Trading Psychology Principles and Best Practices

 

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Principle #5:  Trading is a team sport.  I recently described a number of ways in which teamwork magnifies our learning and spurs our performance.  Teaming up with other dedicated traders adds layers of accountability to our decision making; it also provides us with multiple inputs for trade ideas and ways of managing risk.  Many psychological challenges of trading occur out of frustration, due to limitations of trading in isolation.  When traders are committed to helping one another, there is no room for emotionality and impulsivity.  Ultimately, however, traders who develop their own expertise within a team provide unique and valuable input to one another, supercharging decision-making processes.  It is very rare to find elite talent that develops in isolation.  In sports, in academics, in the arts:  mentoring from experts/coaches and learning from peers supercharges performance.  Who is making you better every day?  Who are you making better every day?  It's great to learn in a community, but it takes teams to build the performance that comes from commitment.  

Principle #4:  Great trading requires the ability to invest.  A member of an Olympic basketball team will work intensively (with coaching/mentoring) on every part of their game--passing, shooting, defending, rebounding, etc.--and will spend further time to work on practicing new plays and strategies tailored to the vulnerabilities of the opponent.  They invest hours and days of practice to prepare for competition.  Similarly, the best traders invest time in every part of their game, from finding the best opportunities to refining entries, sizing, exits, and the structuring of positions.  Working with a coach/mentor adds a layer of accountability to the trader's efforts and helps traders focus those efforts in the areas needing the most work.  For the professional, much more time is spent in practice, review, and making improvements than in actual performance.  The goal is not simply to win a game or make money, but to become your very best in every aspect of what you do.  The measure of a great trader is found in what they do outside market hours.  

Principle #3:  The best trading proceeds from values, not needs.  This is related to the idea that great traders have a passion for markets, not trading.  The challenge of understanding markets engages our curiosity, fueling efforts to dig deeper and dig differently.  That is what uncovers fresh edges in markets.  The best trading teams that I've worked with are just as engaged in markets when they're not trading as when themes are active and prices are moving.  In trading, as in other performance fields, success is a function of the ratio of time spent practicing and preparing for performing vs. the time actually spent in performance.  We can only sustain such intensive, deliberate effort if we find something intrinsically rewarding in preparation:  we value the process of curiosity and discovery.

This is why trading based upon needs never works.  When we need to trade--when we need P/L--markets control us.  We're no longer engaged in a performance mode.  In trading, as in our personal relationships, deficit needs are a weak foundation for longevity.  The best relationships, including our relationships with markets, are based upon positive values.  They are expressions of who we are, not vehicles for what we lack and need.

Principle #2:  Know who is on the other side of your best trades.  Many of the best short-term trading edges come from exploiting the behavioral tendencies of others in the marketplace.  What that means in practice is, not that you simply avoid emotional trading, but that you identify the emotional trading of others and take advantage of their cognitive errors and overreactions.  We had a great example on Friday, when the SPX went down on meaningful selling pressure (as measured by the number of trades hitting bids; the number of stocks trading on downticks).  Eventually the selling pressure led to a situation where buyers came in (as measured by volume lifting offers; the number of stocks trading on upticks) and price moved higher.  From that point forward, there were continued bouts of selling that could not push the market to fresh daily lows.  The bears kept selling, even as price and volume were telling them they were wrong.  That contributed to a rebound that was every bit as potentially profitable as the prior decline.  

The people on the other side of your best trades are those slow to update their views and positions.  They are trading their ideas/biases and not truly tracking market activity and its shifts.  The open-minded ability to adapt rapidly is one of the most powerful edges for short-term traders.

   

Principle #1:  The best trades come to you.  I have consistently found that, if I begin my market day with a definite idea and a desire to trade that idea, I'm likely to lose money.  If, on the other hand, I enter the day having done research but then adopting an open mind as to whether or not the market will follow its historical tendencies, I'm much more likely to place winning trades.  Really good trades are not something I bring to the market.  Really good trades emerge from being immersed in the market.  Watching and watching, listening and listening to what the market is saying leads to moments where it suddenly becomes clear what is going on.  The idea will come to me (as happened yesterday) that buyers cannot push this market higher.  That leads to a nice short trade to fade what has been happening.  

When trade ideas come from immersion in the market, we experience a quiet confidence in those ideas.  Calm clarity is a sign that an idea has come to you--that you're not simply imposing your needs, your views, your desire to trade on the market.  One of the most promising practices in trading psychology is training the brain to more consistently operate in a mode of enhanced focus.  The best trading comes, not from controlling emotions, but from building our capacity to stay in the zone.  When we wait and wait and wait and track the market and track the market over time, we are doing the very things that help train our brains.  

Success comes from active patience.  That's when the great trades come to us.     

How Teamwork Makes The Dream Work

 

5/28/2025 - What I see happening in the best training of trader talent at hedge funds is a marriage of top-down and bottom-up analyses.  Top down analyses are often historical studies of how a stock or market has behaved under a given set of circumstances.  For instance, if a company reports earnings that are significantly above consensus, how does its stock tend to behave over subsequent time periods?  Or, if interest rates make a new month-long high, how do different stock market sectors tend to behave going forward?  The top-down analyses provide a big picture of where there might be edge going forward.

The bottom-up analyses are all about shorter-term pattern recognition and how a stock or market tends to behave when price and volume meet certain criteria.  For example, if a stock trades with high relative volume and breaks above a two-day range, how does it tend to behave during the remainder of the trading session?  

The marriage of top-down and bottom-up analyses aids trading psychology because traders understand what the edge is, why it is there, and what to do about it.  That broader understanding contributes to confidence in the idea and the ability to take meaningful risk when the odds are in the trader's favor.  Great traders, like great poker player, know the hands they are playing, the odds of winning with those hands, and how to best bet those hands.

5/26/2025 - So how do teams in professional trading settings help their members trade at their best?  They do so by exchanging ideas on:  1) Why to trade (what are catalysts for buying/selling); 2) What to trade (what instruments/stocks will best exploit the reasons for taking risk); and 3) How to trade (what would provide ideal risk/reward entries; what would be opportunities to size up positions; how positions would best be structured for risk/reward).  In other words, teams don't just share ideas for entering trades.  They collaborate to get the most from those trades.  What to trade is just as important as why to trade.  How to trade is just as important as what to trade.  When teams review their trading together, they internalize lessons in making the most from their ideas.  

