The Daily Trading Coach

by Brett N Steenbarger

  If you serve as your own trading coach, a great place to start is with the perspective that feelings contain information. Research in cognitive neuroscience finds that emotion is an essential component of rational decision-making. When the brain is damaged and becomes unable to engage in emotional processing, the result is profoundly distorted behavior. Your coaching goal is not to banish the feelings associated with difficult trading—a strategy that only prevents resolution—or to blindly act upon them. Rather, the most constructive step you can take to change a feeling is to give it full acknowledgment and extract its vital information.

  Feelings inform us about our appraisals of self, others, and world.

  The research of James Pennebaker, a professor at the University of Texas, is quite relevant here. He and his colleagues found that writing in a journal or talking aloud for a half hour a day had a powerful effect on enabling people to cope effectively with challenging emotional circumstances, including traumas and crises. When we make implicit feelings explicit, we view them from different angles and place them into a different context. For example, someone who has been angry and frustrated with himself over poor trading performance might journal about these thoughts and feelings at length. As he is writing—and reading over his writings—he suddenly realizes, “Whoa; I’m being awfully hard on myself. I’m not that bad!” With that, he is able to throttle back his negative self-talk and turn his attention back to markets.

  When we fail to acknowledge emotions, we lose their information and thus the opportunity to shift perspectives. The frustrated, angry trader who brushes aside his tensions and forges blindly ahead finds them easily triggered the next day. This is particularly the case when the frustrations are triggered initially by trading mistakes. I recently met with a trader who fought a market trend all morning, built frustration through the day, and then blew up in the late afternoon. Had the trader used the frustration to examine his trading, he could have ridden the trend and made significant money. Brushing emotions aside doesn’t change them. Ironically, acknowledging and accepting them, giving them free expression, sets the stage for transformation.

  Does that mean that we should give full vent to whatever we’re experiencing? No, psychological research also suggests that unbridled expression of emotion interferes with concentration and performance. Simply yelling when we’re angry or pouting when we’re discouraged does nothing to alter the feelings—and certainly does not place us closer to resolving the situations responsible for the upset in the first place. The trader from my example, for instance, spent much of his afternoon fuming, but never resolving his anger. Reflexive acting on such emotions only reinforces them; you can’t overcome frustration by behaving in frustrated ways.

  Blindly venting or acting on emotion is as unproductive as blinding ourselves to emotion; both prevent learning from the information in our feelings.

  The idea, then, is to transform feeling, not ignore it and not revel in it. One way to do this is to replace one emotional state with another: to substitute feeling for feeling, not thought for feeling.

  In my Psychology of Trading book, I explained how I used the early music of Philip Glass to enter a meditative state and trance-form experience. Actually any stimulus that evokes calm, focused attention can be effective as a tool for shifting emotions. The key is to evoke and sustain the Yoda state—the calm focus—during periods of high frustration or discouragement. Biofeedback can be especially useful in this regard, as computer-based applications provide real-time feedback about your success in sustaining the altered state. It is virtually impossible to sustain a worked-up state—anger, anxiety, and stress—when keeping yourself calm and focused. Even better, in the relaxed state, you’ll arrive at perspectives and insights that remain unavailable while you’re immersed in the flight-or-fight mode.

  One exercise I recommend to traders is to draw two thermometers side by side on a sheet of paper and then run off a number of copies of the paper. One thermometer records your emotional temperature with respect to frustration; the other records your temperature with respect to confidence. The sheet stays by your trade station; all you need to do is make a mark on each thermometer to indicate how frustrated and confident you’re feeling at the time.

  When we’re most frustrated, but also most overconfident, we’re likely to make our worst decisions and violate our trading principles. If you require yourself to “take your emotional temperature” during each trading session, you create a mechanism for catching your state of mind before it can disrupt trading performance.

  Once you identify an elevated frustration temperature, a valuable, automatic rule is to take a few minutes away from the screen and enter into a trance-formation. This can be done by regulating your breathing—making it particularly deep and slow—and fixing your attention on something that captures your attention: music, imagery, or a picture in front of you. If you slow your body and take your attention away from the situations that may be elevating your emotional temperature, you shift your state and make it easier to act calmly, in a planned fashion. With practice, this can be accomplished in a matter of minutes, short-circuiting many disruptive patterns before they lead to poor trading decisions.

  The key is to keep yourself aware of your emotional state throughout the day. The thermometers are an easy, visually arresting way of becoming your own observer—and coach.

  COACHING CUE

  Check out the insights about breathing in Chapter 9. Mike Bellafiore of SMB Capital explains how he and partner Steve Spencer teach the traders at their prop firm how to breathe as part of training them to trade. As practitioners of meditative disciplines understand, emotional self-control begins with physical control.

