Tuesday, December 06, 2022

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER


Contact For Trading Firms and Media:  steenbab at aol dot com

My Twitter Feed:  @steenbab

RADICAL RENEWAL - Free blog book on trading, psychology, spirituality, and leading a fulfilling life

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The Three Minute Trading Coach Videos

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Forbes Articles:


My coaching work applies evidence-based psychological techniques (see my background and my book on the topic) to the improvement of productivity, quality of life, teamwork, leadership, hiring best practices, and creativity/idea generation.  Trading firms, teams, and portfolio managers interested in performance coaching and help with hiring processes can email me at steenbab at aol dot com.  Please note that my work is limited to trading and investment firms, so I cannot provide online advice or coaching services to individual, independent traders


FURTHER RESOURCES




I wish you the best of luck in your development as a trader and in your personal evolution.  In the end, those are one and the same:  paths to becoming who we already are when we are at our best.

Brett
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The Three Essential Sources of Your Trading Edge

 

Few concepts in trading are as poorly understood as that of having an "edge".  In a literal sense, the idea of edge--in trading, as in poker--means that you have a skill and strategy that provides you with a non-random, probabilistic advantage over other players.  Often, however, traders refer to an "edge" if they believe they have unique insights into markets, if a strategy has worked recently, or if a strategy is copied from someone believed to be successful.

Based on successful traders and portfolio managers I have worked with,  I would argue that "edge" comes at the intersection of three factors:

1)  What You Are Good At - A true edge, in finance as in sports, has to be grounded in your unique talent.  Having a talent may not, in itself, provide an edge, but it is difficult to imagine possessing an edge without a distinctive talent.  One trader I've worked with is unusually social and outgoing and is quite good at reading other people.  He talks with many market participants all day long and obtains an unusually good feel for how people are positioned, what they are thinking, etc.  He can also sense changes in their tones of voice and levels of conviction.  Many times, he can identify when they are shifting views before the shift has even occurred.  That social talent has also helped him build an effective team of analysts, who he has also learned to read quite well.

2)  Who You Are Making Money From - A genuine edge has to make conceptual sense.  It can't just be a pattern ("setup") that has recurred in the recent past.  Anyone can backtest 20 patterns and find the one that tests as statistically significant at the p=.05 level!  A true edge comes from understanding other market participants and how they behave, so that you can profit from their activity.  For instance, perhaps you're trading a meme stock and understand how retail traders identify and trade with momentum.  Perhaps you're trading earnings news for a stock and understand how investors respond to beats and misses.  Perhaps you're trading reversals in markets and understand how trend-followers behave.  The edge, in markets as at the poker table, comes from knowing who is at the table and how they behave.

3)  How You Develop Your Skills - The reality is that someone could have a talent and could learn about tendencies of other market participants and still not make money if they haven't developed the trading skills needed to implement the conceptual edge.  Skill development comes from repeated experience guided by corrective feedback, a process known as deliberate practice.  Even after you identify valid patterns in markets, how do you size trades based on those patterns?  How do you structure the trades to maximize reward relative to risk?  These are skills that need to be honed.  Many traders fail because they do not follow a systematic process of skill development.

If you understand the three components of edge in trading, you'll appreciate how silly it is for market gurus to tout "setups" that make money.  It's like someone telling you successful pass plays on a football field.  Unless you actually develop the skills of a quarterback, understand your opponent, and implement those plays in ways that utilize your team's strengths, those "successful plays" will fail miserably.  It's not as easy as simply trading with discipline or trading your personality.  Success in the trading business is like any entrepreneurial success:  it requires talent, passion, objective opportunity, and the ability to learn from experience.  

Further Reading:

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Thursday, November 24, 2022

Trading Consciously



Note:  The following is from an essay I wrote a couple of decades ago, recently discovered in a stash of old papers.

A therapy for the mentally well begins with the realization that change is impossible while we remain in our habitual states of consciousness.  Talking about our problems or working on changing behavior while remaining in our characteristic states is like trying to improve the reception on a TV by switching channels.  "What can one do in sleep?" Ouspensky asks his students.  "One can only have different dreams--bad dreams, good dreams, but in the same bed.  The dreams may be different, but the bed is the same".

