Wednesday, August 31, 2022

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



RADICAL RENEWAL - The new blog book

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Most recent blog post - What We Experience is Who We Become

Most recent Forbes post - Amazing new research on psychological farsightedness and what it means for our development as traders

Recent Podcast:  New Perspectives in Trading Psychology with John Sinclair and Positive Trends

Recent Podcast:  Tools and Techniques for Minding the Markets with Optimus Futures

Recent podcast:  The Psychology of Performance with SUNY Upstate HealthLink

Recent podcast:  Trading Psychology and Spirituality with BearBullTraders

Recent podcast:  Ego, Trading, and Spirituality with Alpha Mind

Recent webinar:  How to improve your learning curve as a trader (with Bookmap)

Trading, like any great performance field, is an arena in which our self-development is an essential part of honing our craft.  Welcome to TraderFeed, a blog site that now also serves as a repository for over 5000 original articles on trading psychology, trader performance, and trading methods.  Within the extent of my knowledge, this is the largest single source of trading psychology material in the world.

The links on this page will help you navigate the database of posts to find the information most relevant to your development.

My coaching work is limited to trading and investment firms, so I cannot provide online advice or services to individual traders.  I do, however, welcome questions about the ideas in this blog.  You can email me at steenbab at aol dot com.  I'm also available via Twitter (@steenbab), where I link new posts and articles.

TRADERFEED TABLE OF CONTENTS











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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Saturday, October 12, 2019

Our Experience Is Who We Become

Riding on the plane on the way to Las Vegas and the Traders4ACause gathering, I had an interesting thought that I quickly tweeted:  What if all our usual assumptions about coaching, counseling, therapy, and psychology miss something essential?  What if the most important thing is not to use our thoughts, actions, and insights to change how we feel?  Rather, what if emotion itself is our gateway to change?  What if our feeling states are what we internalize over time?  

A lot of things begin to make sense if this is the case.  It's why psychological change has been linked to "corrective emotional experiences", for example, and why traumas can be so life changing.  We internalize our experience, which explains why the quality of home life is so important in a child's development.  

In the most recent Forbes article, I review fascinating new research in what is called "prospection":  our ability to connect our present selves with our futures.  It turns out that some of us are relatively "farsighted":  we are able to live our present lives in ways that connect deeply to our future.  Others are more "nearsighted", making short-term decisions that never build their desired future.  As the article explains, it's our emotional connection to the future that enables us to operate in farsighted ways.

So let's put these two ideas together:  1) we become our experience; and 2) our connection to the future enables us to achieve it.  I suspect it's a bit of what Ayn Rand had in mind when she noted that anyone who fights for the future lives in it today.  To achieve a positive, successful, fulfilling future, we must experience those things today--and each day.  The future is like a beautiful building:  once it is visioned, it is assembled stone by stone, wall by wall.  Too often, we fail to build our future because we're not spending our days laying bricks.

If this is correct, much of traditional trading psychology is wrongfooted.  It's not simply the negative emotions we tend to emphasize--fear, greed, and frustration--that undermine performance.  Rather, it's psychological nearsightedness.  In focusing on processes, discipline, and short-term performance, we fail to emotionally connect to our futures.  Take a look at your trading journals; take a look at your conversations about your trading and about markets:  How much fulfillment is expressed?  How much accomplishment?  How much excitement and enthusiasm over learning and discovery?

Identify all your communications about your trading:  from your self-talk to your journals to your conversations with others.  The emotional tone of those communications is what you are in the process of becoming.  Each piece of self-talk, each journal entry, each conversation is a brick you're laying in the structure that is tomorrow.  Can we truly expect to internalize success and satisfaction if those aren't daily parts of our experience?  How ironic it is that we spend our time worrying about "missing out" on trades when that is precisely the kind of preoccupation that misses out on our future.

