Wednesday, February 22, 2006

A Note on Trading Psychology

I just finished an email to someone at a trading firm in which I tried to summarize the essence of trading psychology in a single post. Here's the gist of what I had to say:

Under conditions of perceived risk and uncertainty (after all, what we react to is what we perceive) we no longer process information in our accustomed ways. At a brain level, regional cerebral blood flow shifts from the frontal cortex (our executive center) to motor centers that facilitate those famous flight or fight responses. This denies us access to our usual good planning, judgment, and decision making. As a result, we can end up making decisions that we look back upon in amazement: "What was I thinking?!" The answer, of course, is that we *weren't* thinking at the time. We were reacting: managing our perceptions of threat rather than the objective trades in front of us. Effective brief therapy for traders enables them to reprocess perceptions of risk and uncertainty, so that the blood shifts--and the associated state shifts that generate anxiety, frustration, and impulsive behavior--cannot occur.

My book The Psychology of Trading was an effort to explain this process and provide basic tools and techniques for traders to use under conditions of heightened risk and uncertainty. In the new book I'm currently writing, I will provide actual "therapy manuals" to help traders become their own therapists.

Anticipating market movements from historical studies provides a valuable edge in trading, but any edge is worthless if our states of mind prevent us from acting upon the information effectively. My hope is that the articles on my personal site, as well as the book, provide traders with some help on that front.


fred said...

I am new to your information and a relatively new currency trader. Have you had experience trading currencies? Fred

Brett Steenbarger, Ph.D. said...

Hi Fred,

My experience with currency trading is limited, and the experience I've had has kept me away from those markets. That is because such a large proportion of the business is done in the cash markets that my usual analytics--which read supply/demand in the futures--have far greater limitations. I prefer electronic marketplaces where as much business as possible is transparent.


MidKnight said...

Hello Dr. Steenbarger,

Been a long time fan of your blog and bought your book about 2 week ago. Absolutely loving it. Thank you.

Just wanted to let you know that a 'therapy manual' of sorts would be IDEAL. I've been reading about trading psychology since I got into this business 2 years ago. While I can intellectually understand the concepts they are putting forward in these books, it is so incredibly hard for me to trade from the couch. I haven't finished your book yet, but already it is helping me view my problems as solutions. Looking forward to the manual :)

Thanks for all you contribute to the personally unfamiliar concept of trading from the couch.

Kindest wishes,

Brett Steenbarger, Ph.D. said...

Thanks Matthew,

Some of the articles on my personal site may be relevant to your interests as well. I spent 19 years teaching in a medical school department of psychiatry, and my main focus was teaching psychology interns and psychiatry residents how to do brief therapy. What I'm trying to do now is teach those same skills to traders, so that they can become their own therapists in real time--as they are trading.