Such is the state of most coaching, counseling, and therapy.  It changes the content of our thoughts, but we remain in the same "bed".  True change requires that we awaken and rise from our bed.  Because when we can access different states of consciousness, we become able to process self-relevant information in qualitatively different, creative, and constructive ways.  

Several days ago I found myself running late for a morning meeting.  In a frenzy, I attempted to beat the clock by getting myself dressed, quickly checking the overnight trading in the financial markets, and getting my children ready for school.  I went to the closet to get my jacket, but it was nowhere to be found.  Twice I scanned the rack and could not find the jacket.  Meanwhile, the clock was ticking and I was growing frustrated with my mounting lateness.  Suddenly, without premeditation, I closed my eyes and evoked a piece of music that I have come to equate with a clear and calm state of mind.  I calmly walked back to the closet and began looking for the jacket between the hanging garments.  Sure enough, it had fallen off its hanger and was caught between two other articles of clothing.

What is important in all this is that, in my ordinary state of consciousness, I was incapable of seeing between the garments.  The jacket was lost as long as I remained in my normal mode.  Only once I had shifted to another state was I able to see.  How much else lies "between the garments", unseen, while we fuss and fume through the racks of life?

Ouspensky was correct:  As long as we believe we're conscious, we do not take the steps to live--and trade--consciously.


Further Reading:

Trading With a Higher Consciousness

How We Tranceform the Mindscape

A Radical Method for Quieting the Mind

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Friday, November 18, 2022

Relapse Prevention: A Neglected Topic In Trading Psychology

 

A savvy trader at SMB Capital reached out with a dilemma.  Each month he creates a new goal to work on, but to his dismay he has found that, once he moves on to a new goal, a previous problem resurfaces!  Psychologists refer to this as the problem of relapse.  Old patterns of thought, action, and feeling become ingrained habits.  They are not only learned, but overlearned.  It is relatively easy to change a habit pattern when we put full attention to doing things differently.  It is also easy to fall back into that pattern when our attention is turned elsewhere.

This is a neglected topic in trading psychology.  We talk about making changes, but not so much about maintaining those changes.

It is discouraging to make a change and feel that you're making progress, only to fall back into old ways and re-experience negative consequences.  But relapse is an intrinsic part of the change process.  We will always relapse until we have turned our new, constructive patterns into positive habit patterns.  That means that we have to rehearse and rehearse and repeat and repeat our positive changes day after day until they become automatic, natural parts of us.  If we need to muster motivation and effort every time we want to do things constructively, we'll never be able to direct our willpower toward new goals. 

This is where psychological resilience is important.  When we relapse, we want to summon our determination to change and say that "This is not how my story will end!"  If I relapse after three weeks of positive change, that's progress compared with relapsing every week.  Relapse is a detour, not a failure.  If we're truly learning and growing, we make special efforts to learn from our relapses.  That enables us to respond differently and constructively to the situations that may have triggered our old ways.

What I emphasized to the smart trader who raised the question is that you never want to let go of Goal #1 when you formulate Goal #2.  Change is never a straight line.  We always need to be working on our old patterns, even as we tackle new ones.  As I emphasize in The Daily Trading Coach, we defeat relapse through repetition.

Further Reading:

The Power of Regret in the Change Process

The Secret to Changing Our Selves

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Sunday, November 13, 2022

Strong Two Day Rally: What Comes Next?

 

We've seen stocks trade solidly higher for the past two trading sessions.  What has been notable about the move is not simply how strongly we've bounced, but the breadth of the rise.  Notably, we closed the week with over 80% of all SPX stocks trading above their 3, 5, 10, 20, and 50 day moving averages.  Think about what that means:  the great majority of shares are quite strong on multiple time levels.  This generally occurs when money managers and large institutional investors allocate more of their capital to equities as an asset class.  Such allocation is typically not a short-term, tactical decision.

