own experiences from her many years at the cutting edge of trading.

The central theme running through the book regarding emotions is based on the concept that actions and behaviours stem from thoughts and cognitions, and that the inputs for these come from one’s emotions and feelings. The book also delves beyond this and explores how people reproduce self-similar patterns of behaviour in their psyche from earlier periods of their lives, and how these patterns can reappear when trading, often to wreak havoc on their trading performance. Throughout the book Denise is able to intertwine her theories with a fictional sub-plot which helps draw out and crystallize aspects of her theory in a trading context, she also provides some useful trading insights from her own past.

The book makes some bold attempt to introduce some concepts and ideas which are rarely touched upon in the trading literature. Many people have written about the psychological aspects of trading and investing, however few have made what I consider a worthwhile effort to get to the nub of the issues. Previously, only Mark Douglas and Brett Steenbarger have, in my humble opinion, really made a telling contribution to the subject of trading psychology at the personal level. And only Steenbarger has actually tackled the inner-mind aspects of trading in any meaningful way. I believe this book is a worthy addition to the works of Douglas and Steenbarger, and segues well with some of Steenbarger’s excellent work.

I am particularly drawn to the element of the book where Denise talks about self-similar patterns in the psyche, which she terms, rather controversially as it would seem, ‘Fractal’. As a former trader, now working with traders as a coach, I often see similarities between people’s trading behaviours and experiences from previous periods of their life and past relationships. The legendary trader Ed Seykota was famously quoted in Jack Schwager’s Market Wizards as saying “Everybody gets what they want out of the market”, a comment which has been argued and debated about for many years. In ‘Market Mind Games’ I believe Denise implicitly goes some way to exploring why this may be.

In summary this book is both original and bold; Denise brings some new ideas to the table, some of which have not been without controversy. Denise herself terms her ideas as radical, and it is hard to argue against that. If I was to have any concerns about the book I think at times it veers between appealing to the broader trader community the narrower academic audience, and thus at times can be a challenging read, requiring a second or even a third examination of certain sections. These are however small criticisms in what is a very worthwhile effort which I believe makes a valuable contribution to the subject of trading and investment psychology.

USDJPY EURUSD AND EURAUD UPDATES

USDJPY

Further to my recent posts on USDJPY highlighting the prospects of significant gains (See here) and the more recent post highlighting the possibility of some consolidation for a few weeks (See here), I thought I would update my view as it stands. But first an interesting chart showing the US v Japan 2 year govt yield spread over the past year versus the USDJPY.

There seems to be a clearly visible correlation between these two.  Though I always caution against to much reliance on correlations, one can see that this correlation is suggesting that the USDJPY spot fx rate may have got slightly ahead of itself. - I myself am looking for a pullback possibly to the mid 81s on USDJPY at some point in the next couple of weeks, though in the volatile world of fx it could easily over-shoot a little. - Overall I remain bullish longer-term though I may have to review if USDJPY starts making value below 80.00.

EURUSD.

EURUSD continues to behave largely in line with how I thought it may unfold in the previous post. 1.34/35 is my pivotal area for this. -  My longer-term view on EURUSD is for bearish forces to re-assert themself, with 1.34/35 capping. However a clear break through 1.35 would suggest to me that this may be off the table for now at least and may bring 1.40+ into play longer-term. - I still find it hard to believe that people will be happy being long EURUSD in the bigger picture with so much strife still existing in the Eurozone. (How ironic that as I write that, as I sit long at the moment, but in fairness it is a short-term view with a trailing stop and take profit in the mid 1.34s. - However, it only takes many people getting short-term long and stopping out of shorts, to keep pushing this higher. - 'That is how this thing works'.)

The chart below shows the current EURUSD with a couple of interesting technical aspects. - Further to last week's post, I still believe we are re-testing the recent high and the breakdown of the trend-line, this line acted as resistance yesterday, and may continue to cap though rising quite sharply all the time. On the downside, 1.3290/1.33 appears as if it may be an important pivot, initially providing some support.

EURAUD

I called this a few weeks ago (See here), only to find a reason to talk myself out of my long (See here). 

For now, for me, this horse has bolted, with a good chance we could see 1.3100 area pretty soon.

EURUSD - CLASH of Wedges + Some futher observations on EURAUD, SP500, US 10 YEAR, USDJPY..

