BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER

Below are resources to help traders become their own trading coaches, improve their trading processes, and develop a positive work-life balance.  All the TraderFeed posts also contain links to valuable resources and perspectives.  

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:

https://www.forbes.com/sites/brettsteenbarger/
  

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.  An important part of the "solution-focused" approach that I write about is that we can often best grow by focusing on what we do well and how we do it--and then doing more of what works for us.  The key is to know our cognitive, interpersonal, and personality strengths and leverage those in the pursuit of performance. 

FURTHER RESOURCES

*  A Creative Way to Use TraderFeed 

*  Brett Steenbarger Bio

*  Brett's Books on Trading Psychology

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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A Quick Trading Self-Assessment

 

Here's a checklist to guide your evaluation of yourself as a trader:

1)  What did I learn from today, and how--specifically--will I bring that lesson to tomorrow's trading?

2)  What do I see in markets that others don't see and what am I seeing uniquely in the market right now?

3)  When is not trading the right decision and how have I utilized my time when I'm not in the market?

4)  What is my pipeline of new trading approaches and ideas that I am developing for the future and how am I working on that today?

5)  What have I learned this week from others and what have I cemented by teaching others?

When we do positive things in trading, we grow a positive trading psychology.  When we do positive things in life, we grow a positive psychology.

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The Key To A Successful Life

 

Let's start with the conclusion:  The only path to a successful life is to live a success-full life.

I've been reading a number of books summarizing recent research in positive psychology and will sharing the major conclusions in my next book.

One conclusion especially stands out:  The various attitudes and activities that lead to a happy and fulfilling life--love and social connections; spirituality; gratitude; physical health; achievement; self-acceptance--all are developed by actively exercising them.

If we challenge ourselves in our work, relationships, mindset, and physical development, we can live a life that is successful, because it is success-full.

Living life consciously and intentionally takes a hell of a lot more than sitting for a few minutes and doing meditation exercises.

Living life purposefully means that we create challenges and goals in every area of life that matters to us.  

All of life is a gym.

One question matters:  What is today's workout?

Further Reading:

Building Our Emotional Fitness

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Positive Trading Psychology - III: Framework

 

The first post in this three-part series on positive trading psychology emphasized the emotional and physical side of optimal performance, which has been called flourishing.  The second post looked at the cognitive side of trading success, including the development of focus and deeper, faster processing of information.  In this post, we'll examine the importance of developing a framework for understanding markets and creating our trading edge.

In any competitive endeavor, whether it is chess, basketball, or boxing, we have to understand who we are competing against.  Notice that in all these activities, we don't just prepare for success by building ourselves up.  We also study the opposition and their strengths and vulnerabilities.  An important part of preparation for the next game is watching film, studying the opponent, and then formulating strategies and plays that maximize our strengths and take advantage of our opponent's weaknesses.  Because the opposition is always changing, our game prep always varies.

Over the years, I've found that consistently successful traders possess a framework for understanding markets and opportunities.  That framework clarifies three vital components of strategy:  1) who they are making money from; 2) how those other players behave in particular market conditions; and 3) the types of trading that work in those different market environments.  We can think of a trader's framework as the essence of their business plan:  it guides decision-making under dynamic conditions of risk and reward.  As Michael Dell points out above, we need a dream to succeed, and it's our framework that helps us realize that dream in the real world.

Volume is always changing in markets, which means that market participants are always changing.  Volatility is always changing in markets, which means that market moves always vary in how they extend and reverse.  Correlations are always changing in markets, which means that what we are trading varies in its sensitivity to other markets.  Without a framework to make sense of the environment we are facing today, we are as unprepared for game time as the team that never studies its next opponent.  Can you imagine preparing for an outdoor football game without understanding the probable weather conditions at game time?  Without studying how the opponent varies its offensive and defensive alignments and strategies?

This is an important reason mentoring is vital to a trader's development.  When we are exposed to multiple mentors, we absorb different frameworks and ultimately synthesize those into our own.  We develop our own positive psychology when we broaden and deepen our understanding of what to do and why we are doing it.  Take a look at groups that are active in mentoring, such as SMB Capital; BearBull Traders; and My Investing Club.  All feature multiple mentors that enable a developing trader to internalize a framework for making decisions under dynamic conditions of uncertainty.  The result of all this mentoring, for a trader as well as a football quarterback, is what Mike Bellafiore calls a "playbook".