My breadth database goes back to 2006, encompassing almost 4000 trading sessions.  Interestingly, over that period, we've only seen 45 occasions with over 80% of stocks closing above those moving averages.  Such breadth thrust is relatively rare.  Over the next few days, there has been no distinct directional edge, but we begin to detect momentum 20+ days out.  Specifically, over the next 50 trading sessions, the SPX has been up 39 times, down 6 times for an average gain of +3.41% vs. +1.95% for the remainder of the sample.

My preference is to measure breadth in multiple ways and look for occasions in which backtests line up.  On Thursday, we saw 854 stocks across the NYSE universe close above their upper Bollinger Bands.  That database goes back to 2019, and Thursday's reading was the highest over that period.  Since 2019, when we've had more than 400 stocks close above their upper bands (N = 13), the next 20 days were up 10 times, down 3, for an average gain of +2.72%, compared with an average gain of +.81% for the remainder of the sample.

To be sure, market history is no guarantee of the market's future, but we can find probabilistic edges by understanding the behavior of market participants.  When institutions are reallocating capital to stocks, it pays (on average) to swim with the current and not against it.  It is a big mistake to think that trading psychology is simply about our own psychology.  Some of the best edges, in trading as in poker, come from reading the psychology of those on the other side.

Further Reading:



Sunday, November 06, 2022

Trading Psychology Advice - 3: Solution-Focused Trading

 

The first post in this series emphasized the importance of getting the right kind of help--mentoring vs. coaching--for your trading challenges.  The second post stressed the value of structuring your learning processes the right way, by first pursuing competence and then by cultivating expertise.  In this third and final post, I highlight a valuable approach to making changes--in life and in trading.    

The solution-focused approach that I write about in Trading Psychology 2.0 and throughout this blog reflects a unique psychological perspective.  Instead of solely focusing on our problems, we should examine occasions in which our problem patterns don't occur.  Very often, it is in the exceptions to our problems that we can identify what we are doing right.  So, for example, let's say that I have a problem with trading emotionally and impulsively during periods of frustration.  Well, I don't go on tilt every time something doesn't go my way, so what am I doing to not become overemotional at those times?  Upon reflection, perhaps I'm talking to myself differently on those occasions.  Perhaps my positions are sized or structured differently.  Whatever I'm doing when my problems don't occur could offer the kernels of solutions.  What's great is that these are solutions genuine to me:  ones that are already working.  

Furthermore, the exceptions to our problem patterns are usually there because they reflect some underlying strengths that we can leverage personally and professionally.  For example, I may find that I trade much more selectively and avoid marginal trades when I talk out my ideas with a trading partner or teammate and when they do the same with me.  My strengths in processing information interpersonally (talking aloud rather than writing or keeping ideas in my head) and my social strengths (enjoying working with others and helping them) enable me to be my best self during my trading.

What I've shared in my writings is that, in some measure, you are already the trader you seek to become.  The exceptions to your problems hold the key to your solutions.  By doing more and more of what works, we can become more and more of who we hope to be.  

Further Reading:

Keys to Solution-Focused Trading

Learning How to Lose

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Monday, October 31, 2022

Trading Psychology Advice - 2: Pursue Your Development The Right Way

The greats in any field hear a different music than their peers.  That can make them seem a bit crazy.  One of my favorite examples occurs when a great musical group completely reinterprets a great song.  Consider the folk classic by Joan Baez and then the metal version by Judas Priest.  By the time we get to 3:50, we have a completely new song, a completely new experience.  Or take the dance classic Billie Jean by Michael Jackson and then listen to the same soulful song by Chris Cornell.      

Expert performers hear a different music, dance a different dance.

I recall a meeting years ago with a market great, Victor Niederhoffer, who experimented with turning market time series into musical sounds.  Done the right way, you could follow the market "music" and become exquisitely sensitive to shifts in pace, tone, etc.  Good traders look at charts and market data uniquely.  Great traders look at unique things. 

An important step in my trading development occurred when I encountered the work of John Ehlers and began to view market time series as multidimensional, incorporating elements of trend and cycles.  Understanding those dimensions made it far more clear when markets can be expected to continue their recent direction and when they can be expected to reverse.  Volume dictates the pace of movement; trends and cycles define the path.  It's a kind of music a trader can "dance" to, but the odds are good that the dance will seem insane to those looking at one-dimensional chart patterns or fundamental relationships.

