The TraderFeed Home Page: Trading and Market Psychology Resources

Welcome to the TraderFeed blog. TraderFeed began in December, 2005 as a project to help me think aloud about trading and market psychology, market patterns, and the short-term trading of financial markets. Over the subsequent four+ years, the blog grew into the largest single archive of trading psychology material on the Web, with over 3700 posts.

In anticipation of my joining a hedge fund on a full-time basis, I have stopped posting new material to TraderFeed, but have retained the blog as an archive. Below are links that will help readers navigate through the many posts.

Many thanks to readers for their interest and support. I hope the links below will help developing traders make the most of their market ventures.

Brett Steenbarger

** A great place to get started with the main ideas of the TraderFeed blog is this post and its links.

** For more depth on these themes, here are the three books I've written:

The Psychology of Trading - Examines psychological patterns and their impact on trading

Enhancing Trader Performance - How traders can accelerate their learning curves

The Daily Trading Coach - A set of 101 lessons to help traders coach themselves to success

** Best posts of TraderFeed for 2010: Volume One, Volume Two

** Best posts of TraderFeed for 2009: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2008: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2007: Volume One, Volume Two, Volume Three, Volume Four

** Best posts of TraderFeed for 2006: Volume One, Volume Two, Volume Three

** Posts archived by theme are also available on the Trading Coach blog
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Trading and Poker: Reaching the Next Level of Success

Well, that's another way poker might be like trading: It's easy to participate, difficult to sustain success. Many just play for the thrills of winning and losing; relatively few systematically learn from experience and build skills over time.

One reason online poker is particularly promising is that players can play so many hands at one time. This allows for the possibility of accelerated learning; the online poker participant can gain years of live tournament experience in a matter of weeks. But this is only possible if the experience is structured in such a way as to generate frequent, timely feedback and goal-focused efforts at improvement.

Imagine a training program for traders in which there is daily observation of leading traders making decisions, frequent interaction with those traders to understand what they are doing and why, and supervision of students' trading decisions by those traders. It would be like having world-class poker champions sitting behind your shoulder as you play, offering immediate observations and coaching. Expertise development that normally might require many years of effort could now occur in a fraction of that time.

That is the vision.

The key is recognizing that it is the structure--and not just the content--of a learning experience that accounts for its success. Most learning efforts fail because there are too few cycles of performance-feedback-goal setting-corrective effort per unit of time and no clear curricular progression guiding the content of those cycles.

Interested in reading more about enhanced learning and developing elite trading skills? Here are a few sources worth checking out:

* Enhancing Trader Performance - This is the book that I wrote to capture the progression of successful traders from novice status to competence to expertise.

* The Talent Code - Dan Coyle's book nicely draws upon research to show that elite levels of performance are as much a function of training as inborn ability.

* Talent is Overrated - Excellent book by Geoff Colvin that documents how the structure of practice is a major contributor to successful performance.

The core concept is that, whether you are a poker player, trader, or something else, you can become much better at what you do by creating more and better learning cycles. For the real champions, nothing less will suffice.
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Best of TraderFeed 2010 - Volume Two: Trading and Market Psychology

Here is the second and final installment of TraderFeed's Best of 2010 posts. You can find the first group of best posts here. The links below cover March - May, 2010.

* Suggestions for Your Trading Journal

* Why I Am A Trader

* Lessons From Blues Man

* Questions for Your Trading Business

* Strategy and Tactics in Trading; see also Grand Strategy and Tactics

* What to Look for in a Range Day

* Identifying Breakout Moves

* Best Practices for Traders

* Overcoming Trading Bias

* Failed Breakouts and Patterns to Trade

* Overcoming Large Trading Losses

* Exiting the Performance Roller Coaster

* When Trading Becomes an Addictive Problem

* Accessing Inner Expertise

* Listening to the Market's Communications

* Keys to Daytrading Success

* The Value of Keeping Score

* The Importance of Goal Setting

* Hidden Volatility Assumptions in Our Trading

* Calculating Price Targets; See also Defining Effective Targets and Alternative Targets

