Monday, December 31, 2007

Coaching Yourself for Profitable Trading Performance in 2008

In my recent post, I mentioned that there is a considerable overlap between coaching and the short-term approaches to behavior change known as brief therapy. Many traders try to make accelerated changes in their cognitive, behavioral, and emotional patterns without understanding how such changes can be made and sustained. Indeed, few of the professional trading coaches that I've met seem to be aware of the brief therapy literature and the extensive research on change and how it occurs.

So how can you use this growing area of research and practice to aid your progress in 2008? Here are a few findings from the brief therapy world and their implications for coaching yourself to successful trading performance:

1) Keep It Focused - The research is unequivocal: focused efforts at change are more likely to occur--and more likely to occur in a relatively brief time frame--than efforts to change many things at one time. Establishing and maintaining a change focus is perhaps the single most important thing one can do to ensure that efforts at improvement will pay off. The focus should be grounded in a thorough assessment of the problems to be addressed and the strengths to be built upon. Many times traders assume that their problem is one thing or another, when in fact they haven't really drilled down into their trade data to identify what, specifically, they're doing right or wrong. Working on something broad and vague, such as "discipline", is not a focus. Focused changes should identify specific things to do differently and concrete steps to make a difference.

2) Keep It Consistent - Research into short-term change finds that involvement in the change process--consistent efforts over time--is associated with success. Traders who work on their trading in a structured, daily fashion are much more likely to benefit from coaching than those who limit their change efforts to weekly or monthly reviews. The goal of all short-term change is to create new, positive habit patterns. It is impossible to create those patterns without regularity: doing new things so consistently that they become part of the self.

3) Keep It Doable - Success breeds optimism, motivation, and further efforts at success. Effective change efforts create a virtuous cycle of continuous improvement. If goals for change are too difficult, they will create only frustration and discouragement. It is better to start small and ensure success than to try to make the most complex changes all at once. If you're working on entering or exiting trades differently, just try it for a single day and see how it goes. Then modify the goal for the next day. By focusing on the next day's trade, you keep goals concrete and doable.

In general, I would say that traders tend to overweight the importance of psychology in their results and underweight trading mechanics: how they execute trade ideas (getting good entry prices, not chasing moves; ensuring that each trade has a favorable reward-to-risk profile) and how they set and follow criteria for exiting trades (price targets as well as stop losses). To be sure, psychological factors can interfere with the implementation of those mechanics, but many traders simply lack sound rules for entering and exiting positions and instead make decisions impulsively, on the fly.

A review of one's own best trades can be very effective in identifying one's own "best practices" regarding trading mechanics. Those best practices can then be translated into focused, doable goals that are pursued with consistency.

Best of luck in your development in 2008. The posts below may be of additional help in your self-coaching efforts.


Predicting Coaching Success

Coaching and Mentorship Resources for Traders

Why Coaching Doesn't Work - Part One

Why Coaching Doesn't Work - Part Two

Coaching the Professional Trader


Adam said...

Brett ~

My few years of full-time trading have taught that once one understands the mechanics of markets, can parse “greeks” in options formulae, grasps basics about volatility, “trendiness,” elusive relationships between sectors and indices, the larger balance ~ the most important part ~ of this craft is psychological.

It matters not if one trades intra-day, inter-day, takes long-term positions or envisions oneself a potent math stud. The fractal nature of markets eventually brings us all face to face with the counter-intuitive nature of our chosen craft.

Fear, failure and self-imposed blow-up lurk behind every diversion from the rules. The temptation to go down the road too-often traveled is ever-present; it sings a siren song.

Your advice here is golden, to be taken seriously to heart.

I’m far from alone in thanking you for all the wisdom you’ve so generously shared in ’07. If all your loyal readers act on only a fraction of it, many of us will be better off in the coming year… not only financially.

Happy New Year!


Brett Steenbarger, Ph.D. said...

Thanks for your note, Adam. You are absolutely correct about the "counter-intuitive" nature of trading, regardless of time frame or strategy. Psychotherapy and trading are two of the few domains I know where doing what comes naturally and easily usually results in disaster.


tzink said...

This is one my favorite posts. I think that the techniques for improvement in trading can carry over to other facets of life as well, such as improving in sports (my weak badminton game, for example).

Ryan said...


Thank you for the excellent advice. Keeping it doable is such a key component to achieving your trading goals.

I think many people set goals too large in a short time frame leaving them overwhemled. Great advice to start off slow and gain momentum as your confidence and success builds.

You continue to raise my level of awareness towards trading success through your words. I enjoy reading your posts so much I decided to start my own blog

Thank you for the inspiration and great knowledge.

Brett Steenbarger, Ph.D. said...

Thanks for your comment, Ryan, and best of luck with your new blog!


Globetrader said...

In general, I would say that traders tend to overweight the importance of psychology in their results and underweight trading mechanics

Regardless what kind of trader you are: Take the time and try to formulate your trading rules. If the chart- or trading software you use allows it, try building a mechanical trading system. That's a task, which forces you to exactly define what rules to apply to enter and exit a trade.

Concentrate on the entry first. (The exit can be anything from a fixed target to a reversal signal.)
For the purpose of this exercise defining sound entry rules, which when present give you a tradesignal can do wonders for your daily performance.
Not only will you see, when to take a trade according to your own rules, but you will also get feedback on the performance of your own tradesignals.
Usually you will end up with too many or no signals at all in your first tries. No signals at all means you most likely have a definition error. Too many signals is good, as long as the real good tradesignals you have manually identified, are present as well.

Now you need to finetune, identify what is the difference between a real great signal and a mediocre signal. Add this to your rules until you end with a 75% winner: 25% loser system.

Anything less for dayttrading will usually drain you emotionally, even if a 50%:50% tradesystem can be traded profitable using good money management rules.

Ps.: I have not yet been able to boil all I'm doing down into a set of mechanical rules. But trying has already sharpened my eye for the things I'm looking out for, when trying to identify a good trade setup.

Have a great new year 2008,


Brett Steenbarger, Ph.D. said...

Great insights, Chris, into the importance of review and trading rules. Thanks so much for your contributions, via comments and via your blog--


Stephen said...

Hi Brett, great post. Adam's post really resonated with me as well. I have discovered that I am best suited to EOD trading. I have developed a system that is working for me but I still struggle with my desire for the big kill. I found myself almost committing all my capital to one big gamble as I sat in a full cash position waiting for my system to " go green" again.
A psychiatrist (a great coach) has helped me understand my strong desire for the "quick fix" or the easy way out rather than staying committed to grinding out the profits and perfecting the skill of trading through trading.
I find that when I am tempted to go "all in" I need to go back to my analysis and run my back tests again and again until I can see that by staying the course and trading my system I will get to where I want to be.
I have back tested my system on over 10 years of data sets from north America and Europe as well as paper traded for 6 months and have been live since last April and am now sitting on a 21% gain so far.
I am confident in my research but until I have several years of success I will need to coach myself
through my doubt and down times.
Thanks for a great book. I have found it to be very helpful in assessing my development.