Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - Three tough questions traders need to ask themselves

Most recent Forbes post - What it means to be a father

Recent podcast:  Keys to living a diversified, happy, and fulfilled life

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 nearly 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 the address on my bio and contact page.  I'm also available via Twitter (@steenbab), where I'll continue to 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
.

Monday, June 24, 2019

Three Tough Questions Traders Need To Ask Themselves

I work with traders who do a great job of tracking their most recent trades and figuring out what they did right and wrong each day.  What they don't do as well is ask the big questions.  It is like a company that gets better and better at manufacturing their product, but fails to look at the bigger picture of supply/demand for that product.  It doesn't help to get better at making manual typewriters or flip phones when those are becoming extinct.  No amount of focus on tactics can substitute for effective strategy.

Here are three sets of questions traders need to ask themselves periodically:

1)  Is what I'm doing truly unique, or am I simply part of the consensus?  What, specifically, in my trading approach and process is different from what the herd is doing and how, specifically, is that giving me an edge?

These are questions every business needs to ask.  Why should you succeed?  What makes you different and better?  How do you know that you have a genuine edge?  There are many "me too" businesses and many "me too" traders.  It is difficult to think of highly successful business or traders who are playing the same game as their competitors, the same way.  

2)  How am I building my business?  What am I researching and developing today that will help provide tomorrow's profits?  How am I actively adapting to market conditions to find new sources of edge?

Many traders spend all their time trading and very little time developing new frameworks for exploiting financial markets.  They are like businesses that keep churning out a product or service, never adapting to the changing needs and desires of consumers.  Look at the great technology businesses, retailers, and pharma firms.  All heavily invest in research, development, and technology and all have a pipelines of innovations.

3)  How, specifically, does my lifestyle provide me with an edge in this peak performance activity of trading?  What do I do each day to maximize my energy, focus, wellness, and emotional well-being?  How do my review processes actively create new goals and learning for the future, so that I am always growing?  If I saw a professional athlete with my lifestyle, would I expect him/her to succeed?

One dynamic I've emphasized over the years is that performance professionals are always training.  They spend more time preparing to win than actually participating in formal competition.  Can we expect ourselves to be disciplined in trading if we lead undisciplined lives?  Can we expect to maximize our focus in trading if we are continually distracted by our phones, televisions, and chats?  Our time outside of trading is our training for trading, by design and by default.

The above questions make a great backbone for a trading business plan.  Yes, it helps to review trading each day, but it's the overarching plan and vision that keeps us energized and inspired.  As the old saying goes, failure to plan can amount to planning to fail.  We're not likely to reach any distant destination if we don't have a map and travel plan.  Writing out your plan can be a solid grounding that aligns your daily efforts with your larger life goals.

Further Reading:

.

Thursday, June 20, 2019

Trading Psychology Techniques - #10: Overcoming Overconfidence

I have found that runs of winning trades are just as dangerous for traders as runs of losers.  It is very common that we anchor ourselves to our most recent returns, trading too small after we lose money and too large after wins.  This means that we're often too small when we turn our trading around and too large when we encounter inevitable losing trades.  The overconfidence dynamic is common among momentum traders who become more confident in the trade as it goes their way, adding to positions that have already moved in their favor.  This greatly changes their average price and makes them vulnerable to normal reversals.

The mistake traders make in anchoring themselves to recent returns is a failure to recognize randomness in the outcomes of a few trades.  A 50/50 win/loss ratio for an active trader means that strings of four losing trades (or days) will inevitably occur.  If every such series leads to a loss of confidence and a micro-managing of the trading process, it will be difficult to sustain consistency.

On the other hand, it's inevitable that such a trader will have strings of winning trades or days simply by chance.  If this leads to overconfident thinking and a doubling down on risk-taking, the trader will quickly give back those gains.