EURUSD FX
A couple of years ago I wrote about what I termed 'The clash of the wedges' on the SP500, the post can be seen here. We seem to have another smaller scale version of a clash of the wedges on the EURUSD. - Just for the record 'Wedges' are subjective patterns which usually indicate a temporary interruptions of the previous price trend, they can appear at terminations of trend, and can also appear to be occurring at the onset of new trends before the wedge actually morphs into a new trend. Technical analysts see a 'breakout' of a wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

I have noticed a number of occasions in the past when the breakout of a wedge takes the form of a new wedge, thus evoking a 'clash of the wedges'. One would normally expect the outcome to favour the major wedge, though this is not always the case as can be seen on the lower of the two examples below. I have produced a chart showing the current EURUSD wedges and some further charts below highlighting a couple of previous examples each with a different outcome. - In the first example the major wedge dominated, though not before the minor wedge had put in a strong showing, and in the second case the minor wedge overcame the major wedge and emerged dominant. - At this stage, I would favour slightly the major wedge, to emerge strongest but it is certainty not a given, and in the meantime, there is every chance the minor wedge pushes the EURUSD back towards the recent highs around 1.34/1.35. - As I said I would slightly favour a re-emergence of the downtrend from there, however a solid break through the 1.35 highs is likely to favour further EURUSD strength possible towards 1.4000.

SOME FURTHER OBSERVATIONS AND UPDATES.

EURAUD FX - DIAMOND PATTERN UPDATE:  This may have made a breakout of thIs basing pattern today, though given my own antipathy to these formations (See post here) I would still heed caution on this.

US 10 YEAR NOTE FUTURES: Similar emergent price behaviour over the past years to EURUSD in 2009.(See below). If this continues to unfold in a similar fashion, we may soon some period of consolidation, before further significant losses emerge int he months ahead.

 

SP500: Finally, my recent comparisons of SP500 rallies of late, which hinted at possible top in early-March proved to be somewhat wide of the mark.- Which goes to show how one should always treat comparisons with previous behaviour somewhat cautiously. - Which ironically leads me onto some comparisons with previous behaviour on the SP500. - A couple of weeks ago the SP500 produced a weekly 'Hanging-Man' candle, the chart below shows a number of these patterns emerging after some sustained weekly rallies. In the highlighted cases the hanging man was followed by further strong gains usually for another couple of weeks, followed then by some fairly wide-ranging consolidations back in all cases to the top of the 'Hanging-Man' candle where support kicked in. - In this case, were this to occur again, then the top of the 'Hanging-Man' candles would offer good support around about 1370. - Note, these previous consolidations were merely resting places for the rallies to re-charge themselves for further gains later on. 

 

USDJPY FX:  Last but not least the USDJPY, I highlighted in a post a couple of weeks the significance of a close over the 95 Week SMA (See post here). Since then it has continued to solidify these gains. I have updated the USDJPY chart below to show activity since that breakout. - If previous break performance is to be echoed, then I believe in the next couple of week, we may see a re-test of the moving average. This could bring USDJPY back down to 81.00-81.30, where support/new buyers would be expected to hold it before further significant gains emerge over the course of this year, quite possibly carrying this much higher into the 90s at least. _any significant moves below 81.00 on a sustained basis may cause me to question the assertion of further USDJPY strength.

Finally bringing all this together: The outlook for T-Notes appears to suggest further losses in months ahead, the SP500 further gains, and the USDJPY further gains, however all appear to be close to a period of consolidation of recent moves, thus I would be on the watch out for some corrective/consolidation activity on all these markets over the next few weeks.

EURUSD and EURAUD appears to be un-synched a little from these risk asset classes of late and following their own direction. EURUSD may see some further gains towards 1.34/35, however I think this zone may be pivotal, with my current preference for the EURUSD waekness to re-assert itself. EURAUD may be making a significant base, but I remain cautious as to whether to trust this right now. 

The 'Trader,Trading & Risk Psychology' Blog is part of 'BGT Edge' a trader and investor coaching, development and education company. - To know more about how we can help improve your Trading or Investing Performance from a psychological or behavioural perspective, and how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.bgtedge.com.

Trading - 'The best loser is the long-term winner'

I was watching an excellent programme on the Falklands War the other night on the BBC. One of the first comments on the programme was by Major General Thompson (Brigadier of 3 Commando Brigade in 1982), he said that he 'thought the Falklands victory on our part was close run - I think the Argentinians could have won it had they played it right.' - and crucially he said 'In the end it came down to them (The Argentinians) making more mistakes than us.' - I thought about this afterwards in terms of trading. At the end of the day the successful traders are probably the one's who make fewer mistakes, or to re-iterate the quote above which comes courtesy of the mythical 'Phantom of the Pits' - 'The best loser is the long-term winner'.