Trading psychology aids our performance, but having a framework for trading grounds our trading psychology.

Further Reading:

Elements of My Trading Framework

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Broad Selling After A Broad Advance: What Happens Next?

On Friday, we saw something unusual.  After the day's steep drop, we finished the day with fewer than 10% of SPX stocks closing above their 3, 5, and 10-day moving averages.  At the same time, by Friday's close, we still saw more than 50% of those shares trading above their 100 and 200-day averages.  Since July of 2006, when I first began collecting these data (over 4400 days), this set of conditions has only occurred 20 times.  In other words, it's been unusual to get a broad short-term decline following a broad longer-term advance. 

While 20 instances is not enough for a robust statistical analysis, I do find it noteworthy that 18 of the occurrences finished higher 20 days later for an average gain of +2.66%, substantially above the average for the entire sample.  

I've found that such historical queries are useful tools for framing market hypotheses.  If I see evidence of buying going forward and then see that we cannot make fresh lows on subsequent selling pressure, the chances are good that I'll participate in the potential bounce.  This is particularly the case if several queries drawing upon different data point to similar conclusions.

The future does not always mirror the past and, in the present situation, it would just take a further escalation of the Middle East conflict to potentially move oil prices higher and stocks lower.  When the present varies greatly from historical patterns, that, too, can be information.

Further Reading:

Learning From Our Best Trades:  Trading With A Backtested Edge

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Positive Trading Psychology - II: Focus

 

The first post in this series on positive trading psychology took a look at flourishing and what we need to do in order to maximize our performance in life and markets.  When we establish flourishing as a personal and professional goal, we move past the preoccupation with our mistakes and instead learn to make the most out of what we do well.  

In this post, we explore an area of trading psychology that is underappreciated:  cognitive performance.  Research that I've conducted at multiple trading firms finds that our cognitive strengths--what we do best in processing information--are every bit as important to trading success as our personality strengths.  For example, one of the consistent qualities we see among very successful traders is intellectual curiosity.  Rarely, however, do we see traders actively working on growing the breadth and depth of their interests.  

There is much more to trading psychology than "mindset".

Especially important to our cognitive functioning is focus:  the degree to which we can intensify our concentration, processing individual things in great depth and also processing a wide range of things.  One of my first observations when I began my trading career was that I could often identify the best traders by observing their screens.  The best traders had more screens open with a broader range of information.  They had the unique ability to scan and quickly identify what was important and then focus their attention on those areas of opportunity.  This meant that they exhibited quick information processing as well as deep information processing.  During trading, they were laser focused on what was in front of them.  In the state of high focus, they simply saw more than other people and were more prepared to act on what they saw.

I see this among the best traders I currently work with.  By having only the most important information on their screens and focusing intensively on the most relevant news, markets, and price action, they minimize distractions.  This concentration enables them to quickly turn to what is important and act on what they see.  If you watch chess champions during matches, you can appreciate that intensity of focus.  They are not simply focused on winning; they are focused on making the right moves.  They exhibit the flow state, in which they are totally absorbed in their performance.

The capacity for focus is something we can develop.  Many traders make the mistake of performing "meditation" exercises--sitting still and quieting their minds--in hopes of improving their trading.  Quieting the mind is necessary for focus, but not sufficient.  We also need to train ourselves to intensify our concentration and hold that concentration for longer and longer times.  Attention is a kind of "muscle" that can grow with exercise.  A number of apps, such as Brain HQ, can be useful in expanding our capacity for focus.  Meditative exercises that require us to sustain attention for longer and longer times are also useful, particularly when they challenge us to maintain our focus while switching the objects of our concentration.

Yes, it's helpful to maintain our best mindset, but if we don't process information as broadly, deeply, and quickly as possible, we're going to miss opportunities and overreact to limited information.  What I learned early in my work with traders is that successful traders succeed in part because they see more and better than others.  

Cognitive strengths matter.

