How to master trading psychology | Brett Steenbarger

Summary

In this insightful episode of 'Chat with Traders', host Aaron Fichtner interviews Dr. Brett Steyn, a renowned trading psychology coach and author. The conversation delves into the intricacies of trading psychology, emphasizing the importance of understanding market dynamics and personal adaptability. Dr. Steyn shares his journey from philosophy to psychology, and how his fascination with human potential led him to specialize in trading psychology. He discusses the significance of recognizing and leveraging one's strengths, the role of creativity in developing unique trading strategies, and the necessity of cultivating resilience in the face of market volatility. The episode also touches on the challenges of goal setting and the psychological barriers traders face, such as performance anxiety and the fear of loss. Dr. Steyn provides valuable advice on maintaining a balanced life, focusing on process over profit, and viewing losses as opportunities for learning and growth. His insights offer traders a holistic approach to enhancing their performance and achieving long-term success in the markets.

Takeaways

• 📈 **Adaptability is Key**: Successful traders are adaptable and evolve with the markets, which are always changing.
• 🧠 **Mindset Matters**: Identifying whether a trading issue is psychological or logical is crucial for addressing it effectively.
• 🧘 **Self-Awareness**: The first step in breaking bad habits is becoming aware of them as they occur.
• 🚫 **Avoid Emotional Trading**: Frustration and the desire for revenge trades can lead to poor decision-making.
• 📚 **Study and Learn**: Traders should study themselves and the markets to understand what works and what doesn't.
• 🏆 **Strengths Over Weaknesses**: Focus on building on strengths rather than just correcting weaknesses.
• 💡 **Cultivate Creativity**: Seeing opportunities that others miss is a mark of a successful trader.
• 🔄 **Develop Best Practices**: Turn best practices into habits through consistent repetition to influence behavior positively.
• 🎯 **Goal Setting**: Effective goal setting involves having a daily plan that leads towards the achievement of the goal.
• 💰 **Money Mindset**: Thinking in percentages and basis points rather than dollars can alleviate the pressure associated with money.
• 🤝 **Balance in Life**: Having interests and fulfillment outside of trading can provide balance and resilience during market downturns.

Q & A

What is the biggest secret of the best traders in the world according to the transcript?

The biggest secret is that they are just like everyone else, but they work hard to learn the markets, discover what works and what doesn't.

How did Dr. Brett Steyn Bergers' interest in trading psychology begin?

Dr. Bergers' interest began unconventionally through philosophy. He was inspired by the novel 'The Fountainhead' by Ayn Rand, which led him to consider psychology as a field to help people reach their potential.

What does Dr. Bergers suggest is the first step in breaking a bad habit?

The first step is to become exquisitely aware of the habit's presence. It involves building self-awareness and mindfulness to recognize the pattern as it starts.

What does Dr. Bergers mean by 'making friends with loss' in the context of trading?

He means that traders should view losses as valuable information that tells them something about the market's changes, rather than something to fear or avoid.

What is the ABCD approach to trading psychology as mentioned by Dr. Bergers?

The ABCD approach stands for Adapting to market changes, Building on strengths, Cultivating creativity, and Developing best practices.

How does Dr. Bergers suggest traders should think about their weaknesses?

He suggests that traders should focus on their strengths and try to work around their weaknesses. It's rare to turn a weakness into a strength, but one can adapt strategies to avoid areas of weakness and capitalize on strengths.

What is the importance of adaptability in trading according to the interview?

Adaptability is crucial because markets are always changing. Successful traders must evolve with the markets, which involves both adapting trading methods and dealing with the psychological challenges that come with change.

What role does goal setting play in a trader's performance according to Dr. Bergers?

Goal setting is important, but it should be accompanied by a specific, daily plan. Goals without a plan are just wishes. It's also better to focus on improvement and risk-adjusted returns rather than absolute monetary goals.

How does Dr. Bergers recommend traders deal with the pressure of trading?

He suggests having something in life more important than trading. This provides a balance and a source of renewal and inspiration during periods of drawdown, reducing the negative effects of pressure.

What does Dr. Bergers say about the common practice of focusing on monetary gains as a measure of success in trading?

He advises against setting monetary goals as they can lead to performance anxiety. Instead, he recommends focusing on improvement and risk-adjusted returns.

What is the significance of cultivating creativity in trading, as discussed by Dr. Bergers?

Cultivating creativity is essential for success as it allows traders to see opportunities that others might miss. It's about seeing the world through fresh eyes and adapting to changing markets.

Outlines

00:00

😀 Introduction to Trading Psychology with Dr. Brett Steyn Berger

The episode begins with an introduction to Dr. Brett Steyn Berger, a renowned trading psychology coach and author. Host Aaron Fader discusses the importance of learning from traders' journeys, adapting to market changes, and enhancing trading performance. Dr. Berger shares his background, which includes an unconventional entry into psychology via philosophy, and his realization of psychology's role in enhancing human potential.

05:04

📚 Dr. Berger's Initial Foray into Trading and Psychology

Dr. Berger explains how his interest in trading began during his school years and continued in parallel with his academic pursuits in psychology. His decision to write a book, 'The Psychology of Trading,' marked the convergence of his dual interests. The book's popularity led to a full-time offer from a trading firm in Chicago, where he began applying psychological principles to help traders manage the mental aspects of trading.

10:05

🤔 The Intersection of Psychology and High-Frequency Trading

In Chicago, Dr. Berger worked with market makers and electronic futures traders, who traded at a very high frequency. He observed that these traders did not rely on traditional technical or fundamental analysis, but instead on real-time market data. His role was to assist them in maintaining focus and making sound decisions despite the intense pressure and rapid pace of their work.