A great exercise to combat overconfidence is to visualize the scenario in which it's January 1st and you are neither up money or down money.  Would you take the trade that you're contemplating if your P/L was flat?  If so, how would you size that trade?  How much would you risk?  If the trade is truly a good one, you would take it on January 1st and size it reasonably.  If the trade is more marginal--the result of overconfidence--you would be much less likely to put it on with a flat P/L.  By vividly imagining a flat P/L, you help yourself get flat in your head, reducing emotional pulls.

Another useful technique is to actively rehearse, prior to putting on the trade, what you would need to see to tell you the trade is wrong and that you need to exit.  When we're overconfident, we often don't process adverse scenarios.  By making such processing an active part of your preparation, you give yourself a more balanced perspective during the life of the trade.  

"This, too, shall pass" is a great mindset after periods of both losing and winning.  Imagine the surgeon about to operate.  You don't want that surgeon to be wildly excited and overconfident, and you don't want that surgeon to be fearful and hesitant.  Each trade is a kind of surgery, and the best you can do is stick to the best practices that have produced favorable outcomes in the past.

Further Reading:

.

Monday, June 17, 2019

Trading Psychology Techniques - 9: Conquering Negativity

The past three posts in this series have dealt with building self-awareness; facing trading fears and anxieties; and overcoming frustration and anger.  In this post, we will tackle negative thinking patterns and how these can be turned around.

The first principle and most important practice is to live a positive life outside of your trading.  It is impossible to sustain an optimistic and constructive mindset during trading if what you are reinforcing during your other hours is negative.  If you take a look at the recent Forbes posting, you'll notice a non-traditional take on the recent Father's Day holiday.  The idea is to turn the holiday into a positive emotional experience by widening its meaning.  This is something that can be done in many areas of life.  Spending time with friends, relationship partners, family, and colleagues is great, but how can we make this time truly fun, inspiring, and meaningful?  As I point out in the book that I am currently writing (due out during the summer), the key is avoiding routine and seeking experiences that are special.

How can we possibly turn our thoughts and behaviors around if we are stuck in a life of routine?

The cognitive approach to conquering negativity is especially powerful.  That requires building the self-awareness to recognize when you are talking to yourself in ways that are not helpful and constructive.  As I've mentioned in my books, a great way to reinforce that self-awareness is to regularly ask yourself, "Would I be talking to someone else I cared about who is in my situation the same way that I'm talking to myself?"  This is helpful, because it reframes our thought patterns as conversations.  Very often, if we view our thoughts as ways that we're talking to ourselves, we can see that the conversations are negative and serve no constructive function.

Once we can recognize the negative thinking patterns, we want to tune into their destructive consequences.  By reminding ourselves that this kind of thinking robs us of energy, takes away our focus, and causes us to be less productive and creative in generating ideas, we gain the ability to become angry at our own negativity.  This is a very important principle.  We are most likely to change a pattern when we view it as an adversary: as something that stands in the way of our happiness and success.  Reminding ourselves of the consequences of our negative self-talk helps us marshal the energy to engage in a much more helpful processing of our situation.

That sequence--recognize negativity, challenge negativity, replace negativity with more constructive self-talk--can become a positive habit pattern if repeated multiple times per day for many days.  Yes, of course, negative thoughts will pop into your head, but you'll be able to quickly smack them down if you immediate recognize their consequences and generate more helpful ways to view the situation.  In my own trading, I turn negative thoughts into learning thoughts.  If each of my losses and mistakes can teach me something--something about me, something about markets--then I can actually value my mistakes and stay positive in the face of temporary drawdown.

Negative things always happen in life.  The resilient person doesn't internalize those setbacks.  Setbacks exist for a reason, and we can turn them into fuel for our personal development and the development of our trading.

EXPANDING YOUR MINDSET:  LESSONS FROM FATHER'S DAY
.  

Thursday, June 13, 2019

Trading Psychology Techniques - 8: Overcoming Frustration

The last post in this series focused on ways of overcoming our trading fears.  Many times, it is frustration that can take a trader out of the zone and disrupt trading plans, including risk management.  When trades don't work out--or when we miss good opportunities--there is plenty of room for anger and frustration.  Frustration occurs when we have a strong set of desires or needs and those are thwarted.  Getting stuck in a traffic jam when we have to make an appointment is a great example.  

