BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER

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

RADICAL RENEWAL - Free blog book on trading, psychology, spirituality, and leading a fulfilling life

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The Three Minute Trading Coach Videos

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Forbes Articles:

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

My coaching work applies evidence-based psychological techniques (see my background and my book on the topic) to the improvement of productivity, quality of life, teamwork, leadership, hiring best practices, and creativity/idea generation.  An important part of the "solution-focused" approach that I write about is that we can often best grow by focusing on what we do well and how we do it--and then doing more of what works for us.  The key is to know our cognitive, interpersonal, and personality strengths and leverage those in the pursuit of performance. 

FURTHER RESOURCES

*  A Creative Way to Use TraderFeed 

*  Brett Steenbarger Bio

*  Brett's Books on Trading Psychology

I wish you the best of luck in your development as a trader and in your personal evolution.  In the end, those are one and the same:  paths to becoming who we already are when we are at our best.

Brett
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The Psychology of Handling Large Drawdowns

 

12/19/24 - Yesterday's massive drop in the stock market in the wake of the Fed news taught an important trading psychology lesson.  Earlier in this post, I discussed replacing frustration with focus.  By mentally rehearsing drawdowns in a calm, focused state, we can normalize inevitable losses.  But the lesson from yesterday was different.  We want to replace uncertainty with understanding.  What happened following the Fed news?  Relative volume in stocks exploded:  the volume each time period was *much* greater than the average volume for the same period.  At the same time, the NYSE TICK completely changed its distribution of readings, consistently hitting very negative levels.  When we put these two observations together, we can appreciate that large market participants were bailing out of stocks.  Only aggressive selling of baskets of shares could account for such negative TICK and such high volume.  

Why was this happening?  Yes, investors were disappointed in the limited outlook for rate cuts, but just as important, they were locking in their gains for the year.  With only a couple of weeks left to go, money managers who are compensated on their annual returns can't afford to sit through a drawdown.  Once we see what was happening, we could entertain the idea that we would see a trend move lower:  the selling was pronounced.  Uncertainty is replaced with understanding.  We don't just trade better because we reach a better mindset; we achieve a positive psychology by understanding what is happening in markets and turning fear into opportunity.  

12/18/24 - A TraderFeed reader asks a question about fear of losing money and how it's affecting his trading.  A great book on this topic is Best Loser Wins by Tom Hougaard.  He explains how planning for (inevitable) losses normalizes them in our experience and gives us control over the downside.  Another good book in this regard is Mastering the Mental Game of Trading by Steven Goldstein.  He highlights the importance of "letting go" of the outcomes of trades and instead focusing on the processes of sound trading.  When we set stop losses, we can mentally rehearse them while we're in a calm, focused state and literally train ourselves to take the emotion out of drawdowns.  This exposure method can be practiced as part of our daily routines, making losses expected and thus less threatening.  

Every successful trader is passionate about making money and even more passionate about protecting their money.  When you read the interviews of the great traders in Market Wizards, you find that many of them started their careers with a passion to make money, then lost significant capital, and only then recognized the importance of managing their losses and taking the right bets.  

Recently, I've received a number of emails asking me about how to handle large drawdowns.  Of course, the answer is to limit drawdowns in the first place:  with prudent stop losses, by keeping bet sizes reasonable to weather inevitable losing streaks.  But if you have already gone through a large loss, how do you move forward as a trader?

Here are three steps you need to take:

1)  Treat financial losses as emotional losses - If you've drawn down significantly, a piece of your dream has flown out the window.  Lose 20% of your capital, and you need to make 25% on the remainder simply to break even.  Lose 50% and now you need to double the remaining capital just to get back to even.  A big loss of money is like a big loss of a relationship.  Research in psychology tells us that the best way to get through those painful losses is to give ourselves time to express our emotions and seek social/emotional support.  We heal more quickly when we go through a grieving process and especially when we are in the company of people who understand us and care about us.  Put trading aside temporarily and make time for healing.

2)  Let yourself feel the suck - It's tempting to want to put losses out of our minds and get back to normal.  But that doesn't help us learn from the losses.  It is the pain of drawdown that gets you to hit bottom and find the determination to never let that happen again.  The only way the drawdown will be worthwhile is if it transforms you.  The only way it will transform you is if the pain of the loss is so great that you will return to markets a new person, dedicated to managing P/L and making risk-taking sustainable.  Hitting bottom can be the first step in rising up.  The losses will only be worthwhile if they're an investment in making you better.

3)  Return slowly - Small capital, small bets:  crawl, walk, run.  You're learning a whole new game of money management and risk control.  Your first priority when you return to trading is to trade with consistency and to follow prudent rules for sizing positions and limiting losses per trade.  In my own trading, I want to make sure that I can easily handle five consecutive losing trades.  I know that, if I trade regularly and actively, such a losing streak will eventually occur due to pure chance.  Start small, get consistent, slowly grow the risk taking, get consistent at the new level of risk, then bump up again, etc.  When you hit a pothole in your trading due to changing markets, hold risk levels down until you figure out the new market patterns.  

The first step in winning the game is staying in the game.  

Losses are only a total loss if they don't make us better.

