Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - The Building Blocks of Success

Most recent Forbes post - Finding success by navigating patterns and principles

Recent podcast:  The Psychology of Performance with SUNY Upstate HealthLink

Recent podcast:  Trading Psychology and Spirituality with BearBullTraders

Recent podcast:  Ego, Trading, and Spirituality with Alpha Mind

Recent webinar:  How to improve your learning curve as a trader (with Bookmap)

Trading, like any great performance field, is an arena in which our self-development is an essential part of honing our craft.  Welcome to TraderFeed, a blog site that now also serves as a repository for nearly 5000 original articles on trading psychology, trader performance, and trading methods.  Within the extent of my knowledge, this is the largest single source of trading psychology material in the world.

The links on this page will help you navigate the database of posts to find the information most relevant to your development.

My coaching work is limited to trading and investment firms, so I cannot provide online advice or services to individual traders.  I do, however, welcome questions about the ideas in this blog.  You can email me at the address on my bio and contact page.  I'm also available via Twitter (@steenbab), where I'll continue to link new posts and articles.

TRADERFEED TABLE OF CONTENTS











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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Monday, August 19, 2019

The Building Blocks of Success

How do people achieve and sustain very high levels of success?  Research suggests that there are several building blocks:

1)  TALENTS - These are the competencies we are hard-wired for; our inborn, native strengths.  From an early age, most children display areas of relative strength and weakness.  Sometimes there is a very high degree of early talent, as in the recent case of Kodi Lee, the blind, autistic singer/musician on America's Got Talent.  As a young child, I devoured books on Greek and Roman myths and then became engrossed in books about human potential.  Even now, it's what I gravitate to when I have free time.

2)  SKILLS - Skills are the competencies we develop as the result of experience.  Through ongoing deliberate practice, we can correct errors and build on successes to hone our performance.  Skills are what we drill on the tennis court or football field during practice; they're also what we naturally develop when we systematically pursue areas associated with our talents.

3)  MINDSET - Our psychology cannot substitute for talents and skills but very much can enhance or hinder our access to these.  I outline how this happens in the recent Forbes article, noting that life experience leads us to emotionally encode both patterns of conflict and success.  When the relevant emotions are triggered, this can either hamper or facilitate performance.  

A very important principle is that we are most likely to maintain optimal mindsets for performance if we are truly aligned with our talents and doing what we do best.  Elite talent fuses all three factors, so that our mindset energizes our skill development and that makes the greatest use of our talents.  This is why our passions often point the way to our purpose.

Further Reading:  

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Thursday, August 15, 2019

Common Mistakes I See Traders Making

It's interesting to see:  for quite a while, traders lamented the lack of volatility in the stock market.  Now that we're seeing an elevated VIX and larger daily price ranges in the index products, a new set of woes has come to the fore.  Many traders are perceiving an enhanced opportunity set, but are having problems capitalizing on it.  Here are a few mistakes I see traders making recently:

1)  Assuming that patterns that worked when VIX < 12 will work similarly in the higher volatility environment.  When we have elevated volatility, the greater movement is present across time frames.  What was a good, tight level for a stop loss point will be blown through in the higher volatility environment.  Simply adjusting stops linearly with volatility also doesn't work, as each unit of trading volume produces more movement, precisely when volume is expanding.  It is not a linear function.  Another example is that traders assume that oversold points, for example, will lead to bounces.  In the low VIX environment, which is often one of rising prices, that pattern may work.  When we get significant downside, short-term oversold can easily lead to further oversold.

2)  Overexcitement.  Traders equate movement with opportunity.  That's not necessarily the case.  Movement is only opportunity if we have studied/backtested it and made sense of it.  In the heat of overexcitement, traders will size up positions right at a time when their stocks or indexes are already providing more movement.  The combination of larger size and higher volatility leads to much larger P/L swings, which can lead to debilitating losses and a much worse mindset going forward.

3)  Poor review processes.  In the busier market environment, traders do more trading and leave less time for reviewing and studying their trades.  At SMB, traders work with the "playbook" concept introduced by Mike Bellafiore.  Just as a quarterback and football team works with a playbook to prepare for games, traders have playbooks of the trading patterns that they have tested and successfully employed.  Per the first point above, traders forget to update their playbooks when market conditions change, just as football teams change their playbooks to exploit specific opponents.  But a changing market environment should call for a doubling down of review, to clearly identify what is working in the new regime.  If traders become so busy trading that they spend less time grading their performances, setting goals, and making adjustments, they will underperform the perceived opportunity set.