This may seem counter-intuitive at first, yet the more one thinks about it the more it makes sense. - In fact it seems to defy everything we have learned in our modern society about how we approach the challenges we face in the world. Basically, we are taught to be winners, to ''go for gold', 'the winner takes it all', 'aim to be a winner', 'got to be in it to win it', etc. In trading however, so strong is this desire to win, that more often than not traders make crucial mistakes which constantly undermine their performance and their ability to be a winner.

In trading you are up against two enemies, yourself and everybody else. - But 'everybody else' is in the same boat as you, they are up against themselves and everybody else. Therefore it stands to reason that everybody has the same principal enemy -  themselves. - It is this hurdle that all traders have to overcome in order to be successful: You may have noticed the quote I maintain at the top of this blog, it is a quote by Sir Edmund Hillary, ' It is not the Mountain we have to conquer, but ourselves'. - As a trader this was my core philosophy, and now as a 'trader performance and psychology coach', this is a principal I try and instill in my clients.

One of the biggest hurdles I come across is peoples inability to see themselves objectively. Thus how can one overcome one-self, when we cannot truly see them-self? - In his book 'Thinking Fast and Slow' Daniel Kahneman makes the assertion that 'We're blind to our blindness'. This is one of the challenges all traders face. - I am going to deliberately leave that point hanging, since I think this is something that you as a reader should try and consider 'yourself'. - However I will finish with one of my favourite quotes, this time from one of my all time heroes - Muhammad Ali -"Only a man who knows what it is like to be defeated can reach down to the bottom of his soul and come up with extra ounce of power it takes to win when the match is even."

To know more about how to improve your Trading or Investing Performance from a psychological or behavioural perspective, and how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.bgtedge.com.

Update to EURAUD post, and why EURAUD may drain your psychological capital.

Last week I took a view that the EURAUD maybe basing. - Whilst I still hold that view long-term I have decided that right now I do not want to be part of it. I will explain below with the help of some charts and a little bit of trading psychology.

Having revisited the EURAUD pair, I have identified what may be a diamond pattern - See below :

Over the years I have come across many diamond patterns across many different times-frames, in my opinion they are one of the most awkward patterns to trade. Whilst I still think basing is probably occurring in the longer-term view, I would rather wait for a clear confirmation, than try and anticipate it.  Admittedly on occasion diamonds do behave well, in my experience however they are mostly like naughty children, they never do want you want, are very erratic and temperamental and will often ask of you - 'are we there yet?'... --- In other words, whilst they are forming and growing up, they will drive you mental, test your patience and exasperate your mental energy and psychological and real capital. In the meantime - whilst waiting for this to happen - other opportunities could go begging. And remember, if this does start to advance, then there will be plenty of time to get on a trend, with far better risk/reward set-ups.

I have below illustrated an example of a large-scale diamond formed at the top of the US equity market 1999-2000, I remember that whilst this formed that there was a lot of hair pulling-out going on.

Additional note to earlier comment.

Further to post earlier today : As of today's close this rally has seen a gain of 16.1% and in duration terms it has been 56 days. - The average of 3 prior similar rallies was 16.3% and 55 days. AND it is 2 days to the Ides of March. 

- Cue original twilight zone music.  

UPDATE TO SP500 RALLY POST

This is an update to the 22 Feb posting 'Has the SP500 been producing a repeat rally?'

As you can see from the charts below, there were 3 prior rallies over the past couple of years similar in nature to the rally of the past 2 - 2 1/2 months. - If this is to continue rhyming (as opposed to repeating) with the previous 3 rallies, then we are well into the end-game for this rally. --- Of course there is no reason that this could not continue on its own course - comparison charts are always fraught with dangers when it comes to interpretation and extrapolation, and their similar appearances may be purely coincidental. - However, continuing with pure conjecture: suppose this does continue to follow a similar path to the prior three, what would the likely outcome be: Following the prior rallies the markets corrected 100% (Included the flash crash), 29% and 55% over the subsequent couple of weeks. - To reiterate; just because it happened before, does not mean it will not happen again, but it is noticeable that significant correction occurred. - Charts of the 3 prior rallies are reproduced below, with details of the current rally added.

I would also like to add that last week produced a potentially bearish 'Hanging Man' candle. (See lower charts). Single candle signals are not necessarily significant on their own, but taken in context with other signs they should be given consideration. - I like to look at all these signs as clues into trying to help understand and forecast the environment or direction which may lie ahead. - Right now this to me is indicating a heightened possibility of a correction or reversal ahead, or perhaps an erratic consolidation.

 

Please Note: I work with professional traders as 'Trader Performance, Psychology and Development Coach' helping them further develop the mindset and habits needed to achieve sustained trading success. I work with traders in banks, hedge funds and proprietary trading houses. - If you would like to find out more about my work and would like to know more about how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.mindsetofatrader.com.

