3/2/2025 – Quick update re: correlation. I built a model covering the last five years. The relationship between correlation and forward price change in SPX is not a simple one. When we have a rising market and correlations are falling and becoming low, it’s a sign that fewer shares are participating in the strength. That often precedes a reversal of the strengths. When we have a falling market and correlations are rising and becoming high, it’s a sign of a broad selloff. That often leads to a continuation of the weakness. In stable and moderate correlation regimes, short term returns have been most favorable. The takeaway is similar to what we know about breadth measures: the degree of participation in a move is an important predictor of what is likely to happen next. Simply looking at chart patterns misses this information.
3/2/2025 – I woke up last night with a question in my head: Suppose we were to look at the correlation of every single stock’s movement with the movement of the overall index (e.g., the correlation of each of the 500 SPX stocks with the SPX itself)…what would it tell us if, across stocks, we are moving from more to less correlation and vice versa? What would it mean to stay at a very high or low correlation? What if it’s the movement beneath the surface that contains the most important trading information? The best trading practice is to be so immersed in asking questions and understanding markets that you’ll generate fresh perspectives in your sleep. Creativity comes from immersion. Now for the hard work of building correlation models for the market! 🙂
2/26/2025 – Another best practice: Replaying each trade bar by bar. How could I have improved the entry? The adding of risk when risk/reward improves? The taking of profits on pieces of the trade? The exit? Bar by bar replay your decision-making process and review how you would make incremental improvements. Note that this accomplishes two things: 1) it greatly expands your exposure to market patterns; and 2) it reinforces what you did well and pushes you to fine-tune your improvements. The best reviewing of trades is re-viewing our trades.
2/25/2025 – When we study our successful trades–and especially the processes that are part of our most successful trading–we gain insight into what we do well in markets. No amount of work on our emotions can ground us in our strengths. If we are not explicitly focused on our best practices, we cannot possibly trade at our best.
In this post and subsequent follow-ups, I’ll share a few of my best trading practices. Together, these form a template that not only guide my trading, but also anchor my efforts to be my best self.
The first best practice is to be extremely explicit with what is going on in the market across multiple time frames. I watch very short-term market behavior and minute-to-minute indicators such as NYSE TICK, and I watch what has been happening through the day and last few days, and I observe how the market has been trading longer term (changes in volume, breadth, etc.) The best trade ideas and trades come from seeing clearly across these time periods. When what is happening shorter-term makes good sense with respect to what is happening medium-term, and when that is making sense with the bigger picture, the result is a sense of clarity. My best trades come from seeing clearly, having a scenario in mind, and knowing–explicitly–what I need to see to validate or contradict what I’m seeing.
That strong degree of clarity only comes occasionally during a day or week. The willingness to wait and wait and wait for everything to line up and everything to make sense is perhaps the best practice of all. If I need to trade, I’ll trade my needs, not the market.
More to come–