The key takeaway is that we always play in unique environments.  For the professional bowler or golfer, one tournament site is not like another.  For the football or soccer player, field conditions can change.  Many of the mistakes we make as traders involves failing to make the right adaptation to the environments we find ourselves in.  All the self-help mantras and techniques will not help if we fail to identify and make the right adjustments to today's conditions.

Further Reading:


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Monday, August 12, 2019

Three Key Ideas Of Trading And Spirituality

Around month's end, I will be releasing my new book, Radical Renewal, which is quite possibly the first book to explore the relationship between trading and spirituality.  It will be an online book written on a blog platform, which means that it will incorporate many links and will be free of charge to anyone with an online connection.  It's been a joy to write and will be an absolute pleasure to give to the trading community.

In a recent podcast with Steven Goldstein and Mark Randall, we explored a few basic ideas of trading and spirituality.  Here are three big ideas from the coming book:

1)  Many of the problems of trading do not come from diagnosable psychological disorders, but rather come from intrusions of the ego into the trading process.  It is when we become self-focused and focused on P/L that we are most likely to lose our feel and understanding for markets.  

2)  The answer to our trading problems is not so much self-help and self-improvement, but rather self-transcendence.  We need to transcend our "small selves"--who we identify with in day to day experience--and step back to find our larger selves.  Tapping into our larger identities provides us with meaning and energy.  Our best trading comes from the soul--the larger self--and not from the ego.

3)  The major spiritual traditions of the world provide techniques and paths for us to cultivate our spirituality and access our larger selves.  Our strengths define our essence:  what we are good at and what speaks to us.  A spiritual life taps into those strengths to ground us in an overarching life purpose.  

There is much more to spirituality than doing a meditation exercise a few minutes each day.  I look forward to exploring this with traders in an interactive format and in a practical fashion.  Thanks to Steve and Mark for the opportunity to discuss some of these ideas!

Further Exploration:


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Thursday, August 08, 2019

Two Ways of Achieving Trading Mastery

How do we achieve mastery in a performance field?  Let's use athletics as an example.

One path to mastery is learning from experience.  That is why coaches sit down with teams after a contest and review game film.  Watching the film in slow motion and keying on what team members did right and wrong helps cement goals for improvement in the minds of the players.  That intensive review is common among chess champions.  It is also something I've seen among successful traders.  They will replay the market day after a long day of trading and walk themselves through the "game film", noting areas of good trading and areas needing improvement.  That review turns every day of experience into a day of learning, doubling our exposure to key patterns that might set up the next day.  Learning from experience also takes place among traders when they share their lessons.  This occurs among the teams I work with at trading firms and is also shared online as learning lessons by the teams at SMB.  Online trading communities, such as those mentioned in my recent post, are also great forums for learning from the experience of others. 

In short, the first path to mastery is accelerating our learning curves by reviewing our performance and viewing the performance of others.

A second path to mastery is increasing our overall capacity for learning.  Again, we can turn to athletics for an example.  Much time is spent between games doing physical conditioning and running drills.  When we hone our skills and improve the shape we're in, we can make the most of our experience.  Recently we've seen an explosion of brain training applications for athletes, helping them master their psychology and also master actual brain functioning.  We're in very early days of understanding the brain activity that contributes to successful trading.  By conducting exercises to increase our attention/focus (such as meditation) and our processing of information, we create drills that can prepare us for "game time".  Again to use an analogy from sports, we can develop the best plays and review them but we won't win if we're out of shape.  Drilling the right brain functions may be the next edge in performance mastery for traders.  

I've often mentioned that successful performance professionals spend more time working on their game than in actually playing.  Years of preparation and training go into the making of an Olympic athlete, dance pro, chess grandmaster, or basketball star.  For every hour of game time, there are many hours of practice, drills, and review.  That is how we achieve mastery.  We often focus on what we're doing during market hours, when it's the hours outside of competition that make us champions.