An important thesis of the Trader Performance book is that our performance proceeds in two phases:  the development of competence and the development of expertise.  The process of building competence involves what we saw in the last post:  mirroring the actions of capable mentors.  Expertise development is quite different.  That begins when we synthesize the inputs and influences of multiple mentors and experiment with the insights that result from this synthesis.  Many problems in trading psychology and performance occur when we do not follow this developmental sequence.  We try to figure out markets on our own without proper mentoring.  We settle for copying others without finding our own integration of their ideas and influences.  

Pursue your development the right way:  first find and copy the masters and then hold onto pieces of what they teach you that truly resonate.  Those are the practices that mesh with your strengths and that ultimately hold the greatest potential for your performance.  Others won't hear your music and may view you as a bit insane when you dance to your own tune.  That's OK.  No one ever achieved great things by staying safely within the realm of consensus.

Further Reading:

Radical Renewal - an online book on the spirituality of trading

Sunday, October 23, 2022

Trading Psychology Advice - 1: Get the Right Kind of Help

 
Many times traders fail to reach their potential because they seek the wrong kinds of help.  Early in a trading career, what is needed is mentoring, not primarily psychological coaching.  Consider a young person who is early in their development as a baseball player.  The most helpful help will come from mentors who are familiar with the game and can teach proper ways to stand in the batter's box, pitches to swing at and let go, ways of adjusting the swing to the placement of the defensive players, ways of recognizing different kinds of pitches, etc. etc.  In copying the guidance of a mentor, the novice performer learns the fundamentals of performance.  Only later in their development do they modify those basic actions based upon experience.  It makes little sense to focus on self-help, psychological advice if performance problems are due to a lack of mastery of basics.

Conversely, the experienced player doesn't necessarily need to be shown basics.  The problem is implementing those basics with consistency.  This requires coaching from one familiar with the performance domain.  For instance, an experienced trader might have difficulty adapting to a new set of volatile market conditions and become frustrated when losses are larger than expected.  Coaching in such a situation might include techniques for mastering frustration as well as solution-focused efforts to reduce trading size, structure trades for better risk/reward, improve diversification, etc.

Here's a good way to think of ways to get the right kind of help:

If you lack experience, you need a mentor to show you what to do and how to do it.

If you have trouble drawing upon the experience you have, you need a coach to help you identify what you already do well and how to expand that.

Many developing traders have never seen a bear market, have never traded consistently volatile markets, and have never traded proper trends.  They need to go back to basics and obtain mentoring from those who have been there and done that.  

Experienced traders facing a new environment need to maintain a constructive mindset, focus on what they do best, and figure out how to adapt their strengths to current market conditions.  The right coaching helps the experienced professional become their best version of themselves.  

Turning trading around begins with seeking the right kind of help.  This is an important reason why success rates of traders at top trading firms are so much higher than among traders who try to develop entirely on their own.  When we are part of a team or trading community, we can learn from each other and achieve both mentoring and coaching.  Think of performance domains:  in sports, in the arts, in the military.  There is always mentoring and coaching to further the process of development.  It is very difficult, if not impossible, to find world-class athletes or musicians who are entirely self-taught.  That should tell traders something.

Further Reading:




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Friday, October 14, 2022

What Trading Cannot Do For Us

 

To paraphrase Ms. Rand, the quest for self-esteem is the surest sign of its absence.  A common underlying theme of blog readers who reach out to me is their desperate need for trading success.  They don't just want to be consistently profitable; they want to be among the elite of the elite.  They proclaim their passion for trading and their complete absorption in finding opportunities to profit.

One question I typically ask is, "What in your life is more important than trading P/L?"  The speed and depth of the answer speaks volumes.  A life wholly dedicated to market P/L is an impoverished existence, a desire to achieve a self-esteem that is otherwise absent.  A common reason for overtrading is the absence of anything else meaningful to be doing.

The overfocus on P/L is an attempt to evade the reality of that absence.  Little wonder we then overreact to losses and extended drawdowns.  That is when we most need a full life to fall back upon.

