Some Notes on Trading from Traderfeed (Dr Brett Steenbarger

 

  • Keeping risk-taking down until you see markets clearly – Losing small and gaining big is what makes for excellent risk-adjusted returns.  Accepting that you’re not seeing things well is half the battle.  By continuing to actively engage markets in small size, you give yourself an opportunity to regain perspective.  Trading larger or more often out of the frustration of losing is a recipe for disaster.
  • We can best learn and master markets if we are absorbed in them and their patterns.  We can best sustain absorption if we structure our learning so that tackling challenges provides us with shots of dopamine, not frustration.  It’s not just about fear and greed:  emotional experience is essential to trading mastery because it provides the conditions under which we best learn and perform.

  • Tadas makes the excellent point that there are many opportunity costs associated with developing trading mastery.  The time and effort required necessarily eat into other potential productive and rewarding activities.  It only makes sense to forgo those opportunities if one can find in trading the quality of emotional experience that comes from the flow state.
  • It is much easier to ride the ups and downs of markets and trading performance if you have a deep relationship that remains steady through life’s ups and downs.  Maslow had it right:  we only soar once our core needs are fulfilled.  It is difficult to pour ourselves into our life’s dreams if we’re facing our own inner void.  
  • It is much easier to ride the ups and downs of markets and trading performance if you have a deep relationship that remains steady through life’s ups and downs.  Maslow had it right:  we only soar once our core needs are fulfilled.  It is difficult to pour ourselves into our life’s dreams if we’re facing our own inner void.  
  • Fallible edge is central to how I think about markets.  Edge means that there is a reliable, repeatable, significant pattern within markets; fallible means that idiosyncratic, unique drivers of markets can always emerge and overwhelm that edge.  My model could shout “buy” from the rooftops, but that will not be helpful if military conflict erupts overseas or if a major bank announces a crisis situation.
  • In short, day trading is like American Idol tryouts.  A few contestants are really good and a few of those become true stars.  Many are fair to middling and never go anywhere.  And a few are so head-scratchingly awful–and unaware of their awfulness–that you wonder how they can persist in their talent delusion.  Is it stupid to pursue a dream?  Not if you wake up and are willing to do what’s necessary to make it a reality.
  • What *is* stupid is thinking that you can be in the elite group of performers without substantial deliberate practice and experience.  I know of several day traders who have enjoyed very long careers of consistent success.  Every one spends significant screen time absorbing market patterns and working on their craft.  
  • The one inescapable reality of anxiety is that you can’t overcome a fear of something by avoiding that thing.  That, for example, is how fears turn into phobias; how performance pressure morphs into performance anxiety.
  • Once you accept that problems shouldn’t be eradicated–that every problem represents a suboptimal strategy for meeting a legitimate need–fresh paths to solution appear.  
  • In the case of taking profits prematurely, that need might be a need for psychological victory and a fear that such victory will be lost should the market reverse.  This often occurs when traders measure their progress and success solely in outcome terms (by their P/L), rather than in process terms (by how well they engage in the right trading behaviors).  One of the advantages I’ve observed by having traders keep best-practice checklists is that those become a kind of report card, enabling the traders to identify their good trading.  When success is experienced in process terms, the insecurity that leads to premature profit grabbing no longer drives behavior.
  • The key idea is that problem patterns often represent ways of meeting needs that unfortunately bring their own consequences.  If you can identify the need that lies underneath the problem and find a better way to meet that need, the problem suddenly yields way to a solution.
  • Searching and re-searching – Stepping back from trading doesn’t mean you step back from markets.  When times are tough, great traders double down on research and idea generation.  It’s that pipeline of ideas that will produce the next winning trades.  Research and development is what ultimately keeps your trading business alive; turning the search for trades into trading re-search turns a losing period into an opportunity for advancement.  Drawdowns are inevitable.  Slumps are not.  Your job in coaching yourself is to learn from the drawdowns and use them as opportunities to make yourself better.  A drawdown only becomes a slump when it gets inside our heads and takes us away from our core strengths.  Drawdowns become business opportunities when they focus us on those strengths and prod us to expand them.
  •  what are common elements in the strategic edge sought by these discretionary stock traders?  I observe several:  1)  A discipline of pre-market preparation:  All emphasize the importance of process and preparation: sticking to what you do best and being prepared for fresh opportunity–and threat–each market day.  2)  Selectivity:  All have some methods for screening stocks and focusing on a core group that offer opportunity.  Often, these screens focus on stocks that are trading actively, that show good movement, and that are setting up for directional price moves because of earnings reports, breakout patterns, etc.  3)  Patience:  This follows from the first two.  The experienced traders emphasize risk management and waiting for high quality trades, rather than overtrading.  All stress understanding the current market environment and adapting to it.  4)  Diversification:  These traders don’t focus on one or two opportunities, but look at a range of promising shares and setups and trade more than one thing at a time.  All the proverbial eggs are not in one basket.    5)  Simplicity:  My sense is that the traders are focused on understanding what is happening now, not predicting what will happen in the future.  If I had to guess, I’d say that they are talented in detecting the flow of activity in and out of shares and are riding moves as they are getting under way.  They don’t appear to be researching deep value and holding for long periods to wait for that value to be realized.  So much of this kind of market edge boils down to pattern recognition, and so much of pattern recognition boils down to practice and immersion in markets.  This may be why the traders I selected all make extensive use of videos in their training:  they are attempting to hasten learning curves by providing more practice time in pattern recognition.
