In Trading Routine and Psychology

It seems difficult to understand the true meaning of “rabbit hole” until you enter an activity such as trading.

While it is true that we have close to 100,000,000 articles floating the internet explaining the key differences, or just “advantages”, of one market, strategy or instrument versus the other, the vast majority are essentially bullet-point combinations of Wikipedia facts. So I thought it would be fun to put together a strategy for alternative selection centered around one's abilities: intellectual, emotional and tangible.

There are huge benefits to taking a back door approach, versus the common “wow, that seems great” first impression so many of us have when introduced to certain markets. This article has as much to do with making an intelligent strategy and instrument selection as it does with productivity, enthusiasm and knowledge. I have found these to all be very tightly intertwined.

Over the years on this site, I have done my best to boil things down to the simplistic means while providing enough supporting depth as not to sound too wishy washy. But as a trader for the past 15 years I oftentimes find it difficult to explain why and how people should be trading what they do.

In a corporate environment, people tend to just fall into a specific asset class or grouping. This was the case with me, many years ago, when I landed a job working in FX, then with natural progression, global macro.

But independents have options. Oftentimes, the chosen option is not the one suited to his or her best interests.

I am going to take a backward approach to this simply because the answer is not as easy as 1-2-3. People rush into things all the time, and trading is no different than anything else in this world. “Professionals” have the ability to get their rear ends handed to them just as much as the guy reading his first book about trading or enrolling in Macroeconomics 101.

First, we are going to talk about interest and how it leads to significantly enhanced knowledge, then all things related to time (because we never have enough of it), and then finally, the markets themselves.

Your Personal Trading Crusade

I am going to go into this with a presumptuous statement: you want to make money.  This is a goal any trader is going to have, unless of course you are on some kind of twisted vendetta to sink the ship. Trading should not be a task of pulling teeth day in and day out. If it is, you're going about it all wrong. Learning is one thing but struggle in practice looks very, very different.

You should never be paranoid about losing money. Slight worry? Yes, that's only natural. But “fearful” is a word we want completely removed as an adjective for your daily routine. A level of clarity needs to exist in order for any trading strategy to show its true colors and flourish, and this takes time. Erratic or inconsistent behavior driven by fear proves nothing. Your data rapidly loses value as your strategy unwinds, and you have completely lost sight of your initial hypothesis/assumptions. It's close to junk and now likely to have a downward trajectory.

Zeal = Knowledge

To “conquer” fear, I have always been a strong advocate of knowledge. Fear of the unknown is perhaps the most common (and analyzed) type of fear.  And so here is of course the theory that more you know, the more positive reaction you will have to the situation. I became obsessed with all things technical analysis more than a few years ago now. This obsession was essentially a knowledge hunt in order to find out what makes price move in the manner in which it does. Few books or other sources actually satisfied the needs of the hunt, so I went digging on my own.

In the process, I was able to assess a great number of patterns and common behaviors which in and of themselves drove my confidence level significantly higher. When you witness these behaviors day in and day out, the magic goes away and you begin to see things for what they are. But I wasn't out of the woods just yet. I needed to engineer these ideas into a rubber meets the road strategy, proving their worthiness through my own form of planning and execution.

It was my interest and enthusiasm that kept me me going. I am at a point in my life where all I seem to have time for is “normalcy”. That is, I'm responsible for a relatively new family, and it allows me to look back and observe my process over the past 15 years. And even with this new level of “normalcy”, I am still constantly seeking out new and exciting ways to forge forward and introduce something unique to my day to day. While the time I have to do this is significantly less, the level of enthusiasm still brings out the Happy Meal kid in me.

Of course, my dip into technical analysis looks very similar to other's dip in equity fundamental analysis, and so on. There are certain parts of all markets that interest us. Some of us thrive at finding highly profitable long-term companies in which to invest. Others thrive in highly granular order flow analysis and machine-based execution. And yet others in medium-term macro fundamental appreciation or depreciation.

It all varies. Based on our interests, we acquire significantly more knowledge than others when it comes to certain components of any market.

To me, this is highly relevant and should not be ignored. There is a certain level of enthusiasm that allows you to keep going and stay motivated.

I have gone through a number of activities in my life where my motivation drops like a rock because my level of enthusiasm simply isn't there. Most of you can probably relate.  As a result, I acquire less knowledge. When I ultimately get back to work on the task, the results are unsurprisingly sub-par. Trading is once again, no more special than anything else in this sense.

