The Daily Trading Coach

by Brett N Steenbarger

  COACHING CUE

  Take short breaks from the trading screen. These breaks can be a great way to renew concentration and step back from difficult markets. Some of the best breaks are ones that are wholly absorbing, that get you into a different zone than trading. Physical exercise is one example, talking with people you enjoy can be another. I find myself wholly absorbed when I play with my cat Gina or when I swim in our pool. The activity completely takes my mind away from what I had been doing and lets me return with a new perspective. Switch gears—absorb yourself physically and/or emotionally—after you’ve been cognitively immersed in markets. These breaks can provide some of the most effective trades.

  LESSON 24: TRADE WITH ENERGY

  One of the important dimensions of psychological well-being is energy. Happiness, enthusiasm, motivation, and general contentment are difficult to sustain when you feel mentally and physically run down. Fatigue is the enemy of concentration; physical vibrancy fuels a positive, energetic mood.

  We are like laptop computers running on batteries: after sustained operation, we run down. Concentration and attention require effort; eventually we drain our mental reserves and lose focus. This leads to trading mistakes: missing opportunities, overlooking important pieces of data, forgetting key aspects of trading plans. When we are run down, we’re also most likely to fall back into old—and often negative—habit patterns. When we’re drained, we might find ourselves eating out of boredom, becoming unusually irritated when things don’t go our way, or getting caught up in negative ways of thinking.

  Think of it this way: it requires sustained focus to remain goal-oriented. To actively direct ourselves, we need an alert, active mind. When we become fatigued, we lose this active direction. We become passive, responding to events rather than making them happen.

  This distinction between active and passive trading is all-important. The active trader is one who researches markets, identifies distinct areas of opportunity, and consciously executes and manages trades to maximize that opportunity. For the active trader, nothing is left to chance: where to pursue opportunity, where to sit back, where to take profits, where to limit losses—all are preplanned. This takes time, energy, and a sustained focus. Good trading, in this sense, is pure intentionality: it is a directed act of will.

  When we are physically drained, we lose the ability to sustain this intentional focus. We neglect our research; we fail to calibrate risk and reward. We fall back on simple heuristics and enter trades based on simple reasoning—chart patterns or price levels—that may well lack any true risk/reward edge. Worse still, when we’re run down, we become emotionally reactive and find ourselves chasing price highs or lows or robotically enacting rules (fade weak stocks in a strong market) without taking the time and effort to assess the broader context our decisions (an trending day to the upside).

  Managing your energy during the trading day may take little more than ensuring that you:• Get proper sleep and proper quality of sleep. Interrupted sleep can deprive you of important stages of sleep and leave you feeling un-rested, even though you’ve spent a full number of hours in bed.

  • Eat properly. Highs and lows in blood sugar can make it difficult to sustain concentration; an excess of caffeine and sugar may provide temporary jolts, but can also lead to distracting rebound effects.

  • Maintain your mind properly. I’ve seen alcohol and drugs take a fearsome toll on traders over time, as partying the night before leads to diminished performance the next day. Conversely, those who are focused and intentional in their personal lives tend to see this carry over into their trading.

  • Maintain your body properly. Physical exercise is one of the most neglected facets of a trading plan. Hours upon hours sitting in front of a screen do not promote aerobic fitness. Over time, we lose conditioning—and our energy batteries lose their charge.

  • Take the breaks. Not many people can stare at a screen and follow market action continuously through the day without losing focus. Breaks during slower market action can replenish the energy and concentration needed when markets become busier.

  A trading career is a marathon, not a sprint: the winners pace themselves.

  None of the above considerations is earth shattering, but it’s amazing how poorly many traders score if they incorporate the five factors above into a daily checklist. We prepare our trades, but we often fail to prepare ourselves for trading. How can we stick to disciplined trading decisions if we’re inconsistent in our personal discipline?

  When you are your own trading coach, you cannot afford to run yourself into the ground by working so hard that you can no longer work. Nor can you so neglect your physical state to such a degree that, like that laptop battery, your memory effects lead you to lower and lower energy states with each recharging. Your assignment is to track your daily profits and losses simply as a function of two factors: your energy level (high or low) and your trading mode (active/planned or passive/unplanned). Add a simple checklist to your trading journal to help you see the correlations among your physical state, your concentration level, your intentionality, and your trading results.

  If you lack energy, you will lack focus; if you lack focus, you’ll lack intentionality; if you lack intentionality, you’ll lack the ability to follow trading plans.

  Unless you calculate and appreciate these correlations for yourself, you’re unlikely to sustain the motivation to address—with consistency—the five areas above. Once you see that your energy level is directly correlated with the quality of your trading (and with your trading results), you will prod yourself to build a daily routine that addresses sleep, eating, exercise, and a healthy lifestyle. You’ll also be able to overcome guilt or fear over leaving the screen and realize that opportunity is not just a function of moving markets: it’s also a function of your ability to capitalize upon those markets.

