Sunday, May 15, 2022

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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Listening as a Core Trading Skill

 
Last week, we took a look at the challenge of trading markets that are ever-changing.  What that means in practice is that good trading begins with open-minded observation.  Are we seeing a continuation of previous market behavior, or are we seeing a change?  Markets trade thematically.  Sometimes the theme is risk-on and everything is trading higher.  Other times, we trade in a risk-off fashion, with pretty much everything declining.  Most of the time, the themes are expressed in relative terms, with certain asset classes stronger, others weaker; certain sectors of the market strong, others weaker.  Before we put our hard-earned money to work, we want to identify themes that are in play for the market.  That means that we don't blindly predict what we think will happen, but instead listen carefully to the market's communications and detect what *is* happening.

If you want to get on the floor with your partner and dance, you don't just start dancing.  You wait for the music to begin and adapt your dancing to what is being played.  

If you want to help a person in need, you don't just start giving advice.  You listen to what is going on in their life and adapt your response accordingly.  

As this post emphasizes, silence and a quiet, open mind are crucial skills of trading psychology.  Good trading requires emotional intelligence, not just cognitive complexity.  Every day, the market talks to us, and it is up to us to read the themes and make our decisions accordingly.  

The active trader who begins the day with preformed ideas--and who scouts for every possible "setup" that could confirm the ideas--is like the person you talk with at a party who is figuring out what they want to say before you've finished speaking.  Conviction makes convicts:  we become imprisoned by our expectations.  If markets are ever-changing, then we must be ever-open to change.

An important part of trading process, too often ignored by developing traders, is the maintenance of an open mind and the ability to quickly spot themes and shifts in themes.  Looking at chart patterns in a single asset misses the thematic nature of movement across markets.  First we find the themes; then we find the specific "setups" that provide us with a good risk/reward trade.  Once we place and manage the trade, we return to open-minded mode to detect further changes or trends.

Good trading does not replace negative self-talk with positive self-talk.  It replaces all self-talk with listening.

Further Reading:

Trading With Clarity

Relative Volume and Other Indicators I Find Helpful

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Monday, May 09, 2022

The Challenge of Adapting to Changing Markets

 
A stationary time series is a set of data derived from a single underlying process.  A simple example of a stationary time series would be the distribution of values from the rolling of fair dice.  Any given roll is not predictable, but the distribution of values over time would be stable.  

Suppose, however, that we used weighted dice and then changed the dice at random intervals.  Now each roll would not be predictable, but the distribution of values would also be random.  The distribution would no longer be stationary, as it's generated from multiple processes (dice).  

The stock market--and, indeed, financial markets in general--does not yield stationary time series.  This has been evident in recent markets.  If we compare the market from the past couple of months with the market from, say, the same months in 2019, we see very different patterns of trend/price change and volatility.  Correlations among stocks and sectors vary from time period to time period, as well.  

What this means is that markets are ever-changing.  This shouldn't be surprising.  Simply observing the differences in volume across various market periods tells us that the participants in the marketplace are not constant.  

The ever-changing nature of markets has a couple of important implications:

1)  Simply looking for patterns across various historical periods is apt to yield weak results.  Similarly, trading volatile bear markets with the same methods and "setups" as were used in range markets or low volatility bull markets is not likely to be useful.  A more intelligent process would be to identify a few key regime variables, study markets in those regimes, and identify trading patterns specific to particular market conditions.  A very simple analogy would be a football team that has to play different opponents and play in very different field and weather conditions.  The successful team will adapt to each set of circumstances with unique game strategies.  The successful team will not adopt the same strategy for all opponents and field conditions.

2)  Psychological disruptions often reflect poor trading processes.  It is commonplace to hear coaches and gurus insist that trading is a mental game and that the right mindset will yield consistent, profitable results.  If you understand point number one above, you'll recognize that the idea that poor trading comes from poor psychology is a limited perspective at best.  What commonly occurs is that we adopt one set of trading practices and strategies adapted to a particular environment, only to find that environment changing.  When the trading strategies that used to work no longer produce consistent profits, we become frustrated, fearful, etc.  The problem is not the emotions attached to trading:  those are the consequences of the more fundamental problem of not identifying and adapting to changed market conditions.