5/25/2025 - Below we can appreciate how teamwork helps us make the most of our talents and accelerates the development of our skills.  Teamwork also builds our trading psychology, as we are motivated to help others and serve as a role model for them.  Basic training produces soldiers ready for combat in grueling circumstances.  The right training in markets similarly produces a robust mindset in the face of uncertainty and setback.

So how can individual, independent traders gain the benefits of teamwork?  A first step in the right direction is to find a trading partner who is committed to working with you and who you are committed to helping.  A two-person team more than doubles the benefits of sound trading processes.  By performing separate research and then brainstorming findings, a trading pair can generate ideas that neither had come up with on their own.  Similarly, when reviewing performance together, the lessons learned from our partners, combined with our own lessons, can stimulate creative ideas for making trading improvements.  

Too, working as a pair improves trading psychology as each member focuses on helping the other.  That keeps everyone constructive.  The interactions tap into social motivations, keeping both members helpfully engaged.  Training programs for traders and trading communities can be great places to start the search for trading partners.  Following traders who post on social media may also lead to useful collaborations.  

Teamwork creates synergies...even when the team is two.

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I work with a number of portfolio managers at hedge funds.  Here are a few facts about them:  

*  All of them have a history of success in financial markets; that is why they are managing hundreds of millions of dollars or more.  

*  None of them discuss with me emotional, impulsive trading, FOMO, revenge trading, etc.  The issues that trouble beginning traders are largely irrelevant to experienced, profitable market participants.  Through their training, they have learned to operate by clearly defined processes.

*  All of them work in teams.  The best teams consist of members who have their own unique strengths.  When everyone on a team is better than everyone else in some area, then everyone can make everyone better and the whole is much greater than the sum of the parts.

*  The best teams work as hard on their teamwork as on their markets.  They constantly look to improve what each person looks at, how they look at it, and how they communicate.  They work as hard on team goals as individual goals.  They review team performance every bit as much as they review their own individual performance.

*  The best teams work hard on maintaining a positive, supportive culture.  They take time outside market hours to play and celebrate, as well as to meet and plan.  The best team members support one another and motivate each other.  When I have observed teams at hedge funds and prop firms like SMB, for example, I've invariably noticed that they enjoy their interactions.

Being part of a trading community is helpful, but it does not substitute for being part of a committed team that coordinates trading efforts day in and day out.  Show me a performance field where people earn their livings from stellar performance and I'll show you a field where performance is a function of teamwork.  Even the Olympic athletes succeeding in individual events train as a team and benefit from the teamwork of mentoring and coaching.

Read this carefully:  A lack of discipline in trading comes from a lack of teamwork in training.  No one becomes a disciplined, elite soldier on their own.  It takes teamwork to make our dreams work.

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The Truth About Trading Success

 

Well, my latest trading companion is doing quite well, as can be seen from her picture at her 6-week birthday.  It's amazing how personality comes out even at that early age.  There is much that we inherit that helps shape our cognitive and emotional functioning.  This shapes our talents, many of which appear surprisingly early in life, influencing our development.  We are wired so that the exercise of our talents is inherently enjoyable.  In that way, we pursue what we are good at and what speaks to us, leveraging our talents with acquired skills.

Back in 2010, I explained to a number of companies that solicited my involvement that the reason I didn't want to partner with them was that they are cheap whores.  Can you imagine promising eager young people that anyone who works hard enough (and who makes use of your exclusive services) can become a successful professional basketball players, Hollywood actors/actresses, ballet dancers, or chess masters?  The idea is absurd, because we recognize quickly that no amount of classes or coaching can substitute for raw talent.  The reason elite performance is elite is because it leverages rare talent and the mentored building of superior skills.

The worst of the worst in the trading world are the services that breathlessly promise traders a path to being successful.  They appeal to the egos of vulnerable people and their desperate need for success and then explain that failure is a function of emotional trading!  Well, the reason the trading is emotional is because the traders so desperately need to feel like successes.  They are not leveraging talents; they are needy.  They overtrade and fail to manage positions well because they are trading for ego and self-worth, not for truly professional reasons.

The truth about trading success is that it only comes by leveraging what we have already been successful at, because that is where we find our talents and passions.  We cannot trade to become successful.  We can become successful at trading by drawing upon our previous successes.  But, of course, not all of life's talents translate into trading prowess.  It's interesting that most people would readily recognize that not everyone can make a living from sports performance or artistic activity.  They have trouble accepting that with respect to trading, however.

A desperate need to be successful is not a passion for an activity.  The ones with real passion and talent are just as motivated to study and understand markets as they are to trade them.  One of most important questions we face is:  What do I do superlatively well, and how can I express those talents in my relationships, in my career, in my personal pursuits?  Life's goal is to grow into the very best version of who you already are.

So we'll let little Nomi, the six-week old kitten, figure out what she loves doing and then structure her environment so that she can do lots and lots of what she loves.  As the saying goes, "If you meet the Buddha on the road, kill him!"  Our enlightenment--our path--is to be found within, not by following would-be gurus.  Your talents are your trail and will lead you to mentors who can teach you skills.  When we pursue our talents, we'll always have a positive life P/L.    

TraderFeed Takes a Vacation

 

Well, we'll be bringing a new friend into the home, beautiful Siamese girl, who is currently with her Mom (see below).  As we learned from Molly Ruth, there's much to be said for stepping back, rejuvenating, and stepping forward in a fresh mode.  During the break, I'll be finishing an added chapter to the Positive Trading Psychology book outlining cutting edge strategies for sustaining high performance.  I'll also be building out the brain training resources and applying them to daily trading practice.

And when not writing and adding to the family?  Margie and I just returned from a tour of the only Jewish synagogue designed by Frank Lloyd Wright (see below).  The integration of architectural design, American themes, and religious symbolism was truly awe inspiring.  

The theme here is to never, ever go stale.  Seek out new experiences, invest yourself in fresh opportunities, and always learn and grow.  The best vacations are those that step back in order to step forward anew.

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Training the Brain by Building Intentionality

 

4/27/2025 - Suppose you were to place yourself in a state of intensified focus/concentration as outlined below vis a vis alpha state brain training.  In this state of unusual focus and clarity, you simply absorb shorter- and longer-term charts of the overall market and the stocks that are on your radar:  those that are "in-play".  What you find is that ideas and insights come to you.  When we look at the right things in the right way, we can experience the intuition and inspiration that underpin true conviction.  We can train our brains in pattern recognition.