Further Reading:

Creativity in Analyzing Market Information

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Positive Trading Psychology - I: Flourishing

 

In the next several posts, I will outline an approach to trading psychology based upon recent research in the field of "positive psychology".  I believe this can be a game-changer for many traders and trading teams.

To use the analogy of positive psychology's founding researcher, Dr. Martin Seligman, the goal of positive psychology is not to go from -5 to 0, but to go from +2 to +5.  This means that feeling good and performing well is not enough.  We are meant to "flourish" by amplifying what is already positive.  According to Dr. Seligman's research, there are five dimensions of flourishing, known by their acronym PERMA:

1)  Positive Emotion

2)  Engagement

3)  Relationships

4)  Meaning

5)  Accomplishments

As the Positive Psychology site explains, flourishing is not something we have or don't have.  Rather, it's a process that can wax and wane at various points in our lives.

Think about what this means:  We think about trading processes, and we might even follow personal processes regarding what/how we eat, our sleep and exercise, etc.  How many of us, however, explicitly follow processes of flourishing in how we approach markets?  Consider a simple PERMA review for traders:

1)  Are your reviews and research efforts generating positive emotion, by focusing on opportunities, learning, and insights?

2)  Are you constructively engaged with markets?  With other traders?  With learning?  Are you focused and operating in a "flow state", or are you distracted and jumping from screen to screen and idea to idea?

3)  Who is mentoring you and how are you learning?  Who are you mentoring and how are you improving them and cementing your ideas?  What are you doing to nourish your friendships and personal relationships, and how are they nourishing you?  If there is no nourishing, there can be no flourishing.

4)  What is meaningful to you in your trading beyond short-term P/L?  What in markets captures your interests and passions and helps you find unique opportunity?  What is meaningful in your life outside of trading that keeps you emotionally and spiritually nourished?

5)  What have you accomplished recently and how can you build upon it?  What have you learned from the accomplishments of others?  How are you celebrating your accomplishments and who are you celebrating with?  How are your achievements in all areas of life keeping you energized and focused?

We develop a flourishing life by focusing on flourishing each day.  Each day is a miniature lifetime.  We are born in the morning and by nighttime we lose energy and lie down to rest.  In between, our challenge is to live the most meaningful and successful life possible.  It's great to cope and correct our mistakes, but the key question is:  How can we flourish today and be all that we're capable of being?  One hint:  a large, recent research review finds that mind-body applications of positive psychology are especially effective.  Maximizing our daily, physical well-being may be the best way to flourish emotionally and in our trading.

Further Reading:

What is Your Emotional P/L?

A Flourishing Assessment 

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Investing in Your Trading Psychology

 

There is a very important difference between acting on desire and acting on commitment, as anyone in a successful long-term romantic relationship can attest.  If a relationship is only about desire, it quickly burns out and fails when circumstances call for commitment.  Successful relationships translate desire into commitment:  it is because someone is incredibly emotionally special to me that I am committed to them.

Many traders begin with a desire for market success, but never get to the point of commitment to the practices and processes that lead to ongoing profitability.  They love trading, but are not in love with markets.  As a result, they never put the time into truly understanding markets and their dynamics, which is a vital component of trading success.

In a recent Economic Times article, Anupam Nagar reviews ideas from my books and stresses the importance of achieving trading success by building upon one's strengths.  It is not enough to correct one's mistakes; a true edge in financial markets requires that we find *our* edge in those markets.  It is not enough to mimic the trading style and edges of others.  Our mission is to figure out what *we* see uniquely in markets and then translate that it into durable trading practices.  

For that reason, a successful approach to trading psychology requires an investment in ourselves.  We need to figure out what we see uniquely and distinctively in markets and then invest in that.  Success lies at the intersection between our particular strengths and the patterns that exist in markets.

There's an old saying that, "If you meet the Buddha on the road, kill him".  The idea is that the genuine Buddha is not a guru who knows all the answers.  The path to genuine enlightenment is found within, not in following someone else.  We can never find our own, personal conviction in ideas peddled by others.  If we find the market guru, we're meant to "kill" them.  