It is a commonplace observation that successful traders follow a disciplined "process".  If trading were like manufacturing widgets, that would be all that traders would need.  In an ever-changing environment, however, a successful trading process would need to include an assessment of the current environment and the opportunity set specific to that environment.  The successful trader is much more like the entrepreneur than the manufacturer of widgets.  Identifying and adapting to changing markets is central to success.

The changing nature of markets impacts active traders as well as investors.  The markets behave differently at different hours of the day, as we see different volume/participation and different event/catalysts across times of day and time zones.  Similarly, would we invest in the markets of the 1970s the way we invested during the 1990s?

And might it be the case that some market periods are simply not tradeable, if they change more rapidly than we can adapt our strategies?  

An important source of trading psychology woes is holding positions across non-stationary market periods.  Key to successful trading is knowing when to hold 'em and when to fold 'em.

Further Reading:

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Wednesday, February 23, 2022

Common Mistakes Traders Make - 3: Reacting Rather Than Acting

 

It's a common misconception that acting rationally means eradicating emotion from our thought processes.  Indeed, the opposite is the case, as psychologist Nathaniel Branden observes.  Our greatest ideas are ones that we feel deeply, that resonate with us.  That is what traders mean when they refer to having "conviction" in a trade.  Our worst trading occurs when we feel things and react to those impulsively.  In those cases, our reacting prevents us from reflecting and thinking clearly.  Everyone feels uncomfortable when markets move against us.  The question is whether you use those emotions as information or allow them to control your next actions.

Most traders have had the experience of looking at market information, discussing ideas with others, and scouring research and suddenly see where things are lining up and making sense.  That aha! moment is a great example of feeling deeply.  Our greatest ideas are ones that come to us with that deep sense of recognition.  Those are the ideas we're meant to act upon.  Acting means directing ourselves toward a chosen end based on all the information available to us:  factual information and also information from our deepest feelings.

When we react, we are not directing ourselves toward a chosen end.  Rather, we are allowing events to control us and dictate our actions without planning and without conviction.  Little wonder that some of our worst trades come from decisions made out of fear, greed, FOMO, etc.

We think most deeply when we quiet our minds and shut off our internal chatter.  It's when our minds are still that patterns in the world can come to us and give us that sense of aha!  A quiet mind is an open mind and an open mind is ready to feel deeply.  One of the greatest edges in trading is the ability to approach markets with a still, quiet mind.

Further Reading:



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Sunday, February 13, 2022

Common Mistakes Traders Make - 2: Acting Before Understanding

 

In the first post in this series, we took a look at how traders often lose their ideas when their stop levels are hit.  In this post, we'll examine a different, but related, cognitive mistake.  Many traders will place trades based upon price patterns and "setups" without truly understanding how their market is behaving.  This is a particular problem when market regimes change and markets change their behavior.  Knowledge is necessary, but not sufficient, in trading success.  We also need to understand what is happening in our markets so that we can profit from the behavior of other market participants.

One variable important for understanding is volume and especially changes in trading volume.  If volume is increasing in a stock, index, or other instrument, it means that new participants have entered the market.  We want to examine how our market responds to this expansion of participation, because that will provide us with important clues as to who is in the market and how they are leaning.  For instance, if we're trading a small cap stock with a relatively small float, a meaningful expansion of volume almost certainly indicates speculative interest among small traders.  These traders are active as daytraders and often pile into momentum when a stock moves.  Knowing this, we can get ahead of their activity.  A large cap stock, on the other hand, is dominated by institutional traders who will wait for good prices and execute their orders over a period of time.  If we can study the stock and see how it has moved on high volume in the past, we can reverse-engineer the execution algorithms used by the large traders and front-run their accumulation of shares.  Stocks index volume is often significant as a function of time of day, as different participants are active at different time zones and times within each zone.  When we see volume expanding and a breakout early in the U.S. session, this often has implications for trending through the day.

