Elite Trader Insights: Dr. Brett Steenbarger
Episode 16: How to Master Trading Psychology
Each week we try to unlock the collective wisdom of the Trading Elite. Strategies and unique insights from hours of interviews with top traders, sliced into bite-sized pieces and delivered to your inbox for your pleasure.
Dr. Brett Steenbarger is a renowned trading psychology coach who has consulted with some of the biggest names in the trading industry. With a background in clinical psychology and a passion for trading since his college days, Dr. Steenbarger has a unique approach that combines psychological insights with trading strategies. He is also a respected author of four books, including "The Psychology of Trading" and "Trading Psychology 2.0."
Key Learnings and Takeaways from the Interview
Here are the top actionable pieces of advice from his interview on the Chat with Traders podcast:
1. Adapt to Changing Markets
Dr. Steenbarger emphasizes the importance of adapting to market changes, such as shifts in volatility and participation patterns. He advises traders to constantly study markets and their own strategies to stay relevant. "A huge issue in trading psychology is identifying when is a trading problem a logical problem and when is it the result of a psychological problem," he says.
2. Build on Strengths
Successful traders know their strengths and build on them. Dr. Steenbarger highlights that different trading styles require different skills, and recognizing your strengths is key. For example, high-frequency traders excel in fast thinking, while longer-term traders are more analytical. He also suggests to look at your own personal strengths outside of trading, to give you an idea of where your trading strengths and weakneses may lie.
3. Cultivate Creativity
Creativity is crucial in trading. This was a bit of a surprise statement to me. Dr. Steenbarger points out that seeing the world through fresh eyes helps traders find unique opportunities. He states, "If you trade the same way that everyone trades, you're going to get the same returns that everyone gets."
4. Develop Best Practices
Traders should develop and stick to best practices in all aspects of trading, from idea generation to risk management. Dr. Steenbarger explains that turning best practices into consistent processes can significantly enhance trading performance.
5. Make Friends with Losses
Losses can be valuable learning experiences. Dr. Steenbarger encourages traders to use their losses as information about market changes and to adapt their strategies accordingly. "Our losses are information; they're telling us something," he notes.
6. Focus on Process, Not Just Outcomes
Setting process-oriented goals rather than purely outcome-based ones can reduce performance anxiety. Dr. Steenbarger advises, "A goal without a plan is a wish. You need to have a concrete plan to actualize them." He does not recommend monetary goals.
7. Rewire Emotional Responses
Guided imagery can help traders reprogram their emotional responses to stressful situations. Dr. Steenbarger uses techniques that involve mentally rehearsing scenarios to maintain calm and focus during trading.
8. Understand and Work Around Weaknesses
Dr. Steenbarger believes that while you can't always turn a weakness into a strength, you can work around it. Recognizing and being self aware of areas where you're not strong and finding ways to avoid them can lead to better performance. Most of the high frequency traders enter and exit trades in < 3 minutes…he uses the example that the quick thinking required for this strategy is a weakness in himself, so he doesn’t trade this way.
9. Keep a Balanced Life
Having a balanced life with interests and sources of fulfillment outside of trading is crucial. Dr. Steenbarger advises, "If you have something in your life more important to you than trading, it helps you stay grounded during drawdowns." He also highlights that the most successful trders he comes across are not driven by money, but they derive satisfaction from learning / problem solving the price action.
10. Think in Percentages, Not Dollars
Professional traders think in percentages and basis points rather than dollar amounts to manage psychological pressure. This mindset helps them stay focused on performance rather than being overwhelmed by large sums of money. All the successful traders he coaches speak in terms of ‘Risk Adjusted Returns’.
Like a real life Wendy Rhoades, Dr. Brett Steenbarger's unique perspectives combine psychological principles with trading practices to get the best outcomes out of some of the industry’s most prolific traders. His focus on leveraging strengths, fostering creativity, managing emotions, and maintaining a balanced life offers traders practical strategies for retail traders to enhance their performance and achieve sustained success in the markets.
Cheers
Marto