Further Reading:

Thursday, October 10, 2019

Understanding the Psychology of the Market

It's been a somewhat frustrating recent market for traders holding positions.  We've had good volatility, but not great directional trending.  That can create choppy conditions, where the chop is occasionally violent.  What I've found is that markets that traders call "choppy" (and thus imply that they're not tradeable) are often ones that display cycling behavior.  Another way of saying that is that markets that don't exhibit good momentum can display good mean reversion (value) behavior.  It's all about identifying the market environment and adapting the trading to the behavior of market participants.

Above we can see recent action in the ES futures, with volume traded at the offer price minus volume traded at the bid price captured in the middle panel of bars.  At the bottom is an exponential moving average of the volume distribution, capturing when bulls have been more aggressive (lifting offers) and when bears have taken control (hitting bids).  Note the cyclicality of that behavior; note also the volume traded at each price point (left bars) and how we could not sustain a break below the value area during overnight trade.

All relevant to the psychology of the market.

I'll say something that is a gross generalization, but fits my experience.  Beginning traders struggle with their own psychology; experienced traders struggle with the psychology of the markets.  There are many tools out there that can help us read other players in the market better.  Right now I'm playing with uptick/downtick measures (like NYSE TICK) that are specific to the Dow stocks; the NASDAQ stocks; the S&P 500 stocks; the NYSE shares; and the Russell 2000 stocks.  

When we see significant upticking or downticking in one universe of stocks but not others, that says something about rotation and the perceptions of market players.  When we see all elements of the universe upticking or downticking at the same time, that says something quite different.  The pattern of upticking and downticking across various segments of the market reflects important distinctions between momentum/trending markets and mean-reverting/value ones.

Meanwhile, beginners look at price charts and fret about their own psychology.  Perhaps they're experiencing turmoil because what they're looking at does not adequately capture the psychology of the marketplace.  It's not that they're playing the game poorly; it's that they're playing the wrong game.

Further Reading:


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Monday, October 07, 2019

Maximizing Your Trading Perception

A common mistake I see traders making is looking at many screens, with little deep thinking with respect to any of them.  Very often, what they're doing is scanning for "setups", not achieving an understanding of what is happening in the market.  In other words, they're frantically looking for trades rather than truly developing ideas.

If you click the above, you'll see a real-time screenshot of what I was following in the ES futures just an hour or so ago via Sierra Chart.  Each bar represents 5000 contracts traded.  The middle study captures the balance of volume that occurs at the offer price vs. at the bid.  The bottom study is simply a moving average of that bid/offer volume information.  At the left, we can see horizontal bars that display the volume traded at each market price, in a Market Profile-like fashion. Note how, in the overnight session, we've attempted to establish support around the 2937 point of control level (the price at which most volume has transacted) and are now probing the upside.  Seeing selling pressure drying up at that point of control suggested that we were not establishing a new value area and could probe the upside, creating a nice risk/reward trade.

But you had to have that information to frame the idea; you had to understand the relationships between volume and price in Market Delta and Market Profile frameworks; and you had to be awake and alert around the London open to actually see what was going on.  Our trading perception shapes what we will process, and our processing shapes our understandingHigh confidence trading comes from deep understanding.

Further Reading:


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Friday, October 04, 2019

Changing Negative Trading Behaviors

I'm looking forward to the upcoming Traders4ACause conference, where I'll be doing something new.  Instead of talking to the group as traders, I will speak with them exactly the same way I talk to the psychology and psychiatry trainees I work with at Upstate Medical University.  In other words, I will teach the group literally how to act as their own therapists, using research-based techniques for dealing with problem emotions and behaviors.

A key idea is that before we can change any pattern of thought, feeling, or behavior, three things have to happen:

1)  We have to become better at recognizing the pattern occurring in real time;
2)  We have to switch our mindset so that we can approach the situation in a different way;
3)  We have to make a conscious effort to not follow our old pattern and try something new.

A vital element in this change process is that switch of mindset in the second step.  The various approaches to change involve different techniques for making that switch and seeing the problem in a whole new light.  For example, if you get worked up about missing a trade and then step back and rehearse a different internal dialogue, telling yourself that getting worked up--not the missed trade--is the *real* problem, that helps you distance from bad habits and exercise more control over your next actions and decisions.