Another variable important for understanding is the correlation among related market instruments.  If an auto stock is making a move, it pays to check out other auto stocks and the broader list of industrial shares.  We want to determine if this is an idiosyncratic move, specific to the company, or whether institutions are accumulating shares in particular industries and sectors.  Seeing how sectors behave before we trade can help us distinguish between rotational environments, which are often rangebound, and trending environments.

A football team would never call a play without checking out the defense of the opponent.  Similarly, we want to understand the market environment before we call a play with our capital.  When we act before we understand, we implicitly assume that all price patterns are equal in their meaning and significance.  If that were true, wouldn't sophisticated algorithmic participants already have mined such simple "setups"?  It is precisely the complexity of movement at different levels of participation, different times of day, and different co-movements of instruments that makes trading challenging, even for the algos.  Great traders don't have a passion for trading; they have a passion for understanding markets.  That's what makes professional trading different from gambling.

Further Reading:


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Sunday, February 06, 2022

Common Mistakes Traders Make - 1: Losing Ideas When We Stop Out Of Trades

 
Yes, it's true that problems with our mindset can interfere with good trading.  It's equally true that bad trading can interfere with our mindset.  In coming posts, I will highlight mistakes I see traders make and what we can do about them:

The first mistake I see traders make is confusing the idea being traded with the actual trade that is placed - Traders develop ideas about the markets or stocks they're trading.  Those ideas often reflect what is happening over time with growth and other fundamentals, price action and trends or breakouts, etc.  For example, I might develop the idea that a data release is a game changer for the stock market and should lead to new highs in SPX.  Once we develop an idea, we have to translate that idea into a specific trade.  What will tell us that traders and investors are acting on this idea?  What will give us favorable reward-to-risk in putting on a position to profit from the idea?  Too often, traders will get stopped out of the trade and stop following the idea--only to see it play out subsequently.  The trade is not the idea.  A trade that doesn't work doesn't necessarily mean that the idea is invalid.  It simply means that market participants, right here and now, aren't acting on the idea.  When we stop out of a trade, we need to review:  Is my idea still valid?  

If my idea was that we're breaking out of a long-term range and should head meaningfully higher due to economic growth and positive earnings , but then a Federal Reserve action is announced that drives the market lower, it may well be the case that my idea is invalidated.  We're not breaking out of the range to the upside and an important catalyst is now threatening a downside break and perhaps economic weakness.  

Conversely, if my idea was that we're breaking out of a long-term range and should head meaningfully higher and I then buy the next move to the upper end of the range only to see the market move back into the range, my breakout trade is wrong and I may very well stop out, but nothing has invalidated my idea about growth and positive earnings.  In such a case, I may retain the idea even as I jettison the trade and will ask myself what I need to see to re-enter a position.  Perhaps next time, I'll wait for an actual breakout to occur on increased volume and then I'll join the price action for a momentum move higher.

The psychological mistake we can make when we stop out for a loss is that we can become frustrated and, out of that frustration, toss aside the idea we were considering as well as the trade.  The wise trader looks at a losing trade as information.  It might provide information about what we need to see to make the good idea a good trade; it might provide information that the idea isn't so good after all.

Bad trading is sticking with ideas out of stubborness.  Good trading is sticking with ideas when they have not been invalidated.  This is why risk management is important.  If we control our bet size, we give ourselves plenty of room to go back and express ideas in new ways after initial trades don't work.  Conversely, some ideas end up being incorrect.  Knowing what will disconfirm your idea is just as important as knowing what will disconfirm your trade.