That takes time, and it takes an open mind.  In recent years, I've developed quite a personal interest in the topic of rotation within equity markets and how to trace that through breadth and relative strength statistics.  Many markets are not bull markets (investing more capital in stocks) or bear markets (pulling more capital from stocks), but rather are rotational.  In those rotational markets, money comes out of sectors that are not in favor and go into stocks that promise better earnings and returns.  For example, in an environment of economic growth, money might go into technology and consumer discretionary shares and out of more defensive sectors.  From this perspective, asking whether we are bearish or bullish on stocks is the wrong question.  Rather, the challenge is to find where there is relative strength and relative weakness and profit from both.

When we pursue what fascinates us, we make unique discoveries and find our particular edge.  It is when we see things clearly that we can take the kind of risk that leads to meaningful returns.  What I like about a training program such as that at SMB Capital is that there is exposure to many team leaders and mentors.  They recognize that there is no genuine conviction to be found by mimicking the trading of others.  As Garrett Drinon observes, the challenge is to identify what *we* see clearly in markets and then put on the appropriate risk.

We learn from others, then make that learning our own.  

So, so many market Buddhas out there.  

Kill them.

Further Reading:

Finding Your Niche In Life and Trading

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My Big Takeaway From The SMB Annual Event

 

It was great getting back to SMB Capital and being part of their first ever annual trading event.  I was especially impressed with the expanded mentoring being offered to developing traders.  This includes virtual "office hours" meetings to discuss trading in real time; intensive step-by-step teaching of successful trades from Lance Breitstein; and detailed modeling of winning options strategies from Seth Freudberg.  It was especially rewarding to see traders I knew as developing professionals who are now successful and offering mentoring to the newbies, including Garrett Drinon, Justin Spero, Carlton Bryan, Jeff Holden, and Max Ganik.  Congrats to Steve Spencer and Mike Bellafiore for their work in building an impressive learning culture. 

My greatest takeaway from the event, however, was the tremendous enthusiasm and interest in learning among the participants.  There was an electricity in the group, as traders were eager to network, learn from each other, and absorb lessons from the presentations.  The experience reminded me that every developing trader is an entrepreneur building a startup business.  It was great to see the drive and sense of quest among these aspiring professionals.

As we become experienced and successful, the challenge is to maintain our spirit of quest.  The longer we do something, the more we have to work to sustain the fire of the startup mode:  learning and doing new things.  That is not only true in our trading, but in our personal lives.  Life is meant to be an adventure.  What I loved at the SMB event was that the traders I knew as beginners had developed a fresh fire in the belly, drawing on their passion for growing talent within the community.  

A few years ago, Margie and I took our first trip to Israel and loved seeing historical and cultural sites.  On our last day, we visited the Holocaust Remembrance Center, Yad Vashem, and there I experienced something that powerfully remains with me to this day.  Seeing the display of all those killed in concentration camps around the world, I (quite uncharacteristically) broke down in tears and felt the very strong sense:  "These are my people".  My equally strong sense was that this is what we mean by God speaking to us:  an intense clarity coming from the soul.  

Since then, understanding that clarity and its significance has become my quest.  I've read easily 150-200 books on religion and spirituality; wrote the blog-based book about the spirituality of trading, Radical Renewal; and recently finished a 450-page manuscript about spiritual development from a Jewish perspective that includes a website and blog.  The next project will be an equally detailed review of Christianity and Islam and the lessons they teach us about spiritual development.  Eventually those lessons will find their way into my work with traders, building on the insight that true clarity and conviction comes from quieting the ego and listening to the soul.

The larger point is that I'm just like those developing traders at SMB.  I've found a mountain to climb and a worthy quest.  And I've learned that what brings us passion is what truly--and sometimes quite literally--speaks to us.  

Thanks to those at SMB who affirmed what is important in life.

Further Reading:  

Radical Renewal:  Tools for Leading a Meaningful Life

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Trading Psychology Links: Finding Your Edge

 

*  Setting just one goal for change and working on it consistently for at least a month:  it doesn't lead to revolutionary change, but it creates the evolutionary change that lasts.

*  Very interesting research from Concretum Research regarding time of day when SPX tends to make intraday highs and lows.  Not too surprising that highs and lows for the day are made when market participants are most active.  This sets up valuable research on relative volume, intraday trends, and probability of trend days.  Would be interesting to see how these stats look for individual stocks, particularly ones with lower institutional participation.