The general rule is that we cannot change our problem patterns unless we become aware of them as they are happening and then emotionally connect with the costs of those patterns.  We don't change by writing in a journal.  We change by turning our problem patterns into enemies and finding the motivation to smack them down.

All change begins as an internal battle.  

I look forward to pursuing this area at the T4AC event and in future blog posts.

Further Reading:


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Sunday, September 29, 2019

Building Our Emotional Fitness

In the most recent Forbes posting, I outline two strategies that traders can employ to be more resilient in the face of market setbacks.

Why is this important?

Positive psychology researcher Martin Seligman describes resilience as a kind of emotional fitness.  Like physical fitness, we can train to be more emotionally fit by learning to respond constructively to adversity.  An important part of that training is the cultivation of optimism: the ability to see setbacks, not as final, but as stepping stones toward success.  We can think of a trading journal as structured training in processing adverse performance outcomes.  The journal can be used either to help us use losses as learning experiences or as personal threats.  As Seligman points out, the alternative to resilience and bouncing back is learned helplessness.  A big part of getting through our learning curves is using failure as a source of empowerment and inspiration, not as a personal defeat.

How do we become physically fit?  By engaging in regular exercise that challenges a variety of functions, from our strength and balance to our aerobic conditioning.  We become more fit by pushing past our boundaries and lifting more weight, running faster and more distance.

Similarly, we become emotionally fit when we challenge our various trading functions, from our ability to stay level headed after periods of winning to our capacity for using losses as sources of learning.  When we bump up our risk-taking as a trader, we give ourselves a workout in emotional fitness, pushing ourselves to tolerate greater profit and loss volatility.  One exercise I've used with the traders at SMB is to compute the average number of trades per day for the past few weeks and then, going forward, only allow themselves to take half that number.  That, too, is a workout in emotional fitness, requiring us to truly hone in on our conviction and focus on the best trading opportunities.

A great way to review your trading journals is to ask, at the end of each entry, how you used that day or week to build your emotional fitness.  What did you do to make yourself a more confident trader, a more resilient trader, a more disciplined trader?  Every day of trading can be a workout; how are you making yourself more fit?

Further Reading:


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Thursday, September 26, 2019

A Simple Technique for Overcoming Reactive Trading

In my recent podcast with Optimus Futures, I talk about the relevance of psychology to trading for both developing and experienced traders.  Many of the best traders are highly competitive.  Their drive to win can drive them to make decisions based upon the need for P/L and not because of what is actually happening in markets.  Instead of trading proactively, they can find themselves making decisions that are reactive to the latest market move.  Such reactive trading, over time, is rarely profitable trading.

In the Radical Renewal blog book, I make the point that music or speech would be incoherent without pauses.  If we strung together word after word with no pauses whatsoever, our speech would turn into noise.  Similarly, if we make one decision after another without pause, our behavior becomes random.  It is during pauses that we can reflect, and it is reflection that enables us to make sense of markets and adapt our trading accordingly.

One simple technique for overcoming reactive trading is something I did with the traders I worked with in Chicago.  They set alarms every 20-40 minutes through the trading day, with the understanding that, as soon as possible after the alarm, they had to pause and fill out a brief checklist.  The form simply asked them to rate their emotional state (calm or worked up) and their cognitive state (focused or distracted).  The act of checking the scales on the questionnaire required them to become mindful of their state.  It was an act of self-awareness.

If the trader found that they were distracted, emotional, and not in their proper zone, they took a few minutes away from the screens, engaging in deep, slow breathing and visualizing something peaceful and calming.  Once they felt centered, they could return to following markets--until the next alarm.

What this accomplished was quite important:  It turned mindfulness into a daily habitOver time, the traders realized that they were more at risk missing opportunity because of being in the wrong mindset than being temporarily away from screens.  Once they realized that their mindset would sabotage their trading, their FOMO led them to do the right things to get calm and focused!