15:09

💼 Working with Top Traders and the Role of a Trading Coach

Dr. Berger discusses his work with top traders and asset managers, emphasizing that even successful traders seek coaching to maintain their edge and adapt to market changes. He highlights the importance of understanding when trading issues stem from psychological factors versus logical or methodological problems in trading strategies.

20:10

🧘‍♂️ Mindfulness and Breaking Bad Trading Habits

The conversation shifts to the topic of breaking bad habits and the importance of mindfulness. Dr. Berger outlines a process for recognizing and changing unhelpful patterns of behavior, which involves becoming aware of the habit, making a conscious effort to pause and self-regulate, and then engaging in alternative, positive behaviors.

25:13

🌟 ABCDE Framework for Successful Trading

Dr. Berger introduces the ABCDE framework for successful trading, which includes adapting to market changes, building on strengths, cultivating creativity, developing best practices, and maintaining a learning mindset. He explains that successful traders are those who continuously study and adapt, leveraging their unique strengths and strategies.

30:17

🎯 Setting Effective Trading Goals and Dealing with Failure

Dr. Berger discusses the importance of setting concrete, actionable goals alongside a detailed plan for achieving them. He also addresses the psychological aspect of dealing with failure and loss, encouraging traders to view these as opportunities for learning and adaptation rather than as purely negative outcomes.

35:17

💰 Changing Perceptions of Money in Trading

The discussion touches on the psychological attachment to money and how professional traders often think in terms of percentages and basis points rather than absolute dollar amounts. This approach helps to maintain perspective and avoid the pitfalls of performance anxiety related to monetary outcomes.

40:18

🏋️‍♂️ Balancing Trading with Personal Fulfillment

Dr. Berger stresses the importance of having interests and sources of fulfillment outside of trading to maintain a balanced life. He suggests that finding gratification in the intellectual and strategic aspects of trading, rather than just profitability, contributes to long-term satisfaction and success.

45:22

📖 Dr. Berger's Resources for Traders

The episode concludes with information on how to learn more from Dr. Berger, including his books, blogs, and Twitter handle. His most recent book, 'Trading Psychology 2.0,' expands on traditional trading psychology topics by incorporating positive psychology and well-being.

Keywords

💡Trading Psychology

Trading psychology is the mental and emotional aspect of trading. It involves understanding the cognitive and emotional processes that drive trading decisions and behaviors. In the video, Dr. Brett Steyn Berger discusses the importance of trading psychology in helping traders manage their emotions, adapt to market changes, and build on their strengths. It's a key theme as it underpins the strategies and tactics that successful traders use.

💡Adaptability

Adaptability refers to the ability to adjust and respond effectively to changing conditions. In the context of the video, it is crucial for traders to be adaptable because markets are dynamic and constantly evolving. Dr. Berger emphasizes that successful traders must adapt their strategies to changing market conditions, which is a significant part of their success.

💡Goal Setting

Goal setting is the process of identifying specific, measurable, achievable, relevant, and time-bound (SMART) objectives. In the video, Dr. Berger talks about the importance of setting goals for trading and how they should be accompanied by a detailed plan. He also advises against setting monetary goals due to their potential to induce performance anxiety.

💡Risk-Adjusted Returns

Risk-adjusted returns measure the amount of return an investment generates for each unit of risk. It is a concept used to evaluate the performance of an investment by considering the risk taken to generate those returns. Dr. Berger suggests that traders should focus on improving their risk-adjusted returns, such as the Sharpe ratio, rather than absolute profitability.

💡

💡Behavioral Finance

Behavioral finance is a field that studies the effects of cognitive biases, emotions, and other psychological factors on the behavior of investors and markets. The video references behavioral finance when discussing how people's sensitivity to losses can influence their trading decisions, such as taking profits too early or holding onto losing trades.

💡Portfolio Management

Portfolio management involves the oversight and administration of investment portfolios to meet clients' financial objectives. In the video, Dr. Berger's work with portfolio managers and traders highlights the role of psychology in managing investments effectively and making sound decisions under various market conditions.

💡Cognitive Overload

Cognitive overload occurs when the brain is unable to process information because it exceeds its capacity. Dr. Berger mentions cognitive overload in the context of high-frequency trading, explaining that he personally is not suited for this style of trading as it requires rapid information processing, which he finds overwhelming.

💡Emotional Control

Emotional control refers to the ability to manage and regulate one's emotions, particularly in challenging or stressful situations. The video discusses the importance of emotional control in trading, as strong emotions can cloud judgment and lead to poor decision-making. Techniques such as guided imagery are suggested to help traders manage their emotional responses.

💡Mindfulness

Mindfulness is the practice of being fully present and engaged in the moment, without judgment. In the context of the video, mindfulness is presented as a tool for traders to become more self-aware of their habits and emotional states. By being mindful, traders can better manage their reactions to market events and avoid impulsive decisions.

💡Habit Formation

Habit formation is the process of developing regular tendencies or patterns of behavior through repetition. Dr. Berger discusses the importance of turning best practices into habits to improve trading performance. He suggests that by consistently repeating effective behaviors, traders can internalize these practices and reduce the need for conscious effort.

💡Performance Anxiety

Performance anxiety is the feeling of worry, nervousness, or unease about one's ability to perform well in a specific situation. In the video, Dr. Berger warns against the negative effects of performance anxiety in trading, where an overemphasis on outcomes like profit and loss can interfere with the trading process and lead to suboptimal decisions.

