Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - Three Keys to Trading Excellence

Most recent Forbes post - Three Things I Have Learned From Victor Niederhoffer

Most recent podcast:  Improving the Odds of 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.

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, December 10, 2018

Three Keys To Trading Performance

In the latest Forbes article, I share three important trading lessons that I have learned from Victor Niederhoffer.  These are not the usual trading psychology homilies; they reflect real-world experience with making sense of market behavior.

The truth is, I could have offered a dozen more lessons I've learned from Vic--all of which are highly relevant to trading.  Here are a few keys to trading performance inspired by his example and reinforced over the years:

1)  It's all about the reps - Vic became a squash champion with fanatical practice, drilling and mastering shots.  In preparing for more active trading this coming year, I am using each trading day as a review, tracking the "trades of the day" and the ways in which they have set up, the ways of best entering them, the ways of best managing positions after entry, etc.  Every day becomes a textbook lesson in good trading.  As markets change, the trades of the day also shift--and the reps are helpful in adapting to the new market conditions.

2)  Think outside the box - I am convinced, based on years of experience working with successful traders, that there is no edge in being consensus.  If you are part of the herd looking at the same charts, regurgitating the same narratives, there is no way to achieve distinctive returns.  My own trading has undergone a renaissance as the result of making cycles the most basic unit of analysis.  Identifying dominant market cycles within stable market periods allows the trader to know when markets are likely to exhibit momentum and when they are likely to reverse.  This has freed me from bullish or bearish biases--there are always ups and downs to be exploited in markets.

3)  Collect people - Vic is a consummate collector.  He has collections of art, collections of books, collections of historical artifacts.  His house is a veritable museum.  But where Vic has been most successful is in collecting people.  He seeks out accomplished people in various fields and brings them together, whether online, in meetings, or in parties.  I don't know any successful traders who don't have well-curated professional networks.  Quite simply, people who are excellent in their domains bring out our own excellence.  We internalize what we experience; that is why we should always surround ourselves with excellence.

Life is too short to settle for mediocrity.  What are you doing in your practice, in your thought processes, and in your social life that elevates you toward excellence?  Such reflections are an excellent way to begin planning for a new trading year.

Further Reading:


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Thursday, December 06, 2018

Finding A Mentor, Not A Guru

One of the best things a developing trader can do is find mentors.

One of the worst things a developing trader can do is follow gurus.

Gurus are not mentors.

Gurus offer answers; mentors teach you how to arrive at answers.

Gurus promote the right way to do things; mentors teach you to find the right ways for you.

The recent Forbes article highlights the sobering fact that 95% of people are imitators; only 5% are initiators and innovators.  Isn't it interesting that those odds are similar to the odds of independent traders becoming consistently profitable?  Imitation is not a winning strategy.  It is a sure path for being part of a herd.

When I spoke with traders at the recent meetup for My Investing Club, I emphasized the importance of learning from your own trading experience:  what works for us and makes sense to us often reveals our underlying strengths.  A mentor can help you learn from your experience; not follow their advice and experience.  

The MIC home page begins with the phrase, "Mentorship is the shortcut to success."  That calls to mind a story recalled in a Jewish book called Tanya.  A Rabbi was trying to find his way to the city and asked a child for directions.  The child explained that there was a "short and long way" and a "long and short way".  The Rabbi took the short and long way and found his path obstructed.  He then returned and asked the child why he had said the path was short.  The child said, "Didn't I also tell you it was long?"

The path of the guru is the short but long way.  It promises quick answers, but these don't work in practice, because they do not draw upon *your* strengths and *your* ability to adapt to shifting markets.  When you follow the guru, you become obstructed--and that makes it a long way.

The long but short way is mentoring.  It takes time to learn from experience and internalize those lessons, just as it takes time to become a golf champion or an Olympic winner.  Mentoring can accelerate the development process by helping you learn from both successes and mistakes--and by giving you *many* models of success that you can integrate to make your own.  That makes mentoring the long but short way--the real shortcut, as MIC notes.

