"There are old traders and bold traders, but no old, bold traders."
--Old stock market saying
Recommended for anyone curious about what it's like to trade, or anyone interested in psychological aspects of investing. If you're not an active trader but considering it, this book will teach you quite a lot about what it might be like for you, and what problems and challenges you're likely to face.
I am not an active trader, not by a long shot: most of my investments are for holding periods of years or even decades, and this book helped me see, clearly, why short term trading is absolutely not in my wheelhouse and not something I would do well. This could be a valuable insight for you too.
In some ways this book is more about learning how to learn than about stock trading, and one of Steenbarger's fundamental ideas is understanding the importance of meta-cognition: knowing your level of self-knowledge (of your skills, your strengths, your weaknesses, your blind spots, your current emotional state). Your "knowledge about your knowledge" and your "cognition about your cognition" will drive your effectiveness--in trading or in whatever else you do. Many of us never stop to think about whether we really know what we think we know, and even fewer of us (myself included!) consistently think to check in on our current emotional state when under stress or duress. Both can be costly oversights.
Note also the author's discussion of first-order and second-order competence (see Chapters 3 and 4), which is a useful paradigm for readers learning any domain. There are also parallels and synchronicities here with much of the sports psychology literature I've read and reviewed here on this blog.
Also, there is tremendous value in Chapter 8, where the author shows the reader ways to apply various cogntive/behavioral therapy techniques to adjust and redirect our thoughts and behavior. This is something you can use in any domain, not just trading and investing! See bullet points 88-107 below.
Finally, there are pedestrian--and even circular--insights in this book, but they are still insights nonetheless. See for example the idea that a domain must truly captivate you if you're going to develop genuine expertise in it--it has to feel like play, not work. This might be a pedestrian insight, yet it's often lost on people taking up investing or trading. And let's not forget the critical (albeit totally circular) idea that should be every investor's Rule #1: in trading, to survive you have to survive. In other words: don't blow up. If you're ruined, you're out of the game forever!
Notes: [Warning: there are 127 of these (!) followed by a list of resources and a "to read" section of recommended books. Save yourselves and read no further!]
Introduction:
1) Steenbarger started his career as a psychiatrist in Syracuse, took up investing/trading as an avocation, then left to work at a proprietary trading firm in Chicago; he had already written his prior book The Psychology of Trading from kind of an ivory tower perspective, as he openly admits. This book, Steenbarger says, is "my perspective from the trenches."
2) The central idea of The Psychology of Trading is "the emotional problems faced by traders are extensions of the same problems we all face in dealing with life's risks and uncertainties."
3) "Trading is a performance discipline and trading performance can be cultivated through the same kinds of training activities that generate expertise in such diverse domains as athletics, chess, and the performing arts."
4) On making yourself successful but also seeking to remake yourself; being able to adapt to different market conditions. "In mastering performance, we master ourselves and, in so doing, become more than who we are. What greater calling can there be?"
Chapter 1: Where Expertise Begins
5) "What can we learn about trading expertise by studying expert performance and other fields?"
6) On two traders, Al and Mick, one who had emotional continence, who cleared his head and stepped away from the screen after setbacks, who didn't become irate at losses; versus the other, who became enraged, who obsessively re-reviewed every piece of market data, rehashing his mistakes and seething over them. One irony here is the guy going over his errors all the time gets double the experience, and gets that much more more deliberate practice (taking the phrase from Anders Ericsson).
7) "Good losers usually lose." --Vince Lombardi. [I don't think this saying works well in investing, honestly, there are too many situations where being wrong is part of the game; you have to accept being wrong and plan ahead for it, or you'll get blown up.]
8) The learning loop: attempted performance followed by specific feedback about the success or failure of that performance, followed by renewed efforts that incorporate the feedback.
9) Francis Galton and the "laboring instinct": the idea of being "game" or having an urge to reach higher levels of performance; see also Dan Gable and training for wrestling, as well as his book A Wrestling Life: The Inspiring Stories of Dan Gable.
10) Expertise as a process not a thing; expertise unfolds over the long term, starting with love of the game, simply having fun doing it in itself, followed by developing confidence with skill, practice, and then honing technique; with time you experience a transformation from extrinsic motivations to intrinsic motivations, enjoyment of "the craft" for its own sake. [This was my journey too in investing, although I still have attachment to results/attachment the size of my capital stake, which would be "extrinsic" here.]
