Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - Failing With Enthusiasm

Most recent Forbes post - How to Renew Our Lives

Most recent podcast:  Four Traits That Lead to Trading Success

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.

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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 20, 2018

Failing With Enthusiasm

Thanks to a savvy performance/trading coach for forwarding an excellent NY Times article on "Talking About Failure".  

Talk about our failures?  For most of us, that's the *last* thing we feel like doing!

The idea makes sense, however.  Not only does talking about our failed ideas and failed trades help us put them in perspective; it also enables us to accept them, learn from them, and put them into perspective.

One exercise I strongly suggest to developing traders is the following:

On your flat or down days/weeks, reach out to other, similar traders who made money on the day/week and learn what they did and how they did it.  Let them talk about their success and see what you can take away as ideas, learning lessons, and goals going forward.  Having one or more trading "buddies" who can openly talk about mistakes and successes helps everyone cement what they did right and learn from what didn't go right.

And if you have no trading buddies?

It's worth reviewing your trading and looking for the plausible opportunities you may have missed.  In other words, if you had been trading your way, at your best, what might you have done differently?  In that situation, you are looking to the ideal trader within you to act as your "trading buddy".  By openly facing your "failure" and using it to prod your ideal trader, you turn setback into learning and opportunity.

The psychology of having flat or down periods is determined by whether you view them as setbacks and defeats versus inspirations, prods, and opportunities for growth.  Churchill had it right:  it's all about failing enthusiastically.

Further Reading:


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Thursday, August 16, 2018

Changing How We See The World

One of the most important findings in psychology is that people make important changes in their lives when they are in the midst of deep emotional experience.  Simply talking with a coach, counselor, or therapist doesn't in itself lead to profound change.  Rather, it's when we experience things strongly that our existing views of the world are shaken up.  That shake up opens us to new ways to view ourselves, others, markets, and the future.

This is one of the reasons important change can occur when people "hit bottom".  It's when everything has gone wrong and we're in despair that we're willing to make a complete overhaul in what we do.  Therapists refer to this as "corrective emotional experiences."

But it's not just negative experience and setbacks that can help us see and do things differently.  Sometimes powerful positive experiences have the same impact.  One example is the experience of awe:  when we are so inspired by something positive that it becomes a part of us and changes our perspectives going forward.  In a new article, I describe recent research into awe and how experiences of awe literally renew our energy and help us become more successful.

A theme I have never heard expressed in conventional trading psychology is that markets--and participation in markets--can become sources of awe.  That is, they can be awe-inspiring.  When we perceive the vast complexity of markets and so immerse ourselves that we perceive a meaningful pattern, it's as if we're catching a glimpse of the universe.  It's not an ego thing at all, strutting about and proclaiming your "conviction" in an idea.  Rather, it's standing back and absorbing all that is happening and allowing ideas and themes to come to you.

Trading with your ego ultimately depletes our energy, as we take too many P/L dings.  Trading with a sense of openness and awe can give us energy.  It can be inspiring.  And that inspiration and awe can help us change how we see the world--it becomes a *positive* corrective emotional experience.  Many traders become frustrated with markets and fight what is happening.  How different it is to experience markets as awe-some!

Further Reading:


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Saturday, August 11, 2018

From Discipline To Professionalism In Trading

In sports, as in trading, performance often begins as an ego-driven activity.  The boxer is all about knockouts; the basketball player focuses on scoring; the golfer looks to ace each hole.  The novice trader wants to make money, and so trades, trades, and overtrades.  This ego focus is not entirely negative; it's a big part of the initial attraction to the performance arena.  But it is not enough.  When we perform out of ego motivations our personal needs overwhelm the requirements of each performance situation.

Many thanks to Mark Meadows and the Top Step Trader team for posting my recent webinar on trading performance.  One of the key points that I make in that session is that a passion for trading is actually a predictor of failure.  That is because the need to trade comes from that ego place where we need to prove ourselves right and need to make money.

More predictive of success is a passion for markets themselves--and especially the passion to understand what is going on in markets.  When we prioritize understanding, the focus shifts from ourselves to what is happening in front of us.  Sometimes not much is happening.  Good trading in those situations can mean not trading.  Mike Bellafiore recently made this point when describing the development of a trader who developed rules for when to not trade.  Discipline--rule following--takes the place of ego:  it's not about trading, but about trading successfully.