Some of us are hardwired to enter virtually any job or task and have the mental toughness to keep their productivity levels high and shine at the end of the day. There is only one person in my life I know is capable of doing this. For everyone else, including myself, we need to stay motivated. If reading about technical analysis has a similar effect of taking a shot of NyQuil, then you are likely barking up the wrong tree.

So when we go about selecting a strategy that is going to have highly positive long terms effects, we want to dig our teeth into something with which we know we have a high level of interest and can simply keep us moving. Only then can we tap into the knowledge we need in order to give us the confidence to execute it properly.  The best innovations on this planet have come from people who are best described as passionate, thus obsessive, about what they do.

A Strategy for Some (Or Any) Market – Let Interest and Logic Dictate Your Market of Choice

Of course, not all strategies work in every market. I haven't looked at a public company's balance sheet (for work) in roughly 11 years. This is, of course, a cornerstone component to most long-only or long/short equity strategies. I have, however, sifted through heaps or macroeconomic data, thousands of key price levels and piles of research dedicated to technical and micro/macro order flow analysis.

Part of this has to do with the fact that I was somewhat thrown to the wolves of macro markets in my early days of trading. But most of it has to do with the fact that I genuinely have a keen interest in what I do. Of course, much of what I do can be applied in other markets as well, albeit not as quickly as most people would assume.

Every market is like a different continent, and every instrument is like a different country. And in these “countries” you will find different cultures and different languages. You simply need to adapt. Go from one English speaking country to another and you will have an easier time, but the people are different. Much of this stays true in trading. The Euro and the Pound behave very differently, even though they're “sitting” right next to one another.

The markets in which I have traded have allowed me to feel constantly challenged. This is just one factor that contributes to the motivation that keeps me moving.

The analysis is the strategy. And this is why, when selecting a market, I urge people to start with the analysis that interests him/her, and follow up with the applicable market.  If the area of study is one which can be applied across multiple markets, then I urge you to find the one in which it simply provides the best performance. The bottom line is that no matter what you end up doing, your level of mental fatigue is going to override just about everything else. It is important you do what feels the most natural.

Some people aren't so lucky and get forced into certain situations. Many times, this has a negative effect. I can't say this is always the case, but it is certainly more true than not.

Time Optimization and Usage

Regardless of your level of motivation, time is always going to be an issue as well. We all come from varying lifestyles and are interrupted by many, many different things. The amount of time you have available is most certainly going to have an impact on the type of strategy you're able to execute, if any.

Certain strategies simply require less time than others, and this is very frequently tied to performance, as well.

Unlike other activities, your time is at the mercy of daily/weekly/monthly opportunity (contingent on your strategy). And depending on how specific your strategy is, you may be constricted by certain normalities in liquidity, and so on.

A common beginner question: “What is the best time of day to trade?”. The answer is simple: the time of day/week/month that allows you to extract the greatest return.  In order to figure this out, you need to sift through records, plain and simple. Time optimization is a common technique used in many (if not most) algorithmic strategies. It should be no different for a discretionary trader. Fortunate for traders, the recordkeeping need not be a manual process. Everything is found right on your trading statement.

There is no “best time of day to trade” for all traders unless you are talking about liquidity. In this case, the question should be “what time of day has the most liquidity”. But high liquidity does not mean high return.

Identifying my own window of time has been rather easy (and only somewhat surprising): I seem to thrive from approximately 11am to 1:45pm EST. Once we get into that last half hour to forty five minutes of the pit trading trading day, things have a tendency to lose consistency. And while I will still trade it, I do so with greater caution. By the very last 5-10 minutes of the day (prior to the pit close), I am flat. This is always the case and with very few exceptions (such as a longer-term positions being held).

I believe part of the reason I thrive in this window has a lot to do with me physically, as well. I am not naturally a morning person, though I can pretend to be. The more time I spend awake the better I get, and I am usually at my best in the middle of the day. Sometimes I will wake up full energy and ready to go, but this is not my norm.

Just because my own time window did not come as a surprise does not mean that yours will, as well. Every algorithmic strategy I have ever looked at poses surprising results during the optimization process, and I would expect the same from a discretionary trader.

Making the most of your time through planning is of course going to help in this entire process. With everything I have learned up until this point, I can still boil down much of what I look for into a rather short list. These are the things with which I am most comfortable and know I have an advantage. If I don't see them, I don't take action. Some days, I will see them all over the place and be flooded with activity.