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Monday, August 05, 2019

How To Overcome Fear Of Failure

I've been engaged in an intensive research program exploring unique edges in the market.  The gist of the research is an identification of "who is trapped" in the market when buyers can no longer lift the market and sellers cannot push it lower.  The research is promising (note the recent post on market strength), but it has come with a unique challenge.  The anticipated unwinds of buyers and sellers play out over multiple days and rarely in a straight line.  That means that anyone seeking to benefit from those unwinds has to endure temporary, but very uncomfortable, adverse movement and drawdown.

That really is a challenge, because sometimes the trade idea itself will be wrong.  In such a situation, it can be difficult to distinguish between normal adverse movement and just plain being wrong.  The fear of failure and loss makes it easy to cut the winning ideas short or stop out of eventual winners.  As I recently tweeted, conviction in our trades matters little if we lack the courage of our convictions.

So how do we deal with this discomfort and overcome the fear of failure?  Here are three approaches:

1)  Adjust the Trading - We're accustomed to thinking about how our mindset affects our trading, but how we trade also impacts our psychology.  When we extend our holding period, we are increasing the variability of our returns.  In essence, holding trades longer is sizing up.  If we trade too large over a longer holding period, the adverse movements may not be tolerable.  We need to size positions so that they will matter if they work out, but won't debilitate us if they don't.  We can't win the game if we can't stay in the game.  A second trading adjustment is that I will put on small size initially and only add if I see growing evidence that a top/bottom has been put into place.  I'm not trying to call precise tops and bottoms.  If I am anticipating a good move in the market, I don't need to capture every tick.  Finally, I find it helpful to distinguish between the trade and the idea underlying the trade.  The trade is simply a way to structure good risk/reward in pursuing the opportunity of the idea.  If the trade doesn't work out, I want to stay on the front foot intellectually and ask myself what I would need to see to re-enter the market.  That's only possible if the initial trade is sized moderately, giving room to re-enter.  In short, we want to trade with full awareness of the possibility that this particular trade may not work out, so that stopping out is not failure, but an opportunity to reevaluate the idea.

2)  Adjust the Body - I'm a big fan of using deep breathing and visualization exercises to prepare for adverse outcomes.  The idea is to visualize what we're afraid of in vivid detail (getting stopped out, for example) while we do two things:  a) breath deeply and slowly and keep ourselves calm and focused; b) continue the visualization to include how we would deal with the stop out, how we would talk to ourselves, etc.  This trains mind and body to not overreact to setbacks, normalizing our responses and making it easier to accept losses as part of a bigger picture of winning.  Performance anxiety occurs when fear of outcome interferes with the process of doing.  If we can train ourselves to not overreact to negative outcomes in our pregame preparation, that training carries over to our actual performance.  When trades move against us, we can take deep breaths, place ourselves in a state incompatible with anxiety, and then visualize how we will deal with the situation.  The key is normalizing setbacks so that they don't feel like catastrophes.

3)  Adjust the Attitude - It's important to get to the point where it's possible to embrace our losses, because those can be our greatest learning opportunities.  Our losses are there for a reason.  They can teach us to become better.  Perhaps we need to improve our trading ideas.  Perhaps we need to improve how we express those ideas as trades.  Perhaps we need to improve our sizing and management of the positions we enter.  Perhaps it's our lifestyle and states of mind/body that need work.  What can we take away from losing that will bring us to winning?  If we can use our losses to study our game in greater detail and make incremental improvements in our processes, then those losses are no longer threats.  They are our teachers.  We won't overreact to losses if we can embrace them.  We are fallible.  We will fall short at times.  Those can be great opportunities to start again, smarter and wiser.

Very often, traders will have good ideas but will set stops so close that they never participate in the anticipated movement.  They are playing to not lose, not to win.  Their journals reflect frustration, not learning.  It's one of the paradoxes of performance that we are ready to win when we are no longer threatened by loss.

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Friday, August 02, 2019

Staying Up When You Have Been Drawing Down

I've received a number of emails and comments in response to the most recent Forbes article describing the pain of losing in financial markets.  We don't usually talk about losing and how difficult that can be.  It's more fun to speak about success and profits and always getting better.  But that's not the real world.  As the article makes clear, not all who pursue trading can make a living from their craft.  If I'm a tennis player, I may not make the cut for pro tournaments, but I can enjoy my sport at a local club, playing against local competition.  If I'm just average as a trader, I consistently lose money.  That is not sustainable.