4/25/2025 - Every item on our daily calendar has the potential to train our brains for success.  When we intentionally push ourselves beyond our initial fatigue points, we find what philosopher William James called our "second wind" of consciousness.  We have much more in reserve than we realize we have.  This can be observed when we tackle something very meaningful and important.  Suddenly, where we might have been feeling a lack of energy, we find plenty of inspiration and drive.  If we use each daily activity to challenge our comfort zones, we find that we can exercise and develop our capacity for purpose just as we exercise and develop our bodies.    

4/23/2025 - A cornerstone of most writing/teaching/coaching on the topic of trading psychology is that emotions--and behaviors driven by emotional impulses--interfere with successful trading.  By that logic, if we can learn to control our emotions and ground ourselves in our trading plans, we are most likely to be successful.

In this post, I will explain why this is incorrect.  My forthcoming book, Positive Trading Psychology, will cover this topic in detail.

Consider:  If we possessed total free will, there would be no need for any kind of performance psychology.  We would be able to choose the right actions at the right times and optimize our performance.  Conversely, if we lacked free will altogether, there could be no work on our performance.  No animal, for instance, can purposefully work on its survival behaviors.

What makes us unique as humans is that we possess partially free will.  We have the ability to envision a future and select actions to bring us to our desired state.  We also have the ability to become distracted from our goals and live life aimlessly.  We demonstrate the capacity for intention, but we lack consistent intentionality.  In the words of Russian philosopher G. I. Gurdjieff, we live much of life "asleep".  Summarizing Gurdjieff's work, author/philosopher Colin Wilson asserts that "Western man's concept of knowledge is built on a fundamental error:  the notion that the acquisition of knowledge only requires intelligence.  It requires, in fact, a kind of action.  Consciousness needs to be put into its 'active gear'" (p. 64).

In short, we lack full intentionality because we do not consistently operate in our 'active gear'.  The challenge is not an excess of emotion, but rather a lack of training of the will.  

A common response to this issue is meditation.  If we can learn to control our bodies and our breathing, the logic goes, we will become more purposeful beings.  My work on this issue suggests that this is not necessarily the case.

For a while now, I have pursued neurofeedback training (EEG biofeedback) to learn to sustain alpha brain wave states over increasing intervals.  Using the Muse device and its app, I spend a predetermined period of time listening to the sounds of a rainforest.  When my attention wanders and I go into beta mode, the rain sounds increase.  When I focus with unusual intent and enter alpha mode, the rain slows and eventually stops.  In a sustained alpha mode, I can hear birds chirping.  The app tallies up the proportion of time spent in beta and alpha mode and also counts the bird chirps.  

Interestingly, when I engage in basic meditation work during the biofeedback session (controlling my breathing and maintaining awareness of my body), I am able to remain very still (as measured by the app).  I feel relaxed and emotionally calm.  But I do not enter the alpha state.  In other words, reducing the arousal of the body (just like reducing negative emotions) is not sufficient to maximize intentional focus.  

After a sustained period of EEG training, reduced rain, and many bird chirps, I feel unusually clear and focused.  It feels like being a detached observer of events rather than being involved in the world.  Everything seems to move more slowly.  That state is achieved, not by relaxing and being "present", but by effortfully intensifying my conscious focus to make the rain slow down and eventually cease.

Perhaps most important of all, when I'm in that detached state, my perception--of life and markets--is clearer and it's no problem whatsoever doing the right things.  Purposeful action comes naturally, not with tiring effort.

Perhaps traders fail to follow their plans for the same reason that most of us fail to consistently pursue our life's goals.  It's not that we're too emotional; it's that we operate with underdeveloped focus and intent.  An intentional life--and intentional trading--has to begin by training our brains to sustain the "active gear" of consciousness.  In a relative state of "sleep", we cannot sustain purpose.  That requires ongoing training and practice, not the usual ministrations of coaching or self-help.

Further Reading:

Beyond Meditation:  Using Biofeedback to Change Behavior Patterns

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Making More By Trading Less

 

4/22/2025 - Is your primary interest trading, or is your primary interest making money in financial markets?  What if you're wired as a slower, deeper thinker--not as a quick pattern-recognizer--and your path to success is waiting for longer and shorter-term horizons to line up for fewer trades that you can allow to breathe?  Perhaps the greatest trading edge comes from exploiting short-term participants who can't take heat and exit trades that ultimately work out.  Here is an idea that you don't often hear:  The best path to a positive trading psychology is to align your trading with your information processing strengths.  For many, many traders, staring at screens and pressing buttons is training for impulsivity and distraction.  Success comes, not from trading what you see, but from what you understand.  

4/21/2025 - Note the overnight action across macro markets:  US Dollar down, gold up, stocks down.  If we are going to be selective in our trading and limit the number of trades we place to only the most promising opportunities, it's not enough to rely on short-term "setups".  To profit from the bigger trades, we need to assess the kind of market we're in and align with the bigger picture.  Is the market trading thematically across international markets?  Is the market trading rotationally, with money coming into certain sectors and out of others?  Is the market trading with above or below average volume and volatility?  Successful trading begins, not with prediction, but with understanding.     

4/20/2025 - What if we set a rule for our trading that said we're only allowed one trade per morning and one per afternoon.  That's it:  two trades per day.  How would that impact our trading results?  How would that impact our trading experience, including our psychology?

Clearly, if we could only place one trade per morning and one per afternoon, we would have to make those trades count.  That means that we would have to be highly selective, trading only the opportunities that stand out.  In turn, that pushes us to define very carefully what goes into a top opportunity worth trading.  What instrument would give us greatest bang for our buck?  What time frame/holding period would we pursue?  How would we size our top opportunity?

What if focusing on the criteria of winning cements a winning mindset?  What if controlling the frequency of our trading places us in greater control of our trading--and our trading psychology?  What if we could use the time when we're not trading to better understand what is moving, how, and why?  

Making more by trading less and by trading very selectively:  that pushes us to clearly define our rules and create experiences of mastery.  When we are highly selective, we control our market activity; it can't control us.