Few people ever seem to want to talk about the amount of time they actually spend in their own analysis. The fact of the matter is that this is what should be consuming the bulk of your time, otherwise you mine as well find some other activity that allows you to press buttons without consequence.

Your risk will also need to be adjusted accordingly. A long-term strategy is going to likely employ less risk than one which is actively traded and flat daily. Oftentimes (mainly through experience) people realize that they were better off just taking the long term play and going for lower performance. Knocking down your P&L assumption is rarely a bad idea.

And finally (for those who have the ability) get off the internet. I'm referring to CNN, Daily Mail, BuzzFeed, or anything else that drives careers into the gutter. We are blessed to have access to so much instant information but it can also be a tremendous waste of our abilities. I know this is not easy to do for the addicts out here but please make it happen at all costs.

When you're in a professional working environment, you get fired for taking a 1 hour news break daily. Keep it consistent and step away from the mental pollution.

Most importantly (and going back to our previous section) find an area of trading that interests you. If you're engaged and motivated properly, you won't find the need for such distractions. If other people are the cause of your lack of focus, find a way to get away from them or block them out (politely).

Stay the Course

I want to touch back briefly on the issue of mental fatigue, as I know it all too well. Despite the interest in what I do, I'm still a vulnerable to crying babies at 3am or the guy in the office who is allergic to search engines and can't stop asking questions. I get little, distraction “pricks” all the time, and sometimes I am overwhelmed by them to the point where they interrupt my working cruise speed.

Days would go by where all I seemed to be able to do is stare at my charts and and actually need to go back and refer to old notes just to maintain for the day. Many people wouldn't even got his far, and perform some kind of lazy execution, which, if you drew a picture of it, would probably look like a loose ball of twine that a cat has been playing with all day.

To get around this, I need structure. There is no other way. I think I have tried just about everything any Joe Schmeoe has written about in books or on the internet and every single one of these “productivity hacks” should be burned in my opinion, because they don't work for me. This isn't to say that they can't work for others, but I can't get into the groove of following a 12 step time management plan with 5,000 details found in between. Call me nuts.

These days, I have to literally block out EVERYTHING that I know is going to derail me from a path forward. And when I plan, I always add 50% of the amount of time it is going to take. I am either completely normal in this sense or just the least productive person on the planet. Either way, my guesswork when it comes to time is usually incorrect, though I am getting better with age here.

I tell myself myself that X activity is the only thing I am going to do in the morning. I say “I'm going to do this, and this alone. Everybody and everything else can wait. Yes, I may a phonecall that tells me to do otherwise, but I will politely say that the work will be one tomorrow, unless of course the whole building is burning down.

But this alone isn't enough to save me (or anyone else) the time that I need. If you are going about trading all wrong to begin with, an incredible amount of time can be wasted. Your list of common pitfalls include things like overtrading without reason, lack of proper identification of trading environment, poor margin management, etc.

Forex, Futures and Equities are Worlds Apart

Yet again I stress the importance of working backwards in the sense of choosing an appropriate strategy first, then market / instrument. I urge a backward approach in trading as well when it comes to finding targets, and only then, entries. By starting with that which consumes the bulk of our efforts (or just the most important), we dedicate both time and strengths efficiently.

These three primary markets are obviously not the only ones and as I have mentioned previously, have many subset forms of analysis in and of themselves. For example, a fundamental analysis of live cattle futures (production cost, supply, USDA reports, disease, etc.)  looks very different from that of natural gas (production, inventory/reserve, usage based on weather models, actual usage, etc.). Yes, underlying macro pressures may exist (income, expense) but at the end of the day the driving factors behind these two contracts couldn't be more different from one another.

Technical and order flow analysis is intended to work across all instruments in a non-discriminatory sense. But this is not the case. Without getting too detailed (I could write an entire book on this topic) certain forms of technical analysis will perform better or worse in equities than they will in foreign exchange, and vice versa. These variances need to be studies and applied accordingly.

And then we have liquidity which, once again, will have a positive or negative impact on underlying performance. More or less liquidity can only be correlated to better performance only if the strategy itself calls for it. This is why, when I read about foreign exchange being the “most liquid market in the world” as an advantage, I run like wind. It simply doesn't matter. Personally, I have always fared well in what most people would consider middle-of-the-road liquidity. Not too much, not too little. I like being able to handle wider price movements that respond well technically.  Highly liquid instruments simply don't follow the same rules as those with less in this sense.