Across performance activities we can see that disciplined performance is a necessary phase of development.  The basketball or football player learns to follow a game plan, not just do what they feel like doing.  The poker player learns to fold when the cards aren't right.  It's common for developing psychologists to learn their craft from manuals that are research-validated and that give them a game plan for helping people with various problems.  Discipline is all about sublimating the ego to sound rules and principles.

Later phases of development find that disciplined rule-following turns into positive habit patterns.  Calling the right plays, making the right moves, becomes second nature.  Through repetition, the rules are internalized.  Discipline is no longer needed to do the right thing.  In this later phase of expertise, we see professionals able to read unique situations and make conscious decisions to veer from rules or modify them to the situation.  Instead of following the therapy manual, a sensitive therapist may reach out to a distraught client and offer support.  Instead of backing off trading in the afternoon hours, the index trader recognizes that relative volume has picked up and finds a great place to go short when buyers can't retrace much of the morning's losses.  A football quarterback learns when to call an audible; a poker player learns when to bluff.

That is what professionalism is all about:  Having so much experience that you not only follow good rules and processes, but you know how to adapt to unique situations as they present themselves.  It takes discipline to become a good trader; it takes expertise to know when to veer from that discipline.  It's all about putting our own needs on a back burner and becoming ever more sensitive to what we are trading.

Further Reading:


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Thursday, August 09, 2018

Trading With Patience

You've no doubt noticed that many markets have slowed down with the summer trade, creating narrow daily ranges and little follow-through on directional moves.  The word I most often encounter in trading journals is "patience".  In slower markets, there may only be occasional opportunities worth pursuing.  That means that a good, disciplined trader is often not trading.

What happens during these patient periods--the times of *not* trading--plays a huge role in trading success and failure.  The successful traders I work with use the down time to work on generating new ideas,building new analytical tools, and reviewing their performance.  The less successful traders cannot abide patience and turn trading into overtrading.  They have to have something to do and so they trade, even when an edge is not apparent.

The best traders turn the patient periods into alternative forms of stimulation.

The worst traders experience patience as boredom and find something to trade.

With the VIX below 11 and my "true volatility" measure (movement per unit of volume) at multi-month lows, I'm finding a lot of movement within ranges and then false breakouts from those ranges.  This makes trading very difficult for a momentum style.  A value-based style--buying short-term oversold and selling overbought conditions that break out of a range--has worked much better--especially when directional moves of the index are not accompanied by similar moves across major sectors.  Buying strength and selling weakness on average fail in the slower environment.

In a future post, I'll be reviewing Larry Connors' forthcoming book Buy the Fear, Sell the Greed.  It's an unusually practical trading book, with each chapter describing a specific source of edge and a backtested way of implementing that edge.  One of his tools is a short-term variation of the RSI measure originally developed by Wells Wilder.  During slow market times, I've been experimenting with the measure to exploit the behavioral biases Larry discusses in the book.  Such research is a great way to turn patient times into productive ones.  

Years ago I did an experiment where I showed people a chart and asked them to predict where the market would go from there.  The charts were identical, but half of the subjects saw a chart with a nice green up bar as the most recent bar and the other half of subjects saw the last bar as a good red, down bar.  Not surprisingly, those seeing the most recent green bar expected the market to rise and vice versa.

It's a great example of recency bias.  We overweight recent experience.  In slow, low volatility markets, there is a worthwhile edge in fading that bias.  That's a great lesson I learned during my patient period of not trading:  markets don't have to trend to provide opportunity.

Further Reading:


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Sunday, August 05, 2018

Trading With Energy

One thing I've noticed among traders is that success breeds optimism and energy and optimism and energy breed success.  It's not difficult to walk onto a trading floor and see who is active, interactive, and inquisitive and who is glumly staring at screens and pacing the floor.

I've written in the past about the ratio of activities that give energy to activities that drain our energy and why it's so important to have a positive balance.  It is very difficult to sustain effort--whether it's concentration in following markets or researching trade ideas--without feeling energized.  This is why quantity and quality of sleep are so important to performance; it's why being in good physical shape is helpful.  It's also why clinging to moment to moment, day to day P/L can be so deadly, draining us of willpower resources.