  • Whether you end up working with a counselor, mentor, or coach, other ingredients of success include:  1) a concrete focus for change; 2) active work between meetings to make changes; and 3) the ability of the helper to provide fresh perspectives–and new directions–for the change process.  In other words, change is most likely to occur when you specifically spell out the desired change, work actively and consistently to achieve that change, and receive useful and insightful guidance from the person you’re working with. 
  • One of the distinguishing features I’ve found among successful traders is that they innovate.  They don’t look at the same markets in the usual ways.  They find new ways of viewing and trading markets.
  • If I hold a deeply held belief that everything I do is destined for failure, then it’s understandable that part of me would hold back from taking risks even though another part of me wants to take a calculated leap.  If my belief is that it is selfish to make money and focus on success, it’s not surprising that I won’t sustain the drive to achieve in business or in markets.
  • When I first met Julian, he had no particular experience with quantitative analysis or Excel programming.  He taught himself the relevant skills so that he could become multifaceted in his views of markets.  His key insight is that markets don’t move in isolation:  many times they move thematically, in response to macroeconomic developments.  By tracking the correlated movement of assets, it is possible to read the themes that are driving market action and bet either on the continuation of those themes or their reversal.
  • When change is each day in small ways, you gradually experience yourself in new ways…and soon that experience becomes part of your identity.  Most people are not immune to change.  They are immune to big changes.  The key to remaking yourself is to find the small steps that add to big changes without setting off alarms.
  • Since 2013, I notice that the average five-day return in SPY has been about .25%.  When the correlation among sectors has been above .80, the average five-day return has been .49%.  When the composite correlation has been below .80, the average five-day return has been .06%.  When stocks peak, they tend to move their own ways as sector rotation sets in and strong shares stay high while weak ones begin their declines.  When stocks fall, they tend to fall in unison–and then often bounce back in unison.    It’s not just about how stock indexes move; it’s also about how stocks move relative to one another.
  • I mentioned a little while back that the website Abnormal Returns is part of my daily market preparation.  I have found that Tadas is both thorough and discerning in his selection of daily links across the landscape of financial journalism.  It doesn’t make sense for me to review everything out there when someone with an informational edge is already doing a good job of curating content.  Yes, there are things I look at independently, but if I’m looking for fresh perspectives, an efficient solution is to start with the pieces selected daily by Abnormal Returns.  My best practice is to go with an assumption:  Somewhere in the collection of daily links, there is something I should know to help with my idea generation.  My job is to scan the array of links and articles and find the one, two, three items that provide me with a fresh perspective.  I don’t leave the site until I have found content that can feed my brain.  So, for instance, this morning, I was checking out articles on housing starts, inflation, and the distribution of returns across market sectors.  I am very interested in the expectations of traders vs. what markets are actually telling us and pricing in.
  • The rabbi and I discussed change and he made an excellent point:  You can look at an ideal behavior–or someone who is ideal–and that can be inspiring.  But most of us are far from ideal and need to change one action at a time.  If you want to be a more generous person, you start by doing one generous thing each day.  No big change–just a step in the right direction.  Now it turns out that this is how people overcome many forms of anxiety, such as phobias and PTSD.  They very gradually, but very steadily, face the thing they are afraid of and build one successful experience after another.  Each step is not a large one, but after a while people are facing things they could never have tolerated earlier.
  • His track record wasn’t perfect, but it was his willingness to keep score, stay intellectually honest–warts and all–, and open the kimono in the search for peak performance that made me strongly suspect he’ll get to that next level–and beyond.
  • But my experience is that one success factor trumps all others:  great helpers care greatly about helping.  They are personally invested in your success and go the extra mile to make the coaching or mentorship work.  With the less effective helpers, you have the nagging sense that the meter is always running, that they’re in the business of generating billings.  Effective helpers plan for the end of helping: they want you to be independent and reach the point of helping yourself.  Less effective helpers want to milk the cash cow: they invent endless ways to keep the coaching or counseling going. 
  • Those are the traders you want in your network:  they will bring out the best in you through their devotion to achieving the best within them.
  • If you’re not working on change daily, you’re not working on change.  And if you try to accomplish massive changes in one day, you run the risk of activating competing motivations and derailing your efforts.
  • There is no more important coaching relationship than the relationship you have with yourself.  How do you talk to yourself when you start your day?  When you are in losing trades or drawdowns?  When you are traversing your learning curve?  Our self-talk creates our most immediate psychological environment.
  • To overcome anxiety, gradually face the fearful situation–first in visualization, then in the real world–until that anxiety is extinguished.
  • Do you talk to yourself the way you would speak with a loved one or a dear friend?  Do you motivate yourself?  Inspire yourself?  Challenge yourself?  Support yourself?  You wouldn’t want to work for an employer that wasn’t constructive, motivating, inspiring, challenging, and supportive.  Why would you settle for that as your internal workplace?
  • Effective self-talk is much more than empty positive thinking:  it’s staying constructive no matter how challenging life and markets become.
  • I’m not sure pursuing day trading is any more stupid than pursuing a Hollywood career or a calling to become a WWE wrestler.  Many are called, few are chosen in most performance fields.

 

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