Because You Can…

Finding your ideal market and/or instrument can be a process of trial and error, but one which will be time well spent at the end of the day. The possibilities truly are endless, especially these days.

Planning out your attack has just as much to do with targeting the right enemy as it does with how you're going to do it.

Take your time and choose wisely. If the fundamentalist in you has been screaming for the past three years, then it may be time to let him out of his cage. Do whatever it is that gets you excited.

It will be well worth it in the end. I hope at least some of this can be useful to you, if not just a little.

Thanks and good trading,


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Showing 18 comments
  • Emma Love

    Ah, I was hoping for a chart of the different types of markets and what type of person or analysis each was best suited for, or the different characteristics of each – something to help one choose.

    • Steve W.

      Hey Emma, Well I was actually ready to assemble one until I got to around 2500 words and realized it is an offshoot topic to begin with (I literally had the table drawn up). I have an entire slew of information that would have doubled the size of this post that talks about specifics. Perhaps at one point I’ll be able to get through it and post it up here. Thanks,

      • Emma Love

        Awesome, I hope to see it if you get to it. As a newbie trader, I’m only dimly aware of all the options available in terms of markets and it would be interesting to consider if I’d enjoy ones I don’t yet understand very well yet.

  • Rico

    I’ve played with that loose ball of twine. Ah, i’m tired ; )

    • Steve W.

      I’m actually thinking about giving them out as gifts in the office here……because you just never know 🙂

  • Wes

    Steve, thanks as always for taking the time to write

    • Steve W.

      Fun for me, Wes. And I hope all is well with you my friend.

  • Erinn Federici

    Excellent article Steve. I have noticed the differences when comparing analysis on highly liquid vs illiquid markets. For example, the emini SP500 (ES) compared to the US 10yr Treasury Notes (ZN). The ES is fairly volatile as it is less liquid. Could you elaborate more on why the technical analysis does not play as well with the highly liquid markets like the US Treasuries markets?


    • Steve W.

      Hi Erinn, Treasuries really are their own animal in a certain sense, and in the back of my brain I was actually thinking about crude and ES when I was writing this. First it would depend on the tactic. If we are talking about your standard brew of key price level identification, more saturated markets are going to respond as a more saturated market does: more participants, faster turnover thus harder to move prices “on the dime”. Limit order levels of significance spread out due to the enhanced number of traders holding influence. Markets target turnover on a daily basis – this is a standard tenet that never goes away. In deeper areas of liquidity you’ll find what was thought to be “clean” levels get washed away by a slew of big traders. So while the premise stays the same, the area in which it happens widens up. With treasures, it takes massive numbers of contracts just to get a tick and my experience is on the low side actually trading them (I traded 30s and 10s for just a short period). Those who I know trading them regularly use nothing but order flow analysis of some form.

  • Erinn Federici

    Thanks for the quick response Steve. So it sounds like because there is so much liquidity that a chart is not too helpful because it is harder to define areas where that liquidity might actually exist? I started to learn how to scalp treasuries using the depth of market and time and sales. I am guessing this is they way the traders you know trade them? I learned a lot about order flow coming into the futures world and later realized that price action, SR, trendlines, etc. is an interpretation of that order flow but in futures we have the ability to actually see where that liquidity exists in the depth of market (dom). I’ve noticed with treasuries though, because they are so thick and have very small daily ranges that you really have to look at volume at price to define the significance because the chart disguises where that volume actually took place. Do you think that because treasuries are a market where a lot of spreading takes place (buy the 10s sell the 30s for example) it is harder to define the direction?

    Thanks a bunch

  • Albert Kamego

    Thanks for sharing your thoughts and writing this article. Sound ideas. I think you hit the nail on the head. Knowing ourselves is very important. Thanks.

    • Steve W.

      Hi Albert, my pleasure and thanks for stopping by!

  • Shane

    Always a delight reading your writings Steve.

  • haile

    I come to this blog to get inspiration, keeping an eye on my future profession even if I don’t trade. So much tursn and twists in life. Thank you for the article 😀

  • gustavowoltmann

    Hello, I’ve been reading your blog for some time now and you always share only good stuff. I really love it and I got a lot of new informations from your posts as well. Keep up the good work, Sir!

  • Trader Group

    Great article Steve! This would be very helpful to individuals who are new to trading. It is normal to be paranoid at first, but you’re right – it won’t help anyone win a trade.

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