*  Following the observation of Mike Bellafiore, it's so, so, so important to experiment, experiment, experiment when learning trading and see what makes sense, what grabs your interest, and especially what you do well.  Too often, traders are so eager (and needy) to make money that they cut their learning processes short and never develop their strengths.

*  I like Crede Sheehy-Kelly's advice to practice each day being the person you want to become.  Per Ayn Rand, those who fight for tomorrow live in it today.

Have a great week!

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How to Change Your Psychology

 

We internalize what we do consistently.

If we consistently avoid effort, we will internalize lack of initiative.  If we consistently reach out to others with love, we will internalize warmth and caring.  Change begins with doing.  Simply shifting goals or mindsets will not produce lasting change.

Notice how athletes work out in structured routines.  Surgeons learn their craft by following evidence-based procedures and following these faithfully.  Performing artists master their craft through feedback and repetition.  When practice and performance are process-based, something important happens psychologically:  We internalize a sense of discipline and self-control.  Consistency of preparation and practice creates consistency of performance.

To change ourselves psychologically, we can start with just one improvement we wish to make and create a routine for implementing that shift every single day.  If I want to internalize a sense of physical fitness, I can go to the gym daily and challenge my limits in terms of flexibility, aerobics, and strength.  If I want to internalize discipline in my trading, I can use backtests and performance reviews to create rules for when to take trades, where to enter/exit, etc.  Following rules each day leads me to internalize a sense of control.  Pushing my limits each day reinforces a sense of growth and achievement.

Choose one goal and do one thing to achieve that goal daily for a month.  Then take on a second goal for a month, etc. and add that to the first.  Then a third goal, a fourth--and soon you internalize a sense of progress, achievement, and self-control.

We don't change by thinking new things.  We do new things and shift how we think and feel.  

What one thing will you do consistently this week to be your best version of yourself?

Further Reading:

How to Change Your Life

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Trading Psychology Links: Developing Yourself by Developing Your Self

 

*  Every trade plan is an opportunity to work on our psychology, training us to act on opportunity and not react to fear; 

*  Lance Breitstein does a great job of explaining why success in trading requires investment in ourselves;

*  Such a valuable point from Adam Fiske:  What indicators/signals do you track regularly to tell you *not* to trade?

*  Jeff Holden from SMB Capital observes that we need to work on proper bet sizing--and understand the relative degrees of edge we have in trades--before we start betting big;

Have a great finish to the week!

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How to Deal With the Fear of Not Being Right

 

It's one of the great paradoxes of psychology that when we run from something we fear, we are most likely to encounter it.  The important principle here is that we internalize what we do.  When we act on a particular premise, we reinforce that premise in our minds.  Thus, when we run from a feared outcome, we end up reinforcing that fear.

An experienced trader recently reached out to me regarding the fear of not being right when in a trade.  Psychologically, that means we're taking being wrong as a threat.  The threat of being wrong can become so strong in our minds that we take off the position before it has a chance to be right!

Every trade plan is an opportunity to work on our psychology.  When we set a stop loss for a position, we want to use that stop to intensively mentally rehearse what we want to be doing if the order is triggered.  Very often, we can get stopped out of a trade, but nothing happens to invalidate the idea behind the trade.  For example, I might get long a stock on an earnings beat in the premarket.  The stock stalls out and begins to retrace some of its initial gain.  I become so afraid of not being right that I take the position off--only to see the stock roar higher at the NYSE open when large volume hits the tape.  

If I have set a stop on the trade, however, I can--at that time-- mentally rehearse the conditions that would get me back into the position.  Just because a premarket flow took me out of an initial position doesn't mean that the fundamental strength of the company won't support a higher share price.  

So, so often the trade doesn't work out, but the idea--and the work we have put into generating the idea--is still valid.  We lose sight of the good work that goes into a trade when we focus on the fear of not being right.  What makes the trade not right is not the same as what makes the trade idea not right.  It's when we can embrace the possibility of any trade being wrong that we open ourselves up to re-entering positions and profiting from being right.