  LESSON 6: FIND THE RIGHT MIRRORS

  A mirror is an object that shows us our own image. Thanks to mirrors, we know what we look like. Far more goes into our self-image, however, than our physical reflection. That is because virtually all of our experience serves as a psychological mirror. We see ourselves reflected in the impacts we have upon the world around us. As a result, much of self-esteem—our sense of worth and competence—follows from finding the right mirrors in life.

  Let’s start with romantic relationships. When we select the right partner, we choose someone who knows and values the person we are. That love and support is ongoing; consistently reflected to us, it is a deep affirmation of self. In a similar fashion, parents constantly mirror a child’s identity: “You’re such a good boy!” and “What a smart girl!” Our self-talk is born of just such early life conversations: we internalize the voices from significant relationships.

  This is why abusive relationships are so damaging. To share life with a spouse who attacks or demeans us—or who just doesn’t care—or to endure parents who are neglectful is to continually face a distorting mirror. Over time, children absorb the distorted images and no longer feel lovable, secure, and important. Out of such twisted self-images, they select future partners that validate their identities, sadly finding others who repeat the messages and experiences of the past. That is how abused children find themselves in abusive relationships; how insecure people land in insecure marriages.

  While relationships may be our most powerful psychological mirrors, given their emotional intensity and ongoing influence, they are far from the only determinants of self-image. The Devon Principle that I wrote about in the TraderFeed blog captures the understanding that everything we do is a psychological mirror. When my daughter Devon tackled work that she didn’t like, she found the work frustrating and felt inadequate as a result. When she pursued work that she loved so much that it didn’t feel like work, she felt fulfilled and gained confidence. The best work speaks to our interests and values, matching our abilities with challenges. Day after day, performing efficaciously at work that is important to us generates mirror-experiences of competence and worth. Conversely, when we’re performing meaningless work that doesn’t challenge our skills, it is difficult to feel anything other than boredom and me
aninglessness. A large portion of career success consists of finding the right mirrors; it’s much easier to get to the top when you’re climbing the right ladders.

  For more on the Devon Principle, check out my blog: http://traderfeed.blogspot.com/2006/12/devon-principle.html

  For my work as a psychologist, nothing is a more powerful mirror than having a meaningful, positive impact upon people’s lives, particularly when I get to know those people well and care about them. I enjoy giving a talk for a large audience or writing an article that’s widely read, but the real joy is hearing back from someone who thought the ideas were of genuine value. And, to be honest, I find far more reward in helping a single person in counseling or coaching than in giving a keynote address for a large conference. When a person transforms her life via coaching or counseling, a mirror is created that validates and enhances both participants in the helping relationship. I have been most successful when I’ve immersed myself in these positive mirroring experiences, least successful when I have pursued activities that, ultimately, offer a limited sense of self.

  When you serve as your own coach, your challenge is to structure your learning and development so that trading itself becomes an experience that mirrors your growing confidence and competence. Many traders limit their self-coaching to keeping a journal, and then limit their journaling to recounting all the things they’ve done wrong. As a result, self-coaching becomes little more than self-criticism. What is mirrored to a trader when the journal focus is so negative? What would be mirrored if we hired a teacher or coach who only offered criticism? Over time, such coaching would fail, reinforcing a sense of incompetence and failure.

  One of the best means for creating positive mirrors is the structured pursuit of goals. When we create challenging, meaningful, and doable goals, we generate potential experiences of mastery and success. When we make goal setting an ongoing feature of our self-coaching means, we continually construct opportunities for powerful, self-affirming emotional experiences. We know from psychological research that such emotional episodes are processed more deeply and enduringly than normal, daily experience. A good therapist creates vivid experiences that challenge clients’ old patterns; similarly, a good coach generates emotionally powerful and positive mirroring experiences for traders.

  Your goals should set yourself up for success and a building of confidence.

  So here is your assignment: Each day this week your trading journal should include a specific goal for work that particular trading session, concrete actions that you will take to achieve that goal, and a self-evaluation at the end of trading to gauge your success in reaching that goal. The goal should be a trading process that you wish to improve (i.e., something you have control over), not a profit target (which you ultimately don’t control). For example, your goal might be to increase your trading size incrementally, to implement a strategy for exiting trades in stages, or to limit trades to setups that align with the larger market trend. At the end of the day, you will give yourself a report card based solely on how well you achieved the goals you set for the day. These report cards can be displayed beside your monitor to reinforce your performance and progress. If you fail to achieve a good grade, improvement on that activity becomes your goal for the next day. If you receive a fine report card, you generate fresh goals for the next session. The idea is to never trade without consciously working on some aspect of your trading.

  It is not enough to set goals; you need ways of tracking your progress toward those goals and feeding that information into future goals.