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Further Reading:

Three Best Practices for Dealing With Drawdowns

The One Question to Ask When You're in Drawdown

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Three Challenging Questions For Traders

 

12/12/24 - All good work on improving ourselves increases our capacity to sustain work on ourselves.  Just as in a gym, our workouts build our ability to sustain work:  when we grow our trading, we grow ourselves, and that is growth of our free will:  our capacity to grow.

12/11/24 - Here is a formula for making positive changes going into the new year:  Think big, implement small.  What that means is that it's important to have a vision and mission that inspires and energizes you, but it's equally important to implement that vision with concrete activities, goals, and plans every single day.  Add one positive action to your routine each day that implements your big picture vision.  Incorporate that new action every single day in the same way for a month and then add another positive action in the same way.  Step by step, you move toward your ideal.  Change requires inspiration; change requires consistency.  What you do shapes your mindset.  Each day, be a little more of the person you're ultimately meant to be.

As we get to the end of the year and you review your performance, here are three tough questions to ask yourself (and answer!):

1)  If a basketball or football team prepared for its next opponent with the intensity and thoroughness that I bring to my daily preparation for trading, how well would they do?

2)  If I entered an elevator and saw a famous venture capitalist riding with me, what pitch would I make for my trading business and how likely would it be that he/she would invest in my trading?

3)  What have I been truly successful at prior to my trading career and how, specifically, do I leverage that talent in my current trading to achieve positive and unique returns?

Mindset will never, by itself, make you a successful trader.  What you do to pursue your distinctive trading success  empowers your mindset.

Further Reading:

Three Questions to Ask About Your Positive Trading Psychology

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Our Losses Are Our Lessons

 

12/6/24 - This video from SMB is one of the best I've watched in quite a while.  It highlights the psychology of winning:  how traders responded to a big trading day.  How we respond to losing makes us good; how we respond to winning can make us great.  It's important to be happy with success; it's equally important to not be satisfied with success.

12/4/24 - Yes, our losses can be lessons that guide our improvement, but our wins are also our windows on what we do well.  Yesterday I had a good trade, selling morning inability to move higher in ES and covering when the selling pressure, as measured in NYSE TICK, could not push stocks lower.  It wasn't a big trade in the size of the move, but it was a window onto what I do well in reading the market.  What was particularly encouraging was that I didn't let my bigger picture view (see below) interfere with the proper management of the trade.  Our wins are windows onto our distinctive talents and skills...when I trade well, I clear my mind and listen to the market the way I listen to a person I'm helping as a psychologist.  Very important lesson:  we're successful in markets when we're doing what makes us successful in other areas of life.    

12/2/24 - Here's a great real time example of how a process orientation to trading can also provide a positive trading psychology:  My breadth research, tracking the percentage of all NYSE stocks over various moving averages since 2006, shows that over 75% of stocks are trading above their short, medium, and longer-term moving averages.  When this has happened in the past, returns 10-20 days out have been subnormal.  I then examined the historical periods most similar to the current one in terms of breadth and volatility and two periods stood out:  early 2018 and early 2007.  Both led to intermediate-term corrections, but not outright bear markets.  Such research provides hypotheses grounded in history--not absolute conclusions.  Now, however, the hunt is on.  I will be looking for evidence to see if the historical pattern is playing out in real time or if this time is truly different.  Either way, there could be a good trade out there and, either way, the hunt for opportunity will keep me in an opportunity-focused mindset.  Good quantitative analysis feeds the brain, but also nurtures a positive trading psychology. 

I'm pleased to announce that the manuscript for my next trading psychology book, tentatively titled Positive Trading Psychology, has been completed and sent to the publisher.  It represents an important paradigm shift, taking trading psychology beyond the usual focus on the challenges facing market noobs and instead identifying the best practices of successful traders.  In the new year, TraderFeed will track my own trading and ways in which I'm applying the lessons of positive psychology.  

To maintain our optimal mindset, every trading day must be a win--either in terms of P/L, in terms of ideas generated and opportunities created, or in terms of lessons learned and applied going forward.  Nothing is more important in your daily and weekly reviews than identifying what you've done that will make you better going forward.  We achieve our best performance when we are enthusiastic about what we are doing.  The best traders are the ones that are always learning, always growing, always trying new things, always adapting to changing markets, always discovering new opportunities.

We can't make money every day, but every day we can be entrepreneurs building our trading businesses.  A growth mindset fuels our trading growth.  When we surround ourselves with other trading entrepreneurs, enthusiasm becomes contagious and we find ourselves with the energy to focus harder and longer, dig deeper, and work harder to exploit opportunities.  

Further Reading:

Mastering the Positive Psychology of Trading

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Mentoring: The Key to Developing as a Trader

 

11/24/24:  When I first learned trading, the single most effective learning strategy I found was printing out charts of the market I was trading (S&P futures) on different time frames, charts of other stock indexes on those time frames, and a core set of indicators (RSI, NYSE TICK, VWAP lines, etc) on those time frames.  Every day, I identified the "trade of the day" and studied how it set up on the different time frames and how it set up on the various indicators.  I also studied how to best enter the trade, where to set a stop, when/where to take profits/add to the position, etc.  I literally did this for the better part of a year before going live with meaningful size.  By that time, the patterns were ingrained in my mind and a natural part of how I viewed the market.  I didn't fully appreciate it at the time, but I was also training myself to maintain an opportunity mindset and a positive psychology.  We can train ourselves to think big.    

