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Enhancing Trader Performance and The Psychology of Trading: Interview with Brett N. Steenbarger

Today we are going to talk about the appli­ca­tions of cog­ni­tive neu­ro­science to trad­ing and neu­ro­fi­nance. Brett N. Steen­barg­er , Ph.D. is Asso­ciate Pro­fes­sor of Psy­chi­a­try and Behav­ioral Sci­ences at SUNY Upstate Med­ical Uni­ver­si­ty, active trad­er for over 30 years, for­mer Direc­tor of Trad­er Devel­op­ment for Kingstree Trad­ing, LLC, and author of The Psy­chol­o­gy of Trad­ing: Tools and Tech­niques for Mind­ing the Mar­kets(Wiley, 2003) and the new Enhanc­ing Trad­er Per­for­mance: Proven Strate­gies From the Cut­ting Edge of Trad­ing Psy­chol­o­gy (Wiley, 2007).

He writes fea­ture columns for the Trad­ing Mar­kets web­site and sev­er­al trad­ing pub­li­ca­tions, includ­ing Stocks Futures and Options Mag­a­zine.

Key take-aways

-Elite per­form­ers in any high­ly-com­pet­i­tive field fol­low struc­tured learn­ing and train­ing process­es to devel­op their skills, ensur­ing con­tin­u­ous feed­back and refine­ment.

- Traders would ben­e­fit to fol­low­ing this exam­ple. Tools at their dis­pos­al include books, sim­u­la­tion pro­grams, biofeed­back pro­grams for emo­tion­al man­age­ment, and coach­es.

- Spe­cif­ic skills to train are brain speed and work­ing mem­o­ry (for short-term traders), ana­lyt­i­cal skills (long-term ones). For both, man­ag­ing emo­tion­al-dri­ven impul­sive behav­ior.

Books on Trad­ing and Peak Per­for­mance

Alvaro Fer­nan­dez (Alvaro): Wel­come, Prof. Steen­barg­er. Why don’t you start by pro­vid­ing us some con­text on your inter­est in trad­ing per­for­mance and how it led you to your new book?

Brett N. Steen­barg­er (Brett): Thanks, Alvaro, for hav­ing me here. I real­ly enjoyed your last inter­view with Prof. Gopher. My main inter­est is how to enhance cog­ni­tive and emo­tion­al devel­op­ment among traders to help them become more suc­cess­ful. My first book, The Psy­chol­o­gy of Trad­ing, focused on emo­tion­al and stress man­age­ment, and tried to help traders (both pro­fes­sion­al and ama­teur) over­come emo­tion­al dis­rup­tions of trad­ing. My new book, Enhanc­ing Trad­er Per­for­mance, helps traders devel­op their own train­ing pro­grams or, we may even call them, “brain gyms”, to build their skills, strength­en their men­tal capac­i­ties, and improve their per­for­mance.

Alvaro: please tell us about your new book. What is the premise, and what are you try­ing to get at?

Brett: The premise is that elite, per­form­ers in high­ly com­pet­i­tive fields share com­mon traits. This includes peo­ple in such fields as ath­let­ics, per­form­ing arts, chess, the mil­i­tary, and med­i­cine. I review the research regard­ing what makes peo­ple suc­cess­ful in a those fields, find the com­mon fac­tors behind their suc­cess, and then apply the find­ings to traders.

Alvaro: what are those com­mon fac­tors for top per­form­ers? And what dif­fer­en­ti­ates elite per­form­ers from the rest?

Brett: The elite per­form­ers are dis­tin­guished by the struc­tur­ing of their learn­ing process. From a rel­a­tive­ly ear­ly age, they are engaged in an inten­sive learn­ing process that builds upon their nat­ur­al tal­ents. They find a niche—a field that makes use of these talents—and become absorbed with a delib­er­a­tive and sys­tem­at­ic learn­ing process that pro­vides them with con­tin­u­ous feed­back about their per­for­mance. The recipe for suc­cess seems to be tal­ent, skill, hard work, and oppor­tu­ni­ty. In con­trast, many peo­ple who don’t end up per­form­ing at a high lev­el were dri­ven most­ly by prac­ti­cal rea­sons to enter that field and are not moti­vat­ed to fol­low the same lev­el of inten­sive and sys­tem­at­ic train­ing. (What Brett is say­ing reminds me of the Learn­ing Cycle that Pro­fes­sor Zull out­lined a few weeks back).