The Forbes article points out how easy it is for us to become influenced by others.  I have never met a consistently profitable trader who has not demonstrated a high degree of intellectual independence.  At SMB, for example, developing traders are part of a team and receive mentoring from senior, successful traders.  They are expected, however, to develop their own "playbooks" and cultivate their own understandings of markets, stocks, and opportunities.

One of the most common errors we make in thinking about trading success is that mentoring is limited to the early years of development.  If markets always traded the same way and followed the same patterns, this would be the case.  It is the ever-changing nature of markets that ensures we not only learn, but continually relearn and update our learning.  That means it is helpful to have mentors throughout one's trading career: colleagues we can learn from.  In dynamic fields, such as medicine and technology, education is not enough.  Success requires continuing education.  And that means ongoing mentoring.  

Further Reading:


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Monday, December 03, 2018

When Your Past Overwhelms The Present

Margie and I are currently fostering a lovely young cat who spent the first year of life in a relatively confined space.  He was wary upon first meeting us, but warmed up and began to play and purr.  This morning, I set up his cat bed in a larger room so that he could become accustomed to new space.  When he saw me carrying the bed, he had a complete meltdown.  He panicked, hurled himself against the window to escape, and shook and growled.  When I put the bed down and spoke to him softly, he calmed down and was eventually able to resume play--but only after returning to his safe bedroom space.

Trauma occurs when life incidents become such threats that they overwhelm our coping.  Not all trauma is full-blown PTSD.  Many events in our lives leave scars that can be reopened at various times in our lives.  A person who was mistreated as a child may function quite well as an adult, but suddenly "overreact" when treated unfairly at work or in a romantic relationship.  Not so different from the cat.

All of us bring our personal histories to trading.  When unresolved issues of self-worth, anger, or anxiety are triggered by the challenges of markets, we can be a bit like the cat.  We can "overreact".  But, of course, what looks like an overreaction in the present is really nothing by a reaction to our emotional past.

Not all of us are acting out our past in our current trading.  But if you find yourself "overreacting" to life events outside of markets--at work, in relationships--there is a high probability you'll bring those issues to your trading.  That's when a professional counseling relationship can be useful to resolve those issues.  No amount of playing with indicators or listening to trading coaches will put your past into perspective.  Investing in the right kind of help could be the best thing for your trading.

Further Reading:


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Friday, November 30, 2018

Rigorously Reviewing Your Trading

One thing I'll be talking about in Saturday afternoon's NYC meetup for My Investing Club will be an enhanced review process I've initiated for my own trading.  My general observation is that the frequency and intensity of review processes is associated with learning and performance improvement.  What I'm testing with the enhanced process is whether making the review structured and concrete also contributes to the learning and development curve.

So what I did was write out all my trading rules in a two-page Word document.  The rules are broken down to explain in detail:

a) What I need to see to enter a position (This includes criteria on multiple time frames);
b) What I need to see to tell me the position is incorrect;
c)  How I need to size the position;
d) What I need to see to take initial profits and the portion of the position to take off;
e)  What I see as a subsequent target and where to take the rest of the position off;
f)  When to not trade; when to trade more actively; when to trade more selectively.

This trading document/plan serves two important purposes:

1)  Review before trading starts to ensure that the rules are being followed in generating ideas, with special emphasis on the rules relevant to the prior day's trading;

2)  Review at the end of trading to assess whether rules were followed and especially to look at how a following of the rules could have improved the day's trading;

3)  Targeting one or more rules to focus on for the coming session to improve trading.

The idea is that every day is a practice situation in implementing the trading framework.  Over time, we become more grounded in our best practices, and we also better as rule-governed traders.  This is the value of having a true playbook for each market and strategy that we trade, as Mike Bellafiore has illustrated.

What I can tell you from my experience is that just the act of putting your trading into a very tight, clearly defined rules framework highlights the factors of what we most need to focus upon to improve our performance.  If we cannot convey our best practices on paper in a way that others can understand, how can we expect to be grounded in them in real time?