11/21/24:  Here are two keys to successfully mentoring ourselves:

1) Process market activity and trading ideas in multiple ways in great detail:  talk them aloud, write them down, chart them, discuss them with others and listen to their reactions.  What we process many times in many ways, we are much more likely to internalize.  We mentor ourselves by guiding our own processes of preview, performance, and review.

2) Put energy and enthusiasm into the learning process: highlight the details that point to opportunity, focus on identifying and learning from what we've done well, treat mistakes as fuel for growth and learning.  The most positive development occurs in a positive mindset.

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I'm in the process of finishing my next book, tentatively titled Positive Trading Psychology.  The last chapter has been the most fun to write, because I've learned the most in writing it.  Nine mentors who work at SMB Capital submitted their best mentoring practices to be included in the text.  Even though I've worked with all of these mentors/traders personally, I found their ideas to be eye-opening.  Here are a few important lessons for developing traders that will be covered in detail in the book:

1) Seek Training, Not Just Education - Education is necessary for professional development and elite performance, but it is not sufficient.  Medical students begin their studies in the classroom, learning anatomy, physiology, etc, but they learn the practice of medicine by observing and helping senior students, interns, residents, and attending physicians.  Coursework and webinars cannot substitute for real-time experience under the guidance of a mentor.  The mantra in medical education is "see one, do one, teach one".  We develop expertise by observing masters at work, by tackling performance under supervision and guidance, and finally by cementing our skills by teaching others.

2)  Learn From Multiple Mentors - We begin by copying a master; we develop our own styles by absorbing the skills of multiple masters.  Copying the master brings us to a level of competence.  Synthesizing the learning from multiple mentors develops our own styles and brings us to a level of mastery.  Teaching others cements our learning and transforms mastery into expertise.  Too often, traders seek answers in a single video, podcast, or course.  Expertise comes from finding and cementing our answers, not by mimicking others.  There are no short cuts in the development of elite performance.

3)  The Best Learning Instills Optimal Trading Psychology - A mentor is not just someone who teaches you where to buy and sell.  An effective mentor models how to think about and pursue opportunity: how to blend risk prudence and reward maximization.  In teaching trading process, mentors inevitably model trading mindset.  We most effectively learn trading psychology in our pursuit of sound trading.  Great mentoring builds a positive trading psychology, as it establishes a sense of understanding and mastery.  We internalize optimal trading psychology when we ground ourselves in optimal trading process.

Most of all, the SMB mentors have taught me that the best teachers are always learning from their students.  The effective mentor-student relationship creates teamwork.  Mentors learn from the research and practice of their students just as the students learn from the instruction and guidance of mentors.  Great mentoring forms great teamwork, making everyone better--

Further Reading:

Three Questions to Ask About Any Market

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Becoming Solution-Focused in Our Trading

 

Added Note:  11/18/24:  Quite a few of the senior traders/mentors at SMB Capital are contributing best practices to my upcoming book.  What has become clear is that they don't just teach setups and risk management; they actually do those things with the developing traders on the trading floor.  One mentor described forming joint accounts with the developing traders, so that learning occurs in real time, with real money on the line for both teacher and student.  Notice how this is powerfully different from simply teaching trading techniques in live or online classes.  We learn trading solutions by seeing them applied--again and again--in real time with immediate feedback.  How we learn trading shapes our trading psychology.  

Additional Note:  11/13/24:  We can't be solution-focused in our trading if we're living our lives in problem-focused mode.  A solution-focused life means that we identify--every single day--what specific things we're doing to bring us energy, fulfillment, and success.  Working on our trading is fruitless if we're not working on ourselves.  Here's an article with links to assess our overall well-being and improve our positive psychology.  The goal is to maximize our happiness, life satisfaction, energy, and relationships.  If we are living full and fulfilling lives, we can readily handle the ups and downs of markets and trading performance.

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We give energy to what we focus on.

If we focus on negative outcomes, we energize our worries and fears.

If we focus on problems, we fuel our sense of being broken.

What is in your trading journal?  What is in your thoughts after a losing trade?

That is what you are energizing.

This is why it is so very important to focus on your best trading and learn from your successes.

When your trading problems are *not* occurring, that is often when you are doing something right.

Once you focus on what you're doing right, you become solution-focused.

Success follows when we identify our solutions and turn them into habits.

Suppose you identified one thing each day that you did well in your trading and made it a goal to repeat and extend the next day?

What we focus on each day compounds and becomes our reality.

No solution-focused trader has ever gone on tilt.

When we are solution-focused, we grow the best within us.

Further Reading:

Solution-Focused Trading

Keys to Solution-Focused Trading

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Trading Without Drama

 

Added comment (11/7/24):  In a video just posted, Jeff Holden and I teach a class for the SMB Training Program and address how to avoid trading on tilt.  Tilt always has a trigger.  If we rehearse trigger situations while placing ourselves in states of optimal focus, we defuse our negative triggers.  If we rehearse our A+ setups while placing ourselves in states of optimal focus, we create positive triggers.    

Additional note below:

What if we're looking for the wrong thing in our trading?

What if we're looking for "catalysts" and "breakouts" and bursts of volume and volatility, because that's where the action can be found?