11) On approaching trading like medical school rotations: six weeks of general surgery, six weeks of radiology, etc. Analogous "rotations" in trading might be scalping, then options, then FX; trying short-term holding periods vs longer term, or whatever. You'd hate some, love others.
Chapter 2: Finding Your Performance Niche as a Trader
12) "Look, kid, don't ever--ya understand me?--don't ever let anyone monkey with your swing." Ted Williams to a young Carl Yastrzemski
13) On selecting your niche, the idea that you can select it (rather than have it defaulted onto you) and you can find an environment/practice that nurtures you.
14) Genotypes (e.g.: high IQ) unlock phenotypes (e.g.: tendency to choose intellectually stimulating environments), thus you get a type of multiplier effect from this.
15) "The best traders I have known and worked with are tinkerers. They have refined their training over time, and failure has been their greatest teacher. Over time they become multi-dimensional, learning how to adapt to different market conditions... Your challenge may not be to learn markets, but to relearn them as conditions change." See for a contra-example a 1990s daytrader adrift and unprofitable during and after the tech crash.
16) On our cognitive style: how we make decisions, whether from the gut, or with careful weighing of pros and cons; with a lot of time, or very quickly, etc.; these are expressions of our cognitive style, how we best learn and process information. This is difficult for people to modify. We become our own greatest adversaries "when we attempt to operate outside our cognitive styles."
17) See also Nietzsche's (intriguing) claim that people are either Apollonian or Dionysian--processing the world intellectually or experientially--reflects an awareness of our fundamentally different wiring.
18) Note also your emotional style: do you prefer stimulation or stability, routine or novelty? Someone who craves activity and novelty will have trouble holding onto positions or staying out of slow markets; likewise, a patient trader who thrives on consistency will be rattled by too much activity or pressure to trade in and out of the market.
19) The author is extremely low risk, with an analytical style, who metaphorically "trades like a sniper": he doesn't trade slow periods, trades almost exclusively in the morning, keeps his exposure low, and waits for the right moment to take his shot. Interesting also how several pages later he describes what it was like for him to trade all day long: he found the process dull and meaningless, he felt unfulfilled as he was not dedicating sufficient time to learning and working with others; thus he wouldn't be a successful full-time trader.
20) Also on matching your style with the opportunity set available in the market. "Markets, like people, have their personalities; our relationships with markets will profit to the extent that there is compatibility.... Opportunity thus becomes a moving target for the active trader."
21) Adaptability: broadening your skills so you can match your style(s) to more types of market environments [becoming the proverbial all-weather investor].
22) On paper trading: the problem with choosing trading as a pursuit is you can run through your capital stake while still in learning mode! Of course paper trading is quite different psychologically because there's no real money at stake. But the idea is to do it to find out if it's fun for you, see if it's interesting and challenging to you.
23) Interesting section here matching the Big Five personality traits (neuroticism, extroversion, openness, conscientiousness, agreeableness) with potential training styles: for example someone with neuroticism should probably not do short-term trading and instead should lengthen his holding period to reduce the odds of impulsive decision making "under conditions of emotional arousal." Likewise if you're extroverted you're probably going to be more of a risk taker and thus gravitate to more aggressive training styles. If you have low openness you may want to find a stable routine and clear rules to follow. If you value novelty and variety you're going to want to be trying different types of trading methods, avoid rules-based trading, etc.
24) "Scouting for your strengths." "Find what you do well and then figure out how to do it in trading."
25) On mentors and mentoring. See sites like Trade2win, CCI Club, TraderFeed (Steenbarger's blog), as well as other trading resources at the end of the book.
Chapter 3: Building Competence
26) "For the first lesson, I want you to play over every column of modern chess openings, including the footnotes. And for the next lesson, I want you to do it again." Bobby Fischer's assignment to biographer Frank Brady, who had requested chess lessons. On humbly, earnestly doing the "wax on, wax off" part of learning a new domain.
27) You'll need "an adequate fund of knowledge" also competence is a necessary but not sufficient condition for expertise.
28) "A competent trader is one who consistently covers his or her trading costs. An expert trader is one who makes a consistent and acceptable living from his or her trading."
29) Important nuances about trading costs: they can really add up especially if you're active. You have to think about connection costs, stock screening costs and other software, bid/offer and other "spread" type costs, etc.; You may need to have significant returns to cover all these things and also be profitable. The example the author gives us on spread costs is particularly unsettling.
30) Can the novice accelerate the development of his competence? A good meta-question because it gets you to think about the "how."