One way to view the situation is that, if you're not training yourself to sustain mindfulness, then you're actually reinforcing mindlessness.  The simple alarm can wake us up to put ourselves in the right state for success.

Further Reading:


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Tuesday, September 24, 2019

Two Best Practices I'm Observing Among Active Traders

One of the joys of working with traders at different kinds of hedge funds and trading firms is the opportunity to see common threads among those finding success.  Here are two best practices that I'm observing across a range of talented money managers and traders:

1)  The smart use of options to express views - A very common problem that I observe is that traders see the opportunity for medium-to-longer term market moves, but cannot tolerate the volatility of price movement over such a time horizon.  Often, this leads them to exit sound ideas at inopportune times.  A different way to participate over longer time horizons is to express some or all of a view as an options position.  In purchasing a limited number of puts or calls, you define up front the amount of money you're willing to lose in the trade; stops become far less relevant.  I notice that Ivanhoff has a recent book available on using options to capture swing trading moves, with a number of examples.  Among experienced options users, I find a savvy ability to use options structures (such as spreads) to capture market movement while limiting the premium paid and the impact of decay.  Even more experienced traders use options to express volatility views, profiting from price breakouts without the need to define which way that breakout will occur.  This provides an entirely different edge from the usual directional trading.  A valuable overview of options and their practical use can be found on the Investopedia site in an article edited by James Chen, head of research at Forex.com.  The smart use of options gives a trader multiple ways to win, and it can provide superior risk/reward expressions of trading ideas.

2)  Quick adaptation to market conditions - A few savvy traders talk about different instruments having their own "personalities" and also talk about the "personality" of a given trading day.  The best traders quickly size up the environment we're in and adapt their trading accordingly.  Some of the things they focus on is volatility and the relative volume of the instrument they're trading, to size up the potential for moves to extend.  They are quick to notice when volume dries up in a move, when volume expands at key price levels, etc.  As Jim Dalton's work has found for years, it's not enough to track price changes on charts.  Understanding who is in the market and what they are doing is key to anticipating extensions and reversals of moves.  This can change from day to day, week to week, and indeed even within the day.  Smart hedge fund managers track themes that cut across markets and that often frame specific trading opportunities.  For example, the chase for yield due to falling interest rates around the world has created underlying demand for stocks, especially sectors offering sound, high dividends, such as utility shares.  Many times, we can detect themes to market movement even during a trading day, giving us an opportunity to quickly adapt and add to positions, limit losses, and find fresh opportunities.  In the stock market, such themes can occur as sector rotation moves, where the opportunities can't be found in the broad market but do show up as trends in the relative strength of one sector versus another.  The same occurs when we see movement in calendar spreads in commodities and flattening or steepening curve moves in rates.  We limit ourselves when we view trends solely in terms of flat price.  The relative movements of assets often define the opportunities in otherwise flat market environments.

The common thread here is thinking multidimensionally about opportunity.  Many traders focus on playing the game better when they should be stepping back and asking which game they should be playing.

Further Reading:

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Friday, September 20, 2019

Finding Unique Trading Opportunities

Now that I have finished the new book, it's time for a very different project.

The most recent Forbes article outlines a few of the reasons I believe we may be headed for meaningful opportunity in the stock market in the fourth quarter of this year.

Supporting that view is a method for identifying trading opportunities that looks at markets in a unique way.

First, we're looking for opportunity across time frames:  everything from intraday to multiple weeks.  It turns out that traders and investors typically lock themselves into opportunities on a limited range of time frames.  That is very different from asking the question of which time frames, for the current market, offer the greatest opportunity and how can we trade those.

In other words, we're trading where markets offer opportunity, not where our preferences lead us to trade.

Next, we don't look for universal "setups" that will provide trading signals across markets.  Rather, we will break markets into meaningful categories based upon features that differentiate one kind of market from another.  We can think of these categories as "regimes", so that we can categorize rising markets and falling markets; busy and slow markets; markets in high and low interest rate environments; etc.  

This means that, instead of trading the patterns *we* prefer to trade, we identify the patterns that appear in different market conditions/regimes and trade those.