Further Reading:




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Monday, January 31, 2022

How to Change Your Life

 

An important key to psychological change is turning desired patterns of thought, feeling, and action into positive habit patterns.  We don't do this through motivation.  We do this by finding ways of being who we want to be every single day, with each day building on the next.  Over time, we internalize those changes:  they become natural parts of us.

In short, paraphrasing Aristotle, we become what we consistently do.

If I want to become a more caring, less self-centered person, I will perform an act of caring each day.  If I want to become a more disciplined trader, I will carefully plan my next trade and make sure it is grounded in sound research and understanding.  If I want to become a more energized person, I will incorporate into my morning routine something stimulating and meaningful.

We climb the ladder of our ideals one rung at a time. 

In what way will you be your best self today?

What will you do today that you'll be proud of as you get ready for bed?

You're writing your own life story day by day.  Be the heroine or hero of that story, not an incidental character.

To achieve greatness in life, we must do something greatly each day.

What are you doing greatly today?

Further Reading:



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Sunday, January 23, 2022

Why Am I Losing Money In The Market?

 

I have had a record number of people reach out to me asking for coaching help.  Why?  The majority have developed their trading in a bull market and have learned to buy market dips.  And so they have bought, and bought, and bought--and they have lost a lot of money in the past month.  In my view, this is not a problem of psychology.  It is a problem of not knowing how markets behave under different conditions of volatility, correlation, and monetary/fiscal environment.

As you may have noticed from my recent post, I am quite the optimist and believe in the power of making fresh starts--in life and in markets.  To continue risk taking without knowing what you are doing, however, is not a formula for optimism.  We have to learn from our experience before we can benefit from it.

So let's begin with two basic concepts of financial returns:  the average return over a period of time and the variability of those returns over that same period.  Too often, traders focus on the first and neglect the second.

Here's a current example from my database:

As of Friday's close, we had fewer than 20% of all stocks in the SPX close above their 3, 5, 10, and 20-day moving averages.  That is unusually weak short- and medium-term breadth.  Indeed, since the start of my database in 2006 (approximately 3900 trading days), only 179 days have met those criteria.  In other words, the market is not only broadly oversold, but more oversold than on 95% of all occasions.  Right away, that tells us that this is not just a normal market pullback, but something more extreme.  But of course we only know that if we make the effort or invest the resources to create such a database.  There is certainly no guarantee that the future will mirror the past, but pursuing the future with ignorance of the past is not a winning proposition in any field.

So let's take a look at the 179 occasions when we've been broadly oversold at these intervals and see what the SPX has done afterward.  Sure enough, we find that the market, on average has been up +.75% compared to an average gain of only +.18% for the remainder of all occasions.  Surely, therefore, we are due for a bounce and should be long going into next week!  That is what I've been hearing from traders of late.

If we look a bit deeper, we find that the market rises after such oversold conditions 64% of the time, compared with 60% of the time for the other occasions.  That doesn't look like such a great edge.  When we look at the variability of returns, however, we see that the standard deviation of next five-day returns for the oversold occasions is more than twice that than for the rest of the sample (4.81 vs. 2.32).  What does this mean?  It means that, following such oversold markets, we have had significantly more volatile returns going forward.  So, for example, in August of 2011, we would have made well over 7% over the next five trading days.  In November of 2008, we would have made over 19%; in March of 2020, we would have made over 16%.  But in October of 2008, we would have lost almost 19% over that next five-day period.  In early March of 2020, we would have lost over 13%; in early August of 2011, we would have lost over 13%.  

The important point here is that we have to be aware of the range of possible returns and not just the average return if we are to place intelligent bets.

Suppose I told you that I would make you a bet where you had 80% odds of winning $10,000.  Would you take that bet?  A not-so-smart trader would say, "Sign me up!"  The risk-savvy trader would ask, "What happens the other 20% of the time?".  Well, in this case, the bet is to go to an interstate highway at 2 AM and cross all lanes blindfolded with earplugs.  At that time of the morning, you'd have an 80% chance of reaching the other side free and clear.  The other times, you'd be hit by an oncoming vehicle and either crippled or killed.