31) "The path to competence for someone who eventually develops expertise is different from the path for those who remain competent non-experts."
32) On crystallizing experiences, having something special about a field that captures you. Debussy after discovering the compositions of Wagner. These produce a type of obsession in the person, a desire to immerse in the subject, the field becomes a sort of play, it's not effortful in the way ordinary learning would be. "Free time is as apt to be used for work as for non-work. This is because the work no longer feels like work. It becomes pleasurable in its own right." This is a reliable way to see when competence can lead to expertise as opposed to just normal competence building. Per the author: "if you do not experience the performance high, you are in the wrong niche."
33) The fundamental performance fallacy "Because we see expert performers working hard, we assume that hard work is responsible for their success. We thus believe that more of the normal, ordinary efforts--and intensification of the activities of common competence--will bring expertise." "There is a difference between hard work and immersion."
34) "A rage to master": consuming motivation to extend and express one's capacities. See the group of Euro FX traders who reached out to the author for advice: Steenbarger learns they don't trade the London open, and he wants to reach through the phone and shake the guy: where is your rage to master?
35) Flow/Csikszentmihalyi, see the idea of the "zone of proximal development" and related ideas. Weights can't be too heavy or too light for growth. Boredom (too easy) vs flow (just right) vs anxiety (too hard).
36) On self awareness and mood: self-awareness makes individuals aware of discrepancies between their real selves and their ideals.
37) First- and second-order competence: First order competence is getting good at a domain but then being unable to deal with changes in that domain, like a trader who did well during the tech boom but couldn't adjust to the post-2000 environment. An expert will master changing markets; we are always learning and relearning markets. "The performer with first order competence has a sense of skill at a task. The second order performer has a sense of being able to obtain the skills needed for any foreseeable task." You have to be confident enough to have confidence that you can learn to deal with iterations in your market environment. "First order competence is optimism about doing. Second-order competence is optimism about competence building itself."
38) Making money in the market versus making money in any market: are you an all weather trader?
39) On resilience and competence: see also athletes in a slump, "Once athletes think of themselves as being in a slump, they become self-aware--no longer in the state of flow. They begin to make changes in parts of their game that aren't broken. This creates further slump, which creates further deterioration of confidence and performance."
40) [One can't help reading the author's mentions of Lance Armstrong in various parts of the book without a rueful sadness about the central lie about Lance Armstrong's career. It really makes you think when you're writing a book or article whether or not you should cite a given celebrity given that so many of them seem to be either fake or to fall from grace afterwards.]
Chapter 4: Strategies for Cultivating Competence
41) On Victor Frankl making his wretched life situation into a sort of "patient" that he would study for years afterwards.
42) On finding a worthy challenge that energizes you, keeps you learning gives, you the desire to take on the challenge of performance development; it's not just about making money, in fact it can't be and still provide meaning if that's all it is.
43) On a structured learning experience:
* Clear goals at each step of the learning process
* Immediate feedback regarding one's actions
* A balance between challenges and skills
44) Drilling with purpose, each skill with a specific drill set. Note in the case of trading you will likely be both your own coach and your own student: thus you have to decide on and design the drills, skills and feedback. See later in the chapter for a sample trader's curriculum.
45) Practice of varied skills; also mixing skill practice in a random fashion (a tennis analogy would be mixing in forehands with a primarily backhand drill); seeking practice that encourages implicit learning (which is more resistant to emotional interference like anxiety or other emotional arousal).
46) Explicit learning (exit a trade when it goes a full point against you) versus implicit learning (where the student relies on developing a feel for performance rather than using an explicit set of rules).
47) "I hope by this time you can see that there is a huge difference between the learning of professionals and the learning of amateurs." Amateurs learn by hacking around whereas professionals learn with specific drills, specific progressions, sequences of skills, feedback and mentoring. The notion that you learn to trade by trading is actually not true, it's not true as you would think.
48) If you are mentoring yourself "your greatest challenge will be to create learning conditions that test you but do not break your spirit."
49) Many of the informational/educational sites the book refers to don't exist anymore: see for example Minyanville.com and teachmefutures; it kind of gives an indication of the life expectancy of people in this field as well as the life expectancy of resources in this field. Likewise the author talks about lots of different software and trading services and platforms, many which are likely no longer in business since this book was published (in 2007). Unfortunately these specific aspects of the book are not that useful.