Highlights

The biggest secret of the best traders is their hard work in learning the markets and discovering effective strategies.

Dr. Brett Steyn Berger, a renowned trading psychology coach, shares insights on breaking bad trading habits and introducing best practices.

Traders need to be adaptable in markets, and goal setting and progress measurement are crucial for success.

Dr. Berger's entry into psychology was inspired by the novel 'The Fountainhead', which introduced him to the concept of reaching human potential.

His interest in trading began in grade school and later formalized during his graduate studies, running parallel to his psychology career for years.

Dr. Berger's work in Chicago involved coaching market makers and electronic futures traders, focusing on the psychological aspects of high-speed trading.

Successful traders often seek coaching to stay grounded in their strengths and ensure consistent performance.

Dr. Berger currently consults with various financial firms, helping traders and money managers enhance their performance.

The importance of identifying when a trading problem is logical versus psychological and adapting to market changes.

Building self-awareness is the first step in breaking any habit, whether in trading or personal life.

Successful traders have a process that includes adapting to markets, building on strengths, cultivating creativity, and developing best practices.

The ABCD approach to trading psychology: Adapting, Building on strengths, Cultivating creativity, and Developing best practices.

The significance of developing positive habits through repetition and mindfulness to counteract negative patterns.

Dr. Berger emphasizes the importance of focusing on strengths rather than weaknesses to achieve trading success.

Effective goal setting involves having a concrete plan and working consistently towards it, rather than just having a monetary goal.

Making friends with loss and failure is essential in trading, as losses can provide valuable information about market changes.

Professional traders often think in terms of percentages and basis points rather than absolute dollar amounts to manage the psychological impact of money.

Having interests and fulfillment outside of trading is crucial for maintaining balance and managing the pressures of drawdowns.

Dr. Berger's latest book, 'Trading Psychology 2.0', goes beyond traditional themes to include positive psychology, strengths, creativity, and well-being.

Transcripts

that was tried as episode 65 the biggest secret of the best traders in the world

is that they're just like everyone else

however they worked hard to learn the markets and discover what works and what

doesn't

but how can you hear about these journeys and getting on the strategies

and tactics they use you can do it by listening to chat with traders

here's your host Aaron fight field

all right what's up traders and 54 here host of the chat with traders podcast

thank you very much for tuning in to this week's episode and for this episode

i interviewed dr. bread steyn berger after many many requests from this is

brett is a very well known in trading psychology coach and has consulted to

some of the biggest names in the industry

he's also a respected author who is now published four books some of which have

been recommended reading by previous guests on this podcast

during our conversation I a spread how to break bad trading habits and

introduce new best practices to explain why traders need to be adaptable in

markets

Plus how we should think about goal setting and measure progress and of

course much more about how to enhance your performance as a trader

now if you do enjoy the interview please go ahead and leave and itunes review

like I've said in the past it literally takes you two minutes

you can do it while you're listening and it really helps to boost your rankings

in itunes and attract more Lissa's so if you'd like to support the podcast please

go to chat with traders . com /i Jones

ok folks let's skip to the interview you're listening to the chat with

traders podcast and here is a very special guest for episode 65

dr. Brett steyn berger rat

many people have been asking for this so i have to say straight off the bat

thanks a million for being here I appreciate it and I know

listeners will also has your day been what's going on

days been good thank you very much Aaron I appreciate the opportunity to be here

and to share some ideas with the listeners

sure thing the pleasure is mine so as most writers already know you are the

go-to guy for all things related to trading psychology of course that will

be the ultimate focus for a chat today but starting from the get-go

Brett if you could give us a little insight to your background - like how

did you get into the psychology field and where did you initially start out

after getting your pick

eh day ok uh yes

the initial impetus for my entry psychology was a an unconventional one

I came to psychology via philosophy as a sophomore in college I was interested in

psychology and indeed had declared psychology as my major but I never

really considered it a career field until i read a novel called The

Fountainhead by ion Rand and that novel illustrated something that i hadn't

encountered before

and that is the vision of people as heroic as reaching their ideals their

potential and the thought came to me it was during a winter break in my

sophomore year

the thought came to me that this was a proper role for psychology to not just

treat mental illness but to expand the best of people's potentials and that's

what has interested be in psychology ever since

and what i do now in working with traders and portfolio managers and

earlier before that working with medical students and residents of the medical

field

it really has been working with healthy people people who are bright and

creative and energetic and helping them make the most out of what they do

ok right answer and very interesting to get your backstory there so we did the

interest in trading come from like when did that creep into the picture

you know the training thing is something that I first expressed interest in his a

project when I was in grade school

and uh later became more interested in in a formal way during my graduate

school education at the University of Kansas and I actually open to trading

account began trading individual stocks and that was in the late nineteen

seventies but that was completely separate from my interest in psychology

my degree was in clinical psychology and my interest was in becoming a

psychologist the trading was a side interest a challenge and it's something

I found stimulating and interesting and those two preceded in parallel for a

number of years

I shoot trading as an application and I pursued psychology is my vocation and it

wasn't to tell around the year 2000 that I seriously contemplated putting the two

