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Check out this interview that my girlfriend Daleela did with Brett Steenbarger, author of the awesome trading psychology blog TraderFeed, and the even more useful book “The Pyschology of Trading” (which was instrumental in teaching me and helping me retain most of the millions of I’ve made over the years).
I’ve copied a few of my favorite pieces below, but the interview is too long so definitely check out the original article at DailyFinance.com:
How does a trader’s short term approach to changing emotional situations affect his success as a trader?
Traders need to be able to sustain focused concentration both to respond accurately to market movement and to access the knowledge and skills they have acquired. If traders become unduly fearful, frustrated, or euphoric, they tend to make impulsive decisions based upon superficial criteria. This can be particularly dangerous if traders lose money, become highly emotional over their losses, and then continue trading in a “revenge” mode. The trader who can disengage from markets temporarily, restore emotional equilibrium, and renew concentration is most likely to learn from adverse market events and not spiral into bad trades and outsize losses.
What are key attributes that make successful traders?
I strongly believe that trading is a performance discipline, not unlike sports or the arts. That means that success is a function of skill development and sustained learning. Successful traders excel at pattern recognition, and only an immersion in markets over an extended time enables traders to internalize patterns and act upon them quickly.
Successful traders must also possess a reasonable degree of risk tolerance and an unusual degree of emotional resilience. Even the best traders go through losing periods. It takes a strong individual to persist in the face of risk, uncertainty, and frequent setbacks.
So traders need to be Cool Hand Lukes?
Well, many successful traders are quite competitive and emotional, so I wouldn’t necessarily call them Cool Hand Lukes. But they do have the ability to channel their emotions in constructive ways, so as to not lose their focus on markets. As a general rule, traders-while they are trading-should be focused on markets, not on themselves and their profits/losses for the day or week. As soon as attention becomes self-focused, it is diverted from the reading of market patterns. It helps to be a Cool Hand Luke, but many successful traders talk out or vent their feelings and then stay market focused.
Do successful traders respond from a different part of the brain than unsuccessful traders?
Research in cognitive neuroscience tells us that, when we are calm and focused, we are most likely to be activating our brain’s prefrontal cortex, which has been called the “executive center” of the brain. It is these frontal regions that are most active when we are reasoning, planning, and making decisions. During times of stress, regional cerebral blood flows tend to move away from these frontal areas and toward motor regions, to help us with our “flight or fight” responses to danger. As a result, it’s precisely at those stressful times in markets that we’re most likely to be challenged to stay calm, focused, and centered in our executive functions. Rather, under stress, we tend to act out our fight or flight in markets, often making hasty and ill-considered decisions. Successful traders learn to normalize losses and uncertainties in markets, so that they stay more continuously grounded in those executive functions.
How must traders deal with financial fear, and how, psychologically, can they best deal with this?
I strongly believe that the best response to fear is proper risk management. If traders know in advance how much they can lose in a trade or in their portfolio, they can prepare for that possibility mentally and emotionally, so that they don’t respond to the loss as a catastrophe. Ironically, it’s by embracing uncertainty and planning for inevitable losses that we normalize them emotionally and overcome fear of them.
Since the recession started, have there been more traders seeking therapy?
Yes, I would say the recent economic challenges have created heightened performance pressures for traders and portfolio managers. It used to be that people feared losing their jobs; now they fear losing their careers, simply because fewer firms are hiring. Among independent, individual traders and investors, we’ve seen heightened stress due to losses in the stock, bond, and housing markets. Therapists report more business since the markets collapsed, and I think economic uncertainty is a big reason why.
What important lessons would you teach the average investor/trader? What are some common mistakes?
The most common mistake I see traders making is putting money at risk in markets before they have advanced sufficiently in their learning curves. I’m a firm advocate of simulated trading as a learning tool: immersing yourself in market patterns *before* you put capital at risk. Many traders think that trading looks easy and they jump right into the water with market pros. This is a major reason why, by some research estimates, over 80 percent of all traders eventually lose their capital. Success at trading comes no more easily than success at golf, acting, or chess. Many are called, few are chosen when it comes to making a living from such performance activity.
Posted in Interviews