  Many traders only engage in such goal setting when they’re trading poorly or losing money. The idea, however, is to make self-coaching and self-improvement an ongoing part of your trading career. Why? Because it’s not just about making money, it’s about creating the experiences that will sustain your sense of competence and confidence. Think of a young child: you don’t offer positive feedback only when the child is hurting. Rather, your support and love are continuous, enabling the child to sustain a consistent self-image. As a developing trader, you are like that young child. Your ability to create powerful mirroring experiences will make a difference in your ability to sustain the optimism and courage to weather drawdowns and aggressively pursue opportunity.

  Please take note of the following principle: If you limit your losses, pursue your strengths, and take concrete steps toward mastery, every single trading day can be a positive experience, even when you’re not making money. You cannot eliminate losing days, but there should never be days that leave you feeling like a loser.

  COACHING CUE

  When you construct your report cards, grade yourself based on your improvement, not based on an abstract (or perfectionist) standard of success. If you manage your trades better today than yesterday, that merits a good grade. Your goal is to improve; by focusing on improvement, you create powerful mirrors of self-development. Relative, not absolute, goals will get you to your desired endpoint, and they will ensure an enjoyable and empowering journey.

  LESSON 7: CHANGE OUR FOCUS

  A valuable psychological rule is that if you wish to change the doing, you must change the viewing. How we see the world colors how we respond to life events. We don’t just react to markets, but also to how we process those markets. Our thoughts are the filters between trading and trader.

  Many times we respond in exaggerated ways to markets, not because there’s anything unusual going on in the instruments we’re trading, but because a set of negative thoughts have intruded into our performance. Let’s say, for instance, that I notice that the ES futures are unable to surmount their overnight highs during the opening minutes of trade despite a few flurries of buying. I then observe that large traders are coming into the market hitting bids. I hypothesize that we cannot sustain strength and that the overnight highs will not be breached. I further infer that we will trade back into yesterday’s price range and hit the average trading price from that session. I wait for a bounce higher in the NYSE TICK that cannot make a fresh price high and use the occasion to sell the futures. As the position moves my way, however, the thought enters my mind that I should take quick profits because I’ve had a losing week thus far. A buy program then hits the market and my position ticks higher, eroding some paper profit. Now especially concerned, I take a small profit—only to see the market weaken notably and eventually hit my initial price target.

  What has happened in this scenario? Anxiety has interfered with my performance, turning a good trading plan into bad trading. But the anxiety has nothing to do with the behavior of the market: the market did absolutely nothing to disconfirm my idea. Indeed, when the buy program lifted the index futures briefly, the market was giving me a perfect opportunity to add a second unit to my trade! Not only did I miss an opportunity to profit from a good idea, I also missed an opportunity to hit a home run. Often, keeping losing trades small and hitting those few home runs generates profitability over the long run.

  Many traders’ problems show up in how they handle opportunity, not loss.

  Sometimes anxiety is a legitimate and appropriate response to a market that behaves in violent and unexpected ways. After all, as I note in the blog, anxiety is our body’s adaptive response to perceived danger. But danger can be a function of perception, not objective reality. I begin my trade immersed in market activity, framing hypotheses and executing an idea well. At some point, however, my thoughts veer from the present market and instead focus on how much money I’ve lost during the week thus far. That focus on loss creates a sense of danger and threat. Instead of responding to the market, I’m now reacting to my own concerns regarding profitability. My thought process has taken me out of the market immersion—and ultimately takes me out of my game.

  In a cool, calm moment, I can see clearly that the validity of my trade idea/plan has absolutely nothing to do with how I’ve traded the past several days. If I introduce worries over profitability into my trading, however, I’ve now allowed the viewing to affect the d
oing. I’m no longer absorbed in the market; my focus is gone. I’m responding to my own uncertainties and insecurities.

  How can we change our focus and stay grounded in our plans and in objective market activity? The first step is to recognize our triggers. These are the performance thoughts and worries that typically intrude during trading. Concerns over profitability are one trigger; excitement over anticipated profits could be another. Anything that gets you thinking about how well or poorly you’re doing while you’re doing it is a trigger that can nudge you out of your zone. When you know your triggers, you’re in a much better position to intercept them when they occur and treat them the same way you would treat any ordinary distraction, such as road noise outside your window.

  In other words, it’s not the thoughts of performance that take you away from your focus, but your identification with those thoughts. This is an important distinction. Everyone experiences distracting thoughts at times. When we identify with those thoughts, however, they—not our markets, not our plans—become our focus.

  Negative thoughts are inevitable; the question is whether you buy into them.

  Meditation can be a very helpful exercise. One purpose of meditation is to help people create a quiet mind by sustaining a single point of concentration and brushing aside all distracting internal dialogue and impulse. A simple adaptation of meditation for you to try is to take 15 minutes before the start of trading and seat yourself in a comfortable position, breathing slowly and rhythmically from the diaphragm. While in that position, focus your attention on quiet instrumental music played through headphones. You want to be as absorbed as possible in the music: as soon as your mind wanders, bring it back to the music and the sounds of the different instruments.