of them together and began writing a book

it was my first book in the area called the psychology of trading which was

later published by why light and that was encouraged by my good friend and

mentor

Victor need her offer so that's how the two came together but up to that point

for a number of years they were completely parallel interests are the

book became popular and was discovered by trading firm in Chicago and they

began asking me to work with their traders and then made me a full-time

offer so i left the academic setting that I was in I was teaching at that

time in the medical school and Syracuse and also running a counseling program

and went full time to working with traders in chicago and that's when the

psychology and with trading interest truly came together

ok excellent so let's talk a little bit about your time in chicago

like what we doing like how were you actually helping these traders with the

mental aspect the psychology and everything that goes on on that side of

the field

well in chicago i was working primarily with market makers and electronic

futures

these were people placing dozens if not more trades per day also trading on a

very short time frame the average holding period for many of the traders

was around three minutes

so they are very actively engaged in markets and it fascinated me because

they were trading in ways that were completely different from what I had

read in the textbooks the books on trading talked about technical analysis

fundamental analysis and these traders who I was encountering Chicago did none

of it

obviously they didn't know fundamental analysis because the fundamentals don't

change in three minutes

but technical analysis in terms of chart patterns and of indicator readings

those were much too slow for these traders these traders were entering

positions and eggs a position is very quickly and they were working off a

depth of market screen

they were working off the order flow not a backward-looking technical information

so that was an education in itself and sensitize to me to the psychological

challenges that they faced in making decisions so rapidly it was easy for

them to become frustrated to become overconfident and for all of those

emotional factors to slant their decision making and so my work as a

trading coach was to help them keep a level head

keep focused and make good decisions in real time and the fact that I was a

full-time working with them and so on site watching them trade and and

standing with them and helping them really help with psychology become part

of the trading right yeah that's that's very interesting Brett and we're going

to dig deeper into that in just a moment

a question I have for you

is like you know over the years you've been in the field for a long time now

you've worked with many many you know

top traders like some very very hard-hitting heavy white traders and

asset manages fun manages you know they're pretty broad spectrum of of

market participants

now these are all guys who are struggling some of these guys are

extremely profitable and make huge amounts of money

why do they come to you for your help on the psychology side

it's a great question Erin it's the same reason that successful professional

athletes work with our coaches as well you know at that point they're not

struggling they would have never gotten to that quite for the large a large

majority of cases if they were marginal participants

so these are people with real experience real strengths but uh what happens is

that markets are always changing and even the most talented participants have

to evolve with the markets and that need to involve itself brings its own

psychological challenges that need to be creative

they need to be resilient in the face of frustrations and also the need to

identify and build upon strength so many times the portfolio managers are seeking