Further Reading:


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Sunday, November 25, 2018

How To Invest In Your Trading

I'm looking forward to a NYC meetup with My Investing Club members on Saturday.  On the surface, the group is misnamed.  Almost everyone in MIC is a trader, not an investor!  That misses an important point, however.  Becoming part of a trading group is all about investing in your trading.  Too many traders treat their trading like trades:  they try one approach, then another; work on one thing, then another.  In and out, in and out.  The successful traders invest in their trading:  they devote ongoing effort to growing themselves and their trading processes.

A great example of this is the idea recently put forward by Modern Rock:  finding a Trading Accountability Buddy (TAB).  The key word here is accountability.  A TAB is a co-investor in your trading business:  someone who learns with you, learns from you, and teaches you.  Think of it this way:  if you learn one valuable trading lesson each day and turn it into an improvement the next day, you'll achieve a tremendous compounding of learning over the course of a year.  But if you *and* a TAB share your learned lessons and improvements, you've now doubled that compounding.  You succeed simply because you're on a much more rapid learning curve than others.

What a great investment in your trading.

As Alex points out, one of the great advantages of an investing group is the opportunity to get together in person in a setting like a Hawaii beach (or a NYC pub!) with multiple potential accountability buddies.  Everyone shares experiences; everyone answers questions; everyone becomes a resource for others.  Investing in trading becomes a group process, not just something you do in isolation.

I'm in the middle of writing my fifth book on trading psychology--one that will be very different from the others.  The topic is the relationship between spirituality and trading:  how it's not enough to develop ourselves--we have to develop our selves.  So many of problems that impact trading--from overtrading to greed and fear of losing--are *not* the result of psychological disorders.  They are the result of letting our egos get in the way of our trading.  The techniques and perspectives taught by the world's great spiritual traditions really are ways of moving beyond ego.  As I illustrate in the book:  Great trading comes from the soul, not the ego.

I look forward to talking about soul-full investing at the New York meeting--and in coming blog posts!

Further Reading:


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Wednesday, November 21, 2018

Oversold In An Oversold Market: What Happens Next?

I've been interested to see a number of bearish stories about the stock market in recent days.  Somehow these stories were missing when we were trading close to the highs.  But the assumption seems to be that because we've seen weakness in stocks, oil, high yield bonds, etc., we are in danger of an outright bear market.

Maybe.  

Sometimes that happens.  

But is that truly a trade-worthy idea?

Yesterday, we saw fewer than 10% of all stocks in the SPX average trading above their three-day moving averages.  The market is broadly weak in the short run.  Interestingly, when we look at how the SPX stocks are trading relative to their 5, 10, 20, 50, 100, and 200-day moving averages, well fewer than 50% are trading above those benchmarks.  So we're very oversold on a short-term basis in a market that is also oversold on a medium and longer-term basis.  (Data from the excellent Index Indicators site).  

It turns out that this configuration has occurred 46 times since 2010.  Ten days later, the SPX has been up 33 times and down 13 times for an average gain of over +1.63%.  Many of the losing instances clustered in the 2011 period when we had some prolonged weakness.  Similarly, when we take the data back to 2006, losing instances clustered in 2008/2009, so that there was a positive return over the next day or two from 2006-2009, but actually a negative average return over the following ten days.

There is a subtle but important lesson here.  The human tendency is to make an assumption about whether we are in a bull or bear market and then extrapolate expectations on that basis.  A better use of the data is to recognize that the kind of pullback we've seen is historically a very good buying opportunity in all but significant bearish periods.  If we do not see a sustained bounce as we walk forward day over day, we can update our thinking to increase the odds that perhaps we're in the throes of a bear.  Conversely, if we see sustained buying, we can question the bear thesis as we walk forward.