Spe­cif­ic Learn­ing and Train­ing Advice for Traders

Alvaro: What spe­cif­ic advice do you pro­vide to traders in your book?

Brett: Traders typ­i­cal­ly devote lit­tle time to prac­tice and a struc­tured learn­ing process. I want to encour­age them to see that “learn­ing on the job” is not a sub­sti­tute for break­ing down skills into com­po­nents, drilling these, receiv­ing feed­back about per­for­mance, and mak­ing con­tin­u­ous mod­i­fi­ca­tions and improve­ments. In every field of per­for­mance, elite per­form­ers devote more time on prac­tice than per­form­ing. You need to pro­tect and opti­mize that prac­tice, learn­ing time. The aver­age trad­er doesn’t do that, and the result is that many traders lose their trad­ing cap­i­tal with­in 7 months of trad­ing. To devel­op them­selves, I sug­gest traders struc­ture their learn­ing process­es.

There are sev­er­al ele­ments to this devel­op­ment:

- Tools: There are already very good sim­u­la­tions out there that can help traders become more sen­si­tive to pat­terns in the mar­ket and inter­nal­ize these. The abil­i­ty to play and replay mar­ket days pro­vides traders with enhanced screen time to accel­er­ate and deep­en learn­ing. Anoth­er set of tools includes biofeed­back pro­grams that help traders man­age their emo­tions. Biofeed­back is espe­cial­ly help­ful in reduc­ing emo­tion­al arousal that can dis­rupt our exec­u­tive func­tions: judg­ment, plan­ning, ana­lyz­ing, and rea­son­ing.

- Reflec­tion and feed­back: Traders who uti­lize pro­grams to pro­vide them with met­rics on their trading—analyses of their win­ning and los­ing trades—have con­sid­er­able data at their dis­pos­al. The pat­terns revealed by these met­rics help traders fig­ure out both strengths and weak­ness­es. Many times, build­ing on suc­cess­es is more impor­tant than try­ing to change weak­ness­es. Con­stant feed­back on trad­ing results will show traders what they do best—and help them do more of it.

- Role of men­tors and coach­es: In many per­for­mance fields, such as music and ten­nis, coach­es help stu­dents break down their per­for­mance into com­po­nent skills and then sys­tem­at­i­cal­ly work on these and com­bine them. The men­tor is some­one who can struc­ture the learn­ing process for the devel­op­ing per­former and help them move along the path from being a novice to being com­pe­tent to being expert.

Alvaro: inter­est­ing anal­o­gy. Who would be a good “trad­er coach” and where does one find one?

Brett: Ide­al­ly, you need an expe­ri­enced and suc­cess­ful trad­er who is famil­iar with the kind of trad­ing that you will be doing. The book con­tains an appen­dix with dif­fer­ent resources that can help you find edu­ca­tion­al and men­tor­ing resources. For emo­tion­al devel­op­ment, you can coach your­self with prac­ti­cal cog­ni­tive and behav­ioral tech­niques and build new, pos­i­tive ways of think­ing and behav­ing. The last two chap­ters of the book pro­vides read­ers with self-help man­u­als for uti­liz­ing these tech­niques.

Alvaro: let’s talk about some of the key com­po­nents of top per­for­mance in trad­ing, and what skills traders can devel­op.

Brett: First, we must dif­fer­en­ti­ate whether we are talk­ing about short-term or long-term traders. For short-term traders, the pri­or­i­ty would be the abil­i­ty to process large amounts of infor­ma­tion and quick­ly see pat­terns that lead to effec­tive deci­sion-mak­ing. They need speed, and good work­ing mem­o­ry. For long-term traders, ana­lyt­i­cal skills are para­mount.