me out when they are doing very well because they want to stay grounded in

their strength they want to make sure they understand what they're doing well

so that they can be more consistent going forward in making use of those

strengths

and so that's the difference with working with someone who is struggling

and wants to work on their weaknesses or vulnerabilities

ok that's a great answer it makes total sense

I really like he explained that the bread let's bring us up to speed now

what are you doing today like what's your work involved you know in current

times

well I work with several hedge funds and other financial firms

so uh I'm not full time in any one place I consult with a variety of funds and

and what that's done is exposed me to a variety of trading strategies some of

those strategies are discretionary summer more systematic some of the

strategies are more directional sub are more based on relative value movement

some are in macro markets the big liquid markets and some of them are very

specialized in individual markets such as commodity market to reach markets so

I've been exposed to a variety of trading strategies and training settings

it's been a great great great education as a result but in all cases

my main work is to help the traders the money managers with their performance

help them build on their strengths and help them learn from their mistakes so

that they keep improving a secondary focus has been at most of the places

where i worked we've conducted an internal research about what makes

traders successful and so I've been able to help the trading firms with their

hiring processes and help them make better decisions about who to bring on

board

so that's been a separate kind of work but a very fulfilling area as well

sure ok that's really cool now that we have caught up on your background

that's really hard in on the subject of trading psychology

so one of the things many traders will admit and a will aware of

is that they take profits to sown and they cut losses to light

you know that's mostly due to psychological reasons or imagine what

advice would you give to those traders in that situation

what is the question Erin and high as Iran would say i would encourage you and

listeners to check your premises with respect to the question because I i

think that it can be a psychological issue

what is not always a psychological issue i mentioned that markets are always

changing and one of the ways that they change is in there

volatility and so market the market as we are talking right now the market is

trading with a fix of which is implied volatility of 14 and change wasn't so

long ago that we were seeing a fix readings

well into the twenties so markets were moving much more

a few weeks ago then they are currently what that what happens is that traders

don't adapt to that either in their trading or emotional life and so they're

likely to take profits too quickly or likely to allow things to move against

them because they are operating from an old regime from an old set of

assumptions that don't apply to the current market

so for example when volatility comes down

traders will start to make some money and then when the it when they tried to

let the market elected position go

it eventually just reverses against them because the volatility isn't there and

you get much more mean reversion on a short time frame and so the end up

scratching the trade

where is in a higher volatility receive that might have been profitable so

sometimes a problem that trader has might have is logical not psychological

it's a function of not adapting to market it's a function of

training well but you're right there are other times where traders respond

emotionally to making money losing money and as we know from the behavioral or

finance research people are much more sensitive to losing money than they are

making money and so they're likely to be threatened by losses and not want to

take those they're likely to be afraid of losing whatever they gain and exiting

trades early and so forth

so a huge issue in trading psychology is identifying when is a trading problem a

logical problem a problem with one's trading methods and when is it the

result of a psychological problem result of being not in a wrong mindset that

biases your information processing

ok that's and that's an awesome answer that was those really really good

something I guess that is an example of a lack of adaptability

you know and in some cases possibly even a bad habit but in general when we

recognize bad habits and out riding

what's the best way to break these habits of the first step in breaking any

habit whether it's a trading habit or personal habit is to become exquisitely

aware of its presence so we want to become mindful we want to be self-aware

we want to realize that the habit pattern is playing out as it is starting

so let's say my habit pattern is overeating

I but first step in change is directed nuys when I'm starting to feel a craving

for food or when I'm starting to reach for the refrigerator if I can't identify

it at the time it's happening

how could I possibly control it so building awareness is in southwest is

the first step in the change process then once you have that self-awareness

once you can become an observer to your habit patterns rather than someone who

is caught up in those patterns then you want to make a conscious effort to reach

annal yourself

so let's say for argument's sake i have this habit of overeating and I tend to

overeat most when i'm bored so I catch myself reaching for the refrigerator and

then I calmed myself down I focus myself and I purposely engage in an activity

that I will find engaging

that will absorb my energy

maybe it will be some physical exercise up

maybe Allah go play with one of my four cats but uh

the idea is I would address the boredom

so that I no longer feel the need to compensate with food

the same principle occurs with what is wrong with trading

so my habit with trading might be to place trades after a website to place

trades out of frustration after I've taken a loss

revenge trading and so that comes from frustration i have a losing trade I'm

frustrated

I want to make that money back so i want to become self-aware about that

frustration

I want to catch myself being frustrated and reach and all that emotion

so step away from the screen temporarily calming myself down and doing something

that is gratifying

that's fulfilling to counteract the frustration will help put me in the

right state of mind so that i can go back to the screen and make good

decisions

I can show and I like how you mentioned earlier in that answer but i will be an

observer to your bad habits then getting caught up in the middle of it i think

that was a really cool concept

yep important one that shows up actually in Eastern philosophy as well as in

psychology research that we can't change something if we're not aware of it

if the pattern controls us if the habit controls us then we're passive but yet

we have no say in what happens

well so the first element of control is being able to step apart from the habit

pattern

whether it's a habit of drinking habit in trading

I have it in our relationships we stand apart from it and we recognize that this

is causing us pain this is causing us losses and then were able to try and do

something differently

right right ok now the intro to trading psychology to point out

you mentioned that all the traders you've worked with varied greatly and

how they actually traded yet they had many commonalities and how they did what

they did

so here you are of course referring to process and habits

could you elaborate on these observations for us

yes absolutely obviously the traders I work with have very different strategies

some more short-term some more long term

some are long short investors building very large portfolios are among

individual socks

some of them are training macro assets globally and trading macroeconomic

themes so they're very very different in their approach to markets and in their

training styles but a process level there's some real similarity and that's

what I talk about in the trading psychology true . notebook with those up

basic a b c d themes not a being adapting to market be being building on

strengths see being cultivating creativity and d being developing best

practices and so what the really successful traders are doing is studying

themselves and figuring out what works what they're good at and where their

vulnerabilities live where the weaknesses lie and they do more of what

works

the active ways that make that and more of who they actually are

and they may be different strengths in different markets but all of them study

themselves just as they study markets and stay grounded in what makes them

successful

ok so the ABCD that you mentioned there could you just walk us through each one

of those in a little more detail just so we can understand you know get a better

grasp of each .

yeah absolutely yes so a you know is adapting to changing markets and this is

I point out in the book is no different than it would be for any entrepreneur

you start a business and your marketplace is always changing and so at

one point in time you're if you're starting a restaurant

you have your marketplace may have one set of taste and then something else

will become popular and and so you have to adapt by changing your menu by

changing your de coeur by changing how you deliver service successful

businesses never stay static we see this in the technology industry new

smartphones are coming out with regularity

because the marketplace demands new features and functionality so we're

always having to adapt markets change in their trend markets change in their

volatility as i mentioned markets change in their patterns of participation the

people who dominate markets now are not the people who dominated 10 years ago or

20 years ago and so we see different patterns and markets to assume that

markets are static and that our edge will last forever

does not work any better in financial markets that it does in the business

world a great way to go out of business in the business world is to assume that

what you're doing well

will last forever and you never have to change that's how to become a dinosaur

that's how to become obsolete and that happens in financial markets as well

so the successful traders are always studying markets and only studying how

markets are changing and the interesting part aaron is that many times our

mistakes and trading our losses are setbacks are drawdowns tell us about

changing markets because we do what we did do when we were making muddy and

suddenly it's not making money for us and if we reasonably disciplined doing

what we have been doing when we made money that we have to ask ourselves well

how could smell working anymore

what has changed and that helps us go back to the market

learn from our mistakes and adapt so we're using our drawdowns we're using

our losses as real information that helps us adapt to markets that have

changed their correlation patterns or other trend patterns and so forth

so that's a adapt that's the a party adapting to changing markets of the B

part is building on strengths and I i alluded to this earlier of why I found

in my research with successful traders and portfolio managers is that all of

them have different strengths but all of them have at least one distinct and

strength and it could be a personality strengths could be a cognitive strengths

but really successful traders are really strong in some areas as a rule the

higher frequency traders the day traders are very good at fast thinking skills

they see things broadly they see many things across different stocks or

markets and they process

real-time information across a wide area very quickly so that they can make quick