Rational traders and investors operate in a Bayesian manner.  They start with a researched base case founded on experience and then keep an open mind, modifying the odds of their base case as new data emerge.  For them, conviction is a process, not something we have or don't have.

Further Reading:


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Sunday, November 18, 2018

The Best Way To Trade Better Is To Trade Better Ideas

Margie and I visited the Aros art museum in Aarhus, Denmark earlier today, where we circled the Rainbow Panorama and viewed the town landscape through a variety of colored glass walls.  The idea is to be inside a rainbow and see what the world looks like.  Indeed, the same scene gives a different appearance when viewed through colors of orange, blue, and yellow.  The colors turn ordinary experience into a work of art.

In the recent Forbes article, I describe three techniques for generating creative insights.  The key point of the post is that trading psychology does not just help us trade our ideas better; psychology can also help us find better ideas to trade.  My experience, with hedge fund managers, day traders, and longer-term investors, is that the single most important thing we can do to improve performance is improve our idea generation.

A powerful way of accomplishing that is by viewing markets through fresh lenses, just as we did in viewing the skyline from the art museum.

Here are a few ways I've seen traders use creative processes and insights to view markets through fresh lenses:

1)  A very successful trader charts and analyzes patterns in the relationship between markets, not the markets themselves.  For example, he looks at spread relationships in commodities, relative value relationships in rates, and relative strength data for individual stocks.  The relative strength data that he examines shows clearer and cleaner patterns of momentum and reversal than the usual data traders look at, setting up successful trades.

2)  In my recent trading, I have viewed market data through the lens of volume bars (a fresh bar draws after a certain amount of volume that is traded).  The volume bars even out market activity over different parts of the day, yielding clearer patterns of market cycles.  These cycles provide a powerful way of making money when there are not clear trends.

3)  Market Delta breaks each transaction in futures markets into "buying" transactions (those transacted at the market offer price) and "selling" transactions (those transacted at the market bid price).  The ongoing flow of trades at bid versus offer effectively captures shifts in dominance between big buyers and sellers, helping individual traders identify potential turning points.

4)  An enterprising fund utilized satellite data to identify traffic patterns in shopping malls and estimate consumer activity.  These data provided advance information of both company earnings and overall economic activity. 

What is the common thread here?  In each case, the creative trader is not just interpreting the same data in different ways, but actually viewing different data.  This creates fresh perception and the identification of patterns that others cannot see.  The blunt reality is that, if we look at the same information as everyone else, we'll pretty much see the same things as everyone else.

Great ideas begin with creative insight and creative insight begins with fresh perception.  When you have new data, you can see new things--and suddenly markets and ideas become less crowded.

Further Reading:  


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Tuesday, November 13, 2018

How Overconfidence Derails Our Trading

Here's an observation I've made of both traders and investors--those with little experience and those who have been doing this all their lives:

They are at their best when they treat their ideas as hypotheses and continually update their hypotheses as price action, news, and fundamental data emerge.  Their focus is on what they would need to see to disconfirm their hypotheses.  That allows them to exit quickly and limit risk in adverse conditions.  It also enables them to take the opposite side of a trade should they observe a meaningful disconfirmation of their ideas.

The traders are at their worst when they treat their ideas as conclusions and dig in their heels in these views in the name of "conviction".  This leads them to interpret market information with confirmation bias, looking at data that support their views and minimizing information that might not support their ideas.  Such an approach leads to a loss of flexibility and a situation where the only effective stop level is pain.

One way we turn confidence into overconfidence is by crystallizing our observations into narratives.  Among portfolio managers trading global markets and strategies, this is sometimes pejoratively referred to as "macro story telling."  The trader observes information--perhaps fundamental, perhaps monetary, perhaps intermarket, perhaps price-action based--and turns these observations into a narrative.  "Stocks are going higher because economic conditions are improving and sentiment is bearish."  That could be a simple narrative.  It is not a tested set of relationships, and it is not treated as a hypothesis.  It is a conclusion drawn from limited pieces of information.

