Skill Building and Performance

In competition, how often do we find ourselves in situations where in a moment of pressure we 'know' what to do but we don't 'act' or our response is delayed, in effect altering our outcome? This connection between 'knowing' and 'acting' can be made second nature through situational preparation. Performance under pressure is a 'motor cortex' activity linking cognitive processing and behavioral response. Great athletes, performers, traders, surgeons and the like must train themselves through repetition - practicing by building the connection between receiving and processing input and taking action (making the decision to act). Neurologically, through practice and immersion of our respective activity we help facilitate myelination; the formation of a white sheath that lines and enhances the speed of neuronal firing, which improves the connection between cognitive input and behavioral output. The most effective way to improve this process is by designing exercises and scenario's that mimic real conditions and by immersing yourself in the practice.

Asset 'drift' and return distribution are dynamic forces, constantly changing as market characteristics change on the basis of volatility. Therefore asset sensitivity or amplitude of directional movement is never constant, nor is it linear or 'Brownian'. When trading systematically, I can't just aggregate historical returns over extended time periods and project forward with certainty. I isolate return periods on the basis of historical market condition as a framework of analysis specific to that condition, so as to create future expectations within similar structural conditions. Therefore, return distribution will have differing skew or kurtosis depending on time period selected for. That's my way of assessing strategy 'alpha'; looking at performance within market conditions as independent structural entities as opposed to aggregating broad, historical data samples across time as an annual performance measure.

Volatility begins as changes in levels of activity (price movement) at the smallest unit of time, subsequently embedding into larger time periods as an established bias, giving way to trend or directional movement. Volatility isn't just a linear phenomenon that emerges from month to month - it clusters and scales.

Price sensitivity is not just isolated to a specific trading period (monthly, weekly, daily, minutely, etc) - it permeates the entire spectrum dynamically; heightened monthly price activity is accompanied by increased hourly, and minutely price activity and so adjusting our risk and money management systematically through trading time must be synchronized.

If we take the Nasdaq 100 mini futures contract (NQ) from Feb 11' - July 11' we have an embedded sideways monthly structure or condition with a range defined by price levels 2280-2400 that encapsulated trading activity. August and September (11') monthly trading range expanded to 2395-1972 = 423 points of activity. Traders must now contend with a waterfall effect of volatility into the smaller units of time. This will impact performance (risk-adjusted returns) and return distribution. The May-Aug 2010 market condition in the NQ contract can provide a comparable measuring stick of performance. How did you trade the mini's in that timeframe?

Trading Within A Volatile Monthly Structure

Changing conditions call for slight modification of swing strategies to increase risk-adjusted returns.

The August carnage in global stocks have established wide monthly channel structures that are grounds for changing volatility conditions, trade risk, and expectancy. The current NQ channel ranges 2395-1972 in August, unofficially -- there will be a lot of movement within this range in the coming months ahead, just as the 'crash' of May 2010 was a precursor for movement and consolidation for 3 months. The previous monthly lower boundary for the NQ at 2280 should stand as a resistance level, structurally. See the day chart of the NQ below for context. The 'brown' and 'blue' horizontal overlay lines represent the critical monthly and weekly structure levels and the 'black' trend line links the low prices established in August/Sept 2010.

Short Signal In Stocks

The NQ violates the hourly 3 Day Rolling Pivot Range in yesterday's session at the 11am hour, and continued lower signalling a short position. ES however, does not generate the 'sell' signal, but generates an indecisive close within the 3 day pivot. So, for ES traders waking up this morning to see the gap down move, any rally attempt at the open or through the day can be sold, using the updated hourly pivot channel high as a stop for the position trader.

Managing Trading Stress

Notice what happens to your 'state' and 'behavior' when a small string of losses accumulates in a short period of time. Our hardwired response, designed as an adaptive evolutionary reflex, driven by fight/flight is to try harder, narrow our focus and increase concentration, energy and intensity on the problem, shifting thoughts into 'potential' consequences or impacts. This inherent pattern does not serve a trader very well, and can lead to compounded mistakes because you are in a 'protective state.'

Short Term Up Trend Intact

Despite yesterday's intraday volatility, they were supporting the dip, as the stocks continue to find support and the hourly structure remains stable into today's session.

The stocks put in an intraday 'buy' signal at 9:45-10:00 today, which is again positive for the continuation of the up trend. The hourly pivot chart has also tightened up, which improves the overall risk side of this 'long' trade, making the 'hold' more manageable in the volatility. For NQ, the 3 day hourly pivot range sits at 2188-2181, which is a nice improvement from the 50pt range of risk as of the past few days.

Day Set Up

Markets rolling on weak GDP news Q2 in Germany - GDP only expanded by 0.1% from Q1 as per the headline. As far as trading set up for today, US stocks have sustained above hourly pivots, but have not generated any intraday momentum via 'buy signals' - the last 2 trading days have been effectively 'neutral' despite stability and up trend.
Today's pivot for the NQ on the hourly sits from 2185-2134. Any closing violation below 2134 would imply a short trading signal. The market can close within the pivot structure and still 'read' a long trade, but, in this market, I would suspect imminent weakness to follow.