What if, instead, we filtered our search for instruments that were trading in the most stable manner, following relatively unchanging trends and cycles?  

In that case, we would trade, not what moves the most, but what moves the most coherently and consistently.  We wouldn't be predicting in the face of uncertainty; we would be identifying in the face of stability.

If we trade the opportunities that are most predictable with the least drama, how might that impact our trading psychology?

Might our trade selection shape our trading psychology?

Perhaps logic starts where drama ends--

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Additional note - 11/5/24:  Notice something subtle.  Many traders attempt to use technical analysis tool for predictive purposes.  If we're trying to identify markets that are trading in regular, stable patterns, then the tools of technical analysis can be used to describe those patterns and help us align with those.  To the degree that the patterns indeed remain stable, that would bring some predictive benefit.  The main purpose of the technical tools, however, would be for trade idea generation, capturing the degree to which recent price action has followed stable cycles and trends (and, of course, cycles within trends).  

When I create charts where the bars are defined by volume traded, not time, this helps normalize the market's time series and makes it easier to use technical tools to identify stable patterns.  (Here's an interesting example from a few years ago; here's a relevant earlier post).  It's particularly enlightening when we can identify stable patterns over multiple time frames, aligning our ideas, an idea that Brian Shannon has emphasized in his work.

Further Reading:

A Framework for Trading and Trading Psychology

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Overcoming Emotional Trading in Real Time

 

Update:  My medical school colleagues and I wrote a chapter for a standard reference text in psychiatry that just came out.  It covers recent research and practice in short-term approaches to changing our thinking, feeling, and acting.  An important finding is that it takes emotion to change emotion.  We are most likely to internalize changes we make if we truly feel those changes.  One key implication for the topic below:  We can most efficiently and effectively change emotion in real time by evoking the *opposite* emotion, not by trying to make ourselves emotionless.  If we're frustrated and self-critical, instead of trying to empty our minds and meditate, we can evoke memories of trading experiences that left us feeling fulfilled and grateful.  More to come! - Brett  

We read a lot about trading psychology and the need to maintain perspective, trade our plans, control our emotions, accept losses and uncertainty, and manage our risk.  This education is helpful, but it is not training.  Actual training in trading psychology would have to occur in real time, because trading challenges crop up only when we are in certain states of mind and body.  This is why Jeff Holden and I have teamed up for SMB Capital's training program to help traders coach themselves in the heat of battle.  This is going to be a multi-week collaboration, in which we integrate the discussion of markets and trades with hands-on work on our mindsets.

Here is the video from our first class.  

A major idea from the session is that, before we can change our emotional state, we need to be aware of our state.  Jeff presented a "mood meter" that enables us to place labels on what we're experiencing.  As I point out in the video, the very act of identifying what we're feeling enables us to be an observer of our experience--not one who is wrapped up in their experience.  This coming Thursday midday, we'll discuss--in the context of the market trade that morning--what to do once we observe our emotions, so that we can stay constructively engaged in our trading.  I look forward to getting a video for that session as well.

Now here's an important point that we rarely encounter.  It comes from the book I'm currently writing, which integrates positive psychology and trading psychology:

Awareness of our positive emotional states is every bit as important to our trading as awareness of our frustration and negativity.

If we are aware of the emotional signs that accompany our best trades--our feelings of understanding and confidence--that awareness helps us take larger risk when the expected value of our trades is best.  We have positive triggers for our best trading just as we have triggers that set off our worst trading.  Recognizing our positive triggers in real time enables us to make the most of the opportunities that present themselves.  This is why it's important that our "mood meters" capture the best as well as the worst of our trading experience.  

More to come!

Brett  

How To Coach Yourself To Trading Success

 

Update:  During Thursday's session, Jeff reviewed with the group the chart of emotions that described four quadrants at the intersection of two axes:  positive and negative; high and low energy.  We also discussed the very center of the chart as our state of focus.  The idea is that, when we're super focused on markets, we're not immersed in either positive or negative feelings.  At that point, it's not about us.  So the question becomes:  how do we reach and sustain that center point?  The first step is self-awareness:  simply to know what we're experiencing in the present and to be an observer of our emotional state, not immersed in what we're feeling.  An initial exercise in this direction is to write down what we're feeling when we're feeling it.  By observing ourselves, we are exercising (self) focus.  Next week we will build on this-- 

This Thursday, I will join the head of recruiting for SMB Capital, Jeff Holden, for a combined mentoring/coaching class with developing traders.  What will be unique to the session is that I will be presenting and teaching coaching skills to the traders at the same time that Jeff presents and teaches best trading practices for that day's trade.  To the best of my knowledge, this will be the first time that the skills of trading psychology are taught alongside the skills of consistently profitable trading in the context of a live market session.  Once we've held the session for SMB students, I will share the specific methods we talked about in an update to this blog post.  The goal is to go beyond coaching advice and provide specific tools for TraderFeed readers to coach themselves to trading success.  

As Coach K indicates above, the key to elite performance is hungering for excellence, not success.  We can't always win, but we can always learn and learn and practice and practice excellent ways to play the game.  Back in the mid-1970s, I had the honor of being part of the freshman basketball team at Duke.  The coach ended quite a few of the evening practice sessions with an exercise where each player had to hit 10 consecutive free throws before they could go home.  You can imagine, tired and sweaty and needing to get homework done, how the players desperately wanted to get home.  That put real pressure on their free throws.  Over the course of the season, they had practiced doing the right things at the charity stripe so often under duress that they didn't wilt when it came to clutch situations at game time.  They achieved excellence by practicing under the emotional conditions of actual performance.