decisions

the traders i worked with in Chicago were very much like that they were great

at pattern recognition on the other hand

traders with a longer time

verizon behave more like investors they're slower thinkers but deeper

thinkers are more analytical and so they are going into depth in different areas

and finding out information that other people just aren't looking at and so

that becomes their strength and happened help them

let's say find an undervalued company that they can invest in over a longer

time horizon

so we we all have our strengths and the really distinctive traders that traders

who make distinctive returns have distinctive strength and so the success

is based on making the most of your strengths not just correcting your weak

areas the C stands for cultivating creativity and and and that's a topic

that i have found tremendously neglected in the trading psychology research and

writing

creativity is all about seeing the world through fresh eyes

if we trade the same way that everyone trades

we're going to get the same returns with everyone gets we have to see some fresh

opportunity we have to see the world differently from others

if we're going to achieve distinctive results again

it's like the entrepreneur entrepreneur sees an opportunity that others don't

see and is able to build a business based on that perception of opportunity

the successful traders that I work with have very distinctive strategies and

i've been involved as i mentioned in hiring success hiring traders and

successful traders at I different firms and I always know who has the potential

to be a successful trader because we talk about their strategy and when I

hear the strategy it hits me upside the head

it smacks you in the face and I said Wow why didn't I think that it's something

unique it's something different if what they tell me is something i could have

read in any of a dozen books

I know that that's not a distinctive skill set so cultivating creativity is

an essential for success and of course creativity is a big part of what helps

us adapt to changing markets and finally the fourth topic is developing breast

best practices and turning best practices into best processes

so when we look at best practices we want to look at them in every facet of

trading how we generate our track paid ideas how we manage our positions and

how we manage our risk

how we review our results and learn from those all of these are separate elements

of a training process and we want to identify our best practices in each area

are best practices and generating ideas are best practices in damaging positions

are best practices in managing risk and reward our best practices and managing

ourselves as performers and we leave those together those best practices into

best processes and the successful traders I work with are always working

on themselves and improving their processes over time

that's awesome bread and very very insightful thanks a lot for taking the

time to to flush that out for us and obviously if guys want to learn more

about that

definitely check out your book trading psychology too . our link to that in the

show notes at chat with traders . calm and just a couple questions to bounce

off your answer there

firstly what about habits early we covered and bad habits how to break bad

habits

what's the best way to form new habits and implement those introduce new new

habits

yes and you're absolutely right

we want to develop best practices by turning those into habit patterns are so

often we hear that traders need to motivate themselves and y'all do various

things with imagery

they'll do various things like have sticky notes I don't have a computer

screen to motivate them to do the right thing but in fact motivating us it

ourselves is not the best source of up influencing the behavior of the best

method for influencing behavior

if you look at the things we do consistently in life it's not things we

do through motivation

it's things we do through habit so i don't have to motivate myself to eat

breakfast take a shower in the morning

uh I don't have to motivate myself to do the right things for the people i work

with as a psychologist because that is part of me and part of my routine and so

we want to take our best practices are trading practices that work well and

repeat them with fidelity repeat them in a routine way so that time and time

again with repetition

they start to become habit patterns so repetition is really

the our source of developing positive habits

once we identify best practice once we identify something that works for us we

want to be very conscious about employing that day after day after day

after day Tony Robbins the the well-known a motivational speaker makes

the case that if we repeat something for 30 consecutive days in a reliable way it

eventually becomes part of us and I think there's some truth to that

that by doing things again and again it they start to feel familiar and they

start to become part of us

mmm very very great points their breath thank you very much

now you also mentioned weaknesses

so you know every single one of us we have their own weaknesses

how should we treat our weaknesses i mean some people with the school of

thought that you should just focus on your strong points and really drew down

on those others say you should you know improve on your weaknesses

how do you feel on on this subject

yeah yeah that's a great question and yep

ar-ar-ar strong areas are strengths are there because those are competencies we

built over time and and and they're also talents that we've been born with and so