Further Reading:

How FOMO Can Actually Help Your Trading

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Trading Psychology Links: Finding Our Optimal Performance Mindset

 

The right mindset won't substitute for a rigorously developed edge in the markets, but the wrong one can certainly undo all our training and experience.  Here are some valuable trading psychology perspectives that can help you make the most out of your experience:

*  It's not enough to control our emotions and stick to time-tested processes.  We have to actively develop a positive mindset if we're going to maximize our creativity, productivity, and performance.

*  Akil Stokes offers a diverse trading psychology podcast for developing traders.

*  Valuable trading psychology videos and tweets from Yvan Byeajee.

*  Here are two valuable books on trading psychology:  The Mental Game of Trading by Jared Tendler and Mastering the Mental Game of Trading by Steven Goldstein.

*  This is the focus needed for successful trading.  If we need to make money, markets control us.

Have  a great finish to the week! - Brett

Mastering the Positive Psychology of Trading

 

Working on mastering the psychology of trading is different for beginning/developing traders and for experienced traders.  I have worked with rookies at proprietary trading firms, and I have worked with experienced money managers who guide large teams.  The psychological challenges faced by the two groups are entirely different.  What you need to do to master your trading psychology very much depends upon where you are at in your learning curve.

Here is an analogy that might clarify things.  Freud's revolutionary contribution to psychology can be found in his dictum, "Where id was, there ego shall be".  The id represents our basic, primal instincts: our flight and fight tendencies.  When we are triggered by past, unresolved conflicts, we tend to regress to our instinctual mode.  The purpose of psychotherapy is to help a person process their issues and feelings in the medium of a helping relationship.  This enables them to gain perspective on what is truly a threat in the present versus a leftover response from our past.  The heart of Freud's therapy is that we first confront and resolve our conflicts in the here and now context of the helping relationship.  Once we can begin to constructively handle our issues within therapy, we're ready to tackle them in our day to day lives.  Therapy thus replaces the id with the ego:  we replace our flight/fight triggers with rational thought and planning.

The field that has come to be known as positive psychology takes Freud's work to a new direction.  Instead of working on resolving past conflicts and painful repressed experiences, positive psychology has us identifying and building our unique, distinctive strengths.  For example, I might experience a loss of motivation at work and my performance might suffer.  A traditional therapist might have me explore conflicts about my work and with my colleagues.  Resolving hidden problems in the workplace could help me regain my motivation.  The therapist addressing my situation from the perspective of positive psychology might help me understand the positives that I need in my life and that might be missing on the job.  For example, if one of my basic strengths is intellectual curiosity, I might need to address my situation by changing how I interact with my team at work--or perhaps I need to find different work.

So now we can appreciate the difference in psychology between beginning and advanced traders.  Beginning traders, unaccustomed to ever-changing, volatile markets, find themselves coping with their flight/fight stress responses and the ways in which those color trading decisions.  Experienced traders, on the other hand, find that their greatest challenges occur when they do not adequately cultivate and utilize their strengths.  For example, where the rookie might respond to volatile action in a stock with decisions based on FOMO, the experienced trader might be challenged by finding the best risk/reward expressions of their trade ideas.  

For the experienced trader, a key to trading success is knowing what speaks to you and what you're truly good at.  You cannot play to your strengths if you aren't intimately familiar with what those strengths are.  Working on correcting weaknesses only gets you so far.  Eventually, if you're going to progress from competency to expertise, you need to master your own positive psychology.  

An obstacle I've faced in my own trading is that I simply become bored with following markets and I stop trading.  Creativity and learning are my two greatest strengths, and I lose motivation when I'm not discovering and doing new things.  The common wisdom of trading psychologists is to turn everything you do into reliable, repeatable processes.  That is precisely what bores me.  If trading begins to feel like an assembly line, I start to feel trapped in a rote, routine job.  To keep trading fresh and exciting, I need to do the same thing that I do in my marriage and in my personal life:  find new challenges and new opportunities and always, always devote some portion of my time to innovation.  

I recently wrote on the topic of finding different sources of trading edge.  I also wrote on the topic of developing resilience as a trader.  The two topics are intimately connected--for me, and for many people I work with.  What keeps us going during the inevitable drawdowns is that we're continually learning, continually discovering, continually moving forward.  Doing new things keeps us psychologically fresh.