There are two types of methods that can help us overcome frustration:

1)  Behavioral - This would include relaxation/visualization exercises, biofeedback work, and meditation.  In these techniques, we learn to recognize the signs of frustration as they are occurring (angry thoughts, physiological arousal, pounding the table, etc.).  We then pull back from the frustrating situation and perform exercises that calm us and require us to sustain focus.  For example, in meditation we might slow and deepen our breathing, keeping it quite regular, while we maintain focus on a peaceful image.  By entering cognitive and physical states incompatible with frustration, we can short circuit the anger and prevent it from dominating our actions and decisions.  One powerful variation of the behavioral method is to engage in guided imagery when we are not trading and vividly imagine scenarios that normally might frustrate you.  While you are imagining the frustrating scenes in great detail, you are keeping yourself chilled:  slow, deep breathing, maintaining stillness, etc.  Doing this exercise repeatedly allows you to internalize the calm response when the frustrating situation occurs in real life.  The key is repetition, so that your calming becomes an automatic response to situations that don't work out.

2)  Cognitive - Cognitive methods look at our thoughts and mind states as triggers for our emotional responses.  As the above quote suggests, frustrations are generally preceded by strong expectations and needs.  If we strongly expect a trade to work out--and, even more, if we need it to work out--we set ourselves up for frustration when our scenario doesn't play out.  Such expectations and needs occur when we place too much ego into our trading, so that our feelings about ourselves rise and fall with our profits and losses.  One technique that works well for me is to size initial positions moderately and view the initial trade as a hypothesis.  If my hypothesis is disconfirmed, I can take a modest loss and use that information to potentially take a trade in the other direction.  By viewing my idea as a hypothesis rather than a conclusion, I am mentally prepared to be wrong and, indeed, am in a mindset where I can accept the loss as money well spent for market information.  Risk management is a powerful tool for keeping frustration manageable.  I never want to lose so much in one day that I can't come back over the course of the week.  I never want to lose so much in a week that I can't go green on the month.  When we can frame losses as challenges, they can energize us, not frustrate us.

Trading with too little capital and expecting unrealistic returns to make a wonderful living set us up for disappointment and frustration.  I know developing traders who view each day and week as a verdict on whether or not they'll succeed at what they're doing.  That is simply too stressful for the purpose of maintaining consistency in trading.  We are much more likely to be consistent in our trading if we sustain a consistent mindframe.  That means training ourselves to accept and learn from losses and treat them as learning opportunities, not as existential threats.  Practice in behavioral and cognitive methods can help us create positive habit patterns that defuse frustration and keep us in control of our trading.

Previous Posts in This Series:







.

Sunday, June 09, 2019

Three Key Mistakes Traders Make In Evaluating Their Trading

Ongoing evaluation of our trading enables us to learn from experience and guide ourselves toward improvements.  We cannot change what we do not observe and measure.  Successful traders study themselves--and their performance--every bit as diligently as they study markets.

On Monday, June 10th, I will participate in a webinar with the good folks at Bookmap, where we will discuss ways of evaluating and improving our trading.  The session will be at 11 AM Eastern Time and will include time for Q&A.  Registration is free and available here.

Traders make a number of mistakes when trying to evaluate themselves.  Here are three of the most common:

1)  Too general and subjective - The trader doesn't drill down to identify what he or she has done well or poorly in specific trades.  The evaluation simply notes general problems like fear of missing or traded too small.  The evaluation should not only identify specific mistakes, but also highlight specific ways of correcting those.  That turns the evaluation into goal setting and planning.

2)  Not enough information - The traders I work with at SMB utilize software that captures information on all trades all the time.  That way the traders know exactly how many winning and losing trades they've had; the average sizes of winners and losers; the win rate as a function of time of day; a breakdown of P/L by strategy; and much more.  All this information provides useful information about what the trader is doing well and what needs improvement.  Many, many times, the areas that stand out as needing work are ones that the trader was not focusing on.  In the webinar, I'll discuss the use of software to aid our evaluation.