Additional Note:  Limiting the number of trades per day as suggested above pushes one to be very explicit about what goes into an A+ trade.  That makes trading much more intentional and far less reactive.  An important question for traders is whether their approach to trading reinforces reactivity and impulsivity or whether their approach strengthens their ability to act purposefully.  If we can only trade once per morning and once per afternoon, we have to become quite thoughtful about what we're doing and why.  Great example of how a shift in our trading can change our trading psychology.  

Ideas That Can Reshape Your Trading Psychology

 

4/15/2025 - A bit later this week, I'll be returning to the Syracuse medical school where I teach and introducing psychiatry residents to research-backed ideas on how we can accelerate changes in thinking and behavior.  A key concept from the research literature is that we cannot make lasting changes while remaining in our normal, habitual states of mind and body.  Emotional arousal and fresh experience open us to change.  A major shortcoming of our trading psychology efforts is that we review performance and set goals without transforming our consciousness.  In upcoming posts, I will share my experience with intensifying focus/concentration and processing trading lessons while in a sustained switched-on mode.  I strongly suspect that just as important as what we rehearse is the state of mind of our rehearsals.     

4/14/2025   The best way to work on your trading psychology is by cultivating your intentionality:  your ability to sustain purposeful action.  The mind is like a muscle, and it becomes fatigued.  When our minds become overloaded, the result is distractibility and the inability to efficiently pursue goals.  Becoming emotional is often a result of this problem, not the cause.  By dividing your trading day, week, and month into discrete units, setting goals relevant to those units, and refreshing as you move from one time period to the next, you maximize your brain's ability to stay focused on your best trading processes.  

What would happen, for example, if you were an active trader and divided your trading day into morning (NYSE open to 11 AM ET); midday (11 AM ET - 2 PM ET); and afternoon (2 PM ET to NYSE close)?  Each of these time units would be treated as a separate trading "day", with their own preparation, review, and goals.  Most important, there would be time in between these trading "days" to refresh attention and focus, learn from the most recent action, and reset.  If each trading "day" had its own, unique P/L, then twice daily you would reset P/L and frame fresh goals.  Breaking up the day in such a fashion, frequently resetting/reviewing, and setting new goals, how likely would it be that you would lapse into emotional trading and go on tilt?  How likely would it be that any such lapse would extend through your day?  When we make time intentional, we build our intentionality and gain greater control over our trading--and our trading psychology.

4/13/2025 - For traders, the best mindset is a set mind.  Notice that I'm not suggesting that the best mindset is a *settled* mind.  The idea that successful traders trade in a Zen-like mindset of peace is contradicted by everything I've observed while working on trading floors at hedge funds and proprietary trading firms.  A set mind is a highly focused mind, a highly intentional and alert perspective.  That is the mindset of any competitive performer; it is the mindset of the best military units.  Switched on, processing and responding quickly.  From that perspective, what you do during your morning preparation for trading can either set your mind or distract it.  What would happen if traders made use of brainwave biofeedback exercises to sharpen their perception and thought before entering markets?  What if the brain needs warm up exercises every bit as much as the body before an athletic contest?  Among professionals, trading psychology is never about controlling emotions.  It's about sharpening focus and achieving the mindset of a set mind.   

4/11/2025 - What if you viewed each day of trading as a gift?  The losing days and missed opportunities are learning lessons you've been given to make you better.  The winning days and trades are also wonderful opportunities to show you who you are and what you do well.  Every trading day approached in a purposeful manner gives you a gift:  a P/L in terms of your growth and development.  In that mindset, you can approach every trading day with gratitude, acceptance, and purpose.  The only negative mindset is one where we turn down the gifts we're being given.  Each of us has a path to travel in terms of becoming better people.  For some of us, trading is that path.

The Purpose of Vacation

 

4/9/2025 - So much of trading success is knowing when to switch off and when it's time for all hands on deck.  I encourage those interested in studying markets (and learning from today's market) to track the short-term action in the NYSE TICK alongside price action in SPX.  There are several great tells for the big market reversal, including very negative TICK readings (<-800) that could not push the market to fresh lows (between 13:00 and 13:18 ET), followed by massive positive TICK readings (>1000) that launched the rally (beginning 13:19 ET).  We only see huge TICK readings when stocks are either all trading lower or trading higher at the same time.  That only happens when institutions are moving baskets of stocks.  The selling that could not move us lower set us up for buying that lifted us much higher.  Great, great market lesson.   

4/9/2025 - Trading crazy volatile markets is quite different from trading slow ones.  I have had to adjust my charts, so that I focus on bars representing 1000 contracts traded as my quickest "time" unit rather than 5000 traded.  This meant that the overbought and oversold levels I track with the adaptive moving averages are hit more quickly.  I use the NYSE TICK; Dow TICK; NASDAQ TICK; and SPX TICK to gauge buying and selling interest across different segments of the market and had to switch those to 15 second bars.  The same patterns that I track in slower markets--overbought signals at lower price levels; buying activity that can no longer push the market higher--show up at these higher frequencies, but there are more patterns that show up during the day.  The result is that I have to be much more switched on, which means I need to be able to take mini-breaks that allow me to reset.  I also find that I have to talk to myself more often to maintain focus on levels for entry, exit, etc.  The goal is to maximize attention and minimize distraction.  By adjusting my charts, limiting my trading to familiar patterns, taking frequent mini-breaks, and talking out my ideas, I help ensure that the market's frenzy doesn't become my own.  Whew!

4/8/2025 - There are two purposes behind every great vacation period:  getting away and getting to.  We get away from routine, and we relax and rejuvenate.  That's good, but not good enough.  We also need to get to something positive and inspiring, whether it's the company of relatives or an amazing culture we haven't experienced before.  If, indeed, we find a way to take a regular "vacation", how can we step back from work, but also step toward something that energizes us and inspires us for the coming week?  The busier the markets and the more challenging the trading, the more important it is to come back refreshed for another day and week of opportunity.  What is your routine for exiting routine?    

4/7/2025 - When we take a vacation, what are we vacating?  Our daily routines, our usual surroundings, of course.  But the right vacations vacate our usual frames of mind, opening us up to fresh experiences and expanded awareness.  Margie and I are traveling the Amalfi Coast in Italy, sharing the experience with children and grandchildren and taking in breathtaking views and bustling villages.  New experiences lead to novel frames of mind, and those can lead to powerful insights. 