* The Perils of Impotent Goals

* Productivity in Life and Trading

* Considerations in Selecting a Trading Coach

* Core Competencies of Successful Traders

* Stress, Burnout, and Renewal in Trading

* How to Grow Your Trading Size

* Creating Change With Imagery, Visualization, and Anchoring

* Keeping Your Eyes on Ideals

* The Role of Vicarious Trauma in Shaping Identity

* Assessing Your Trading

* Coaching Insights for Traders; also see More Insights for Traders

* The Four-Leaf Clover Principle

* How Body Becomes Soul

* What New Traders Most Need; see also What Competent Traders Most Need

* Trading and Self-Development: Links to Core Ideas in Trading Psychology

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Best of TraderFeed 2010 - Volume One: Trading and Market Psychology

In anticipation of winding down the blog, I assembled highlight posts from January and February, 2010, covering trading psychology and market topics:

* Building Motivation Through Optimism

* Changing How We Think

* The Trading Process and Generating Trade Ideas

* Finding Your Solutions

* The Trading Process and Trade Execution

* Turning Trading Goals Into Performance

* Self-Appraisals for Traders

* Trading and Job Satisfaction

* Becoming a More Consistent Trader

* Coaching Fundamentals for Traders

* A Key to Trade Execution

* Trading Breakout Moves

* A Worthwhile Life Lesson

* Assessing Your Trading Edge

* Risk and Overtrading

* Defusing Trading Stress

* Know Who You Are as a Trader

* Ideas for Improving Your Trading

* The Essence of Greatness

* Play as a Key to Development

* A Psychological Checklist for Traders

* The Dark Side of Trading

* Reflections on Love

* Overcoming Psychological Trauma

* Simulation as a Key to Learning

* Building Market Intuition

* Frontiers for Trading Psychology

* Happiness and Quality of Life

* Greatness and Creativity in Trading

* Vitality and Success

* Finding Your Niche in Life and Trading

* Formatting Your Trading Journal

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Core Ideas in Trading Psychology: Trading and Self Development

This is the final post in the series summarizing core themes running through the TraderFeed blog. The other posts in the series are:

Introduction to Trading Psychology

Trading as a Performance Activity

Changing Problem Patterns

Solution-Focused Change

Mirrors and Corrective Emotional Experiences

Implicit Learning and Somatic Markers

Market Structure and Adapting to Market Change

Identifying Historical Patterns in Markets

Reading Market Psychology Through Volume and Price

Reading Market Psychology Through Intermarket Themes

We develop as people by recognizing and modifying patterns in thought and behavior that limit our ability to act upon our ideals and reach desired goals. We also develop by recognizing and building upon those patterns that define who we are at our best. Self-development is thus a continuous quest for self-mastery: replacing randomness with intent, so that we are living life by design, not default.

Markets, too, trace out patterns at various time frames. Our development as traders hinges upon our ability to recognize those early and act upon them decisively, thoughtfully maximizing reward relative to risk. The skills we need for self-development, at a psychological level, are very similar to those required for our development as discretionary traders. Ultimately, we are trying to replace trading patterns that are outside of our control--and ones that are more poorly informed--with ways of processing and acting upon information that consistently draw upon our strengths.

People are neither wholly determined and conditioned by their environments, nor fully free, self-determined agents. Our peculiar makeup psychologically is that we have partially free wills: at times we are masters of our fates; at times, we are reactive and robotic, lost in routine and habit. Our evolution, personally and as a species, is defined by expanding free will: over time, if we are developing as people and traders, we become more intentional, more self-determined. Our lives are based more on values than needs; our thoughts, feelings, and behaviors reflect where we are going, not trapped in where we have been.

The value of trading, properly conceived and exercised, is that it can become a vehicle for self-development. If not properly conceived and executed, trading can become an addictive and destructive activity. Good trading is trading that is self-determined, self-enhancing, and rewarding in terms of personal and financial development; bad trading reinforces and repeats the negative patterns that hold us back in life.

It is rare to find activities that reward you financially for your growth and development as a human being. That is one of the great appeals of trading.

More on these themes can be found in the posts on The Value of Trading as a Performance Activity; What is the Value of Trading; Achieving Greatness as a Trader; The Dual Road to Trading Success; Trading and Addiction; Addictive Behavior and Trading; Trading and Goal Setting; The Power of Goals; Vitality and Psychological Energy; and Performance as Lifestyle. Psychological methods and perspectives on self-development for traders can be found in The Daily Trading Coach book.

