Psychology of trading. Enhancing Trader Performance by Brett Steenbarger

When I thought about the article on the topic of psychology of trading, on the one hand, I understood the importance of the topic, but on the other hand, considering the number of searches in search engines, it doesn’t cause much concern. This is very sad, because sooner or later, any trader is facing psychological problems.

I believe that the book “Enhancing Trader Performance. Proven Strategies from the Cutting Edge of Trading Psychology” by Brett Steenbarger must be read in the first place, before studying any strategies and before the start of trade. At least the first three chapters. They give the right direction in the approaches to learning trading. The vast majority simply begins to learn wrong. Most learners find teachers by chance (on advertising, advice on the forum,from a bought book). Next, they immediately wait for the “grail”, they want to see the entry points. They hope that by simply copying the strategy, they will earn money and set themselves for the rest of their lives. Question about teacher’s statement is still actively debated: if he earns or doesn’t do i. In this approach to trading, everything is wrong at all. You will not start earning, no matter how profitable the strategy was and how much money the teacher earned. If this happens, it will be a great success.

The “Steenbarger’s book” is also worth reading to “teachers”, often I hear from such people very dangerous trading tips. For example, people are categorically beginning to assert that some kind of trading style does not work and one needs to learn their style. I have repeatedly heard, for example, that scalping has died, day trading doesn’t work and it is necessary to engage in medium-term trade. Or, for example, they do not advise to “trade” on the simulators, and immediately go to the real market, and on the cheapest tool to trade the minimum volume. All this is wrong from the point of view of organizing the learning process.

The first stage of learning is to know yourself. You need to analyze your cognitive and emotional style, your strengths, and then search for a trading strategy, a niche on the market, considering your psychology. Your psychology is the foundation on which your trade will be built. It is very difficult to change psychology, your psychology will win your trading strategy very quickly if they do not match. Most do not get to trade because they are not in their niche. Books, seminars, which I saw, just skip this most important stage of training. Why did you decide that this strategy is right for you? Finding the right type of trade for you is the most important stage.

Before choosing a trading style and the market Steenbarger recommends to determine the comfortable time for you to hold a position. What is closer to you? Frequent opening of positions for a short time or medium-term, long-term retention of positions? The time question is very important. The sense of time depends on your psychology. Your discipline will depend very much on how you are comfortable in your time. In general, finding the right niche for you and your discipline are directly related. Discipline “improve” is impossible. If you are in the right niche for your psychology, you will be disciplined. Discipline will be natural for you.

I’ll tell you my story with discipline and time. It’s not from Steenbarger’s book, but from my trading experience. Over time, gradually, I found my niche. I traded volatile stocks of three issuers: Google, Apple and Tesla. I came to the fact that it was clear to me to trade the same securities daily, only three. I knew them well, I felt the tape, the volumes, the levels and the time when you need to wait, and when to open positions. I was lucky that from the first days of trading I managed the time. In fact, I scalped, held positions for 5, a maximum of 20 minutes. I managed scalping on a limited number of instruments. There were periods of two months without a single loss-making day, with rare unprofitable transactions. I was frustrated by the fact that there were often situations when I did not make a lot of deals, but at the same time I quickly closed the unprofitable positions. As it turned out, quickly closing losses is much more important than incubating profits.

Then I did not understand that I was in my niche, and tried to improve my trade, began to hold positions much longer, an hour or two. Started problems with discipline, I began to hold much longer losing positions. If in the scalp I had very tough stops, now I gave shares to breathe, focused on hourly schedules. The ratio of the number of profitable and losing trades has significantly worsened, serious drawdowns appeared in the profitability chart, which didn’t exist before.

I felt the stocks well, and in the end, they got in my direction, but, for example, the next day. I thought that, perhaps, it is worthwhile to increase the holding time of the position, that it is worth starting to postpone the position the next day. The situation became even worse. I began to hold unprofitable positions longer, and close the lucrative earlier to take at least something. Feelings of waiting for the opening session on the NASDAQ, when you sit from the previous day in a loss-making position, were terrible. My exit from the niche completely destroyed my discipline.

The worst thing about this was that under the influence of stress, I had negative patterns of behavior. Although I wrote earlier that psychology does not change, in fact, under the influence of strong stress, it changes very quickly and for the worse. Bad habits are fastened very quickly. I realized that I began to hold a loss-making position, 2-3 days, I could not close it, I just could not admit that I was mistaken, because earlier I was so rarely mistaken. The matter was further aggravated by the fact that the account on which I traded wasn’t controlled by the external risk manager. Nobody could stop me. I stopped myself when I lost profit for 6 months. I did not lose the account, but the grief from the incident was so great that I could not look at the stock market for a year. These are the results obtained because of the exit from my “niche of time”.

First of all, you should decide on your “niche of time”. To do this, use “paper trading” on historical data. Find a simulator in which you can feel the time. There are free simulators, where you can test the strategy, on the bars “cursing” the schedule. They will not suit you. We need a simulator that will build a graph in real time. The task for you will be to understand your feelings from being in position. What will you feel in 5 minutes, 15, 30, hour, when you move the position the next day? What do you like best? Often open and close positions within a day or keep a few days? Try at different time periods to open one, two positions or several at once. Are you comfortable watching several issuers at the same time? Find your comfortable time and comfortable number of tools.