Now imagine that you couldn't leave your trade station after the market close until you had traded that day's market successfully in replay mode.  Again and again, you'd replay the market and push yourself to stay in the right mindset and take the right actions.  Day after day, those reps would eventually become part of you and you'd internalize sound trading psychology at the same time that you internalized sound trading.  

Stay tuned to this blog post after Thursday morning's session with Jeff.  I'll share the methods I discussed with the developing traders and I'll highlight how you can best rehearse these methods to coach yourself effectively.  This should be fun--

Brett    

Why Can't I Improve My Trading?

 

Think of how many trading courses are out there.  Consider how many trading and trading psychology books have been written.  Trading videos, tweets, interviews, podcasts:  the amount of content related to trading success is phenomenal.  And every week we get more and more and more.  Traders I hear from read books, watch videos, take courses--and they wonder, "Why can't I improve my trading?"

To address this question, I'll offer an analogy:

I could write chapters on how to pack, wear, and deploy a parachute.  I could produce videos on proper parachute maintenance and use.  I could teach a parachute course.  Now suppose you consumed all of the content I created on how to master the parachute and then you jumped out of a helicopter with your parachute.

How would you fare?

Of course, in the military, you learn to properly pack a parachute by packing parachutes and getting first hand instruction and inspection.  You learn to deploy a parachute by being tied to a line from a height and then dropping:  first at relatively low heights, then at higher heights.  You deploy the parachute again and again during real drops that are completely safe before you tackle riskier jumps.

The reason for this is that learning is state-dependent.  We are most likely to recall information and enact skills when we are in the state that we were in during our learning.  If we learn parachuting skills when we are calm and collected in a classroom, we're unlikely to recruit those skills when we're making a leap and the adrenaline is flowing.

Traders typically learn trading techniques and get psychological coaching when they are very far from the heat of battle.  Everything they learn flies out the window when markets are moving and there's real risk and reward every moment.  

We can't learn to drive racecars by watching videos, reading books, or absorbing tweets.

We can't learn combat skills in wartime by staying safe and peaceful in a classroom.  We can't master our upheavals of trading psychology when we're quiet and comfortable outside of market hours.

The best trading education and trading psychology is processed in real-time, in the act of trading.  We learn best by acquiring and practicing skills when we're in the mental, emotional, and physical states of real performance.  Our best teacher is realistic, progressive simulation.

For trading psychology, this is a game-changing insight.  More to come--

Further Reading:

Using Your Body to Program Your Mind

Overcoming the Triggers to Poor Trading

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Should I Join a Prop Trading Firm or Trading Community?

 

In recent weeks, I've had a number of traders reach out to me, asking about joining proprietary (prop) trading firms or joining trading communities.  Here is the essence of my response:

*  There is value in learning trading and developing trading skills and experience when you can learn from the experiences of others.  The best trading firms that I work with operate with team structures where there is a commitment to help each other and learn from each other.  Having trading partners can increase our accountability, and it can provide us with multiple role models.  Simply being online with other traders is not team trading.  Go where traders are committed to one another.

*  The best trading organizations only succeed and make money if their traders succeed and make money.  When I began my work in Chicago, the best prop firms covered basic overhead with desk fees and passed along member firm commission rates to traders.  Those firms shared profits with successful traders.  They did not succeed if traders were not profitable.  They invested in the best trading technology, because that would make the traders--and the firm--successful.     

*  You should be encouraged to make money, not simply to trade.  Other prop firms in Chicago operated as arcades, where traders traded their own capital, kept most of their profits, and paid fees for access to equipment and technology.  Some charged high commissions and made the bulk of their money by getting traders to place lots of trades.  When traders pulled back their risk taking due to uncertainty, this became a problem for management.  The interests of the firm and the traders did not always align.

*  Beware firms selling hope as their main product.  Some prop firms are not really prop firms at all, as they promise access to capital based upon tryouts that traders pay for.  The conditions of the tryouts are quite challenging, and it's not unusual for aspiring traders to engage in multiple tryouts.  Often, the interests of some of these firms are in selling tryouts, not in funding and growing successful traders.  Is there real training, real performance feedback, and real teamwork among participants?  Does the firm's growth depend upon the success of those who pass the tryouts?

*  Seek interactivity.  Online trading communities often offer education and coaching as well as sharing among community members.  This can greatly broaden the learning of developing traders.  The key question in evaluating online trading communities is the degree to which members actually form virtual teams and make teamwork a daily part of their trading processes.  If the communities succeed mostly by selling memberships and services, they cannot foster the mutual learning and development essential to our learning curves.

A quick anecdote:  Tomorrow, I'll be joining Jeff Holden from SMB Capital to help traders make use of a new technology that tracks the expected value of trades in real time.  This can be of tremendous value in sizing positions appropriately and in helping traders grow their risk-taking in responsible ways.  SMB is training the traders to take better risk/reward trades and they are investing in the technology so that the firm will succeed as the traders become more successful. 