It's surprising how often traders with bullish or bearish biases can find information to weave into bullish or bearish narratives!  

Once the narrative has crystallized, it organizes our perception.  We see the world through the lenses of our narratives.  That makes us less sensitive to other, possibly more relevant lenses and information.  Seeing the world through our story-telling--and then justifying that in the name of confidence--is the height of overconfidence.  What we want instead are multiple hypotheses, each with shifting odds as information comes out.  At some point, the odds shift sufficiently that we can put on a trade.  But we are always updating those odds, and we are always aware of what would lead us to reverse that trade.

A great exercise is tracking your self-talk during the course of a trade.  Is your internal dialogue information-based, or are you grounded in a single narrative?  Are you flexibly assessing odds and possibilities, or are you looking for information to support your fixed view?  Or are you so self-focused and P/L focused during the trade that you never get the chance to update your thinking?  That often occurs when our "conviction" views suddenly prove vulnerable.

This is one of the great ironies of trading:  It takes unusual confidence to believe that we can outperform the world's most experienced money managers.  Taken too far, however, that confidence can ensure our failure.

Further Reading:  


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Sunday, November 11, 2018

The Role Of Creative Insight In Trading Success

In the Trading Psychology 2.0 book, I outline several new frontiers for improving trading performance.  One of the most interesting and promising is the enhancement of creativity.  Simply put, the success of traders and investors rests on their ability to perceive unique, distinctive market opportunities that are not apparent to others.  For the faster, shorter-term trader, this means detecting patterns in price action that reflect shifts in supply and demand.  For the slower, deeper-thinking investor, it means piecing together information about companies and economies and arriving at original theses that ultimately will drive the behavior of other market participants.

Having worked with very successful market participants who operate in both the faster and slower modes, I can attest to the role of creative insight in the trading process.  This not only pertains to the generation of ideas, but also their management.  During the life of a trade there are many decisions to add to positions, take them off, or hold them.  For the discretionary trader, all of these decisions are more or less informed by creative insight. 

Here are a few ideas relevant to the role of creative insight in trading success:

1)  Few trading processes--from market preparation to research/idea generation to risk management--are designed to maximize the creativity of the trader.  Indeed, common trading behaviors, such as discussions on trading floors and ongoing following of price action on our screens, actively interfere with creative outcomes.  When traders talk about "process", they often mean the repetition of helpful practices.  This is valuable, but the following of routines via habit patterns, will not in itself maximize the creativity of a trader's thought process and, indeed, may work against it.

2)  Maximizing creative thought requires an unusual degree of flexibility.  What we know about creativity suggests that multiple brain centers are at work in processing information, reflecting multiple cognitive processes.  Processing multiple, different sources of meaningful information and processing all that in different cognitive modes (analytical, reflective, etc.) aids the insight process.  Sitting in one place and staying in one dominant mode of analysis/thought is a great way to stifle creativity.

3)  Creativity is never maximized in our normal, routine states of consciousness.  Research into creativity suggests that a variety of moods and levels of cognitive focus/awareness impact creative thought.  There is a very strong case to be made that many of the commonly noted psychological problems experienced by traders--from performance anxiety and overtrading to frustration and lack of discipline--stem from states that actively inhibit creative thought. 

In short, a major problem with trading performance is that traders focus on what they perceive to be their "edge" in markets when in fact "edge" is the result of a process, not a static set of market relationships.  Where there is no creativity, there can be no edge.  Reducing "edge" to a rote series of patterns virtually ensures that the trader will fail when market regimes change.  It is the ongoing creative process that fuels our adaptation to evolving market conditions. 

The implications of this perspective are profound.  The most useful self-coaching traders can do is reverse-engineering their best trades and especially the processes that led to the relevant decisions.  A solution-focused perspective suggests that all experienced, reasonably successful traders already are tapping into creativity at various points in the trading process.  The key is distilling *your* ingredients of creative insight and turning those into robust routines that can provide you with an actual, ongoing edge.

Further Reading:


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