Saturday, January 16, 2021

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER


Contact For Trading Firms and Media:  steenbab at aol dot com

My Twitter Feed:  @steenbab

RADICAL RENEWAL - Free blog book on trading, psychology, spirituality, and leading a fulfilling life

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The Three Minute Trading Coach Videos

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Forbes Articles:


My coaching work applies evidence-based psychological techniques (see my background and my book on the topic) to the improvement of productivity, quality of life, teamwork, leadership, hiring best practices, and creativity/idea generation.  Trading firms, teams, and portfolio managers interested in performance coaching and help with hiring processes can email me at steenbab at aol dot com.  Please note that my work is limited to trading and investment firms, so I cannot provide online advice or coaching services to individual, independent traders


FURTHER RESOURCES




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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Can Intensive Practice Produce Trading Expertise?

 
One practice I have noted among successful discretionary traders is their review of price action in markets.  Some have used replay functions on their charting platforms to see patterns unfold in the market, making them more sensitive to the occurrence of these patterns in real time.  Especially among daytraders, I've noticed that their trading is largely based upon visual and numerical information on screens.  What they are looking at amounts to patterns in market behavior, just as physicians look for patterns among symptoms and test results to make diagnoses.  For instance, a trader might observe that prices are breaking out of a narrow range with increased volume and increased lifting of offers on a depth of market screen.  That might be an indication that the market is establishing a new, higher level of value.

Pattern recognition, however, is a trap as well as a gift.  We can identify patterns where nothing meaningful is actually occurring.  Many chart patterns that traders look for have no causal relationship to price movement and ultimately lead to frustrated and unprofitable trading.  Promising patterns in markets are ones that capture an understanding of what is going on between buyers and sellers.

Physicians learn the pattern recognition of diagnosis through repeated experience.  A radiologist may need to look at many, many images in order to detect malignant growths or hairline fractures.  A psychiatrist may need considerable experience to identify when a mood swing is part of a depressive disorder, anxiety disorder, or bipolar disorder.  Case studies and years of training provide the repeated exposure that allow for accurate pattern recognition.

What if a major reason for the failure of developing traders is not a lack of discipline or disruptive emotions, but rather the lack of repeated exposure to meaningful patterns?  Traders review their trading and look over charts, but is this really the same as training oneself to identify patterns in real time?  Would reading books or reviewing medical charts substitute for observing actual patients for doctors building expertise in diagnosis?

I recently had a worthwhile conversation with Al and Kunal, the principals of TradingSim, a platform that allows traders to replay stocks and markets from any recent period of time in order to practice trading skills. Joining us was Andrew, the leader of the BearBulls online trading community.  One of the intriguing topics we explored was the use of a feature-rich trading simulator as a way that independent traders could drill their trading skills.  This strikes me as having tremendous potential, as it potentially provides a level of intensive practice not typically available to individual traders.

I recently suggested that a major component of trading success is the capacity for sustained focus.  What if the right kinds of trading drills become ways of cultivating the capacity for focus, so that we become better pattern recognizers over time?  In that scenario, trading psychology follows from superior training.  Intensive practice may lead to trading expertise, and it also may build the brain states most likely to result in sound trading.

Further Resources:



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Sunday, January 10, 2021

Why Your Trading Psychology Exercises Don't Work

 
In the most recent Forbes article, I make the case for mastering our trading psychology by literally engaging in brain training. When I refer to brain training, I am not talking about online exercises or apps that walk you through visualizations, breathing exercises, etc.  Rather, I am talking about directly measuring our body's functioning and training ourselves to control those measures through real time biofeedback.

Over the past two weeks, I have conducted focused experiments with heart rate and heart rate variability, electrodermal activity, and brain wave patterns, using the Fitbit Sense and Muse S units that I referenced in the earlier article.

Here are a few observations that were unexpected:

1)  Taking a Break Doesn't Necessarily Break Our Stress - When I feel stressed and take a break, calming myself and deepening my breathing, I succeed in taking my attention from what is troubling me and I feel more settled, but my body has often not recovered. My heart rate remains elevated, my electrodermal activity and heart rate variability still record stress, and my brain waves are not calm.  Simply taking a break and saying nice things to oneself feels good when we've been frustrated, but may not significantly aid performance.

2)  Less Stress Does Not Equal Greater Focus - This has been dramatic in my experiments thus far.  I can remain still, breathe deeply, and engage in calm imagery and that will reduce my heart rate over time.  (It takes longer than most of us allot to trading breaks.)  When I measure my brain waves, however, they do not show that I'm more focused.  Indeed, to achieve high focus readings with the brain waves, what I need to do is concentrate, not relax.  Interestingly, when I do a meditation routine and do it well, it helps my stress measures (i.e., I'm more relaxed), but my brain waves don't register as being in the zone.  A few minutes of a meditative exercise is very different from mastering the discipline of meditation.

3)  A Few Minutes of High Focus Changes Our Psychology - Most of us are familiar with the feeling of being calm and unstressed. That relaxed state can be helpful in winding down from a period of trading.  A highly focused state feels quite different.  When I'm unusually focused (and the brain wave feedback registers such focus), I feel a slight tension in my forehead and I feel distanced from the world around me.  It doesn't feel relaxed, as one might feel after an alcoholic beverage.  It feels quiet and I feel separated from the world, more like an observer than a participant in what is going on.  Perception is different in this mode, clearer and not at all distracted.  I'll have more to say about this in the next Three Minute Trading Coach video, but my sense is that I see markets much better when I'm highly focused than when I am simply stress free.