Trading can make us financially successful, and trading can provide meaningful intellectual challenge and satisfaction.  What trading cannot do for us is substitute for our needs for a full and fulfilling life.  In the Radical Renewal blog book, I emphasize that good trading comes from the soul, not the ego.  Good trading emerges from a mindset of plenty; it cannot bear the burden of our self-esteem.  Mastering volatile markets is easier with a stable life; drawdowns are easier to accept when we profit from many life activities and interests.

Further Reading:

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Friday, October 07, 2022

How Can We Stay Chill In A Volatile Market Environment?

 
When I began my career working as a performance coach for traders, the first poster I placed in my office was a signed photograph from a military sniper.  It showed the sniper lying in the weeds, well camouflaged, and looking dead ahead with rifle poised.  The absolute stillness and focus of the well-hidden figure was striking.  What makes the best snipers special is that, when battle conditions heat up, they have trained themselves to slow down.  It's when multiple high-value targets come into view that they breathe slowest and become most still.  Opportunity brings focus, not excitement.  

The most common psychological issue I'm hearing from traders today is how to stay calm and focused during volatile market conditions.  It's natural that directional traders view lots of movement as lots of opportunity.  The excitement that brings when markets start to move your way, the frustration that brings when markets reverse on you--all have the potential to disrupt our planning, our concentration, and ultimately our best trading.

It's under these conditions that I find training with biofeedback to be most helpful.  Below are some links that can get you started looking into the topic.  It's also a topic I discuss in The Daily Trading Coach, particularly in the sections on Cultivating the Quiet Mind and behavioral Exposure methods.  In exposure work, we first learn to slow our heart rate and lower our body's level of arousal through the help of such methods as heart rate variability feedback and brain wave feedback.  Once we learn what we need to do to keep us chill, we then actively visualize trigger situations that tend to stress us out.  For example, we might visualize a market going against us and having to stop out with losses.  We vividly imagine the disappointment and frustration of the situation--while keeping ourselves in a state of low arousal and high concentration and monitoring our feedback.  We do this again and again and again in our practice, until stressful situations no longer take us out of our zone.

This requires regular practice, but is amazingly successful in rewiring our emotional responses to situations.  Our job is to climb the mountain of success, not carry mountains of fears and worries on our shoulders.  It is indeed possible to rewire ourselves and reprogram our responses to challenging situations.  When we are encountering volatile and choppy market conditions, this enables us to become like the sniper:  more and more focused as opportunity presents itself.

Further Reading:


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Friday, September 30, 2022

Creativity in Finding Market Opportunity

 
As I've emphasized in the Trading Psychology 2.0 book, creativity is essential to success in trading financial markets.  Finding opportunity that others don't perceive is the heart of what great traders do.  That requires looking at new things and viewing old things in new ways.  The very successful participants in markets enjoy creative discovery, and that keeps them excited about markets regardless of recent profitability.

Consider a standard technical indicator such as Bollinger Bands.  We could view the market--or a stock--to be a buy when it closes above its upper band and a sell when it closes below its lower band.  The idea is that if the market is more or less than two standard deviations from its recent average price, that is indicative of a trend.

But suppose we view the bands differently.  Suppose we look at every stock in the NYSE universe and identify how many close each day above and below their upper and lower bands.  Now we've turned the strength/weakness measure into a breadth measure.  

I've collected those data for about three years and have noticed a pattern that no one talks about.  It's when we have very few stocks trading above their bands that next 5-20 day returns are most favorable.  And when we have very few stocks trading below their bands, the next 3-5 day returns are most favorable.  Interestingly, the correlation between the daily number of stocks trading above and below their bands is a very modest -.20.  In other words, breadth strength and breadth weakness are independent variables.

Now the door is open to similar analyses using common technical indicators.  By viewing presence/absence of strength/weakness uniquely, we can find unique relationships.  The absence of strength or weakness may be as important to markets as their presence.

This is what trading psychology is meant to be.  Not a stale rehashing of the need to be disciplined, but the positive development of our greatest cognitive and behavioral capacities.  Creativity is all about asking new and better questions.

Further Reading:

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