Vacations are perfect opportunities, not only to recharge, but to reset priorities and forge fresh paths.  The risk, for so many who work hard, is that routine--essential to efficiency--eventually leads to staleness.  Yes, we need established processes to be consistent in our performance, and we also need to step back from routine to recharge.  Ideally, we take a "vacation" each day by stepping back from chores and routines and immersing ourselves in something interesting, exciting, and inspiring.  Without the larger vacations, however, we run the risk of losing the passion that comes from vision.  Getting away from life's details is sometimes the best way of getting in touch with life's purpose-- 

Keys To Sustaining A Positive Trading Psychology

4/4/2025 - A great trading psychology is a constructive mindset.  We can be constructive whether we have been making or losing money; whether we have exploited the opportunity set or fallen short.  We stay constructive when we constantly learn from experience.  What did we do well?  What could we have done better?  How can we take these lessons to our trading going forward?  Review, observe, plan, perform, and then review again.  The best mindset is one of ongoing learning and improvement.

So ask yourself how you have performed in recent markets.  There has been no lack of movement in March and thus far in April, but it's different movement than we saw earlier in the year and last year.  It's more volatile and it's more thematic, with coordinated selling by large participants across asset classes.  If you've underperformed, is it because you have missed the change in markets or because you've seen the change but have had difficulty finding good risk/reward trades amidst the volatility?  Is the problem with your trading ideas, or is it with the execution of good ideas?  That will tell you a lot about what to work on.

Great trading requires flexibility of focus.  It's helpful to see the big picture of markets and the larger trends and patterns of what we're trading.  Ideally we want to ride the patterns created by larger market participants.  But to do that, we also need to see the micro picture of markets and what we're trading.  We need to see what is setting up right here and now in order to turn a good idea into a superior risk/reward trade.  Flexible focus is what gives us the ability to size into solid opportunities.  

4/3/2025 - What if we need to do cognitive warmups before intensive activities like trading just as we need to do physical warmups before athletic contests?  What if we rehearse our best trading practices and review our market performance during states of heightened concentration?  How much more would we take in and make use of if we truly eliminated distractions during trading?  What if the answer to trading psychology is not to eliminate emotion and impulsive behavior but to heighten concentration so that reactive trading becomes impossible?

4/3/2025 - 

A positive trading psychology is not one of optimism.  It is a focused, flexible, and open mindset.  We want to absorb as much relevant information as we can from how our market is trading and how related markets are trading.  At short time frames and within our market, we'll see patterns setting up.  At longer time frames and across markets, we'll notice themes playing out.  So often, the themes (or absence of dominant themes) tell us what to trade.  The short-term price movement tells us how to trade it.  All of this requires the ability to sustain intense focus--and the ability to switch our focus from time frame to time frame, market to market.  Attentional focus, like muscle strength, is something that can be exercised and developed.  When we build our focus, we improve our trading psychology--and our ability to recognize and capitalize upon opportunities.  I believe this is the most promising and exciting frontier in trading psychology.    

4/2/2025 - 

Whatever we process most deeply, we are most likely to retain.  Many times, we work on our trading by doing the right things but in a shallow and distracted state of consciousness.  As a result, we don't make lasting changes and we wonder why we lack "discipline".

What if we can train ourselves to sustain a state of heightened attention and awareness?  What if we specifically review our best trading practices and our most relevant lessons from our recent trading while we're completely focused?

Could it be the case that we know exactly what we need to do in order to improve our trading, but are in the wrong mind state for internalizing our lessons?

That's a potential game changer; more to come--

4/1/2025 - 

We become what we repetitively do.

We internalize our experience.

Insight and emotional experience catalyze change.  Habits make our changes lasting parts of us.

What makes us fall in love is not what sustains loving relationships.  The failure to make loving acts part of our daily experience explains why it's so common to fall in love and end in divorce.

Many traders fall in love with trading and markets.  They fail to sustain their passion through small, daily acts of success and fulfillment.

Many careers begin in excitement and run aground in mind-numbing routine.

If our daily trading processes draw upon our greatest talents and interests, our experience will be fulfilling whether or not that day happens to be profitable.

What makes trading rewarding for you outside of P/L?  Is it the intellectual curiosity of finding new ideas and opportunities?  Is it teamwork and the opportunity to learn and teach?  Is it mastering fresh skills and adapting to unique challenges?

Every trading day should tap into the passion that brought you to markets.

Mike Bellafiore of SMB Capital emphasized the importance of grounding our trading one trade at a time:  by placing One Good Trade.  

Success comes from grounding our trading careers one day at a time:  starting with One Good Trading Day.

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The Psychology of Playing a Big Market Opportunity

 

3/30/25 - The tariff announcement on April 2nd carries a high degree of uncertainty and the selloff in US stocks to end the week was one sign of that.  Given an oversold stock market, an announcement that is more benign than expected could lead to quite a round of short covering.  An announcement that conveys elements of shock and awe could continue pressure on U.S. stocks and the U.S. Dollar.  What is important from a trading psychology perspective is that it's not necessary to *predict* what will be announced.  That is because whatever is announced will impact large market participants and create short-to-medium term trading opportunities.  In other words, successful trader identify what *is* happening and respond quickly.  They don't become caught up in what they think will happen or what should happen.  Uncertainty brings opportunity, but only when traders and investors perceive a shift toward greater certainty.     

Keys to Great Trading

 

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3/28/25 - The best trades occur when markets are trading thematically, with the themes representing the actions of the largest investors who move the most money.  I am watching the correlation between equity markets overseas (VGK, EFA, EEM) and the U.S. stock market.  Until recently, those had been moving in different directions.  If we were to have genuine trade wars, we could see a toll taken on global markets.  On the radar as a potential opp...nice example in real time of allowing a big picture to inform short-term trading.

3/26/25 - Quick shout-out:  TraderLion is coming out with a book published by Harriman House detailing the process of finding your edge in markets.  It is so important to understand markets in ways that make sense to you; only then can you have the confidence to take meaningful risk and sustain your risk-taking.  What has worked for me is a lining up of time frames, where I look at my markets (stock index futures) on three different time frames.  As I've mentioned previously, the X-axis actually isn't time; each bar on the chart represents an amount of volume traded.  So the short-term chart has bars representing relatively few contracts traded; the medium-term chart has bars representing a moderate number of contracts traded; and the longer-term chart has bars representing open-high-low-close for a large number of contracts traded.  The charts thus adjust to the busyness of the market.  I overlay the same technical indicators on the three charts and wait for signals across all three.  I then turn to my very short-term chart of the NYSE TICK to time my entry, looking for occasions when buying/selling are drying up and reversing.  I'm comfortable taking sizable risk when everything lines up, and I'm comfortable not trading when signals are mixed.  As a very bright and creative money manager taught me, so much of success comes from not needing to trade.      