EURAUD - POTENTIAL BASING PATTERN.

EURAUD Suffered a huge decline in the period from late Nov through to early Jan. Moving from just below 1.4000 to close to 1.2000. - The past 2 months however it has been in a large sideways pattern. - Bigger picture there is a chance this is part of a basing pattern which could see a decent correction higher for this pair. I would like to see if this could sustain a move over 1.2500, thus far it has failed miserably, a recent move up to 1.2600 barely lasted 24 hours before being hammered back down. - First stop if it can make a break (and hold) over 1.2500 would be near 1.3000. - If it can then hold those gains, there would be a shot at pushing on towards near 1.4000, though at this stage looking at that may be a step to far. - Breaking back below 1.2200 would probably consign this basing to the back-burner - for now at least.

Disclosure: I am currently long EURAUD. 

Please Note: In additional to occasional technical analysis, my main profession is as a 'Trader Performance, Psychology and Development Coach' working with traders in banks, hedge funds and proprietary trading houses. - If you would like to find out more about my work and how it could help you or your business, please email me on sgoldstein@bgtedge.com or check out my website www.mindsetofatrader.com. 

Also feel free to join my 'Linkedin' group 'Trader,Trading & Risk Psychology'.

AUDUSD - Some strong Bearish signals.

The daily AUDUSD chart (See below) has a number of bearish signals, indicating that the move of the past few days has some legs.


Double Top reversal pattern. - Price action over the past month has seen a broad 'Double-top' pattern.
Bearish 'Three Black-Crows' - Formed over the past three days.
Failure to overcome prior resistance - Price has struggled to overcome resistance from the early Sep and late October peaks.
High volume failure and reversal -29 Feb 2012 - This was discussed last week (Can be seen here).

Resistance for now will be the base of the double bottom pattern @ 1.0605, and beyond that up to the mid 1.06 area. - However the likelihood is that pressure remains to the downside. - There is a cluster of targets on the downside in a broad 1.0360/1.0400 range. Failure here could see a dip to 1.0100/1.0200 area, though currently my preference would be for mid 1.03s to hold.

Bigger picture has been quite constructive for the AUDUSD. -  I would suggest that any dips may provide longer-term traders with decent buying opportunities for further gains beyond February highs eventually if it can hold this dip and find support either around mid 1.03s or 1.01/1.02.

USDJPY - Possibly a very significant weekly close.

Coming on top of my recent USDJPY comments in some of my recent posts. -  Here is an interesting little observation on the USDJPY. 

Since the Mid 1980s the USDJPY has had 5 major downtrends, as highlighted by the red areas on the top chart below. - During all these declines the weekly candles failed to close above the 95 week simple moving average. - However, in all 4 previous cases, once a weekly close occurred above the 95 week SMA, the weekly candles never closed below the level of this break for at least 17 months and significant rallies occurred, the smallest of these being 13 big figures in 2006. - Well guess what just happened ? - See bottom chart.

Of course, past performance is no indicator of future performance, and 4 previous occasions of a phenomenon is not statistically significant. Also as is always the case,records are there to be broken. - But as a risk/reward bet it may be worth some consideration. 

 

Given how significant this may be, I thought it would be worth looking at the daily action around the previous breakouts, to get an idea of how this looked at the time. - As you can see, on closer inspection the breakouts were rarely straight-forward. - In all four prior cases, you can see there was quite a bit of noise around the 95 week SMA, this occurring before, during, and after the break and typically lasting around a month. [Note, I used the 470 day sma as a proxy of the 95 week sma, this was the closest in terms of matching levels.]

Looking at the current USDJPY chart, there has been very little action close to this level yet (perhaps a week at most). Hence, further significant USDJPY strength may have to wait for some consolidation over the next three weeks or so, possibly with some noise anywhere over the next few weeks in the broad 79.00-83.00 range.  - (See current daily chart below)

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USD INDEX(DXY) has also produced some interesting recent price action: - The weekly chart has produced a near 'Bullish engulfing week', whilst daily price action is very close to breaking out of a Bullish Falling Wedge pattern, which could have significant upside follow through on a clear break. - See charts below. 

Disclosure: I am currently long USDJPY.

Please Note: In additional to occasional technical analysis, my main profession is as a 'Trader Performance, Psychology and Development Coach'. - If you would like to find out more about my work and how it could help you or your business, please email me on sgoldstein@bgtedge.com or check out my website www.mindsetofatrader.com.

Also feel free to join my 'Linkedin' group 'Trader,Trading & Risk Psychology'.