So what does all this mean?  Perhaps we're managing our trading psychology the wrong way.  Perhaps we're trying to de-stress when we need to be intensely focusing.  Perhaps we are setting up our trading days and processes in ways that increase distraction and actually prevent us from achieving the focus needed to quickly process evolving market patterns.  Our efforts at improving our trading psychology might not work because we're focusing on our feelings rather than strengthening our brains.

Further Resources:



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Sunday, January 03, 2021

What You Trade Is As Important As How You Trade

 

Happy 2021 to colleagues and readers!

In this new year, I'll be doing something different with my blog posts and making efforts to link to the work of trading educators and mentors whose work I enjoy and respect.  The goal is to highlight valuable lessons for traders and also to introduce ideas and contributors readers might not be familiar with.

This week's lesson is "what you trade is as important as how you trade".

Here's a straightforward example from my recent coaching experience:

A trader focused day to day on "catalyst" events that would provide directional opportunity.  For instance, he might trade breaking news from a central bank meeting, a data release, or a news headline.  He worked diligently on refining his entries and exits in these trades, hoping to generate quick profits that supplemented his longer-term, thematic macro trades.  Indeed, this focus on how he traded catalysts improved the Sharpe ratio of those trades over time.

During one of our meetings, he briefly noted some frustration that some of the catalyst trades went on to become great trending moves, but only after he had exited his positions.  So, we investigated his recent successful trades and examined which ones went on to become larger opportunities.  What we found was that it wasn't just the move in a single trading instrument in response to the catalyst that made a difference; it was the move across multiple, related instruments.  

A simple example would be a stock that moves higher on an earnings beat.  If the move is idiosyncratic--limited to that stock--it tended to make for a good short-term trading opportunity.  If the relevant sector moved higher on the earnings beat, this was a sign that the news signaled a broader opportunity for an entire industry and would be more likely to be picked up by equity investors.  On those occasions, it made sense to keep a portion of the position on, as long/short investors and trend followers were likely to join the bandwagon.

Another example would be an economic release that leads to a move lower in the U.S. dollar.  If the dollar moves lower across multiple crosses, this might have very different implications than a dollar move that occurs mostly against a single currency.  If the dollar move is accompanied by correlated moves across the interest rate curve, this, too, might suggest that the macro world is interpreting the news in a way that could lead to trending behavior.

The trader I met with thus focused his energy on *what* he traded, not just on the mechanics of entries and exits.  Prioritizing opportunities that displayed a breadth of response to a catalyst, he became more selective and achieved a higher quality of returns that included both short-term opportunistic profits and the profits from the holding of longer positions.

In 2020, if you were trading stocks, the sectors that you focused on made all the difference in your returns.  The growth stocks and IPOs emphasized by Kathy Donnelly, Eve Boboch, and colleagues, for example, have performed phenomenally versus more value-oriented shares.  Once focused on the area of opportunity--the *what* to trade--it then makes sense to refine the *how* to trade.  Indeed, that was the focus of Kathy's recent podcast with Richard Moglen:  how to decide upon exits in these large opportunities.  But as Kathy relates to Richard, the initial focus of their efforts was Eve's focus on finding the next Google--figuring out *what* to be trading.

A different example of focusing on what to trade came in my own trading, as I reviewed the work of Brian Shannon at Alphatrends.  He has pioneered the application of "anchored VWAP" in trading, including the use of multiple volume-weighted average price lines anchored by key market events.  What I found, based on Brian's work, is that when anchored VWAPs at different time frames converge--and when that convergence is occurring across multiple stocks in a sector--that often provided potential breakout opportunities that had real investment implications.  Those breakouts were ones that investors would be more likely to hop on, providing the longer-term potential.  Here the *what* to trade was defined by the intersection of technical criteria and the breadth of the market opportunity.

Finally, I have noted in the past that the unusual success of many traders at SMB Capital can be attributed to a focus on what they trade and not simply on their work on how to trade the opportunities.  An important tool in this regard is "relative volume".  When a stock displays unusually high volume relative to its past, that's an indication it is "in play" and drawing unusual trader and investor interest.  Because volume correlates highly with volatility, such stocks are more likely to display meaningful moves for short-term traders.  Interestingly, many of the best opportunities are found among smaller cap stocks that don't have a large institutional or algorithmic following.  It is easier to read the tape with those stocks, allowing for better identification of when buyers or sellers dominate.  The same trading techniques applied to widely traded vehicles, such as stock index ETFs, would be far less profitable.

Focusing on what to trade means becoming more selective in our trade selection, prioritizing the quality rather than quantity of opportunities.  As for any successful entrepreneur or oil driller, where to seek opportunity makes all the difference.  You can have the greatest drilling equipment in the world, but if you're looking in the wrong spots, all you'll get are dry holes.

Further Resources:

The Three Minute Trading Coach - 30+ short videos to help traders coach themselves

Forbes Articles - A large archive of articles on methods for improving performance

Trading Psychology 2.0 - Book outlining how we can find our best practices and turn those into repeatable processes   
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