Todd Harrison: The Angels and Demons of Stock Market Trading
Knowing yourself is the first step toward successfully trading the tape.
"Nobody can go back and start a new beginning, but anyone can start today and make a new ending." --Maria Robinson
I awoke this morning with love in my heart and a smile on my face, which I found interesting given I haven't traded particularly well of late. For a long time -- for many, many years -- my P&L would define my mood throughout that night until the next bell tolled. It's the nature of the beast; you eat what you kill and wear your heart on your sleeve.
Perhaps it was the quality time I spent with my youngest last night, a rare slumber party while her mom and siblings were in the mountains. For 41 single years, I dreamed of having my own family, and in the blink of an eye, they materialized. I don't take anything for granted -- I actually count my blessings every day -- so perhaps that gratitude infused me on this fine Friday morning.
We do, of course, have work to do; today is February expiration for stateside financial markets, with index options expiring on the opening and individual stock options retiring on the close. The price action during these sessions typically takes place near the bells and is quiet in between, but the proximity to all-time highs (S&P (INDEXSP:.INX) 1850) may add spice to today's mix.
There's no denying the tape trades great, the 5% round-trip hiccup to start the year notwithstanding. We've shrugged off a lot of catalysts -- the taper, soft economic data, stateside earnings, geopolitical strife, Chinese trust concerns -- but the reaction to that news has been telling, at least to date. There has been a persistent bid, a bend-not-break-mentality, a bravado, if you will -- that seemingly has designs on fresh all-time highs.
We know the technical levels of lore; Nasdaq-100 (INDEXNASDAQ:NDX) 3640 was tested on the downside yesterday and held right where it had to, before rallying higher.
The Russell 2000 (INDEXRUSSELL:RUT) failed at the underbelly of the 16-uptrend on Wednesday, only to rally right back below it yesterday.
And of course, there is the mother lode, S&P 1850, and all the buy-stops that are set on the other side of that level. Breaking through there would be akin to clearing all the jelly in Candy Crush Saga; you'll see a magnificent flurry of action and color, at least until the next level is reached.
The bulls would sure love to trigger that breakout today. Oh, the headlines that would make.
Last night on Twitter, I shared a one-off thought that for some reason got a lot of attention. I wrote, "Anyone in the biz less than 5 years doesn't know a down tape; anyone who has been in the biz 5 years or more, and does, has been punished for it."
I've been thinking about that a lot lately; why I've been persistently cautious rather than blindly embracing the brave new bull. Why I've been critical of the Federal Reserve and policies that I believe will haunt our children, rather than kicking up my feet and enjoying the good fortune they've showered upon financial markets
Traders are supposed be agnostic animals; neither bulls nor bears but opportunistic. They are taught to remove emotion from the process, to remain objective and flexible, to practice discipline over conviction, and to never let an opinion get in the way of making money. I should know those words well, for I wrote them.
In the last 23 years, the Orange County Crises, Asian Contagions, Y2K and tech bubbles and busts, the real estate bubble and bust, the financial crises that almost sunk the system -- having not only traded them in size but lived them in life, I can't help wonder if they took an unconscious emotional toll on me.
And of course, there were the horrific events of 9/11; I think of that day more than all of those other events combined, curious if my innocence was scattered among the ashes at Ground Zero, if the innate optimism that had defined me became structurally flawed, if grains of sand somehow infected my internal operating mechanism.
The honest truth is that I don't know; I may be post-rationalizing my cognitive biases or I may have identified a casual dynamic that is partially responsible for my ingrained cynicism as it pertains to the inner workings of the financial-market machination.
Here's the twist: I've had these inklings before, and they've proved true. In April of 2000 -- well before 9/11 -- I told my partners, Jim Cramer and Jeff Berkowitz, that the tech bubble was about to crash and burn. And in 2005 and 2006, at the Ojai and Vail Minyans in the Mountains retreats, I warned that the conditional elements of a global financial crisis were settling in place.
Of course, that was then and this is now, and as we all know, you're only as good as your last trade. I have been wrong plenty as well; the fatal flaw of catching cusps is that you can pick a direction or the timing, but rarely -- if ever -- both. And being early is the same thing as being wrong unless you're still at the table to collect your chips.
My point in sharing this is to take a deeper dive within and an honest look at myself in an attempt to better understand why certain biases have presented themselves and whether they're predictive -- as they've been in the past -- or wrong-footed, as a function of my experience. And I'm looking at today as day one, as all traders must continually clear the mechanism.
Again, I don't know, which is perhaps why I've chosen to share these thoughts in a public forum. It is in an effort to provoke thought, to engage discussion, to provide an opportunity for each of us to take a harder look within, and maybe share some of our findings with one another.
I do know this: One of the oldest adages in our society is that you can't be happy with someone else until you're happy with yourself. I would offer that when it comes to the financial markets, you'll never tap your full potential until you have a solid grasp of who you are and how you operate. And it's never too late to start.
Good luck today.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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