Be selective:  The right firms and communities treat you as an investment, not as a trade--

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Two Paths to Trading Success

 

There are two very distinctive paths to trading success:

The first path is to study market action in great detail and identify patterns associated with large market moves.  When those set up, the successful trader has seen and charted so many of those examples that they can pounce on the opportunity with large size.  Also because the successful trader has observed so many explosive moves, they are sensitive to when the explosion is *not* occurring and can exit with controlled risk.  For this kind of trader, a key psychological strength is patience.  Much of success lies in not trading until the outstanding opportunity comes along.  Another important psychological strength is aggression.  The very successful trader is not just right, but recognizes when they are right and is able to go for it in size.

The second path to great market success is to trade broad rather than big.  This is the path of many successful hedge fund managers.  They search and search and research and research and look for opportunities in different markets, in different parts of the world, and in different time frames.  None of the positions are necessarily very large, but the combination of the positions makes for a sizable portfolio.  Because the opportunities are relatively uncorrelated, the trader can make large amounts of money even when some views don't play out.  The broad trader is placing so many bets with edge that consistent returns follow.

Team structures help the first path to success, as a recent video from SMB Capital indicates.  Having multiple eyes on the short-term price action of many stocks and markets increases the odds of finding the truly special opportunities.

Team structures are essential to the second path to success, because team members with different areas of expertise and experience contribute unique ideas to a broad portfolio.

You can win by trading big.  You can win by trading broad.  It's tough to win trading in isolation.

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How Gratitude Transforms Trading

 

A wealth of research finds that experiences of gratitude--feeling appreciative of what we have--are important to overall emotional and physical well-being.  Of special significance is research that gratitude impacts our brain activity over long time periods, activating the areas responsible for reasoning and problem-solving.  This fits well with research that shows how positive emotional experience helps us see the world more broadly and deeply.  

When we can turn trading mistakes and setbacks into valuable lessons for learning and growth, we can actually feel gratitude toward our challenges.  Once we're focused on our development, everything--our best trading and our worst--becomes fuel for getting better and better.  Amazingly, when we sustain that positive mind frame, we actually see more in markets.  

Negativity blinds us to trading opportunity.

Including gratitude in our daily review process by focusing on experiences that make us better is a great way of sustaining our positive trading psychology.  At moments when I feel frustrated, I look over to our bonded rescue cats, Molly and Ares, see how they have found happiness, and feel grateful for the opportunity to have given them a good life.  Frustrations melt away when we appreciate what we have.  

An optimal trading psychology is one of focus and one of positivity.  Amazingly, when we are highly focused and in a state of emotional and physical well-being, we see markets better and make more clear-headed decisions.  If trading brings us gratitude--even in challenging times--we'll be best prepared to find and exploit opportunity.

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Three Questions to Ask About Your Positive Trading Psychology

 

The book that I'm currently writing, covering the positive psychology of trading, emphasizes that how we approach trading determines how positive our trading experiences become--and that helps determine our trading success.  Too often, people pursue happiness and fulfillment by seeking trading success.  The field of positive psychology suggests the reverse:  if our trading practices and processes draw upon our strengths and what is meaningful to us, we will trade with greater focus and energy, see more in markets, and interact more effectively with peer traders.  

So much of traditional trading psychology is problem-focused, emphasizing what we need to do to avoid reactive, emotional trading; what we need to do to accept risk and handle drawdowns, etc.  The reality is that we will never achieve a peak performance state simply by shoring up weaknesses.  Three questions to ask with respect to our achievement of a positive trading psychology are:

1)  Are my trading processes well-defined, and do they consistently draw upon my personality, social, and information processing strengths?  (Do I truly understand what my strengths are and how my trading methods draw upon those?)

2)  Do I find energy and fulfillment in the processes of trading regardless of near-term P/L?

3)  Do I draw upon the strengths of others and contribute to their strengths so that I am continually learning and improving?

We achieve a peak trading psychology by making our trading an expression of our greatest talents, skills, and ideals. 

Somewhere, hidden in your best trading, is the trader you're meant to be.  

The challenge is to develop a close relationship with your best self.

Further Reading:

Mastering the Positive Psychology of Trading

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Knowing What The F** Is Going On In Markets

 

It's amazing how our trading psychology improves when we take the time to step back, review macro markets, and understand what is going on in the heads of large money managers.

Consider the recent stock market:

*  Growth-related sectors have been particularly weak.  Check out the XLK (technology) and XLY (consumer discretionary) ETFs.

*  Value-related sectors have been relatively strong, especially the ones that benefit from lower interest rates.  Check out the XLRE (real estate); XLU (utilities); and XLP (consumer staples) ETFs.

*  The bond market has been strong, which means interest rates are falling.  Check out the BND (bond) ETF.

*  The US dollar has been weak.  Check out the DXY (dollar index).

*  Commodities have been falling.  Check out the DBC (commodities) ETF and oil prices.

Macro markets do not always trade thematically.  When they do, smart traders pay attention.  You can work on your psychology 24 hours and, if you don't understand market themes, you'll eventually get run over and lose money.

Going forward, a key question to ask is whether the theme of growth slowdown and potential recession is expanding or whether there are signs that the market's "theme-ness" is reversing.  Aligning shorter-term trading with the market's bigger picture helps ensure that you're swimming with the tide, not against it.