In a recent article, I set out three keys to thriving in any work we perform, including trading.  The common element among these is positive energy.  When we say something has expired, we mean it is no longer fresh, no longer potent.  When we say we are inspired, we mean that we have gained vitality.  There is a world of difference between expired traders and inspired ones.

So here's a quick self-assessment to identify if you are trading with energy:

1)  Does your morning routine give you energy or rob you of vitality?

2)  Do your conversations and interactions with other traders distract you and interfere with your best trading, or do they inform and inspire your best trading?

3)  When you research trading ideas, do you feel inspired and energized?

4)  Do your trading reviews lead you to constructive, energy-giving goals or do they discourage you?

5)  Does your self-talk move you forward and motivate you, or does it discourage you?

If working for someone who managed you the way you manage yourself would lead you to quit your job, you know you have a problem.  All of us are managers of our lives and careers, and--for better or for worse--we are coaches to our own trading.

Is your self-coaching giving you energy or is it holding you back from your best performance?

Further Reading:


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Tuesday, July 31, 2018

The Importance Of Your Self-Talk During Trading

What goes through your mind during trading hours?

How do you talk to yourself?

All of us coach ourselves via self-talk?  What kind of coach are you?

I recently placed a trade looking for a market bounce.  The bounce was feeble and we began to sell off.  I said to myself, "If the bulls are going to be in control, this shouldn't be happening."  I quickly hit out of my position and reversed it.  The small loss on the long position was more than exceeded by the gain on the sale.

The trade was only possible because I had rehearsed an alternate scenario during my preparation of what to do if the market could not hold key upside levels.  Through that alternate scenario, I was able to react to the market weakness without shock or surprise.  It didn't even feel like a losing trade.  It felt like, "OK, it's time for Scenario B."  

Notice that the self-talk was not about being wrong.  It was not frustrated; it was not discouraged.  A well-thought out trade that doesn't work can provide useful information.  It's tuition for some useful learning.

So it is throughout life.  It's always important to have a Scenario B, and view setbacks as learning lessons.  That means taking the ego out of the trade and viewing everything as information.  It isn't about positive thinking or negative thinking.  It's recognizing that it's not about you.  It's amazing how we can trade with peace of mind when we are market focused and not self-focused.

Further Reading:


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Friday, July 27, 2018

Finding Our Fulfillment

The last blog post emphasized the importance of trading with a sense of inner peace.  That peace comes from taking the ego out of what we are doing.

But there is one other key component to inner peace:  fulfillment.

One of the important distinctions that we find in the research on positive psychology is the distinction between happiness and fulfillment.  Happiness comes from doing things that are fun.  Fulfillment comes from doing things that speak to our values.  The research suggests that these are relatively independent dimensions.  Sometimes doing meaningful things is not a lot of fun in the here and now.  Many things that are fun may not be meaningful.

Quite a few life problems occur when we pursue fun without pursuing fulfillment.  Then our success ends up, in the larger picture, feeling like a failure.

Trading problems occur when we pursue trading as a source of fun and stimulation rather than as a career that can provide fulfillment.  The overfocus on P/L is typically a focus on seeking happiness and avoiding unhappiness.  It's in developing, following, and refining good processes that we can find fulfillment.  

When we have plenty of sources of enjoyment in our lives outside trading, we don't need trading for entertainment and stimulation value.  Many, many trading problems occur because we're trying to get personal needs met through markets.  Markets can't always be fun, and they don't always generate fulfillment.  Working on having a positive life--one that is happy, stimulating, and fulfilling--is a great way of taking the emotional burden off our trading and allowing us to deal with opportunity (or lack of opportunity) as objectively as possible.

Further Reading:


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Tuesday, July 24, 2018

Finding Your Peace, Finding Your Success

I'm writing this from the Chicago Traders Expo a couple of hours before my presentation.  One of the topics I'll be covering in my talk is developing ourselves spiritually as a way of furthering our life success--in relationships, in trading, and in careers.