Chapter 5: From Competence to Expertise
50) Trading as a type of selection environment where people who can't adapt become extinct; selecting for resilience, adaptation, flexibility, etc., leaving the genuinely elite performers standing. Also note the meta-idea that "we can control many of the variables that affect survival."
51) An expert will want development simulations that eventually become more challenging than the performance conditions they are intended to model: for example extra long (or multiple extra) rounds for boxing/wrestling; longer-term hostile conditions, etc., this accelerates expertise development.
52) It is interesting thinking about the nature of trading "expertise": an ability to read the market, to have a feel for the market ecology as a collective activity of a group of buyers and sellers meeting in a market; having a feel for what will happen, even though you may not know very much about the underlying assets trading hands! Reminds me of Taleb's "green lumber fallacy" where one of the best commodity traders in the world didn't correctly understand the commodity he was trading (!) conveying the idea that we can be really wrong about what exactly is the right "relevant expertise" in a domain.
53) One definition of expertise is "the ability to replicate skillful performance over time and across challenging conditions."
54) Anders Erickson's notion of deliberative practice versus normal practice: well-defined appropriate difficulties, specified goals, immediate feedback, specific things to work on, etc. Furthermore see automaticity as the result of effective learning, but also the enemy of new learning: we become less conscious of what we're doing and we're then challenged to continually move beyond what is in our comfort zone.
55) Useful working definitions of experts and expertise here: "The expert is one who continually adapts to extraordinary performance demands." Also: "Expertise is the result of implicit learning under highly challenging performance conditions." See for example traders who have seen so many markets and market scenarios that they develop an anticipatory sense of what will happen, seeing the likely event sequences to come.
56) It's interesting to read about Steenbarger's bafflement at the fact that the best traders in his Kingstree trading firm were in their twenties or early thirties, and had not traded for the so called "10-year rule," not even close. I think he's missing the idea that there's a huge driver in "trading success" from randomness, selection bias/survivor bias and a luck factor. It would be interesting to see how these guys traded over the next 10-year period to come, whether the market style or their "feel" moved away from them and de-adapted them. Steenbarger attributes their success to the quality and quantity of learning trials, this is possibly naive empiricism.
57) "Information chunking" of experts versus non-experts. More efficient perception is a product of deliberative practice and implicit learning.
58) Forward reasoning versus backward reasoning: reasoning backward from a conclusion can lead to tunnel vision, confirmation bias.
59) I also wonder if a lot of the expert traders that the author talks to would be totally disintermediated in this modern era of high frequency trading.
Chapter 6: Mechanics, Tactics, Strategies
60) How do expert performers develop an elite psychology? How can such a mental framework be acquired?
61) "Great results come from small improvements that are implemented with consistency." See Ted Williams describing the difference between batting .250 and batting .400 as just "laying off low and away pitches."
62) On the interesting difference between "trading well" and "making money": trading well means being fundamentally/mechanically sound, it doesn't necessarily mean high profits. Executing idea generation, assessing the conditions, placing and executing the order, position sizing and diversification, etc. You can allow you to shave out one or two mistakes or ill-thought out trades out of a given collection of trades, kind of like a race car pit crew shaving a second or two off of a pit stop.
63) On risk management: "most traders blow up, I find, because they failed to hold the downside on a small number of occasions not because of consistent losing." On fat tails, outliers, serial correlations, also on the size of your bankroll compared to the size of each trade. Worse, after a series of losing trades most traders "veer from proper mechanics"! Then you blow a full months worth of profits in a single day and can hardly ever recover from that trauma.
64) See Kenneth Grant in his book Trading Risk: Enhanced Profitability Through Risk Control: one's max daily loss is a fixed fraction of portfolio size, this causes you to bet less and less when you're losing and more and more when you're profitable, but the reality is the risk remains constant.
65) Steenbarger's comment on risk is interesting here: "In my own trading I have made the rule that I want to survive, relatively intact, eight straight days of maximum drawdown. If I set that drawdown at three percent of portfolio value, at the end of my debacle I will still have over three quarters of my capital intact."
66) Primary mechanics for risk management means knowing one's risk per trade per day and one's max allowable risk.
67) Some of the questions Steenbarger asks himself about a given short term trading environment can be applied for longer term investors too, also for thematic/style investing: identify what is distinctive about the present market, identify a historical lookback period that is similar to the present market, etc. This leaves you with three scenarios:
a) I have no edge (thus resist trading, this also saves your cognitive "bullets" for periods of highest opportunity)
b) I have a modest edge (maybe trade but trade small, with carefully managed downside)
c) I have a strong edge (here's where you're aggressive and maximize opportunity)
68) "Much of profitability, I found, is simply staying away from markets and market periods that do not offer a distinct edge."