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Core Ideas in Trading Psychology: Reading Market Psychology Through Intermarket Themes

Previous Posts in This Series:

Reading Market Psychology Through Volume and Price

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Patterns

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

One of the most fundamental indications of market sentiment on a day to day basis (and over time) is the degree to which traders favor riskier assets over safer ones. If traders are anticipating economic weakness, they will tend to place their money into the more stable currencies and stock markets of developed nations, and they will tend to retreat to the relative safety of high quality debt (Treasuries, AAA rated corporate bonds). If traders are anticipating economic strength, they will tend to place their money into the faster growth regions of the world (developing nations' stock markets and currencies) and will seek out the higher yields of lower quality debt. In an expanding world, traders expect demand for commodities to rise and will be buyers of oil and metals; in a world of anticipated economic contraction, commodities become relatively unloved assets.

Market psychology also plays out in traders' preferences for particular sectors within the stock market. If they anticipate economic expansion, they will want to own growth oriented sectors: small cap issues, tech stocks, and consumer discretionary shares. If they are betting on economic contraction, safer large cap stocks become attractive, as do sectors that can sustain demand during hard times: health care, utilities, and consumer staples stocks.

In the shifting patterns of relative strength and weakness, we can infer market psychology. We tend to forget the denominators when we look at stock prices: everything is valued in dollars. By changing the denominators, we can see what is relatively strong and weak: a great deal of perspective comes from shifting denominators.

When we integrate sector and intermarket themes with the earlier mentioned shifts in volume and sentiment, we can develop a rich understanding of how traders and investors are feeling and where they are placing their bets. This is valuable information for shorter and longer time frame traders alike.

Good resources for assessing intermarket and sector themes can be found on the FinViz and Barchart websites, including their heatmaps.

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Core Ideas in Trading Psychology: Reading Market Psychology With Volume and Price

Previous Posts in This Series:

Identifying Historical Patterns in Markets

Market Structure and Adapting to Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

An important theme throughout the TraderFeed blog is that reading the psychology of markets is a core trading skill. Markets, like people, behave in patterns. Those patterns shift over time, with shifts accompanied by markers that accompany changes in state: changes in direction and changes in volatility.

The first important state marker to be able to read is volume. Volume tells us *who* is in the marketplace. Volume also correlates highly with volatility. When volume jumps, it tells us that institutional participants have become more active. When volume dries up, it tells us that the market is dominated by market makers: the liquidity providers. Is a news item or price movement to a new level significant? Volume will typically provide us with an answer: events are significant if they can attract the participation of large traders. It is their revaluation of assets that creates market trends.

What is most important about volume is relative volume: the degree to which current volume diverges from recent volume. If we want to know if the volume from 11 AM to 12 Noon is high or low, we should compare it to the median volume posted during that hour. If we want to know if today's volume is high or low, we should compare it to the most recent median volume. Because relative volume is so closely connected to volatility, reading volume and its shifts provides important clues as to how far markets can go for or against us. That is useful information in setting stop loss points and profit targets.

Equally important, the astute trader wants to see the total volume that transacts at each price over the course of a trading day or week. The range at which the lion's share of volume has transacted defines a market's value area. Many trade ideas--at short and longer time frames--can be formulated by handicapping the odds that a market will return to a value area (if higher or lower prices cannot attract volume) or that a market will accept prices higher or lower than value (if those prices attract volume). The former situation defines a range market in equilibrium; the latter defines a trending market. In the former market, traders make money by fading strength and weakness; in the latter, they make money by going with market direction.

It is the oscillation of price between range and trending modes across a variety of time frames that defines the market's complexity, as market participants reveal their sentiment: either accepting value or redefining it.

The astute trader can also read the psychology of markets by seeing whether volume is dominantly transacted at the market's bid price (suggesting that sellers are willing to take lower prices to get out of their trades) or at the market's offer (suggesting that buyers are willing to pay up for higher prices to get into trades). This measure of sentiment, which is effectively gauged by the Market Delta tools, can be tracked over time to see if buyers or sellers are becoming more or less aggressive.

We can also track market sentiment to see if more transactions across the broad stock market universe are occurring on upticks vs. downticks. When buyers are more aggressive, we will see more transactions occurring on upticks; when sellers are more aggressive, we will see more transactions occurring on downticks. This measure of sentiment, captured in the NYSE TICK, can be tracked over time to reveal whether sentiment in the market is waxing or waning.