we want to make the most of those and you know when you see people have been

distinctively successful there are people who have really made the most of

their competencies with the weaknesses of into rare that you could ever turn a

weakness into a strength but we can our work around our week this is so there

are some kinds of trading that i personally am not good at

in fact the training that we were talking about in Chicago very high

frequency trading banking rapid decisions

I don't have

have the stain kind of fast information processing skills that the very

successful traders in chicago had and if i try to do that

I quickly in a point of saturation well cognitively and emotionally inside

that's not a strength of mine so I want to avoid having to make rapid decisions

and process lots of information in a short amount of time

so in my own trading i will trade short term but those tend to be introduced

wings or maybe swings from one day to the next

where I have enough time to process relevant information and not get

overloaded so by altering my time frame of holding positions on able to dodge or

avoid some of my weaker areas and play to some of my strengths some of which

are more research oriented

ok so this might be just to continue on this on this tangent here

this might be a little bit of a strange question but how do you know that that

was a weakness of yours that you wouldn't actually be able to trade like

the guys you work with in Chicago because I mean all of us even those who

could process information very rapidly and even on day one we would still

struggle when you know for the first few months you know it may be for first few

years and even guys who could process information very quickly and might still

struggle in the beginning

how do you know when it's a when it's a weakness of yours and just not a skill

that you get to develop a great question

uh it wasn't simply the I tried it initially and didn't make money from it

it's that I I rapidly hit a point of cognitive overload and in fact that had

happened to me in other areas of my life apart from trading if I was in a

situation where I

add to process too much information at one time and make rapid decisions

I often would not make my best decisions

so let's say for argument's sake that I was in a situation in a relationship and

there was some disagreement or some issue in the relationship of if I tried

to deal with that right then and right there

often I was not as effective as if I took a step back

really thought about what was going on really reflected upon myself and then

responded in the way that I felt a new was best and that typically wasn't a

huge amount of time but it wasn't spur of the moment either so I had recognized

myself that I do well when I'm able to reflect and the pattern recognition that

the people were doing in chicago was relatively instantaneous and really a

remarkable skill i admire people who can do that

and when I tried to do anything similar

I just hit a point of cognitive overload and that's how i know that i'm just not

wired that way

I don't operate that way in any area of my life and when I'm pushed it to

process information that way is unpleasant

where is when we act on our strengths

there's an intrinsic pleasure to that because we're doing what we're really

good at it it feels fulfilling to us

so some kinds of analysis I really enjoy doing

I look at markets in a rather quantitative way and being able to solve

the puzzle so to speak in and see quantitative patterns and markets is

very gratifying for me very fulfilling and then being able to trade based on

those and see them work out

that's very fulfilling and gratifying to me so when we act on our strengths we

feel strongly feel good we feel fulfilled and when we act counter to our

strength

it's intrinsically frustrating that's a big part of how we can know right i can

ally kay mentioned that you pull on you know your strengths and your in

witnesses and you find those in and other areas of your life and United the

cross-eyed it's a train is all very relevant so excellent point

yeah let me add another point that i've i've mentioned my writings up

I have never traded full time in my career and a couple of times I tried to

do it

I tried to trade full time and I actually was making money and I hated it

I absolutely hated the experience of trading full time

why because one of my strengths is working with people and one of the

things that drew me to psychology was the opportunity to be a meaningful part

of people's lives and it and so trading full-time wasn't playing to one of my

greatest strength and became frustrating

so we have to know ourselves and often

what it's our feelings of happiness and fulfillment that tell us whether we're

playing to our strengths or not

ok yeah that's really interesting Brenda going now

something i'm curious about when you're working with other traders and you know

implementing techniques to get them closer to peak performance

do any of the techniques that you work on operate on a subconscious level to

provide change

I it depends on what

depends what you mean by that are you say subconscious yeah

any technique that as you were saying develops a habit pattern is making that

pattern

automatic and therefore out of consciousness

uh and so you see dating techniques let's say like guided imagery

let's say a trader is afraid to lose money

and we will do some guided imagery to have them mentally rehearse scenarios in

which they hit their stop levels and they keep themselves calm and they keep

themselves focused while they're going through this guided imagery and they do

that again and again and again and again and pretty soon the feeling of hitting

your stop and get stopped out

I is something that becomes familiar to them not threatening to them and they're

able to keep themselves calm and controlled and so is in a sense

reprogramming their emotional responses to a situation they have experienced

this threatening and that is happening at an emotional level until you could

say that it's subconscious

ok ok sure but what you're really trying to do in a sense is rewire a person

you're trying to re-program their responses to certain situations right

now brick one of the things i'd like to ask you more about his goal setting

I think your advice on the topic would be really valuable so how do you suggest

developing traders best go about setting goals for themselves

yeah it's actually research and I've written on this a on the trader feed log

his research on effective goal setting

what what happens a lot of times that people are set a goal but they don't

follow up the goal with a specific plan and so if i have a goal let's say by

goal is let's say my goal is to lose weight

well that's only going to work if it's part of a day to day plan and that's

only going to work if its meal by meal

I have to eat less calories I have to do more exercise and that's day in day out

and so the goal is the big picture

but what makes it happen what makes an effective is the day-to-day

implementation of a plan and what traders often this is all set a goal for

themselves to make a certain amount of money order to avoid losing a certain

amount of money or trade a certain way but they don't drill down so that the

goal is something they are concretely working on each day in each trade

so we want effective if we want to be effective in goal setting by being very

planned and very consistent in working those plans

a goal without a plan is a wish you know if you have a goal you don't have a

specific plan but that's just a good intention

that's a wish that's nice but it is like new years resolutions it for the most

part they're not going to happen unless we have a concrete plan to actualize

them

ok she brought up an interesting point there in your answer about child is

wanting to make a certain amount of money

what - what's your take on goals that have a monetary value attached to them

well not a fan

you know uh one of the things one of the problems that affects traders and

affects people in all performance fields is something called performance anxiety

and performance anxiety arises when we become so concerned about the outcome of

the performance that it starts to interfere with the process of performing

and so if I'm a public speaker and I become very worried about how my

audience is going to think of me and whether they're going to be interested

my topic will pretty soon all forgot what i was speaking about

so we by putting the profit loss of P&L up front and center in our goals were

emphasizing outcomes and that can enter that can put pressure on us and

interfere with processes sometimes markets offer more opportunity than

others and to have a fixed P&L goal doesn't really take that into account

what I would rather do as an outcome related ball is look at improvement

so am I improving from month to month year to year in my trading performance

and I would look not only at pnl in absolute terms but i would look at it

the way that hedge funds look at it and the way most financial professionals

look at it in terms of risk-adjusted returns

how much money am I making per unit of risk that I'm taking and try to improve

not only in my absolute returns but in my Sharpe ratio or in my risk-adjusted

returns and and that I think is meaningful

okay good good . now just continuing on this path

how do you think traders should think about failure or loss because i know

that some people are genuinely afraid to file single work do you ever try to get

tried as to reframe negative thought patterns or anything similar to this

yes and I i think an important part of trading is in his it's fine making

friends with loss and a sentence making friends with failure that it's as i

mentioned earlier it's often are losing trades that teach us about how markets

have changed

look at it this way if we follow a best practice and we are relatively diligent

if we're relatively consistent are trading and we follow our best practice

and then we start losing money

well something has changed in the market we're doing the same thing but something