3)  Not tailored to the trader - Some of the best evaluation comes from knowing what you do best and how you do it.  That way, you can evaluate yourself according to your best practices.  A generic evaluation sheet is probably better than none, but most helpful is an assessment that grades you on the dimensions most crucial to your success.  For example, if certain ways of managing your time and energy help your trading, those should be part of your evaluation.    

Many traders could be advancing much faster if they would only improve their learning processes.  In the Monday webinar and in future blog posts, I look forward to outlining ways in which we can become more effective learners.

.

Monday, June 03, 2019

Trading Psychology Techniques - 7: Facing Your Fears

A while back, I worked with a trader and reviewed his P/L statistics.  Keeping good statistics on your trading is a universal best practice.  The patterns of wins and losses--and the progress over time--reveals a great deal about your trading--and your trading psychology.

What made this trader unusual was a pattern of small wins and small losses.  He had a daily loss limit and never came near that number, either on the downside or the upside.  

When we examined his trading, it was clear that he had profit targets on his trades and he had stop loss levels.  These were appropriate, given his daily limits.  He gave himself room to be wrong with his stops and also gave room to trades to run if they worked out.

So what's the problem?

As we examined his trading, we quickly saw that he rarely let his trades stop out and he rarely hit his profit targets.  He stopped out of trades quickly when they went against him and he took profits quickly when trades went his way.

In short, his trading was an exercise in fear.  When he feared loss, he quickly exited.  When he feared losing gains, he quickly exited.  Over time, that had him playing small ball as a trader.  Psychologically, it meant that he was always acting on fear.

We reinforce what we act upon.  If we act on fear, we reinforce fear.  If we act out of frustration, we reinforce frustration.  Is it any wonder that, fearfully exiting one trade after another, this trader never developed confidence in what he was doing?

An important psychological rule is that we can only overcome our fears by directly facing them.  If I am afraid of going outdoors, I cannot develop confidence by staying indoors.  What I need is to experience the very thing that I'm afraid of and see--in my own experience--that nothing terrible happens if there is an adverse outcome.  In that sense, we don't gain confidence from success alone.  We gain confidence by failing--and seeing that we can bounce back.

This is where the use of imagery is tremendously helpful.  We can visualize, in great detail, having a winning trade reverse on us or having a trade hit its stop, and mentally rehearse how we would like to deal with that situation.  If we mentally rehearse these scenarios again and again, they become familiar to us and no longer so threatening.  That reinforces confidence, because we're telling ourselves that we can fail and bounce back.

Note that what we're doing with such imagery methods is sustaining a state of self-awareness while talking ourselves through the fearful episode.  With sufficient practice, we can become quite good at invoking the self-awareness in real time.  What we've rehearsed with imagery comes back to us during actual trading.

The trader I met with learned to redefine his fears.  Once he realized that playing small ball guaranteed he would never reach his goals, he became fearful of being fearful.  In other words, he changed his perspective.  The problem wasn't losing money; the problem became preventing himself from making money!  In the state of self-awareness, he now viewed his situation differently, and that enabled him to trade very differently.

Further Reading:

.

Friday, May 31, 2019

How to Handle Trading Setbacks

In the most recent blog post, we took a look at the yellow caution signals in the market.  My concern was that these were very similar to the signals we saw late in 2018.  In both cases, we saw waning breadth; in both cases we saw oversold levels that normally, historically lead to bounces fail to produce meaningful rallies.  When a historical edge doesn't play out, that often represents important information:  something idiosyncratic is at work in the present market.  In the case of the recent market, the dynamics of trade wars are one of those idiosyncratic factors.  Continuing lack of resolution and, indeed, escalation of the conflicts has led to a significant pullback in stocks.