3/25/25 - Yet another key to trading success:  The ability to recognize, in real time, when your market is lining up for an unusually good potential opportunity and then to be able to size up for that opportunity without losing sight of sound risk management.  Selective aggression is all about being willing and able to wait for the right opportunities and, when those arrive, being able to pounce decisively.  Very often, a meaningful part of overall profitability for discretionary traders comes from a relative handful of trading opportunities.  A key to great trading is being able to outline--in detail--the criteria for a true A+ opportunity and then having the discipline to wait for those criteria to be met and being able to go from waiting to pouncing.  In my next post, I will outline the high opportunity criteria that guide my largest trading.  

3/24/25 - Here is another key to great trading:  understanding market context.  Reading the "text" of the market--the short-term patterns that set up--is crucial to good risk/reward entries and exits, but what tells you the "context" of market action?  Is this setting up as a trend day?  Are we seeing a rotational day?  Who is in the market; how busy are we and how far could we move?  How does today's market fit into the pattern of recent trading?  Is there a theme driving trading across asset classes?  Who is setting up to be trapped:  Are buyers and sellers moving price effectively, or are we seeing signs of exhaustion? 

Great trading comes from looking beyond the market and time frame we're trading to see the bigger picture that will be driving price action.  The microscope helps us get the best price for our orders; the telescope tells us what to order and why.      

3/23/25 - What if a key to great trading is found in what you do during the time when you're not trading?  What are you doing between trades to generate ideas, to track shifts in what you trade, to track shifts in the markets that impact what you trade?  When I compared being a trader to being a sniper, I pointed out that "It's a beautiful feeling to plan one good trade, execute it to perfection, and then sit back and wait for the next opportunity.  Any performance skill, honed and executed with precision, is a kind of work of art.  I think the best snipers understand that".  

The artistry of great trading is found in what we are doing when we're not staring at screens and firing away.  Like the sniper, we succeed because of our focus during the 99% of the time that we're not firing.  Creative vision is what makes a work of art.  It is also what makes for artful trading.  Skilled traders have studied and experienced so many markets that they can recognize when a meaningful pattern is playing out.  What if we only traded when that creative insight came to us, when we saw--truly saw--how things were playing out?  The cost of overtrading lies not just in the P/L lost, but in the damage we inflict upon our capacity for creative insight.  Our job is not to make great trades; it's to have the wisdom and restraint to allow great trades to come to us.    

Answering Traders' Questions

 

3/21/2025 - In the previous post, we looked at a psychological perspective about why traders might give back profits after a period of successful trading.  Now let's look at more logical, structural reasons for these givebacks.  

What's important to realize is that the market's largest participants trade thematically.  That is, they look for patterns of strength and weakness across different stocks, different sectors, different equity markets, and different asset classes--and they look for reasons that explain these themes.  When the themes change for economic or geopolitical reasons, the market that you are trading can shift greatly in its patterns of volatility/volume and correlation to other instruments.  If you fail to recognize the theme driving the change, you're likely to lose money and not realize why.

Themes have changed in 2025.  Look at how the US dollar has been trading against the Japanese Yen, the Euro, and the British Pound.  Look at the the US stock market (SPX) has been trading relative to the European markets (VGK) and the rest of the world (EFA).  Look at how interest rates have been coming down, but not as much in the junk bond market (JNK).  Look at how volatility (VIX) has expanded.

The dominant theme has been anticipation of economic weakness in the U.S., resulting in a flight from many U.S. assets.  If we only look at the charts of what we are trading, we miss the broader patterns that reflect what large investors are doing.  By noticing the patterns across markets, we can create tailwinds for trading our markets.  

3/20/2025 - I received an excellent question from a reader:

"I keep going through the same problems.  I make money for a while and then go on a losing streak and give it all back.  How can I change this?"

Brett's response:  Going through unusual ups and downs in performance can occur for psychological reasons, and it can occur for logical reasons.  The key to figuring out what to do is to first identify the problem.

You'll know that the problem is psychological if you review your trading in detail and see if your trading patterns change following winning periods.  Do you trade larger after you've made some money?  Do you trade more often?  Do you expand what you've traded?  Many times, out of confidence becoming overconfidence, traders will stop doing what made them money and lose a good amount of money.

The key is recognizing that making money puts you at risk!!  This is when you can get sloppy; this is when you can overtrade and oversize.  After you've made money, you want to trade extra carefully.  You want to ask yourself, "Would I be making this trade in this way if I had just been losing money?"  By putting yourself in the mindset of risk management, you prevent yourself from becoming overconfident and impulsive.  After a winning period, double down on sound trading process, knowing how easy it is to ease up on your rules.  

And what if your losing money is not due to a change in mindset, but a change in markets...how can you adapt to that?  I'll tackle that one in the next post!

3/19/2025 - This is an additional question from the group coaching session that addresses a situation faced by many traders in the recent volatile markets:

"Recently I am struggling to focus on process because I had quite a drawdown, and it's hard to push thoughts about making money now away.  Any advice?"

Brett's response:  Every drawdown/loss should be planned.  You should always know how much money you're willing to lose on a trade, how much you're willing to lose each day, and how much you're willing to lose each week and month.  Knowing your loss limits in advance helps in two ways:  1) You can be psychologically prepared for inevitable drawdowns and still maintain a focused mindset, because no drawdown feels like "quite a drawdown"; and 2) You always give yourself room to come back.  As I mention in my books, traders I worked with in Chicago (who were very short-term) had a separate loss limit for the morning trading and for the afternoon.  They always gave themselves an opportunity to come back on the day and, on losing days, they could always come back on the week.  Any planned activity becomes familiar and cannot trigger us.  Mentally rehearsing the downside and being at peace with your loss limits prevents frustration from ever impacting our trading.

If you've taken a large, unplanned hit, returning to trading in simulation mode (take P/L off the table temporarily), regaining your rhythm and focus, and then sizing up gradually allows you to recover.  If you can't focus on the market, it's time to work on your focus.  