Not such a great bet after all.

"We're due for a bounce" is not a substitute for a rational assessment of markets and their possible outcomes.  No amount of trading psychology techniques can substitute for knowing what you're doing when you put capital at risk.  People who tout their "passion for trading" most often need to trade and that leads them to take undue risk.  Far better to have a passion for good bets.  If you know that broadly oversold markets move a lot on average, the smart bet is to shorten your time frame, reduce the volatility of your returns, and find short-term bets that pay well without a scary downside.

Further Reading:


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Friday, January 14, 2022

Making a Fresh Start: Lessons From Molly Ruth

 

Well, it's been about a three-month break from blogging and social media, and I have to say it's been rejuvenating.  In any life activity that is important, there is a time for stepping back, taking a good look at what you're doing, and making a fresh start.  When we make a fresh start, we can make major life changes, because we've broken old patterns and are now ready to build new, positive ones.

Above we can see a picture of our newest rescue cat, Molly Ruth, who is a khao manee, a relatively rare breed of cat.  We found her in a shelter, afraid of people and cowering in a corner.  Her time in our home has been a fresh start for Molly and she has come out of her shell.  We can now play with her, and she has grown fond of the other three cats.  What she needed was new experience:  she needed to be safe and feel safe and just explore her environment.  As that has happened, her personality has blossomed.

Sometimes traders become overwhelmed too, and sometimes they take losses that rock their sense of safety.  Sometimes, after hard work, markets change and it seems as though all their progress has disappeared for good.  It's tempting to push forward and push forward, but often that compounds the problem.  The better strategy is stepping back, finding new edges in markets, and then--like Molly--making a fresh start.

I'll be making a fresh start with this blog, taking advantage of the break, and hope that the new slant will be helpful to traders.  As long as we can make fresh starts, we can always stay fresh--in trading, in relationships, and in our work.  

Further Reading:


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Monday, October 11, 2021

Taking A Break From Blogging And Social Media

 
Thanks for all the interest in TraderFeed, my books, and the Three Minute Trading Coach videos.  There's quite a library of material available there, and a lot more on performance psychology through the Forbes articles and the spirituality of trading, via the online book Radical Renewal.  

I'm working on a big new book project and have decided to focus all my efforts there.  I'll continue to Tweet every so often, but will be taking time off from writing about markets and trading psychology otherwise.  

I appreciate all the support and look forward to very interesting markets going forward!

Brett

Monday, October 04, 2021

Stages In A Trader's Development

 
A beginning trader starts with eagerness and passion and focuses on winning.  The beginner's great fear is to miss opportunity and so the beginner overtrades and eventually takes significant losses.  Many traders never move beyond this stage.

With experience, the beginning trader recognizes that the goal is not simply making money, but making more money on winning trades than losing ones.  Instead of focusing solely on winning, the more experienced trader also focuses on not losing and containing risk.  The goal is thus consistency of trading and profitability and, above all, staying in the game.  This is when the beginning trader becomes a good trader.

Now, however, the good trader faces a new stage of development:  growing that consistency of trading.  The good trader grows laterally, expanding their expertise and skills and finding a broader range of opportunity.  The good trader also develops depth in their trading, finding superior ways to manage positions and their ever-evolving risk/reward.  The good trader becomes a great trader by exercising skills and experience in different market environments and finding a balance between assertively seeking opportunity and mindfully managing risk.

Good traders become better and better at playing the game.  Great traders find new and promising games to play.  

I recently spent an intensive period of time studying the stock market on a daily basis from 2014 to present.  I tracked cycles in a new way and explored ways of taking best advantage of phases of those cycles.  Instead of regularity of time, I looked for regularity of structure in defining the cycles.  That has led to new trade ideas.  Early days, early days.  But we always have the power to innovate and develop what is good into what is great.

Further Reading:

Trading Psychology 2.0 and the role of creativity in our development as traders

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