I am hearing from a number of traders and investors who have drawn down during this period or who are frustrated over having underperformed the seeming opportunity set.  I've also heard from traders who have pretty much been on the sidelines during this time, unable to deal with the headline risk and increased volatility.  What I hear specifically is self-blame, feelings of hopelessness and discouragement, and fears of losing (more) money.

Those are not good mindsets for trading.

The tricky part of handling trading setbacks is that it is precisely the traders who take trading most seriously who are most vulnerable when things go wrong.  It's wonderful to make trading your passion when things go well, but it can feel pretty dark when all turns south.

I encourage readers to check out the most recent Forbes article dealing with the principle of diversification in markets and how that idea applies to our lives.

There will always be setbacks and disappointments in trading.  At best, it's a probabilistic endeavor.  The great baseball hitters fail to get on base more often than they get on base.  Even if they have a wonderful 50/50 on-base percentage, it's inevitable that they'll have games during the year where they fail to get to first base.

Diversification in markets means that we have investments that can perform well while others draw down.  Stocks have fallen considerably during May, but investment grade bonds have performed well as safe havens.  That balance keeps us in the game:  financially and emotionally.  In life, diversification means that we have activities and involvements that pay off, even when markets cannot give us hoped-for returns.

A great way to handle trading setbacks is to double down on our relationships and interests and spend meaningful time (time with meaning) away from markets.  The best way to sustain passion in one area of life is to have other things that renew you in times of disappointment.  Yes, we have to learn from our trading mistakes and turn that learning into goals and plans going forward.  Often, however, that can't occur until we've renewed our energy by immersing ourselves in the activities that bring us happiness and fulfillment.

Further Reading:

.

Tuesday, May 28, 2019

Aligning Our Expectations: More Caution Lights for the Market?

When we looked at the market in early April, a number of indications were favorable, confirming the bullish perspective from March.  The breadth had not deteriorated as we had seen at the prior market peak.  Since then, we've had challenging news coming out of the Middle East with increased conflict with Iran.  Most pointedly, we've had increased talk of trade wars, with the breakdown of talks with China.  How has that impacted the stock market and what could that mean going forward?

Breadth has decidedly deteriorated.  Although we are not far off the all-time highs in the SPX Index, new monthly and three-month lows across all stocks have outnumbered new highs for six consecutive sessions.  Indeed, in the past 14 sessions, only one day has seen more new three-month highs than lows.  On Thursday, for example we registered 103 new three-month highs across all indexes and 979 new lows.  (Data from Barchart.com).  That is a rather broad correction.  For the past two trading sessions, we've seen fewer than 40% of SPX stocks trading above their 3, 5, 10, and 20-day moving averages.  (Data from Indexindicators.com).  

Now here's the interesting thing.  I went back to 2014 and looked for all occasions in which fewer than 40% of stocks were trading above their short- and medium-term moving averages (as above) and yet over 50% were above their 100- and 200-day averages.  That represents a meaningful correction in a longer-term upward trend.  There were 44 occasions in which that occurred.  Twenty sessions later, SPY was up 35 times, down 9 for an average gain of 1.19%.

What's not to like?

The problem is that two of the downside occurrences were quite nasty and they were the occurrences in February and October of last year, where SPY dropped well over 5% in a week's time.  Since the setup on Thursday, the market bounce has been tepid at best.  

This is where I love to have quantitative analyses and where I love integrating those into my discretionary decision-making.  While the odds of a market bounce are good when we correct in an upward market, we also have to be aware of the exceptions to the pattern.  We have made market highs in early 2018, late 2018, and recently in 2019.  Many sectors (such as financials and small caps) have lagged in this recent rise.  Many international equity indexes (look at EEM for example) have lagged badly.  I want to be open to the possibility that these three tops are part of a larger late-cycle topping process exacerbated by international geopolitics and trade concerns.  If that is the case, a very significant decline could ensue.  I have positioned my portfolios accordingly.