Earlier today, I began analyzing a new dataset.  I looked at market breadth broken down sector by sector.  Interestingly, over the last few years, when breadth strength in the consumer staples (XLP) sector has greatly exceeded breadth strength among the consumer discretionary stocks (XLY), the next 10 to 20-day returns in the overall market (SPY) have been significantly above average.  This finding has set off a flurry of queries into various sector rotations and how those might act as meaningful measures of market sentiment.  New data, new patterns, new trading opportunities, new motivation and drive, new games to play and win.

We master the positive psychology of trading by drawing consistently upon our own positives and expanding those.  I believe this is the single greatest frontier in the field of trading psychology.  More to come!

Further Reading:

Should High Achieving Traders Seek a Balanced Life?

Therapies for the Mentally Well:  Proven Techniques for Building Your Positive Psychology

Radical Renewal:  Tools for Leading a Meaningful Life

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Trading Psychology Links: Sustaining a Resilient Mindset

 

Resilience is not the absence of stress, but rather the ability to channel stress toward greater performance.  Here are some worthwhile perspectives on resilience in trading:

*  How we learn trading can also be how we learn resilience;

*  Here's an excellent thread from Dr. Steven Goldstein re: how resilience comes from aligning our trading with our personalities;

*  Lance Breitstein passes along nuggets of wisdom from James Clear, emphasizing the importance of peace of mind and inner satisfaction toward resilience and performance.  Here's a great thread from James Clear that captures the importance of persistence;

*  I find that researching edges in markets leads to greater confidence in trade ideas, which leads to greater resilience during the trade.  Here's a nice example of research from Concretum Research;

*  Insightful thread from Richard Moglen on how top traders focus their efforts;

*  Mike Bellafiore from SMB Capital teaches developing traders to recognize patterns in the market and build "playbooks" for trading these--great way to build resilience through intensive training;

*  This TraderFeed post has some worthwhile links to different facets of resilience.

We learn to be resilient by learning from resilient performers--

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How to Overcome Performance Pressure

 

I'm hearing from more traders than usual about their struggles with performance anxiety.  As one successful developing trader put it, the problem tends to happen "on high profile trades that you could say most traders have an eye on".  This is a very good observation.  The higher profile the trade--i.e., the greater the perceived opportunity--the more room there is for performance pressure.  As Epictetus observes, the issue is not the "real problems" about the trades, but rather the "anxieties" about those trades.

Let's look at this from a psychological angle.  The more we perceive--and emphasize--opportunity in a situation, the more room we create for anxiety should we miss out on this opportunity.

Imagine shooting a free throw during a basketball practice.  It's routine, you've done it hundreds and hundreds of times, and you feel no pressure.  Now imagine the situation from my old college team.  You've had a long practice after classes and you're dead tired and want to get home.  The coach announces that players can go take a shower, change, and go home after they have made 10 consecutive free throws.  Now, all of a sudden, there is pressure.  You *really* want to go home, so once you've made six foul shots in a row, you worry that you might miss one and have to return to square one.  Coach, of course, knew that.  This was not simply a practice of free throw shooting, but a practice of performing under pressure.

Now imagine that it's an actual game and the second-half clock is winding down with your team down a point.  You have just been fouled, and you get to shoot a one-and-one.  If you miss the first shot, the odds are good that the opposing team will grab the rebound and run out the clock for the win.  If you make the first shot, you get a second shot that could win the game for your team.  Everything is on the line.  Suddenly, what had been routine in practice feels anything but routine.

This is what is happening for the trader who experiences performance pressure.  It occurs in a "high profile" situation in a volatile market, where the trade could either do very well or very poorly.  Moreover, it's a situation that other traders on the floor are focused on.  Everyone will see if you nail it or mess it up.  If this were an ordinary trade in simulation mode, there would be no pressure and it would be relatively easy to execute.  With more on the line--financially and psychologically--we start to overthink the trade.  That gets us away from what we know how to do naturally.