69) On handling your personal finance during the good times so you don't run too much overhead and then run out of capital during times when the market goes against you; on staying in the game. "Let me be plain about this. I have seen more successful traders derailed by personal financial mismanagement than for any other reason." On how traders slip into conspicuous consumption and can't take it down when the market changes character and their profits drop or go negative. You have to stay humble about the nature of your future success, also note that the business (and success in particular) inevitably changes people. "The need to remake oneself is the norm, not the exception."
70) The paradox of self-observation and how it takes you out of the flow of what you're doing, but yet the necessity of observing and adjusting your actions; the author suggests videotaping your trading performance and reviewing it later after the close. Also, on how "the market" traded and how "you traded it", which are two different things.
71) Interesting discussion here of two types of edges: a structural edge (for example you know that other participants in an equity or in the marketplace are leveraged and thus have weak hands) versus an informational edge (like you know more about a company or know more about specific patterns likely to occur).
72) Also on following your sells to see what the price of the asset did afterward or how much a trade went further in or out of your direction after you exited.
Chapter 7: Performance Dynamics
73) On "going slow to go fast," a concept from race car pit crews: how fast market conditions can seem faster when you're not prepared or you don't have a clear game plan; also your perception of time is subjective in the sense that when you're prepared and calm time moves slower, the game moves slower. [Good advice here! When I have a perception that time or the game is moving too fast, it feels like a fast market, I train myself to not take action, or take very small bets.]
74) Another analogy for getting a more and more efficient "pit stop": getting more and more efficient with your information strategies, with various efficiencies in trading costs or spread costs, or missing a trade that you should have done, etc.
75) Also the author here gives an example of the difference between a team from Intel who mastered principles and practices of efficient operation versus a professional pit crew, the professional pit crew is far, far better because of the routine or practice that the Intel pit crew lacked.
76) Many traders only know their P&L or their account value, they won't know the nature of their trades in given market conditions, or how their trades do well or poorly broken down by market conditions: see the exhibit on page 169 where Steenbarger breaks down an oil trader's short-term trades, showing that almost all of her net losses come on rangebound days. It pays to see where your wheelhouse is in terms of market environments, and also where your wheelhouse is not--where you tend to hurt yourself.
77) What's also interesting about these analyses is it's a backward-looking way of classifiying markets. I'ts great to look at uptrend/downtrend/reversal days, etc.; but you don't know which day it's going to be except in retrospect! So if you can tell me that in advance today's going to be "an uptrend day" then sure, I know whether it's a wheelhouse day or not. The author doesn't seem to think about this at all.
78) Metrics to look at:
* Number of trades and number of shares/contracts traded per day: this number should be higher during rich opportunity markets and much lower during low opportunity markets. Also "flat trades" day after day indicate that a trader might be pressing on low opportunity markets.
* Sequencing of winning and losing days, just to see if there's any patterns streaks of winners and losers, then look for a potential underlying explanation.
* The number of winning, losing and scratched trades.
* Average holding time, broken out by winning, losing and scratched trades.
79) "The bottom line is that we cannot improve what we do not observe. Most traders haven't the slightest idea where they stand on these various metrics... We spend far more time studying markets than studying ourselves, and that is at our peril."
80) Note once again that Steenbarger figured out that his trading performance was far better in the morning than in the afternoon and thus curtailed his trading activity only to mornings, which helped his mental state and left him time for other personally rewarding pursuits.
81) "A useful measure of emotional mastery is consistency of results regardless of the profitability of the last several trades."
82) Journaling as another tool for self-observation
* The trading plan, goals, observations
* Good tool for mindfulness, helps you stick to your plan, etc
[I find my investing notebook to be tremendously important: it helps me consolidate ideas, keep track of longer-term plans for particular positions, keep in mind sizing rules and other aspects of investment decisions, helps me keep themes and investment theses straight and well organized, along with many other benefits--an 85 cent notebook literally becomes priceless as a result.]
83) Journaling also helps make life less subjective and more objective, it's hard to perceive much when you're in it; what is my mental/emotional state right now, how is it affecting my perceptions and behaviors?