Indeed, my next book will be on the topic of renewing our lives through cultivating our spiritual development.  That book is being written on a blog platform, which means it will be totally multimedia, totally accessible anywhere in the world where there is an online connection, and totally free.  Best of all, the book will enable readers to make comments and share ideas and experiences, which then become part of the book--along with my responses!  That way, the book becomes a dynamic entity:  it will be continually revised and expanded.

The book format is a nice example of what entrepreneurs have always known:  opportunity comes from doing new things--and old things in new ways.

In the ego mode, I want to write a best seller, make lots of royalties, and become a constant figure on the talk circuit.  Good enough is not good enough:  I want more.  In the spiritual mode, we find what most speaks to us.  Getting to that spiritual mode requires finding our peace and letting opportunity present itself to us.

As I will be discussing at the Expo, so much of trading psychology boils down to getting ego out of the way, finding an inner peace and quiet, and processing markets with an open, receptive mind.  I know from my own trading how easy it is to latch onto *my* view of the market and impose that view with a trade, only to have the market show me otherwise.  Looking back, I can only shake my head at how the market's behavior made perfect sense--but I was blinded to that sense.

It's great to have a passion for trading, to work hard at trading, and to follow markets intensively.  But all too often, those activities are ego-driven.  Everything becomes about P/L.  Market ups and downs become our ups and downs.

We'll never find our peace by succeeding at trading.  Succeeding at trading requires finding our peace, because that's the only way we'll be sufficiently open-minded to truly understand what markets are doing.  Finding fulfillment in our lives outside of trading is a wonderful path toward bringing peace to our trading.

Further Reading:


Sunday, July 22, 2018

Where Are Edges To Be Found In The Current Stock Market?

I decided to take a stroll through my database and update views on where opportunity in the stock market has been residing since 2016.  That provides a lookback period long enough to detect meaningful patterns and recent enough to be relevant to current market conditions.  Here a few observations:

*  Sentiment matters:  When the equity put/call ratio has been in its highest quartile, the next ten day return in SPY has been +.96%.  That is almost four times the return when the ratio has been in its lowest quartile, +.25%.

*  Overbought/Oversold matters:  Let's consider the percentage of stocks in the Standard and Poor's 500 Index that have been above their 200 day moving average.  When that percentage has been in its lowest quartile, the next ten days in SPY have averaged a gain of +1.32%.  When the percentage has been in its highest quartile, the next ten days in SPY have averaged a loss of -.04%. (Data from the Index Indicators site).

*  Volatility matters:  When VIX has been in its lowest quartile, the next ten days in SPY have averaged a gain of +.69%.  When VIX has been in its highest quartile, the next ten days in SPY have averaged a gain of +1.02%.  When VIX has been in its middle two quartiles, the next ten days in SPY have averaged a gain of +.39%.

*  Context matters:  When the percentage of stocks above their five-day moving averages is low and the percentage above their 100-day averages is also low, the next ten days in SPY average a gain of 1.00%.  When the percentage of stocks above their five-day moving averages is low and the percentage above their 100-day averages is high, the next ten days in SPY average a gain of +.38%.

Now these are observations only; they no doubt overlap to some degree and I don't pretend that, by themselves, they provide systematic trading ideas.  What is needed is some framework for accounting for these observations.  My straightforward framework is as follows:  the market has been largely trending higher (note how rarely we see negative average returns) and, within that trend, there have been meaningful cycles of 10-20 day duration that capture extremes of volatility, sentiment, and directional movement.

What this means is that traders with a habitually bearish bias have tended to underperform the opportunity set, and traders with a short-term time horizon (holding periods of intraday or swing periods) have also underperformed the opportunity set.  My sense is that a great number of market participants are overleveraged:  they have small account sizes relative to the returns they want/need to generate.  This leads them to take good-sized positions relative to the amount they can afford to lose, which inevitably leads them to manage their positions on shorter and less optimal time frames.  In actual practice, many traders simply don't have the ability to take heat on holding periods of even 10-20 days, even though they may pride themselves on trading "macro" ideas.

My experience is also that traders are very keen to look for trends and trade directional momentum and lack the tools and frameworks to think about cycles and directional reversals.

In short, there do seem to be edges in the marketplace, but they're not found by doing what the crowd is doing.  The key is not playing the game better, but figuring out the right game to be playing.

Further Reading:  


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