Wednesday, February 25, 2009

Tracking Markets by Attending to What Isn't Happening

I was at the airport this morning following the market via laptop and thought I'd add just a few observations to the recent post on listening as a key trading skill.

The good psychologist doesn't just listen to what is said, but also attends to what *isn't* communicated:

* A man says he's doing well, but pointedly leaves out any mention of the problems discussed the previous week;

* A woman talks about being taken advantage of by a friend, but expresses no feelings of hurt or anger;

* A person in trouble refuses to ask for help, afraid of being rejected.

Many times, it's what isn't expressed that offers the best window into the inner workings of a person.

Similarly, what *doesn't* happen in markets is often as meaningful as what does:

* After rallying solidly the previous day, the market cannot trade above its previous day's high;

* In the opening minutes of trading, even on attempted rallies, buying interest (NYSE TICK) fails to reach a single significant reading of +800 or greater;

* The market never trades above its opening price range of the first 15 minutes;

* Volume never expands on attempted rallies, as large traders don't participate in the upside.

It's often helpful to know what markets usually do, because that sensitizes you to those occasions when they behave atypically. When markets fail to provide their usual communications, they're usually communicating something important.
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6 comments:

Trader M said...

Today I think the market was suffering from MPD. :-)

Ow, I think I got a case of whiplash from watching that ticker today. . . I did have a feeling it would wind up lower at 4:00PM but no "edge" and I didn't put any more trades on after getting stopped out of a short this morning with a few nickels of profit.

OKL said...

I'm slightly different; I got stopped out on all of my trades, but they turned out to be correct!

I made those back and a little more in the dive during the last 20mins.

Viewing Mr. Market as your friend... hmmm...

Joe said...

Hi Brett!

Great thought.
As a Day-trader who really try
think to forward a few steps in
advance I also believe in
formulating the decision, opinion from the market and taking into account what is missing.


For example Yesterday, as the
NASDAQ opened with a GAP Down and in the first 25 minutes was not really able to shoot for a meaningful GAP Fill, as it usually do, the conclusion was that the probability of a first Down move would be increasing...
So I put more focus on verifying weakness in the market...

Thanks

Joe from Hungary

Don C said...

Hi Dr Brett,

Very interesting series of posts this two days on the theme of 'Following the Stock Market Like a Psychologist'.

The above post speaks of 'Attending to What Isn't Happening', which I suppose can be regarded as a first-order takeaway from the observation of (non)communication in both the personal and market contexts.

This throws up a question which I would very much appreciate your perspective on with your experience as a clinical psychologist: judging intended deception in (non)communication, ie a skilled patient/interviewee intentionally misleading with his (non)communication, including using "Rate of speech, volume, inflection, gestures, the richness of language". This may be seen as a sort of 2nd-order analysis of the given cues.

Deception is common in natural/nature systems, group/personal communication and not in the least, market behaviour.
Higher-order deception than even the one considered above may exist (eg interviewer anticipating and asking 'innocent' questions?).

Am curious to hear an actual practitioner's perspective on this.

Thanks,
Don Chu

Jorge said...

Dr. Steenbarger,

All of my basketball and track coaches (back in the days... :)) would talk to us, give us a pep talk or some tough love, tell us what we should do under what circumstances, etc... and then... gave us a demonstration... and afterwards asked us to repeat the exercise while they oversaw it and made any necessary adjustments, over and over, for as many times as it took us to get it right.

I cannot imagine any of them giving us a talk in their office, having us promise to try harder or be more disciplined and then calling it a day.

While it is true that some of us were better athletes than our coaches ever were and while you don't necessarily have to be a star performer to be an excellent coach (and conversely being a star performer doesn't guarantee that you would be a good coach) all of them could play and had no problem making a demonstration. Try getting some $XXXX/hour trading "coaches" to give you a demonstration on when to use limit orders at the bid/ask, or 1-2 tick/s above/below them and when to use market orders. But, hey, it's all in your head, you just have to "believe" and stop sabotaging yourself because of your past incarnation's misdeeds.

Thank you for keeping it real.

Best trading,

Jorge

OKL said...

There's an old saying,

"Listen! Or thy tongue will make thee deaf,"

Works for me.