When we read these shifts in sentiment over time and combine them with a reading of shifts in relative volume, we can determine whether the largest market participants are becoming more or less bullish. That will tell us if volatility (volume) is expanding with direction (sentiment) and whether moves to new price levels are likely to result in market trends.

Much of the skill of reading these shifts is placing market dynamics at a shorter time frame within the context of the longer time frame. What is a trending market at the short time frame may be a movement within a range at the longer time frame. A breakout at the short time frame may be trend continuation at the longer time frame. Context rules. A great deal of developing a feel for markets is a recognition of the patterns that occur as market participation (volume) and market sentiment (direction) shift, with longer time frames exercising impact over shorter ones.

More on this topic can be found in the NYSE TICK Primer post; also the posts on Cumulative Adjusted TICK; VWAP and Range Markets; Identifying Downside Trend Days; Identifying Upside Trend Days; VWAP and Day Structure; and Recognizing Range Days.

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Core Ideas in Trading Psychology: Identifying Historical Patterns in Markets

Previous Posts in This Series:

Market Structure and Adapting to Market Change

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

One of the core themes that runs through the TraderFeed blog is the importance of identifying historical trading patterns in the markets. I owe an appreciation of this theme to the influence of Victor Niederhoffer, whose blog and books have added greatly to the market literature.

The key idea is that, as a trader, you want to think about markets like a scientist. You make observations, you formulate theories about what is happening in markets, you express those theories as hypotheses, and you test those hypotheses with specific trades that you place. Over time, your trading experience either validates your market understanding or contradicts it, supporting or leading to modification of your basic theories.

We know that historical observations of market patterns can help generate successful mechanical trading systems. Less well appreciated is that those observations can generate hypotheses for discretionary traders. Knowing, for example, that in 17 of 20 recent occurrences where the market has made an X day low it has ended up Y% higher in the next X days does not, in itself, necessitate that you take that trade. It does, however, help you frame a trade idea if you perceive that we are in a correction within a bull market (your underlying theory).

Should the historical patterns hold, you might gain confidence in your assessment of the market's strength and trend. Should the pattern not hold, you now have concrete evidence that the market is not living up to its historical script. That could suggest that the market trend is turning: some unique factors may be at work in generating recent returns. As a scientist, you are benefiting from hypotheses that are disconfirmed as well as those that are confirmed: losing trades that were placed with a positive expectancy may be providing unique market information.

When traders identify multiple historical patterns that are independent but that point to the same anticipated market outcomes, that can provide an added measure of conviction to trades: those are strong hypotheses.

Among resources for identifying historical market patterns are the excellent Quantifiable Edges, Market Tells, Market Rewind, SentimenTrader, MarketSci, Vix and More, and CSS Analytics sites. If you check out the blogrolls for those sites, you'll see many more good resources.

If you have an interest in testing historical patterns, do investigate the resources at the excellent Vertical Solutions site. And if you're a do-it-yourself type, the Trading Coach book has a chapter devoted to using Excel to identify historical market patterns.

For more on this theme, check out the posts on Trade Like a Scientist: Parts One, Two, and Three.

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Core Ideas in Trading Psychology: Market Structure and Adapting to Market Change

Previous Posts in This Series:

Implicit Learning and Somatic Markers

Mirrors and Corrective Emotional Experiences

Solution Focused Change

Changing Problem Patterns

Trading as a Performance Activity

Introduction to Trading Psychology

A key idea running through the TraderFeed blog as well as my books on trading psychology is that markets play out the same patterns as people: they exhibit particular states, provide markers for when they are shifting those states, and change their behavior when transitioning to new states. (See The Psychology of Trading for a detailed presentation of states and state shifts).

The states exhibited by markets are range modes (periods in which value is established in a relatively narrow band of prices and price does not move far from this value area) and trending modes (periods in which value is established at successively higher or lower price levels until fresh supply or demand from longer time frame participants enters the market and creates a range equilibrium). Every market state can be described as a joint function of directional tendency and volatility. Thus we can have volatile and non-volatile range markets, and we can have volatile and non-volatile trending markets.

Because markets change states at multiple time frames, the time series of price changes in markets is non-stationary. That means that the mean price change (direction) and standard deviation of price changes (volatility) in one period can vary significantly from those in the next period. If we think of price movement as generated by a process, then non-stationarity means that there is not a single, unchanging process generating all price changes. Markets, like people, display "multiple personalities": they behave differently when occupying different states.