The goal is to stay open-minded and continually update market behavior to see if historical tendencies are playing out or if we're seeing yet another exception.  It is helpful to trade with expectations.  It is also helpful to align those expectations with the objective reality of current market behavior.

Further Reading:

.

Friday, May 24, 2019

Trading Psychology Techniques - 6: Building Self-Awareness

The majority of psychological problems in trading occur "in the heat of battle", when we become so caught up in market action and our concerns about P/L that we become reactive rather than proactive.  At those moments, we become immersed in our thoughts and feelings and lose the broader awareness of what is going on and what we are meant to do in such situations.  That is why we can look back on our actions at a later occasion and wonder how we could have been so foolish.  Once we enter that "fight or flight" mode of stress, we activate parts of the brain that are geared for action, not reflection.  

Self-awareness is the capacity to think about our thinking and reflect on our actions before we react to situations.  The self-aware trader stands back from his or her reactions, notices his or her thoughts and feelings, observes the tendency to act upon these, and then steps back to decide the best course of action.

Notice that self-awareness does not mean being totally free of emotion and impulse.  Self-awareness means that we become observers to those so that they do not dominate and dictate our next actions.

For example, I can see the market drop on increased volume and notice that I'm frustrated that I'm not participating in the move.  I begin to think, "What if this is the start of a bear move?" and then I experience a fear of missing something even larger.  As the weakness continues, I quickly hit the bid and sell the lows, only to see the selling dry up, value buyers come in, shorts cover, and price zoom higher.

The self-aware trader learns to pull back from decision-making during times of "fight or flight".  Often that can mean a temporary pull back from the screens and a self-reminder that this is not a good time to act impulsively.  Here are some specific techniques I've found to be helpful in these situations:

*  Slowing Down - This is where meditation practice can be tremendously helpful.  By breathing slowly and deeply for a sustained period while keeping your focus on one thing, you can learn to quickly re-enter the zone.  It is difficult to be emotionally worked up when you're cognitively focused and physically relaxed.  The more you practice meditation and relaxation skills, the quicker you can access the calm, focused state during the heat of the moment.  Daily practice is essential for internalizing these skills.  The Headspace app is a popular tool for building meditation skill and self-awareness.

*  Coaching Self-Talk - Because I've worked with so many traders, it's easy for me to step back and ask myself what I would tell another trader in the same situation.  For example, I'll remind myself that there is a significant probability of a bounce following the market decline based upon my previous studies.  Instead of becoming fearful of missing further downside, I begin a slow, careful hunt for signs of bottoming and opportunity to benefit from trapped bears.  Combining the slowing down with coaching self-talk can be very helpful in avoiding problems but also using situations to find opportunities.  A good example of this is taking a loss in a good trade idea and using the information to find an opportunity in the opposite direction.

*  Journaling - Writing naturally slows us down.  When we write out what is happening in the situation (or talk it out in an audio journal), we become able to hear ourselves think and plan.  We also gain the ability to read what we've written or listen to what we've said.  This gives us a greater level of perspective by bringing a measure of objectivity to our processing.  Even a brief journaling can help us remember best practices in situations.  I find it helpful to remind myself that I'm in no mindset to trade and that the best thing I can do is use the occasion to refocus and find new opportunity.  That turns the journaling into a positive, putting us on the front foot.

*  Mental Rehearsal - It is helpful to have a basic self-awareness routine that you establish as a process.  You can then, as part of your preparation for the day, use imagery to conjure up situations in which you lose self-awareness and then visualize yourself going through your basic routine.  So, for example, you can visualize yourself becoming frustrated and then visualize yourself talking in a self-coaching way while pulling back and slowing your breathing.  The idea is to turn your self-awareness process into a habit pattern that eventually will kick in on its own.

There is no loss of discipline without a prior loss of self-awareness.  If you can sustain an awareness of what you're doing and why you're doing it, it becomes difficult to fall into reactive modes.  That is what helps us stay cool in the heat of battle, whether in athletics, military combat, or trading.

Further Reading:



Previous Posts in This Series:





.