Many entrepreneurs build a number of start-ups before they hit upon a winning idea and execution.  Years of ups and downs, wins and losses, precede any appearance in the Olympics.  In most performance domains, losing is a necessary part of winning.

If you have been drawing down in your trading, what is most important is to step back and ask yourself a couple of key questions:

1)  Am I looking for opportunity in the right places?  So often, the difference between success and failure lies in what you are trading.  As I mentioned to a young trader recently, you can be the best well-driller in the world and, if you're looking for oil in the wrong places, you'll go broke.  The restaurant that works in the downtown location might fail in suburbia.  You can only know what works by studying traders who are actually successful and seeing first hand what they're trading and how.

2)  Is trading truly my area of opportunity?  As I describe in the book I'm writing (due out later this month), sometimes it's our strengths that derail us, not our weaknesses.  When I tried trading full-time, I found myself interacting with other traders and helping them--and losing trading opportunities in the process.  The reality was that I became a psychologist for a reason.  Being a meaningful part of people's lives is what really gets me up in the morning.  When trading took me away from who I actually am, my trading suffered.  

In the Forbes article, I link to a number of training resources and communities that can help us make the most of our trading.  That can help you determine if there are niches in markets that capture your strengths.  But before you worry about winning make sure you're playing the right game.  What are you really good at?  What gives you your happiest and most fulfilling experiences?  Your wins in life--inside and out of markets--can educate you about who your are and what you do best.  Your losses can be a wake up call, a nudge to become the best version of yourself that you can be.

Tuesday, July 30, 2019

Tracking The Market's Strength

Above we see a helpful chart from the excellent Index Indicators site.  Note that we're hovering near all time highs in SPX, but the number of stocks trading above their 20-day moving averages has been tailing off and now stands a bit above 57%  This waning of strength is also reflected in the intermediate-term new high/new low data, as tracked at Barchart.com.  Yesterday, we saw 578 stocks across all exchanges register fresh monthly highs and 605 make new monthly lows.  Even on a three-month basis we had 330 new highs and 316 new lows.  Not exactly resounding strength for an index at its highs.  The average 14-day RSI for the 500 SPX stocks is currently about 54, down from the 60s earlier this month.  

Meanwhile, a number of sectors of the market are trading below their highs, including financial shares (XLF); energy stocks (XLE); industrials (XLI); raw materials shares (XLB); healthcare (XLV); midcap stocks (MDY); and small caps (SLY).  Internationally, we're seeing notable failures to approach new highs among emerging market stocks (EEM) and European stocks (VGK).  Indeed, stocks outside the U.S. as a whole (EFA) have been underperforming.

Volume in SPY has been extraordinarily low, telling us that we neither have bearish catalysts to bring institutions to divest their holdings nor bullish catalysts to justify richer valuations.  For July, we've averaged about 49 million shares traded daily.  Compare that to an average volume of almost 84 million shares this past May.  It may well be the case that it will take a distinct catalyst to bring market participants off the sidelines and generate the next significant market leg.

It's been helpful to stay open minded and flexible on a day-to-day trading basis, but I am completely on the sidelines in my investment account.  I need to see evidence of breadth strength to justify a longer-term bullish position and so far that evidence is missing.

Further Reading:


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Friday, July 26, 2019

Wiring Our Brains For Trading Success

A major theme of this blog and the Trading Psychology 2.0 book is that success in trading is just as much a function of cognitive strengths as personality ones.  How we learn very much impacts our ability to pick up patterns in markets and trade them successfully.  Yes, emotional factors can derail our trading, but it is our capacity to process market information efficiently and effectively that ultimately determines our ability to trade well.

An interesting study at CalTech looked at people's brain activity during a trading exercise.  What researchers found is that the capacity to read the intentions of other people was key to understanding what was going on in markets.  In other words, reading the market was not so unlike reading people.  As I reviewed the study, I was reminded of a recent conversation I had with a skilled trader.  He was using a program called Bookmap to identify buy and sell orders in the market, including a historical view of where buys and sells were placed at each point in the market day.  This allowed him to see which orders were being continually placed and pulled in the market (fake buyers and sellers) and which ones represented genuine supply and demand at particular price levels.  It was as if he were at a poker table reading the bluffing and bidding of the various participants.