84) On goal setting and visualization: these things obviously are not the same as actually achieving a goal: you need training, a plan, skills, talents and systematic practice, but the visualization and goal setting steps can help you focus your attention, channel your efforts, even facilitate new problem solving approaches.
85) "Results goals" versus performance/process goals: a results goal would be a trader's intention to make $2,500 per day, while a performance goal would be something more in the traders control, such as ensuring that one's largest losing trade is not greater than one's largest winning trade.
86) Note that goals can actually hurt performance if they're at the wrong level of difficulty.
87) On visual imagery (see more on this in chapter 8): mental practice with physical practice improves performance beyond the level of either by itself.
Chapter 8: Cognitive Techniques for Enhancing Performance
88) "All the training and skill development in the world will be for naught if your psychological patterns undermine your performance."
89) We often lack consistent intentionality because we don't have a unified self, we have selves with different attitudes, different perceptions based on our emotional state at that time, which alters our perceptions and behaviors. Note also the "continuity of the self" that we experience: as a result we identify with the emotional states that we are in and we believe that each of these (quite temporary and often inaccurate) states is a reflection of reality.
90) Also note the structural problem of talk therapy, "therapy is occurring while the client is in one state of mind [while] problems occur in quite another [state of mind]." This is likewise true when we use mentors or act as therapists for ourselves.
91) Acting as your own observing ego: look at yourself! Do you really want to be putting on trades now? "The goal is to help people stand outside themselves as observers, even as they are experiencing moment-to-moment state shifts."
92) "This is how cognitive therapy works: it enables us to change our interpretation of events so that we can reduce threat and rely upon our effective coping mechanisms." [Better still, it works with progressive practice and immediate feedback of deliberate practice, so it pairs well with earlier chapters in this book.]
93) "When we overreact to situations, we are usually responding with past coping techniques." See Freud's concept of regression. [This is a good quote to remember: we will default to past (poor) habits when under stress, when in reactance mode, etc.]
94) Note the author's mental checklist when he meets with a trader to think about the nature of that trader's problem: is it a situational problem, lack of training, changing markets, or chronic emotional problems interfering with other aspects of life, not just trading? Also, is the problem primarily a trading problem affecting emotions (lack of training, changing market) or an emotional problem affecting trading (situational or chronic distress)?
95) The example the author gives of trader James losing his moorings because his wife gets pregnant; using cognitive therapy to help James see that it was his interpretation of his wife's pregnancy, that its meaning to him was not the pregnancy per se but challenges he interpreted about supporting his family; thus he could change his interpretation of the event that he thought was stressing him: here, fallacy is the belief that "events are making me feel and behave this way."
96) See how a collaborative therapist or mentor can walk through different hypotheses to test their implications of your internal thinking.
97) Cognitive therapy and thinking about your thinking; identifying and altering automatic thoughts when necessary. Really nice to see Steenbarger quote and cite Albert Ellis and his ABCD sequence (activating event, beliefs, consequences, disputation) here. Ellis's works are tremendously helpful!
98) On keeping a "cognitive journal" to aid self-awareness and identify thoughts and beliefs that are inaccurate or unhelpful. [Note also the fractal/parallel here with keeping a wall chart and a money journal from Your Money or Your Life. It is impossible to change your financial situation unless you're unaware of it.]
99) "The best way to change a pattern is to become emotionally connected to the negative consequences associated with that pattern. Time and again I've seen people make remarkable changes, including ending long-term addictions, when they start viewing their problem patterns as personal enemies."
100) Cognitive therapy step 2: "thought stopping": saying out loud to yourself "Stop!" This is a cue to stop all activity and observe yourself; also it's a tool to build mindfulness, rather than automatically mind-identifying with negative assumptions and beliefs. You repeat a devil's advocacy (against these negative beliefs) day after day through your journal, and "the disputation process itself starts to become automatic."
101) Another tool, a really good one: imagine another person, someone you don't like, repeating your negative automatic thoughts to you. "It is truly interesting that most of us will not accept from others the kind of talk we engage in internally." Using an imaginary enemy lets us use our own reactance to dispute these already distorted thoughts, and thus view them more critically and reject them. Thoughts sound particularly silly once they are given voice, especially in this way!
102) Another tool: ask yourself "Who is talking right now?"
103) Another tool: "What would you say to a good friend of yours who was in your exact situation?" Or "You are the trading mentor, what do you want to say to your student?" The response will most likely be undistorted in both cases.