has changed in the market

we want to use those losses as a prod as a stimulus to learn about what has

changed in markets so that we can adapt our losses are information they're

telling us something

if i'm running a store let's say I own a department store and I normally sell of

you know 500 pair of blue jeans and a week and now suddenly I'm set up playing

a hundred fifty in a week and that happens in week one that happens a week

to that happens we three pretty soon I say to myself what the hack

you know why are people buying blue jeans and sure enough i go to the

fashion magazines and people are into something else and I realize I have to

adapt I have to change my inventory as a retailer

well that's how business works that's how trading works

our losses are mistakes are there for a reason

they are there to teach us something

and if we embrace them if we don't push them away

we can learn from our mistakes it makes us stronger makes us more adaptable

so yes it's frustrating yes it it sets us back temporarily but ultimately

that's how we become better by learning from our mistakes

absolutely now Bret I'd like to ask you about the actual subject of money so let

me ask you this when you're coaching and working with traders do you try to

change how they think about and he'll give you money because straight away by

default

many people have a tight psychological attachment to money so how do you treat

this

gosh it's a great question and had the answer

I don't know maybe I'll surprise people I don't ever think about money

hey where I work haha you know the the minimum portfolio size for a regular

trader at one of the funds right work is two hundred million dollars uh but no

one thinks about money

you think in percentages and basis points and so whatever you ask someone

how much did you make her lose today or this week or this month will always say

I made 50 basis points I made

yeah I made one percent so they're not thinking in dollar terms

that's very very helpful because if you start to think of it in dollar terms

will try if you're crazy

yeah this if you have a 200 million dollar portfolio and you lose one

percent you just lost two million dollars uh but of by putting it basis

points then when you grow your capital a 30 basis . loss is the same when you're

trading a smaller book is when you're trading a larger one and so that's a big

part of how professional traders get around thinking about money

uh they think in those percentage terms

that's a really great that's really great . to the breath

many many of us often feel you know many developing traders often feel a great

amount of pressure to succeed and become great traders

how do you feel about pressure

I mean is it a good thing to place you know sometimes quite a lot of pressure

on yourself to succeed or can't have negative effects

well it definitely can have negative effects and it's hard to take risk

you know when when you feel under the gun

it's hard to make good decisions under conditions of pressure

so I absolutely think that that that is a challenge associated with trading of

one of the things I've commonly told traders and I've written about it is

that for me a 68 of element of success in trading is making sure that you have

something in your life more important to you then trading because if you have

something in your life that's more important to you than markets than

trading the profits

then during periods of drawdown you'll always have something to turn to to

renew you and inspire you and keep you positive

sometimes I hear traders say to me you know i have a passion for trading and

trading the most important thing to me and and I worked got it

you have 14 hours a day and well that's being vulnerable training should not be

the only part of the major part in your life because then you'll have nothing to

balance yourself and to balance the pressures during inevitable drawdowns

so I think have living a balanced life having sources of happiness and

fulfillment and energy and closeness to people apart from markets very very

important to trading success right well this leads into an interesting topic so

from what you've observed what factors have the greatest contribution to a try

to satisfaction and and sense of accomplishment

what what contributes to satisfaction and accomplishment like do they get

excited about making huge profits and you know a month or are they do they

find satisfaction in other areas of the business

I don't know is that an appropriate question it's always a great question

and I'm pausing to reflect which is just what i mentioned i doing

while processing information super quickly because i like to reflect and

I'm thinking about specific trainers I'm thinking about my work with them and you

know if I look and I certainly know traders who get a lot of excitement and

satisfaction from making money and markets and I certainly find that to be

gratifying but the ones who have longevity in the business who have been

at this for a while have some source of satisfaction and trading that is

separate from their profitability in other words it's not that they find

fulfillment in trading they find fulfillment in markets and I think

that's an important distinction that if you find your fulfillment in markets and

learning about markets and learning new strategies and trying new things

then you can find gratification from your your intellectual curiosity is

gratified your sense of puzzle solving and challenges are satisfied even during

those periods drawdown if your only source of ratification and fulfillment

comes from the profitability

then psychologically your Baron so to speak your ear your breath

you don't have anything to sustain you

during those periods of drawing down so I think it's important to have sources

of fulfillment in trading that are separate from profitability

even though profitability is obviously one of the important drivers of our

satisfaction

ok a lock it really really good answer Brett and all someone to take us outside

that's one things down now weakness is going to find out more about you

oh uh well the easiest way would be through the two blogs that I right one

is trader feed the addresses trader feed all one word

trad erfe e dot blog spot.com and the second

yeah r is the blog's I write for Forbes online and if you go to the Forbes

online site and say goodbye name you'll see a lot of articles pertaining to

positive psychology and financial markets

so those are two ways that are free and that uh you'll find more information

than you care to know and obviously I've written four books in the area of

trading psychology and those go more into depth into the topics that we're

discussing today show and you're also on Twitter I know so

which one hand like that so yeah sixteen bab st ii n da b is my twitter handle

and so what I try to post at least the ones a day

excellent now like you mentioned you've got a several books out the most recent

one being trading psychology too . I which came out towards in the last year

that will be sure to include all the links that Brett is mentioned just now

at checkout strides . com including a link to his book and some of his prior

box is there anything that really separates this your most recent book

from your previous material

yeah that's why I called it the tray psychology to point out because i really

wanted to touch upon themes that were not traditional in the writings on

trading psychology

so there are many topics related to positive psychology building on

strengths

there are many topics related to building creativity and well-being that

typically we don't hear about when we read a book some trading psychology

a lot of the traditional trading psychology dealt with controlling your

emotions being disciplined and all those are great that I would take those are

necessary but not sufficient in the trading psychology to play book i tried

to go beyond those traditional themes good one

ok our guys will i'm yet check that out at chose tradus.com Brett

thank you so much for doing this I really appreciate you taking the time

out of your day

I hope this is get a lot of value from this and I have no doubt that they will

so again thank you

well thank you for having me I appreciate the opportunity

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