  COACHING CUE

  Many traders neglect their family lives (spouse, children) in their absorption into their work. The resulting guilt and distraction from those unmet needs wind up interfering more with performance than the time it would have taken to spend the quality hours together. The mental rejuvenation from vacations—even weekend holidays—can renew family relationships and energize work. If you’re too worn down for your personal life, you’re probably not operating with good efficiency in your trading. It’s not necessary to have a totally balanced life—few of us do—but if your life feels unbalanced, that will undermine energy, concentration, optimism, and effort.

  LESSON 25: INTENTION AND GREATNESS: EXERCISE THE BRAIN THROUGH PLAY

  One of the core concepts underlying The Psychology of Trading book is intentionality. We can define intentionality as the ability to sustain purposeful activity over time. The ability to sustain attention and concentration, coordinate a sequence of activities toward a chosen end, and persistently try different approaches toward solving a problem until a solution is reached: all of these are manifestations of intentionality.

  As noted earlier, there is an intriguing connection between intentionality and psychological well-being. In studies of flow, Mihalyi Csikszentmihalyi found that these moments of being “in the zone” result from a complete absorption in one’s activities. It is when we are completely focused on what we’re doing that we reach a state in which performance seems almost effortless and completely natural. This is a highly pleasurable state and, among creative individuals, becomes a psychological reward in its own right. In a real sense, the creator’s passion for her work represents a passion for the flow state. Exemplary performance thus provides its own rewards: a psychological feedback system that lies at the heart of greatness.

  This helps to explain researcher Dean Keith Simonton’s findings that great individuals across a variety of disciplines are unusually productive. They have mastered the art of working within their performance zones, so that sustained effort becomes a desired end in itself. Their productivity is a byproduct of a kind of positive addiction: a pursuit of the high of
the performance zone for its own sake.

  As Elkonon Goldberg notes in his excellent text The Executive Brain, the various facets of intentionality—attention, planning, reasoning—are functions of the brain’s frontal cortex. His research also suggests a surprising degree of plasticity to the brain: utilize brain functions and you exercise those brain regions and strengthen their functions, much as going to a gym builds our muscles and endurance. At any given point in time, we may possess a relatively fixed quantity of intentionality: we can only exercise the brain so much before we become fatigued with the effort and need to rest. Over time, however, we can build our brain’s capacity for intention by exercising those frontal cortex functions. Just as lifting weights is the best way to build our strength, engaging in sustained, directed effort is the best way to cultivate our intentional capacities.

  When we pursue goals in an effortful manner, we build intentionality and free will.

  One would think that trading should be an excellent form of mind exercise for this very reason. That is not necessarily the case, however. We can click a mouse and place trades without engaging in effortful, directed thought. This is the passive trading described in the previous lesson. When we trade without focused intent, we fail to use our mental muscles. At a broader level, when we live our lives on autopilot, those muscles atrophy. All of us know individuals who seem to drift from activity to activity, seemingly heedless of the longer-term consequences of their actions. They spend money and become mired in debt; they jump into relationships and reenact past conflicts. Gurdjieff described this as a tendency to live mechanically, as if we are stimulus-response machines. We see this among retirees: after functioning passively over time, even small efforts become taxing. Life becomes mechanical; the capacity for intentionality has atrophied.

  Just as exercising one muscle group will not develop other ones (or building aerobic capacity will not confer muscular strength), cultivating one form of intentionality does not necessarily raise our self-directed capacities in others. Good examples of this are high-frequency day traders who develop an amazing capacity to sustain attention in front of a screen, as they track bids and offers, upticks and downticks, through the day. These same traders are often unable to sustain the kind of mental effort needed to observe themselves over time or systematically review markets to identify trends and themes. Clearly, we’re most able to sustain concentration and effort during activities that interest us and that fit with our skill sets. The creative talent who stays in the flow is partly able to achieve this state because he sticks to the performance niche we discussed in the last chapter: a sphere of talent, skill, and interest. Outside of those niches, the sheer effort needed to produce results, the frustrations of not getting those results, and the boredom from operating outside our values and interests all conspire to interrupt flow and disrupt intention.

  This is the dynamic described in Enhancing Trader Performance: talents lead to interests lead to immersion in skill building leads to competence leads to further flow and the eventual development of elite performance. It is the interplay between the flow state and the development of intentionality that creates accelerated learning curves: without flow, talents have no place to go; they never evolve into elite skills.

  Many traders fail to succeed because they are operating outside of the niches defined by the intersection of talents, interests, and skills. Because they attempt something that doesn’t intrinsically interest them and that doesn’t play to their distinctive abilities, they rarely encounter flow states: their trading brings little well-being. Without the flow, these traders lack the motivational impetus to sustain efforts, and that prevents them from cultivating intentionality. Then they wonder why they can’t stick to trading plans or why they sabotage themselves with impulsive trades.