Further, Steenbarger says that you need to try yourself on different markets and in different styles. This can be an intraday stock trade based on technical analysis, long-term trading based on fundamental analysis, statistical arbitrageshort-term trading in futures or currency pairs, options. Try trading with crypto-currencies. All these are naturally very different markets.

In addition to different types of market it is important to try to go through changes in the nature of the market that occur over time. It is necessary to try up trend markets and down trend markets. Markets that are in trading ranges. Test the periods with high volatility and slow markets. The change in the nature of the market has a very strong effect on trade. Usually people randomly choose the market, start trading on it when it accidentally is in the same phase that they understand (for example, the trend is upward), and then the market changes. The volume increases, volatility increases or the market vice versa, stops and trades in some range, and people begin to lose money, without understanding of what has changed.

You cannot do without simulators, if, for example, you choose your niche medium or long-term trade. To make hundreds of transactions, you need to train on historical data, speeding up the time in the program. In addition, just in such way you can try different kinds of markets. Trends, ranges, different volatility.

All markets and styles should be tested on demo accounts, and preferably on simulators and historical data. At the first stage of choosing a niche, you need to understand what you like, that you have some sort of positive emotional connection with a certain type of trade. At this stage, you must treat trading as a game. You are not yet learning to trade, you are looking for your strengths, which will develop later. At this stage, you do not need to enter the real market. It will be approximately the same as a first-grader after a week of physical education to compel to compete against the Olympic champion, and financial markets – this is the Olympic Games, where the best competitors compete. You will lose money, interest in financial markets, and will get nothing but disappointment. Even worse, if you due to stress get bad habits, which then are very difficult to fix. Bad habits, unfortunately, are acquired very quickly.

You can say that this will be a very long process, which will last several months. Yes, you need to learn a lot. Steenbarger gives good examples. People, for example, do not learn to control a jet fighter, just sitting in it and flying. People do not learn surgery simply by taking a scalpel and starting to cut people in the hope that something will start to happen during the operation. Any profession cannot be learnt like this, and neither can trading.

First you acquire knowledge, then consistently work out different skills, then there is a simulation of trading situations on the simulator, and only at the very last stage you begin to trade the minimum volume on a real account. Many people skip skills’ training and modeling. Such attempts to accelerate learning lead to nothing good. It’s a big mistake to think that only real trading can teach you. Tasks should correspond to the level of preparation. And at the initial stage, your knowledge and skills do not match the complexity of any market. As Steenbarger writes, the newcomer boxer will not learn anything, fighting against the champion. He will only go into a knockout. You will lose money faster than you learn something.

After choosing a niche, gaining knowledge, you gradually begin to practice your skills. For example, a week you work out only searching for a certain graphic model. Separately work out the inputs / outputs and staging stops, separately control the position (for example, set the position in parts and exit the position in parts). For different strategies and markets, this can be different skills. The learning process should be gradual, so that not to lose motivation, and that the skills are firmly entrenched.

Once you have consolidated these skills separately, you can collect them together and make a deal on the demo. Only after everything will work perfectly on the demo, when all the actions will be worked out till you can do it blindfolded, only then you can try yourself on a real account. This foundation and the skills that have been worked out till you can do it blindfolded will not allow you to shake your psyche in real trading. This foundation will give you self-confidence, without which you cannot trade.

The book “Enhancing Trader Performance” describes the learning processes in prop-firms. An example is given that people were forced to make hundreds of transactions a day on simulators. So, people train in more difficult conditions than in real trading. This is what gives the necessary hardening and brings the trade to automaticity. Confidence and automatism are very important. The results are based on habit. If there is no automatism, then you will miss good deals. Steenbarger says that you need to get to the point where you will open and close deals just like you are washing and brushing your teeth in the morning.

The most important thing is to find your niche and create a strong emotional connection with it. If you do not like what you are doing, then you will not be able to develop and overcome the learning difficulties. People work hard because they have found their niche. In addition, do not forget that the markets are constantly changing and what worked yesterday may stop working, your niche may disappear.

Successful traders study constantly throughout their career. This is a cyclical process from gaining knowledge, working out skills, trading on demos and moving to real trading. For successful development find a mentor who has experience of trading in your niche. It will help you understand your technique, determine what you are doing well and what is not, what you need to refine. He will help determine where the problem lies in strategy, tactics or psychology.

The book consists of many useful tools for both novice traders (keeping a diary, collecting and analyzing trading statistics that will create feedback, maintenance and subsequent analysis of video transactions and one of the most important skills – risk management), and for experienced professionals, tells about useful psychological techniques. For example, about pronouncing out our thoughts about the deal, the market or your behavior aloud. This gives you objectivity, allows you to play the role of an outsider. Tips are given for reprogramming traumatic stimuli. You can try to get rid of acquired bad habits, causing similar situations in safe conditions (for example, trading on a demo or trading a minimum volume).

There is a lot of useless information in this book, of course. It is overloaded with examples from sports that could be reduced. Beginners in trading will not appreciate that much or will not pay any attention. Only after you go through all the rakes in your own trade and read the book again, you begin to understand what’s what, and you begin to appreciate these tips. So, I strongly recommend you to read the book, and then again to re-read. This book will save your money, time and health.

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1 Comment

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