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  Trading and investing are fundamentally different activities (pun intended).  Many trading psychology challenges occur when market participants fail to respect the differences between the two . Trading is a bottom-up activity in which we assess supply and demand moment to moment to determine when buyers or sellers are dominant.  This enables us to place short-term trades with favorable reward relative to risk.  For example, readers know that I track the upticks and downticks among all the stocks in an index, so that I can see, minute to minute, if there are significant shifts in buying or selling activity.  I might see relative volume (volume as a fraction of the usual volume for that time of day) spike and upticks jump as well.  That tells me that new market participants have entered the market as aggressive buyers.  On the first hint of downticks that fail to push the market lower, I might go long to ride the upside momentum. Investing, on the othe...

  In these posts, I attempt to provide perspectives in trading psychology that go beyond the usual platitudes and generalities.  Today's topic may seem unusual:  how our relationships shape our trading. Consider the distinction between transactional relationships and intrinsic ones.  A transactional relationship is one in which each person agrees to do something for the other.  In that sense, it is like a business transaction.  For example, a couple could get married if one partner promised money to the other and the other promised social status.  Employer-employee relationships necessarily have a transactional basis:  one party provides a salary and benefits; the other performs expected work. An intrinsic relationship is one in which there is a commitment to the other person, not for any specific things they are expected to do, but for who they are.  When a baby comes into a family, we expect nothing from the little one.  We love her ou...

  Last week, we took a look at the challenge of trading markets that are ever-changing.  What that means in practice is that good trading begins with open-minded observation.  Are we seeing a continuation of previous market behavior, or are we seeing a change?  Markets trade thematically .  Sometimes the theme is risk-on and everything is trading higher.  Other times, we trade in a risk-off fashion, with pretty much everything declining.  Most of the time, the themes are expressed in relative terms, with certain asset classes stronger, others weaker; certain sectors of the market strong, others weaker.  Before we put our hard-earned money to work, we want to identify themes that are in play for the market.  That means that we don't blindly predict what we think will happen, but instead listen carefully to the market's communications and detect what *is* happening. If you want to get on the floor with your partner and dance, you don't just st...

  A stationary time series is a set of data derived from a single underlying process.  A simple example of a stationary time series would be the distribution of values from the rolling of fair dice.  Any given roll is not predictable, but the distribution of values over time would be stable.   Suppose, however, that we used weighted dice and then changed the dice at random intervals.  Now each roll would not be predictable, but the distribution of values would also be random.  The distribution would no longer be stationary, as it's generated from multiple processes (dice).   The stock market--and, indeed, financial markets in general--does not yield stationary time series .  This has been evident in recent markets.  If we compare the market from the past couple of months with the market from, say, the same months in 2019, we see very different patterns of trend/price change and volatility.  Correlations among stocks and sectors...