For both, I would add, know­ing how to deal with “the emo­tion­al fac­tor” is very impor­tant. Many traders get very frus­trat­ed when bets don’t go the way they expect­ed, and become par­a­lyzed or make non-log­i­cal deci­sions. Oth­ers may lose con­cen­tra­tion and focus when they get fatigued, and make impul­sive deci­sions. But I would stress that there is more to trad­ing suc­cess than con­trol­ling emo­tions. It takes tal­ent, skill, and a con­stant learn­ing process. I would also empha­size that, yes, we can train and get bet­ter at many things, but it is equal­ly impor­tant to ensure an opti­mal fit between our trad­ing tal­ents and inter­ests: the mar­kets we trade and the ways we trade them. There has to be a fit between what we’re good at and the oppor­tu­ni­ties afford­ed by a par­tic­u­lar mar­ket and trad­ing style.

Pro­grams: now and in the future

Alvaro: let’s now talk about the tools you men­tioned ear­li­er. What train­ing pro­grams are avail­able now and which ones can you fore­see will be avail­able in the future?

Brett: First, I find that Dr. Elkhonon Goldberg’s metaphor of a gym­na­si­um for the brain is very appeal­ing. We will be see­ing more and more tools for cog­ni­tive and brain fit­ness. Dr. Gold­berg cites con­sid­er­able research that indi­cates we can improve the func­tion­ing of our frontal cor­tex — home of our exec­u­tive func­tions such as our rea­son­ing, plan­ning, judg­ment, analy­sis, and prob­lem-solv­ing -, through struc­tured exer­cis­es, much as we can build our mus­cles in the gym.

Today, traders have very real­is­tic sim­u­la­tion pro­grams that can help them iden­ti­fy mar­ket pat­terns and improve deci­sion-mak­ing. True, as Pro­fes­sor Gopher said in your inter­view with him, what mat­ters is the cog­ni­tive fideli­ty of those sim­u­la­tions, and how they will help traders see new, non-his­tor­i­cal, pat­terns. But, at the very least, exist­ing sim­u­la­tion pack­ages help traders learn very quick­ly how to iden­ti­fy a wealth of recur­ring pat­terns in mar­kets.

Final­ly, I work with many traders on their emo­tion­al reac­tions—espe­cial­ly new traders. Behav­ioral tech­niques can be very help­ful to devel­op calmer, open-mind, atti­tudes. You linked my blog post that stressed the need to keep an open mind and avoid miss­ing unex­pect­ed “Goril­las in the mar­ket”; we need to be aware of and man­age the nar­row­ing of our atten­tion that usu­al­ly fol­lows hyper­fo­cus. For the many peo­ple out there who become angry and frus­trat­ed after trad­ing loss­es, I rec­om­mend exer­cis­es such as deep breath­ing and visu­al imagery, which, after a peri­od of prac­tice, can be applied very quick­ly to our work when we need it. These tech­niques can be rein­forced by the use of biofeed­back pro­grams that pro­vide real-time visu­al feed­back on the trader’s “inter­nal per­for­mance”, reveal­ing whether they are in the Zone of opti­mal learn­ing and per­for­mance or becom­ing stressed, anx­ious and impul­sive.

It is impor­tant to under­stand the role of emo­tions: they are not “bad”. They are very use­ful sig­nals. It is impor­tant to become aware of them to avoid being engulfed by them, and learn how to man­age them.

Alvaro: Prof. Steen­barg­er, many thanks for your very illu­mi­nat­ing com­ments, both on trad­ing and on improv­ing per­for­mance over­all. Any part­ing thoughts for our read­ers?

Brett: let me go back to the key find­ings of my new book. One, peo­ple who aspire to be top per­form­ers in any field must build on what comes nat­u­ral­ly to them, in order to be tru­ly moti­vat­ed and absorbed in con­stant learn­ing. Two, they will need to struc­ture pro­grams to devel­op their skills and work these pro­grams dili­gent­ly. Because elite per­form­ers do what comes nat­u­ral­ly, they become absorbed in the devel­op­ment of their skills. If you have to moti­vate your­self to work at some­thing, it’s prob­a­bly not your call­ing.

Alvaro: Brett, many thanks.

Brett: a plea­sure.

 

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