6/12/2025 – In the research I’ve conducted re: the personality and life history predictors of trading success, several factors consistently stand out. One of those is the capacity for pattern recognition. Successful traders are more curious than others and look at more things in a greater variety of ways. This enables them to see patterns that, over time, they discover to be meaningful.
Many traders equate pattern recognition with the patterns they track on charts. This is certainly one form of recognition, but not the type I most commonly see among hedge fund portfolio managers. They collect a great deal of data on inflation, monetary policies around the world, behaviors of various markets, sentiment, economic growth, etc. and piece the information together to form coherent views of stocks, bonds, currencies, etc.
The identification of market cycles across different periods, as described below, is yet another form of pattern recognition. I view this as a look from the “bottom up”, since it assembles price and volume data across shorter to longer intervals. In my own trading, I combine this with a “top down” view which looks for historical, statistical patterns in the market. For example, in the chart above, we can see a cycle bottoming out across the various indicators described below. At the same time, we had displayed very few stocks making fresh one- and three-month lows in the lead up to this period. When we look historically, the absence of weakness is quite bullish, especially over a 10-20 trading day horizon. Markets usually don’t plunge until one or more sectors display deterioration.
The combination of the statistical pattern and the real time cyclical pattern produces a trading view with considerable supportive evidence. That pattern recognition underlies our psychological confidence in our ideas–and our ability to size up positions. I did not develop confidence in my trading by working on my psychology; I improved my psychology through better and better pattern recognition.
6/11/2025 – Above is a screenshot from yesterday’s market in the micro-ES futures contract. The previous posts in this series will explain much of what I’m tracking in real time. The bars on the top portion of the chart represent the SPX futures, where the candles capture the high/low/close for each 15,000 contracts traded. As a result, we’re drawing relatively few bars in the overnight sessions and many more during the busier morning hours. This helps identify market cycles.
The green and red lines going through the candlestick bars are the short-term (red) and longer-term (green) moving averages defined by the MESA Adaptive Moving Average system. When the red line crosses above the green, it’s confirming an uptrending move and vice versa. Note that I track the identical cycle movements for shorter-term charts (2000 contracts per bar) and longer-term charts (50,000 contracts per bar). I use the shorter-term crossovers to help trade the longer-term shifts in trend/cycle.
This way of looking at markets may or may not be helpful for you. It is my way of distilling a great deal of directional and cyclical behavior across multiple time frames. What many traders see as “choppy” markets are often markets dominated by shorter-term cycles that are tradeable. Similarly, what looks like trending markets are often markets dominated by longer-term cycles. What is important from the perspective of trading psychology is that you find *your* way of representing and visualizing market behavior that aids your decision-making. Many, many times traders become frustrated with markets and make poor decisions because they are locked into one time period and one type of market behavior and fail to perceive the contexts of market movements.
6/9/2025 – A particular challenge for active, intraday traders is that market activity (volume/volatility) changes significantly as a function of time of day. On average, there is much more volume and movement in US stock index futures, for example, during the New York Stock Exchange hours than overnight; there is much more volume and movement early and late in the day than at midday. When we measure cycles in time units, we end up comparing apples and oranges. If the underlying time series is not relatively stationary/uniform, we cannot identify cycles that are relatively uniform in frequency or magnitude. When the X-axis of our charts represents volume, not time, each bar is a standard amount of volume traded and we draw more bars during busy periods and fewer during slow periods. Cycles appear quicker or slower but are more uniform in composition. When we create charts where the bars represent different volume sizes, we now can see when and how shorter-term cycles line up with longer-term ones. The shorter-term cycles can guide execution to trade the longer-term cyclical movements. It becomes easier to trade trends when we see these as the directional portions of longer-term cycles. Illustrations soon to follow…
6/8/2025 – What I’ve come to understand is that no amount of focusing on bad trading and trading mistakes is sufficient to create good trading. Good trading comes from zeroing in on what you do well and what makes sense to you and then refining and refining your ways of capitalizing on those strengths. My worst trading comes from focusing on (and chasing) trends. My best trading comes from identifying cycles in markets and identifying when short, medium, and longer-term cycles are lining up. Ironically, many of those trades might look like catching trends early, but those trends are simply the early phases of longer-term cycles. It’s the lining up of multiple cycles that creates the favorable reward-to-risk edge.