Many of the market patterns described by technical analysts, including breakouts, double tops and bottoms, etc., represent transitions from one state to another. Some of the best profit opportunities occur in markets when traders behave like psychologists: reading patterns and transitions and timing actions accordingly.

A major reason that traders do not succeed is that they fail to read market structure--the states that markets are in--and thus are not sensitive to the shifts in structure that mark transitions between trending and non-trending modes. This leaves traders placing stop loss points and profit targets at levels that do not reflect the market's most recent levels of directionality and volatility.

Skilled, experienced traders learn to sense shifts in market states and thus recognize when trends are slowing down and turning into periods of consolidation; when range markets are heating up and ready to break out. When new participants enter the market and influence the pace of state change, as in the case of algorithmic trading occurring at short time frames, this can disrupt the implicit learning and pattern recognition of even those skilled traders, necessitating new periods of observation and internalization of patterns.

Failure to restrain risk during such periods of structural change in markets is a major reason why traders who made money consistently during one market epoch fail to sustain success during later periods. The challenge of trading is not only to learn market patterns, but also to adapt to new patterns as the drivers of price change (the themes dominating markets, the participants active in markets) shift over time.

For more on the topic of market structure, see the posts (including links) on Strategies and Tactics in Trading, Calculating Price Targets, and Three Basic Trade Setups.

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Core Ideas in Trading Psychology: Implicit Learning and Somatic Markers

Previous Posts in This Series:

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns Briefly

Trading as a Performance Activity

Introduction to Trading Psychology

Perhaps the most common psychological change that traders need to make is the ability to quiet their minds and focus their concentration. Many of the problems described by traders, from emotional frustration to negative self-talk, distract traders from their best trading practices and plans.

One of my earliest observations as a psychologist working with traders was how common it was for experienced traders to go through periods in which they traded like rookies. How could that be?

The literature review that I conducted to write the Trading Performance book led me to an interesting conclusion: the skills that are central to trading involve frequent exposure to subtle patterns in the shift of supply and demand. Over time, these patterns are internalized, so that experienced traders develop a "feel" for markets. This is known as implicit learning (see the Performance book for a full description): the trader recognizes the pattern, but cannot necessarily verbalize it.

There are many patterns in life that we sense, but cannot fully place into words. My favorite example is the young child who creates grammatical sentences when she talks, but cannot tell you the rules of grammar she is using. Similarly, I can sense clearly when a person is talking in a very sincere or insincere manner, but cannot necessarily tell you all the subtle cues--the changes in vocal inflection, the nuances of facial expression--that lead me to that conclusion. As for the experienced trader, for the seasoned psychologist, it's a gut thing: the result of thousands of exposures to patterns that recur, but rarely the same way twice.

Once the concentration of the psychologist or trader is broken, the access to those subtle gut hunches is lost. In that situation, the experienced professional loses contact with years of experience and, indeed, becomes a rookie. Caught in frustration, worries about profitability, or distracted by family turmoil, the trader is no longer attentive to somatic markers, the felt cues that tell us that a pattern is present.

This is why, in the Trading Coach book, I highlighted exposure methods as particularly promising for traders. Those methods train us to stay calm and focused, even as we are mentally rehearsing (or actually undergoing) stressful situations that typically trigger our problem patterns. It isn't that we need to remove emotion from trading--our feelings provide our best somatic markers. Rather, we need to ensure that self-relevant emotional turmoil does not overwhelm the intuitions that are present when we are focused on markets.

All this having been said, I would estimate that 80+% of traders fail because they have never developed implicit learning in the first place--not because their gut hunches are swamped by distracting thoughts and feelings. Trading is indeed a performance activity and it takes many concentrated months of exposure to patterns to make them our own. Placing money at risk before cultivating that implicit learning is no different from entering a battlefield without military training. You'll be so busy looking for setups that you'll never realize that you're the one being set up.

For more on the topic of implicit learning, check out the posts on Implicit Learning and the Unattached Mind, Implicit Learning and Single-Trial Learning, Building Market Intuition, Intuition and Trading Decisions, and Somatic Markers and Trading. Cognitive and behavioral exercises to aid trading performance can be found in the Trader Performance book, along with a detailed account of implicit learning.

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