3/18/2025 - Here's another question that arose during the coaching session:

"What are the skills you recommend to handle our triggers?"

Brett's response:  Notice that the trader recognizes something very important.  Our problems are not just negative trading behaviors (such as going on tilt), but whatever triggers those negative behaviors.  If we can control our triggers, we can prevent problems like overtrading from occurring in the first place.

The very first step is recognizing the trigger as it is occurring.  For instance, we might wait for a perfect entry on a trade only to see the market make its move without us.  That triggers frustration, and the frustration can lead to chasing the trade and executing at a really poor level.  We can only identify our trigger patterns by studying our preventable losing trades and dissecting how they occurred.  In the above case, what sets up the poor trade is not just the frustration, but the perfectionism that precedes it.  Very often, our excessive expectations set up our excessive frustrations.

By working on our thinking patterns as we're trading, we can ensure that we're going into trading with realistic expectations that won't frustrate us.  For instance, my first entry on a trade is always small and at a good level, not necessarily a great level.  "Good enough is good enough" is the mindset I rehearse.  I have favorable reward to risk and that's good enough for an entry.  If the position moves against me, but not to my stop, I'm prepared to add another clip at a more favorable level.  If the position moves immediately to my target, I've made a decent profit.  

Note that these kinds of thinking patterns can be mentally rehearsed before the market open and during trading reviews.  The best way to handle our triggers is to identify what sets them off and create new patterns of psychological win/win.

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3/16/2025 - In this series of posts, I will address questions that traders posed during my recent group coaching session with Agnieszka Wood and Alex Serzhanovitch.  If you have trading questions you would like me to address, please feel free to reach out to me via Twitter/X.

The first question is:  "Given that markets constantly change, how can traders develop the psychological flexibility needed to adapt their strategies without falling into emotional overreaction or hesitation?" 

Brett's response:  This is a great example of a situation where improvements in trading process can create improvements in our trading psychology.  Basically, what active traders need is real time information that tells them that their market is changing.  The professional traders I work with at hedge funds monitor real time price change, of course, but also real time market volume and volatility and real time correlations.  Very often, shifts in volume/volatility and correlations precede shifts in trading direction.  A simple example would be a stock that moves out of a range to the upside but then stalls on low volume.  If this was a valid breakout, one might expect short-term participants to take advantage of the move, resulting in increased volume and volatility.  One might also expect that, if the stock's upside breakout was valid, it would be accompanied by similar moves in other stocks in the same sector and perhaps by similar moves in the overall market.  By monitoring this real time behavior, traders can become highly flexible in jumping aboard moves or fading them.  Once the market changes are perceived and understood in a broader context, the trader can quickly adapt.  

Recently, the market made an intraday high but many sectors (including small caps) lagged significantly.  This was very helpful information in fading the strength.  Practicing trading with small size while making these observations and adaptations provides the experience that leads to confidence.  How the market moves is just as important as the moves it makes.  

What Kind of Trader Are You?

 

3/16/2025 - Thanks to a very smart market strategist for this quote: "Following your passion is a very “me”-centered view of the world. When you go through life, what you’ll find is what you take out of the world over time — be it money, cars, stuff, accolades — is much less important than what you’ve put into the world. So my recommendation would be follow your contribution. Find the thing that you’re great at, put that into the world, contribute to others, help the world be better and that is the thing to follow." — Ben Horowitz, “Don’t Follow Your Passion” advice to the Columbia class of 2015.

3/14/2025 - There are five key personality traits that spell the acronym OCEAN:

*  Openness to Experience - Our curiosity, creativity, and openness to new ideas;

*  Conscientiousness - Our attention to detail and process-based organization;

*  Extraversion - Our interest in social interaction; also relates to risk taking;

*  Agreeableness - Our ability to get along and work well with others; relates to teamwork;

*  Neuroticism - Our tendency to experience negative emotion and stress

These traits are basic to who we are.  Our job is to find the ways of trading that best play to our personality strengths.  A great way to see how your personality contributes to your trading success is to study your best trades and how you succeeded.  Across many winning trades, you'll see how you best engage markets--and that says a lot about who you are.

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3/13/2025 - Key question:  Are you a generalist in your trading, trading multiple markets and strategies, or are you a specialist, who does one or two things really well?  I work with portfolio managers who are generalists, covering world economies and markets and finding themes and opportunities, and I work with PMs who are specialists, finding opportunities in rates markets in terms of directional movement (due to shifts in economies and central bank policies) and relative movement (due to abnormal movements in one part of yield curves vs. others).  Are you a broad thinker?  A deep thinker?  How are you wired that makes you special as a person and as a trader?

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3/12/2025 - Here's another issue for trader self-assessment:  How do you best process information?  Are you spending the majority of your time in the information processing modes that work best for you?  Many traders process information through social interaction:  talking ideas and hearing ideas.  Trading in isolation isolates them from their strengths.  This is why being part of a team and prop firm like SMB, where there is constant interaction on the trading floor, can be so valuable.  Note that the training classes at SMB conducted by Jeff Holden are via Zoom and feature presentation, discussion, and chat.  Research in psychology is clear:  processing information more actively and in more ways leads to deeper, more effective learning.  If you process information best by reading, then read many things and even read aloud.  If you process information best visually through charts, then have a chart review process and others you share charts with.  Make it active.  Make it interactive.

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3/11/2025 - PM - Here's another thing to think about re: the kind of trader you are:  Do you have a sound, well-thought out, tested process for making money in markets that you sometimes fail to follow or do you need to refine your processes for generating ideas, sizing positions, managing risk, etc?  In other words, do you need to do a better job of following your ideas or do you need to generate better ideas and trade them better?  Is your psychology interfering with your trading, or are your trading weaknesses interfering with your psychology?  It's difficult to make improvements in trading performance if you're not clear on what needs to be improved.

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3/11/2025 - AM - Before I respond to the questions of those who attended my recent webinar, I would like to share the fruits of a discussion I had with an experienced and insightful trader.  The basic idea is that we experience emotional disruptions in our trading, not because we lack discipline or are overcome with greed or frustration, but because we are trying to trade in a way that doesn't leverage who we actually are.  When we don't play to our strengths, trading can be frustrating and unfulfilling.  The best path to wealth in trading is to draw upon the wealth of talents, skills, and interests we bring to markets.