104) Adding a column E to the "ABCD" pattern: "Efforts at change" in your cognitive journal to assist you in structuring efforts to change cognitive patterns, how you would like to process the activating event.
105) Repetition is the most important part of this process, it's the key to the success of cognitive therapy, intercepting and reprocessing events in real time.
106) Common cognitive problem patterns: perfectionism, negative expectations, overconfidence, being overly money-focused.
107) Common problems with cognitive therapy come from:
* a lack of focus
* trying to change too many things at once (instead, work on one pattern at a time)
* a lack of repetition
* a lack of emotional intensity (for example your journal becomes rote and not emotionally salient and thus less effective)
Chapter 9: Behavioral Techniques for Enhancing Performance
108) Now we move to a new therapeutic modality: addressing conditioned responses where we respond autonomically to some stimulus without conscious involvement. Conditioned responses can be adaptive or maladaptive. [also a tangent here on psychological trauma, not sure it's necessary.]
109) On secondary anxiety: fear of experiencing the fears from a trauma, which sends you into regressing to older and less appropriate forms of coping; see for example a trader who experienced extremely large financial losses (this is the trading equivalent of trauma) and for whom even normal losses may be sufficient to retrigger him. "At that point the trader is no longer objectively managing positions in the market. He or she is desperately attempting to manage these roiling emotions."
110) On seeing trauma as on a continuum. Many traders show signs of moderate but sustained levels of traumatic stress per Streenbarger; although admittedly, "'moderate trauma' sounds oxymoronic." Yet moderate trauma can result in significant loss of emotional control at particular junctures in life; again think of this on a continuum but with climaxes at certain points.
111) "But why do so many traders display signs of moderate trauma?" Usually they're overtrading and trading with a size beyond their emotional ability to tolerate; thus a psychological risk exposure beyond where they should be; this is often lumped under the category of lack of discipline. Note also there's just as much danger in extreme trading success as in losses.
112) The author counsels all readers to trade in a steady and progressive manner without emotional highs or lows. If that seems boring to you "find another source of livelihood."
113) See also the famous saying "there are old traders and bold traders, but no old, bold traders."
114) Some of the basic self-taught self-induced behavioral therapy interventions:
* relaxation training, involving diaphragmatic breathing to reduce physiological and cognitive arousal.
* learning to use breathing/relaxation techniques proactively when you know you're about to enter a stressful market situation; also schedule breaks during stressful periods to breathe/relax.
115) Identifying specific triggers; cataloging them when they lead up to any given disruption of trading, as well as thoughts and sensation occurring at those times; some of the cues are triggers might be euphoria, anxiety, boredom, large or sudden losses, a streak of wins or losses, etc. The things that would cause you to ask "What set me off?"
116) Then consciously processing our triggers, see Donald Meichenbaum and his technique of "stress innoculation": visualizing a stressful environment or the stressful market circumstances and also yourself in that environment conducting a relaxation exercise like diaphragmatic breathing. This gets you to process the trigger event consciously with full awareness as well as manage it properly at the same time. With repeated enactment, you are literally crafting a new conditioned response. [Really amazing how much NLP-type techniques show up everywhere.]
117) Learning to evoke relaxation cues during stressful times rather than defaulting to the negative stress response or traumatic cue that elicits distress; this is an example of creating a positive trauma experience evoking a desired set of responses, what the author calls the "Yoda state."
118) "A majority of emotional trading problems are the result of partial traumatization."
Afterward: The Making and Remaking of an Expert Trader
119) This chapter is a portrait of trader Scott Pulcini--flaws, gifts and all. "Having watched Scott's trading as he put up some of those numbers, I find it difficult to entertain the notion of random, efficient markets." Early losses of his father and then adoptive father, he also had a "rage to master," he works in the pits at the CBOT, then gets a job at Kingstree as a prop trader, proceeds to lose money every single day for a month and a half...
120) Note that Scott demonstrated tremendous skill in extremely short-term trading but then the market moved and his niche kind of evaporated on him as volatility in the instruments he trafficked changed nature. "The greatest market stresses are those that reactivate our early personal struggles: losses and powerlessness."
121) Interesting to watch this guy slip into default behaviors but then see it and evolve and adjust. He buys a video recording rig and starts to watch himself trade, how he reacts and manages positions to make adjustments. Unfortunately that kept him in the market niche that he was in that was evaporating away, so this actually hurt him, ironically.