Further Reading:

The Importance of Understanding Global Macro Themes

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Exercising Our Character, Improving Ourselves

 

It's been great spending my 70th birthday with wife Margie and daughter Devon, traveling around Colorado.  There's something about natural beauty that inspires mood and mind, turning vacation time into a time of rejuvenation.  With that new energy, I find myself tackling fresh goals and challenges.  One of the most popular TraderFeed blog posts explained the process of FIGS:  Focused, Intensive Goal Setting.  The idea is that we achieve the greatest growth by establishing a limited number of goals and then focusing on working on those on a daily basis, turning them into internalized parts of ourselves.  I've long held that the age at which we become old is the age at which we determine that our best years are behind us.  The key to staying young psychologically is always having a guiding vision that we pursue intensively, challenging and inspiring us.

A particularly powerful vision comes from visualizing the kind of person we would ideally like to be.  What personality strengths would we most like to develop?  We can view our character development much as we view our physical development:  use it or lose it.  We can also set up routines to exercise our character the way we exercise our bodies.  What one personal improvement can you make that will make you a better friend and partner, a better trader, a better human being?  How can you use each day to make that improvement?

The keyword for my character improvement goal is forbearance.  That term can mean a decision to not enforce an obligation, such as the payment of a loan.  It also means patience and an acceptance of the limitations of others.  When we become impatient with others and expect them to meet our needs, we naturally put ourselves first and can create toxic interactions.  The idea of servant leadership is that we best lead by taking care of others, accepting and addressing their needs.  One of the reasons I've enjoyed our adoption of rescue cats is that it pushes us to get outside ourselves and prioritize their development.  In doing so, we create meaningful experiences and interactions.  In building my forbearance, I'm--in a sense--adopting everyone I deal with, committing myself to furthering their lives.

There is wealth in trading, and there is wealth in our personal development.  Indeed, it's not unusual to find that pursuing personal development furthers our trading success.

What are you working on today that will make you a better version of who you already are?  

How will today provide a great exercise routine for the qualities you want to cultivate?

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The Most Important Skill in Trading Psychology

 

Coaching ourselves to trading success requires that we know our strengths and our vulnerabilities.  All of us have our triggers that are associated with the unresolved conflicts and unmet needs that we bring to trading--and to other areas of life.  Not as well recognized is that we also have positive triggers that cue us to activate our strengths.  If we don't know our positive triggers, we can't establish processes that cue our success and benefit from them.  If we can't anticipate our negative triggers, we can't intercept them before they do harm to our trading accounts.

The most important skill in trading psychology is self awareness.  If we are not mindfully self-aware, we operate on autopilot, miss opportunities to put our strengths to work, and expose ourselves to emotional triggers that can hurt us.  If we know our triggers and can actually anticipate them, we gain significant control over our trading.  

A common positive trigger is feeling in the flow of our trading, absorbed and operating in the zone.  That state of heightened focus is one that sets off our intuitive pattern recognition, allowing us to see opportunities unfolding in real time.

A common negative trigger is frustration.  When we undergo a loss and become angry and frustrated, the resulting fight/flight response leads us to trade reactively.  In that state, we cannot possibly see actual opportunity unfolding.

Taking periodic breaks during the trading day and assessing our degree of focus and frustration builds our skills at self awareness.  When we become increasingly able to identify our states in real time, we gain the option of guiding our trading actions accordingly.  If you know you're seeing the ball well, you can take a meaningful swing.  If you know you're agitated and not seeing the ball, you can step back, work on your focus, and preserve your capital.  That is huge.

At SMB Capital, a mantra is "One Good Trade".  Taken after Mike Bellafiore's book of that title, the mantra tells us to just focus on the next trade and what will make it a good one.  Notice how this is actually an exercise in self-awareness.  If we don't know what goes into a good trade--and what we need to avoid to prevent a trade from going bad--we can't recover from a loss (or build upon a gain) by making "one good trade".

Good traders know the market.  Great traders also know themselves.  

Market awareness + self awareness = consistent profitability.

Further Reading:

Strategies for Building Self Awareness

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How to Coach Yourself to Trading Success

 

Suppose we are all like Clark Kent:  an ordinary person on the outside with hidden superpowers and also a vulnerability to Kryptonite.  

Suppose you begin coaching yourself by looking, looking, looking through all your trades and all your life's successes to find your one superpower.

Suppose, in that search, you examine all your trades and all your losses to find your Kryptonite.

What if your path as a trader is to find your personal superpower and figure how it comes out in your trading?

What if your path as a trader is to find the Kryptonite that has created your life's greatest failures and figure out how that shows up in your trading?

The real enemy is viewing ourselves as average.  We are superheroes with super vulnerabilities.  Our path to success requires that we embrace both realities.  Then we can truly act as our own trading coaches.

Further Reading:

The Heroic Dimensions of Trading

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Overcoming Emotional Trading - Part Three: Eliminating Tilt Trading

 

In Part Two of this series, we took a look at the importance of focus and concentration in successful trading.  Indeed, if we are focused and "in the zone", there is no way that emotionality can disrupt our trading.  On the other hand, if we are caught up in P/L and the need to make money, every price movement will have the potential to be disruptive.  Going on tilt means that we become totally reactive in our trading rather than planned and proactive.  We act on fear, greed, and impulse and make decisions that we would never make if we were in our usual calm and focused state.  Tilt occurs when the needs we bring to trading dominate our need to understand and follow markets.  