Very often, performance pressure manifests itself as perfectionism.  We feel that everything is on the line, so we try to do everything perfectly.  The perfect becomes the enemy of the good, as it gets us away from doing what we know how to do naturally.  Like most players, I had a routine for shooting a free throw.  Hold the ball in both hands, look at the rim, bounce the ball three times, look at the rim again, bounce twice, look at the rim, exhale, focus, and shoot.  Same way, every time.  But if I am in a pressured situation, I alter the routine.  I don't exhale.  I aim the ball.  I become self-conscious of my release.  Clang.  The shot bounces off the front rim.

So it is with trading.  We over-focus on the entry, wanting the perfect risk-reward.  Suddenly the market moves in the anticipated way before we get in.  We don't want to chase it, so we hope for a pullback, but it keeps going.  We missed the trade.  Clang.

What my coach realized is that you can't learn to perform under pressure unless you practice under pressure.  That is why military and SWAT teams practice maneuvers under realistic conditions with live fire.  That is why EMT personnel practice rescue methods under observation while being timed.  Practice under pressure turns pressure into routine.  That is how actresses and actors overcome stage fright.  Going on stage again and again in dress rehearsals prepares them for the live performance.

As traders, we can create dress rehearsals in imagery--vividly imagining pressured situations and visualizing in detail how we want to respond.  Again and again, we walk ourselves through pressured situations and the repetition makes the pressure familiar.  We can't be stressed out by something we're very familiar with.  We can also create our own dress rehearsals by trading challenging situations in simulation mode and making ourselves accountable for the outcomes.  Imagine, for example, working in simulation mode and not being allowed to trade live for the next session unless the simulated trades were executed well.  

We learn to perform under pressure by building pressure into our practice.  No psychological self-help methods will work if we're not making use of them in the actual heat of battle.  If our practice is comfortable, we set ourselves up for performance anxiety when the game becomes uncomfortable.

Further Reading:

Performance Anxiety:  The Most Common Problem Traders Face

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Where Does Trading Edge Come From?

 

It's been interesting returning from my sabbatical and rejoining the online world of trading.  So much noise, so much noise, and yet there are gems out there.  Kudos to the sharing of original research from Concretum Research.  It is a joy to find social media posts that share ideas and address our highest aspirations to understand and master complex realities.

There is an important relationship between trading edge and trading psychology.  Let's explore.

Consider three sources of trading edge:

1)  Directional Movement - We find patterns and relationships in markets that lead to the directional trading of an asset.  An example would be a breakout move that results from a news catalyst.

2)  Relative Movement - We find patterns and relationships in the movement of one asset relative to another one.  An example would be the relative value trading of rates, where we might expect the yield curve to steepen due to inflationary pressures in the economy.

3)  Absolute Movement - We find patterns and relationships in the volatility of assets.  An example would be an options trade that makes money if markets stay in a relatively quiet range after a volatile period accompanied by high options skew.

A rough analogy would be the different ways of scoring of a basketball team.  Against a man-to-man defense, there may be opportunities to drive the lanes and exploit the inside game.  Against a two-three zone defense, there may be opportunities to move the ball on the perimeter and utilize cross-court passes for the outside game.  Against a slower defense, there may be opportunities for long passes and fast breaks for layups.  The point is that no successful team has a single way to win.  They understand the environment in which they're operating and then run the plays that exploit that particular situation.

So it is in trading.  There are times when markets are rotational and relative movement can be exploited.  There are trending periods that call for directional trading.  There are also noisy and quiet periods that lend themselves to edges in volatility space.  A great number of trading opportunities occur when environments change and participants are caught playing the old game rather than changing their offensive alignments.

Great traders, like great sports teams, have multiple ways of winning under varying conditions and circumstances.  When traders lack adaptability and trade limited sources of edge, they find that what worked in one period of time suddenly does not work now.  That leads to frustration, and that can lead to subsequent poor trading.

The problem, however, is *not* primarily one of trading psychology.  The disruption of psychology is the result of the problem, not the primary cause.  It is the limited, inflexible trading edge that makes us vulnerable to changing markets and variable performance.  Expanding what Mike Bellafiore calls our playbooks--our sources of edge in different market conditions--is one of the most powerful ways in which we can fortify our trading mindset.

Further Reading:

Trading Psychology 2.0 and the Importance of Creativity in Trading

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