The above study, interestingly, did not find any correlation between short-term skill in reading markets and skill at solving mathematical and logical problems.  Recognizing patterns in order flow is a different cognitive skill from analyzing markets and finding longer-term opportunity.  Another provocative finding from the study was that participants became better at reading order flow when it was displayed with graphics and not just presented as numbers on a ladder.  How information is organized can help or hinder our processing of that information.

A variety of cognitive skills are important to the performance of athletes, including attention, visual processing, and memory.  Tools are available to assist in the perceptual-cognitive training of these skills.  Research is under way to identify the neurophysiological factors associated with peak performance and ways of training for those.  Traders typically focus on patterns to trade and secondarily on keeping themselves calm and in a good mindframe.  Might it be the case that wiring our brains for trading success is less about finding "setups" and patterns to trade and more about cultivating our degree of focus (concentration); our breadth of focus (flexibility of perception); our strength of focus (ability to sustain effortful information processing); and our depth of focus (ability to take in more information at one time)?  

This is an area of tremendous promise.  If we were trying out for a sports team, no doubt we'd work out in a gym.  If we're trying out for trading success, perhaps a mind gym is what we need.

Further Reading:


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Sunday, July 21, 2019

How Do We Make Changes In Our Trading?

There are many different approaches to change in the world of psychology.  A fascinating body of research suggests that these work surprisingly similarly, with similar results.  Although the theories underlying these approaches (psychodynamic, behavioral, cognitive, systems, humanistic, etc.) are quite different, their common effective ingredients account for much of their success.  When I reviewed short-term approaches to change, one fascinating common ingredient stood out:  all the successful therapies begin by shifting the cognitive, physical, and emotional states that we are in.

As I emphasize in my new book, which will be out in August, in our usual states of mind and body, we think and do usual things.  If we want to make meaningful changes in our lives, we have to exit our routines and experience our lives in fresh ways.  This is why newlywed couples go to new, inspiring places for their honeymoons; it's also why we find value in meditation, arts, travel, and celebration.  When we want our lives to feel special, we seek special experiences, not everyday routine.

So often, it is the pull of habit that keeps us from making changes.  Yes, we all need trading routines, but if all our trading is nothing more than routine, we'll achieve routine results.  It is important to follow robust, proven processes, and it is equally important to exit those routines when we want to make meaningful changes in our trading.  That's the tricky thing: we need habit to stick to what we do well, but we need to break habits when what we're doing no longer works.

So how do we break out of our routines and make changes in our trading?

In the most recent Forbes article, I explore a most unlikely topic:  forgiveness and repentance.  What do we mean when we say we repent for something?  It means we recognize that we've done something wrong and want to make amends for it.  It's no coincidence that every major religion embraces formal services for the purpose of forgiveness and repentance.  It's when we stand outside ourselves, look at our selves from a fresh perspective, and feel really crappy about what we see, that we can become filled with a desire to change.  Many life changes occur because we can no longer tolerate the status quo.  At that point, change feels like a need--an imperative--not merely a desire.  That's what happens when an alcoholic hits bottom.  Looking at the consequences of his drinking, he feels tremendous remorse.  In that new state of consciousness, he cannot go back to his old ways.

The article explains how this is relevant to trading.  When we make mistakes in trading--when we overtrade, when we fail to act on our ideas, when we take imprudent risks--we end up betraying the best within us.  We are most likely to make real changes in our trading if we own up to what we have done wrong, feel the pain of that betrayal, and find the courage and motivation to be better than we've been.  It's a kind of hitting bottom, and it's a great purpose for a trading journal.

No pain, no gain is a common slogan.  This is true emotionally as well as physically.  Great things were never achieved inside comfort zones.  It's the trader who can tap into the pain of f***ing up and find a way to forgive--but never forget--that finds the energy to make lasting changes.  Our successes and our failures are there to teach us something, in trading and in life.  Sometimes it's the pain of the failures that brings us back to what we're meant to be doing and to what brings us that success.

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