122) This guy's career arc doubles as a good review of the book itself, a helpful review. "In Scott, we see an embodiment of so many ideas from the previous chapters: the importance of finding a niche that exploits one's talents, the role of immersive experience in accelerating implicit learning, and the need to constantly evolve with markets." As well as the psychology of an elite performer, the rage to master, how to adjust to heavy stress, how to self-direct trading competence, as well as work on confidence-building on the way to expertise.
Conclusion
123) Interesting here to see the author's thoughts on the "meta" of writing and the challenges involved. "Writing is so much more than a mere transcription of one's thoughts. In putting those thoughts into words, we inevitably analyze them, play with them, and rework them." Ain't that the truth! I learn more (and much more deeply and more permanently) when I write about the things I've learned.
124) The key themes of the book:
* Trading is a performance field requiring initial talent and a development of that talent, and using your skills under various conditions of stress and pressure
* Trading has a variety of performance niches
* Performance as a function of training
* Trading expertise is a developmental process
* The learning curve can be accelerated
* There has to be ongoing expertise development
* The majority of emotional disruptions of trading are preventable, from inadequate training and resulting frustration, mismatches between strengths and the demands of the trading niche, and deficiencies and risk management
* Emotional disruptions of trading tend to be episodic
* Talk counseling and self-help are of limited benefit during emotional disruptions
* There's useful psychological help for traders and methods used with the treatment of trauma
125) Implications
* You have to build on what you're already good at
* There's a lot in the world of trading you need to filter out
* You're going to experience peaks and troughs and performance more often than not and you have to survive these. Use risk management, keep a low expense line with prudent savings, etc., you have to survive!
* You need to manage your emotional experience in trading, structuring things so that you develop experiences of learning mastery and confidence to help you develop a sense of efficacy
126) See also the photo below with concluding advice from Larry Connors: on finding a systematic method to remove most of the emotion and discretionary judgment from your trading--and to be prepared for this to take years; to develop a mindset where you focus on your system and think about your performance longer term, not on the basis of individual trades; commit to tracking it and quantifying it mercilessly; committing to doing better tomorrow; staying positive both in your thoughts and self talk; staying away from negative influences; and to teach others, which also helps you learn your own domain better yourself.
Resources for performance:
[I'm guessing a lot of these sites and resources no longer exist but some of them probably do]
Neo ticker: tickquest.com
Ninjatrader.com
tradingtechnologies.com
Resources for market data, charting:
Decisionpoint.com "Best single resource for sector charting and technical indicators"
Pinnacledata.com for historical intraday data on futures and stocks
Tickdata.com
Realtick.com
Barchart.com
Historical pattern research, other sites:
Note also the authors own site traderfeed.blogspot.com
Also his site Brett steenbarger.com which contains his articles on trading psychology on the web, a tremendous archive
Stock traders almanac (hirsch.org)
Markethistory.com
Vic Niederhoffer's site Daily Speculations: https://dailyspeculations.com/wordpress/
John Connolly's site teachmefutures.com
Lbrgroup.com (this is Linda Rashke's site for online trading and mentoring)
To Read:
***James Dalton: Mind Over Markets
***Dan Gable: A Wrestling Life: The Inspiring Stories of Dan Gable
***Dean Keith Simonton: Greatness
***Marcus Buckingham and Donald O. Clifton: Now, Discover Your Strengths
***Kenneth L. Grant: Trading Risk: Enhanced Profitability Through Risk Control
***John Forman: The Essentials of Trading
Brett Steenbarger: The Psychology of Trading
Larry Connors: How Markets Really Work
John Carter: Mastering the Trade
Nolan Zavoral: A Season On the Mat
John Forman: The Essentials of Trading
Joel Greenblatt: The Little Book that Beats the Market (highly recommend this excellent little book!)
Victor Niederhoffer: The Education of a Speculator (for investing geeks only)
Victor Niederhoffer: Practical Speculation
Mark Hatmaker: Boxing Mastery
Chris McNab: The SAS Mental Endurance Handbook
Anders Ericsson: The Road to Excellence
Ted Williams: The Science of Hitting
Nolan Ryan: Nolan Ryan's Pitcher's Bible
John Carter: Mastering the Trade
Richard Machowicz: Unleash the Warrior Within
Judith S. Beck: Cognitive Therapy: Basics and Beyond
Nick Bollettieri: Bollettieri's Tennis Handbook
Colin Wilson: New Pathways in Psychology: Maslow and the Freudian Revolution
Robert S. Albert, ed: Genius and Eminence