There are basically two types of traders.  The first generally trades very short-term and places many trades per day.  This fast trader excels in pattern recognition and also excels in the ability to maintain high levels of focus and flexibility of perception within and across trading days.  Often these traders are quite competitive and love finding and pursuing opportunities that set up on the screens or in the order books.  For instance, the fast trader will notice volume expanding on a break out of a short-term range and may quickly jump aboard that move, with the idea of stopping out on a return to that range.

The second type of trader typically holds for longer periods of time:  intraday or multi-day/week swings.  The ideas being traded are typically less about short-term pattern recognition and more about themes that are emerging within and across markets.  For example, the bigger picture trader will see selling in stocks at the same time that there is buying in bonds, driving yields lower.  The trader identifies this as the start of a risk-off theme in the market and might buy defensive stocks and sell growth shares.  The intellectual challenge of finding and exploiting themes is a major motivator for these traders.

When the fast trader attempts to trade longer time frames, the near-term pattern recognition (a strength) can actually pose distractions.  When the bigger picture trader attempts to trade short time frames, the intellectual curiosity/creativity of finding themes (a strength) can actually interfere with timing.  In other words, problems with our trading may not occur due to our weaknesses, but because of a misapplication of our strengths.

What we do well and what speaks to us is our surest path to success.

Further Reading:

Mastering the Positive Psychology of Trading

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Identifying Themes in the Stock Market

 

3/9/2025 - The most effective way to work on your trading is to identify themes in your P/L.  Suppose you break down your P/L by market condition:  rising markets, falling markets, range markets, volatile markets, quiet markets, etc.  Suppose you break down your P/L by *what* you are trading and by the patterns you're trading.  Suppose you break down your P/L by time of day, by whether you've been profitable or not at the time of the trade, by the trade size, etc.  What will happen with these breakdowns is that you'll identify patterns in your trading:  what you're doing well, where you're falling short.  Before you can work on what's wrong with your trading it's important to diagnose what is working and what isn't.  Many times the answer to trading problems is to eliminate what isn't working and do more of what you do well.  An analytical journal such as Edgewonk can be very helpful in finding the themes in your trading.  

3/7/2025 - So what is the dominant theme in the current market?  Many traders would point to the fall in U.S. stocks and, yes, that has been significant.  I would argue, however, that the more dramatic and potentially troubling theme is the recent decline in the U.S. Dollar.  (Note, simultaneously, the steep rise in the Euro and the British Pound.  The Swiss Franc has been rising, as has the Japanese Yen).  I find the Barchart site helpful in tracking all this.  If you are a money manager, asset allocator, investment bank, or sovereign wealth fund, there is no more direct way to vote for or against an economy than through investment in (or divestment of) that country's currency.  The prospect of tariffs and layoffs, combined with the recent sense of rapidly changing decision-making, may be  undermining confidence in the U.S. economy.  The fall in Treasury yields accompanying the fall in the Dollar suggests economic weakness and the eventual possibility of a cut in interest rates from the Fed.  See also the weakness in stocks sensitive to discretionary consumer spending.  The challenge of change--personal as well as economic--is to make it both powerful and sustainable.  

3/6/2025 - What portfolio managers typically understand and individual traders often miss is that volatility is an asset class.  There are ways of trading volatility (especially through options structures), just as there are ways of trading directional price movement.  What's more, not only has volatility ($VIX) been ramping up lately in the US stock market, but also the volatility of volatility ($VXX).  In other words, volatility itself has been moving around quite a bit.  That is leading to large whipsaws in the market.  It's important to identify themes in the stock market, it's important to identify themes in individual equity sectors, and it's also important to identify themes in volatility.  The "setups" that work in a low volatility market are not necessarily the same as those that apply to a higher volatility market.  The patterns we look for in a stable volatility market are not those that necessarily apply to a shifting volatility market.  We need to identify all the themes occurring now, study how markets have responded to those themes, and create what Mike Bellafiore calls "playbooks" that apply to the market we're in. 

3/5/2025 - A key trading skill is identifying themes early in their unfolding.  Once the theme is obvious and well-subscribed, it is often subject to reversal as the latecomers are squeezed from their positions.  Yesterday I heard a lot from traders about the market weakness, concerns about recession and inflation, etc.  Just a couple of days earlier, the discussion was much more about buying weakness, playing for the bounce, etc.  No question, we have seen expanding weakness in the U.S. stock market.  Small caps (IWM) and consumer discretionary shares (XLY) have been particularly weak.  Indeed, yesterday we had well over 2000 stocks on the NYSE make fresh one-month lows.  When that has happened in the past, results have been mixed in the near term, but relatively strong 20+ days out.  Most notably, the near term results (3-5 days out) have been very volatile, with large gains and large losses.  Also across the NYSE yesterday, we had fewer than 20 stocks close above their upper Bollinger Bands.  That absence of weakness has been associated with favorable returns (bounces) over the next few days.  What all this is telling us is that market themes have a shelf life.  When they become obvious, that is when continuation becomes less certain.

3/4/2025 - One thing I've learned from working with portfolio management teams for many years is that they think thematically.  They don't just look at individual charts and decide upon entries and exits.  Rather, they scour a variety of markets and see how they are moving relative to one another.  In the patterns of strength and weakness, themes emerge that are very relevant to economic growth, stability, and weakness.  The first way of identifying themes is in the relative movement of various stock market sectors.  For example, take a look at the consumer discretionary sector, XLY.  It topped out in mid-December, well ahead of the overall SPX index.  Note how the raw materials sector, XLB, topped out even earlier and is well off its October peak.  Energy shares (XLE) are off their late 2024 highs, as are the industrial stocks (XLI).  Just during the first part of the year, we've seen the defensive consumer staples sector (XLP) outperform the formerly hot technology sector (XLK).  All of this suggests a reduced emphasis on economic growth.  

Notice how there is a pattern to all this:  First we see reduced participation when the broad index makes marginal new highs and then we see *changed* participation as bear market activity commences.  The relative action of the stock market sectors tells us whether the themes dominating investors are related to growth or defensiveness; whether we're seeing broader participation or reduced participation.  Charts can be very helpful in identifying points to enter and exit when you get to the point of executing your trades.  But it's themes that provide the most reliable information re: *what* and *how* you should be trading.

Further Reading:

Understanding Market Themes From Sector Breadth

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