Please review this post on a powerful technique for overcoming tilt trading.  The key to the success of this method is to train yourself to enter a state of mind and body that is incompatible with tilt.  This can be accomplished with breathing exercises, meditation, and biofeedback work.  It takes practice, but quickly pays off:  Once we can enter a calm, relaxed, focused state at will, then we can recognize in real time when we're starting to become emotional and quickly place ourselves in our focused zone.  The goal is not to eliminate emotion from trading, but to recognize it in real time and become able to shift gears when we need to.

As I noted in my talk with traders at SMB, it is the awareness of danger--the view that tilt is the enemy, not losing money on a particular trade--that allows surgeons and elite military troops to tackle dangerous missions and remove emotion from their work.  The key to eliminating tilt from our trading is to mentally rehearse situations of loss and frustration while we engage in exercises that keep us focused and slowed down.  As long as we're slowed down physically, we can't be worked up emotionally.  These exercises can be part of our daily preparation, where we reinforce the idea that losses in trading are normal and are not threats.  The real enemy is tilt and the loss of emotional control.  When we enter trading totally aware of the dangers of tilt with techniques that help us stay calm and focused, we're like the surgeon or soldier operating in a risky environment.  

A prepared mind never enters tilt.

Further Reading:

Training Your Focus

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Overcoming Emotional Trading - Part Two: Training Your Focus

 

So often, the problem with discipline in our trading is not an excess of emotion, but the relative absence of focus.  If we grow our capacity for focus, we activate the parts of our brains that are responsible for planning and problem solving--not the parts that respond to threat with flight or fight.  

In the first post in this series, we saw that utilizing mental rehearsal with respect to position management--our stops and even our take-profit levels--helps us take the emotion out of decision making.  One of the reasons for this is that frequent and prolonged mental rehearsal actually serves as training for focus and concentration.  When we review performance and rehearse our trading plans, we are creating an associative link between our state of focus and the execution of our processes.  Doing this again and again strengthens this link, so that when we face decisions in real time, we can activate our intensified concentration and bring to mind all the things we've been rehearsing in that focused state.

Training our focus helps us make decisions in the heat of battle.  Rehearsing our plans in the state of intensified focus cements them, so that they become automatic and not laden with emotion.

As I recently shared, brain wave biofeedback (neurofeedback) is an effective tool for training our focus.  When we get real time feedback about our state of concentration, we can figure out how to enter and stay "in the zone".  The biofeedback platform I use, Muse, allows users to engage in video games that give them better scores when they stay more focused.  Playing the games repeatedly and moving up to more and more challenging levels turns the biofeedback sessions into a kind of mind gym, where we strengthen our concentration and extend it for longer and longer times.  Working with a teacher to learn yoga or meditation can serve a very similar purpose.

What I find particularly helpful is mentally rehearsing stressful situations in trading *while* tracking my focus in the biofeedback.  Going through scenarios again and again and training ourselves to stay focused literally trains mind and body to take emotion out of decision making.  We are not only exercising our capacity for concentration, but our specific ability to stay focused in stressful circumstances.

We can grow our heads.  When we stay switched on, it's amazing how emotions switch off.

Further Reading:

Three Dimensions of Trading Focus

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Overcoming Emotional Trading - Part One: Mental Rehearsal and Stops

 

Unless they are trading very specialized strategies, most traders do not win on significantly more than half of their trades.  What makes them profitable is that the average size of their winning trades nicely exceeds the average size of their losers.  Indeed, it's not uncommon to see traders make a little or lose a little on most of their trades.  Their profitability comes from a few sizable winners and from the absence of sizable losers.  Risk management is absolutely key to consistent profitability.

This is why setting stop losses is vital to successful trading.  We need to clearly identify what would tell us our trade is wrong and commit to exiting immediately.  For example, I may see selling pressure in the stock market, with several minutes of negative NYSE TICK readings.  I notice that the market cannot move below the previous level at which we had similar selling.  On the first sign of buying pressure, I go long and my stop is at the most recent lows.  Right away, this provides a favorable risk/reward.  It also makes good sense to me because a violation of the recent lows tells me that buyers have not taken control.

Such setting of stops is as much a psychological exercise as a risk management one.  It is not enough simply to identify a price level for exit.  This must be an emotional commitment.  By mentally rehearsing scenarios in which we're stopped out--visualizing the market action that would take us out of a trade and how we want to respond--the setting of the stop becomes an emotional preparation to handle the loss.  If we are mentally rehearsing a negative scenario and making that scenario familiar--and if we know in advance how much we can lose on the trade and can accept that--then losing no longer becomes a shock or a threat.  Repetition takes the emotion out of negative scenarios.

We always want to create psychological safety in our trading.  Our sizing and our stop losses should be such that we can lose and always come back.  As I've mentioned in the past, we should never lose so much in one trade that we cannot be profitable by the end of the day.  We should never lose so much in one day that we cannot be profitable at week's end.  And we should never lose so much in a week that we can't have a winning month.  If we achieve that kind of consistency of process, we will be consistently profitable and cultivate a consistent trading psychology.

Further Reading:

Using Emotion to Change Emotion

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