  The learning curves of elite performers cultivate intentionality as they build skills, which means that—over time—elite performers can do more with their skills than others.

  What is the first step in performance development? The most common response is practice, and that is important, of course. But before practice, there should be play. Play tells us which activities are fun and which are not. When we play with something, we discover its joys and frustrations: its intrinsic interest for us. Most traders who have not found their niche have never played with markets. They haven’t tried to trade different styles, different instruments, and different time frames. They don’t know what it is like to hold positions for weeks—or for only a few minutes. These traders can’t appreciate the difference between trades made from rapid pattern recognition and those made from rigorous analysis. They try to imitate other traders, or they take the path of least resistance and trade from superficial chart or indicator patterns. Elite skills can never develop in such a learning environment; intentionality is stunted.

  Elite performers never stop playing. Artists sketch; athletes play in scrimmages; actors improvise. Play is a means of self-discovery, and sometimes we discover passions and talents we didn’t know we had. Your assignment for this lesson is to pick a market, trading style, or time frame different from your usual one and conduct paper trading in parallel to your usual trading. Your paper trading should document real trade ideas and real-time tracking of P/L. The simulated trades should be managed as real ones, with profit targets, stop-losses, and decisions about adding to or reducing positions.

  For example, I maintain a separate, small trading account where I play with longer-term trading ideas. It’s a way to test out my research and discover possible edges with very small amounts of money at risk. A majority of ideas in this sketchbook account may fail to bear fruit, but it only takes one promising effort to open new doors to opportunity. This keeps my mind and trading fresh; it also helps me stay in touch with the market’s larger picture when placing bread-and-butter shorter-term trades. Most of all, it tells me which trading ideas and strategies truly capture my interest and imagination: which may form the promising basis of a new niche. When you play with trading, you avoid stagnation; you also discover niches that will sustain intentionality and performance. That’s how you build a trading career—and that’s how you build the mental muscles that propel performance to ever-higher levels.

  COACHING CUE

  If you structure your trading preparation like you would structure physical work-out routines, then every day you are adding a bit to your capacity to sustain intention. I recently observed a trader enter a trade with a strong idea. He was stopped out, but reentered the same trade on a fresh signal. That was stopped out also. He entered a third time and then rode a trend for a very large winner. His resilience was a function of his persistence: his ability to sustain purpose over time, even through fatigue and discouragement. His diligent preparation each day conditioned him to make extra efforts when it counted, at a time when most others would have given up on the idea. When you put effort into trading development, you not only prepare the mind, you condition the will.

  LESSON 26: CULTIVATE THE QUIET MIND

  When we think of psychological well-being, we naturally think of joy, pleasure, and vigor. A different facet of well-being is serenity: a mind free of distracting thoughts and feelings. In many ways, serenity is vital to elite performance: a mind at peace is one that can be fully focused on market patterns.

  Most of us spend too much of our time assaulted by stimuli to achieve a high degree of serenity. Social interaction, television, radio, music players, cell phones, billboards, and computers: much of our day is spent in a me’lange of sights and sounds. Each calls to our attention, entertaining us from without, but leaving us ever more challenged to stimulate ourselves from within.

  In the absence of the ability to generate our own stimulation, many of us equate the absence of stimulation with boredom. Boredom is an empty state, a frustrated state in which there is no-thing of interest. Upon reflection, however, we can see that boredom betrays a kind of inner emptiness, an inability to find objects of interest in our inner and outer worlds.


  The aversion to boredom is the source of many trading problems. To erase boredom, traders will manufacture trades, overtrading—and sustaining losses—in the process. Traders will take unusual risks and size positions too daringly to sustain their excitement and interest. It is ironic that many traders consider emotion to be their enemy, when in fact it is the boredom of quiet markets that they particularly dread.

  But the aversion to boredom damages trading in a much more subtle way. As I stressed in the Enhancing Trader Performance book, trading expertise hinges on the ability to detect and act on patterns that occur within noisy data. Experiments with implicit learning suggest that we can detect complex patterns in situations without being able to verbalize the specific nature of those patterns. This occurs routinely when we sense a market behaving differently from usual, or when we get an uneasy feeling about a conversation. Little children assemble grammatical phrases without knowing the rules of grammar: they’ve encountered so many examples of proper speech that they know what sounds right—and what sounds wrong. They, like traders and conversationalists, develop a feel for patterns and deviations from those.

  This gut feeling, the basis of all valid intuition, is not mere hunch. It’s the result of countless repetitions of complex patterns. When I first drove a car, I could barely stay in my lane. With experience, I now anticipate potential accidents several cars ahead of me. Many times I tap my brake or raise my alertness before I’m consciously aware of the troubling situation. If we needed to rely on explicit reasoning for all life’s activities, we would never be able to respond quickly to danger. Evolutionarily, it makes sense for us to be able to develop a feel for reality, as well as a conceptual grasp.