The bottom line is that sometimes we're meant to be shorter-term traders and sometimes longer-term investors.  Sometimes we're meant to trade momentum patterns and sometimes we'll seek value.

The categorization method I'm using is related to k-NN modeling, where we can both classify market types and create regression-based models specific to the classes we identify.  It's important to not get intimidated by the math:  all we're doing is finding market dimensions that matter and identifying the k number of "nearest neighbors" that represent past occasions similar to the current one.  Forecasts are based upon these nearest neighbors only, not upon all days in a backtest.

Backtesting historical periods is not helpful, because we're comparing markets under unlike conditions.  Meaningful patterns in the data are lost if we average all days together.

Interestingly, in the first model I've created (and this is a work in progress, to be sure), we find that markets trading in narrow ranges following strong rises tend to follow through with continued strength over a next 20-30 day period.  That is a similar finding as the one outlined in the Forbes article.

The important takeaway is that we can find value in looking at markets in new ways.  Doing what everyone else is doing and looking at the same things they are looking at is unlikely to offer any meaningful edge over time.  The great problem for many traders is that they keep doing the same things even after markets change.  There are ways of identifying these changes in real time--and the opportunities that spring from them--and I hope to share more as the project unfolds.

Further Reading:

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Tuesday, September 17, 2019

Trading Psychology Advice for Struggling Traders

Recently, I've received a number of emails from traders who describe themselves as "struggling".  There is a sense in which all developing traders are struggling traders, as we struggle to make sense of markets, and we struggle to master ourselves.  Here are several pieces of advice that might be helpful to traders who are struggling with their development.

1)  Make sure you structure your learning process properly - Starting with trading in simulation mode (many platforms allow this and help you keep track of your performance) and practicing your research; entries; trade management; and risk management allows you to make your mistakes without doing harm to your account.  In every sport, players spend more time on the practice field than on the playing field.  Practicing and keeping score allows you to *see* your progress and gives you the confidence to go live.  Reviewing your trading enables you to see your mistakes and successes and learn from both.  Focus especially on your progress and what you do well...these often point the way to your eventual trading niche.

2)  Get the best mentoring you can find - It is difficult to find a performance field in which teaching/mentoring is not an important part of development.  In many arenas, such as the medical school where I teach, every student has multiple mentors over the course of their education and training, allowing them to absorb many sources of learning.  This is an important reason for joining a trading firm that assists in training, and it's an important reason to be part of online communities and resources.  The Appendix to my new book contains a large list of resources that can offer great education and mentoring.  It's worth the time to examine many of these and see which ones offer the kind of assistance that will speed your learning curve.  

3)  Give yourself time to explore different trading niches - To go back to the medical school analogy, students try out various specialties, such as surgery, internal medicine, and pediatrics, before they focus on a single direction for their training and career.  Sometimes, struggling in the learning process suggests that the niche you're trying out might not be the one for you.  Like the various medical specialties, different forms of trading require different skills and interests:  "scalping" short-term movement is very different from trading longer time frames; trading volatile stocks "in play" is very different from trading the broad market; quant trading is very different from discretionary.  Among the traders I work with at SMB, many are successful at one kind of trading but really struggle with others.  Among portfolio managers I work with at hedge funds, many are successful at one kind of strategy (directional macro) and not so much another (relative value or single name long/short equities).  Think of track and field and how many events there are:  from pole vaulting to sprinting to distance racing to shot putting.  So much of success is finding the niche that speaks to your talents and interests.  

One last piece of perspective.  If I were mining for gold or oil, I would not necessarily start digging where everyone else has been.  I would try to conduct or commission my own geological studies and dig where others have not explored.  Similarly, it is toughest to make money doing what everyone else is doing.  A great deal of success consists of looking at new market data (and old data in new ways) and defining strategies that exploit the herd.  Many of the best active trading edges consist of catching bulls and bears trapped, unable to move the market higher or lower, and needing to get out.  Some of the most valuable tools for trading allow you to detect such opportunities in real time.

Further Reading

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