For the sixth interview in the StockTickr Interview Series (RSS feed), I spoke with Brett Steenbarger, a clinical psychologist, S&P futures trader, and Director of Trader Development at Kingstree Trading, LLC. Brett is the author of The Psychology of Trading (Wiley 2003), a topic that most of us would do well to read up on. He’s also put the finishing touches on a second book called Enhancing Trader Performance which is due out this fall.
Read on and see why Brett looks for just one good trade per day and how he hopes to be like a hidden sniper when he attacks the markets.
StockTickr: Tell us a little about yourself (who you are, where you live, etc)
Brett: I’m a clinical psychologist who taught for 19 years in a medical school department of psychiatry (SUNY Upstate Medical University in Syracuse, NY), where I still hold an appointment as Associate Clinical Professor. During my time in Syracuse, I managed to research the stock indices and trade the S&P on a part-time basis. I also had the opportunity to meet many traders and see how they dealt with the same emotional challenges that I experienced in my own trading. After writing the book The Psychology of Trading, I was invited to Kingstree Trading, LLC, a proprietary trading firm in Chicago, to talk with some of the traders. I was very impressed with them and they were apparently sufficiently impressed with me that they offered me a position as Director of Trader Development in 2004. Since then, I have worked with many professional traders at the firm, generally while they have been trading. It’s been a rare and precious experience to work with very motivated and successful traders and see up front what makes them tick. Out of this experience, I’ve written another book, Enhancing Trader Performance, that is scheduled for print with Wiley in the fall of 2006. The book is my attempt to capture what makes traders successful: the training and learning process, as well as the psychology.
StockTickr: How did you get started trading stocks?
Brett: My “career” began in the eighth grade when a teacher sponsored a trading contest and had us research a possible career. I interviewed the father of a classmate, who was a stock broker. I have traded since the late 1970s, but became particularly active in the late 1990s, when I began a research program into market patterns. Some of that research appears on my blog.
StockTickr: Do you trade for a living now?
Brett: I found it’s not really possible to actively manage positions and work with traders and their needs at the same time. I also found that traders didn’t want me to have market opinions (and positions) when I was trying to help them figure out the market on their own. So I don’t trade when I’m working full time with traders. When my work with traders is part-time, I trade the S&P pretty much exclusively–with much of my trading taking place during morning hours.
StockTickr: Describe your style of trading. How long do you typically hold stocks?
Brett: I’d say my style has changed as volatility has come out of the ES. I’m much more likely now than before to trade swings lasting hours. In the past, my trades would last less than 20 minutes on average. I find there’s a lot more noise in the market on a very short-term basis and that I need to hold positions a bit longer to exploit the signals in the noise.
My style of trading is a mix of quantitative and qualitative strategies. Before the market opens, I perform historical research (such as on my blog) to compute the odds that we will hit particular prices during the trading day. For instance, yesterday my research said that we had very good odds of taking out the overnight lows, even though we were up early in the morning. I then waited for the buyers to start lifting offers in size, confirming that they could not drive the ES above the previous day’s high. I shorted into their buying and then held the position into the afternoon for about 6 points of profit.
Increasingly, that’s how I’m trading these days. One good idea, one good trade a day. It’s when I try to be more active than that and don’t have those odds on my side that I start losing. Trading for profit and trading for fun and excitement are two very different things. I have a signed poster in my office that is a photograph taken by a military photographer. It shows a sniper in the field. He is almost completely camoflaged, with a steely gaze that suggests a patient wait for opportunity. As a trader, I want to be that guy.
StockTickr: What 3 books do you recommend traders read?
Brett: I have been blessed with strong friendships with many fine traders who have written about the markets. Victor Niederhoffer inspired me to take a more scientific approach to trading, and his books–The Education of a Speculator (with Laurel Kenner)–have been invaluable. My good friend Jim Dalton wrote a book called Mind over Markets that, IMHO, is the best single book on Market Profile and auction theory. There is never a time I talk with Linda Raschke that I don’t learn something about the markets. Her book with Larry Connors, Street Smarts: High Probability Short-Term Trading Strategies, is a classic and inspired much of my thinking about price movement and volatility. I could go on and on about great trading books. The articles page on my personal site, www.brettsteenbarger.com, reviews a few more of my favorites.
StockTickr: What is your typical R value per trade? i.e. what % of your portfolio do you risk with each trade?
Brett: What I’ve found is that, as market noise has increased, I’m not only trading less often, but placing stops a bit more widely than I had before. Even so, I’m not even risking 1% on most of my intraday trades; 2% for the relatively few position trades I take. I like the flexibility of trading a relatively large account, but then risking a small portion of that account per trade. For me, as someone who is relatively risk averse, it takes away much of the stress of trading. I can get stopped out on quite a few trades in a row without severely denting my account. I recently wrote a couple of articles dealing with the risk of ruin even when you have a demonstrable edge in your trading system. By chance, you can easily get runs of losers (about a 2-3% chance of four consecutive losses when the odds are 60/40 in your favor). If you don’t size positions properly, those runs can permanently damage both your account and your psyche. After all, it takes a doubling of your capital to recoup a 50% loss. My way of position sizing, combined with my selectivity in taking trades and my intraday focus, pretty much eliminates the possibility of home run trades. But it’s also kept transaction costs down, eliminated large losers, and kept me in the game at the ripe old age of 51!
StockTickr: Trading certainly can be extremely stressful – what are some techniques you can use to reduce that stress?
Brett: As you might surmise from the above, I consider proper money management to be *the* best psychological stress management technique there is. Another technique that reduces my stress is that I always have things in my life that are *much* more important to me than trading: my family, my career as a psychologist, and learning as an activity. Psychologically, I am diversified–and that’s just as important as being diversified in one’s financial investments. Finally, I have multiple income streams. I enjoy trading greatly, and I enjoy its contribution to my bottom line. But if I lose every penny of my money in the markets, I’ll continue to live in my home, continue to support my children, and continue my family’s lifestyle. I only trade with capital I can afford to lose. That takes away a great deal of stress.
StockTickr: What is the most common, but easily corrected fault you see in traders?
Brett: Their position sizes and trading frequency are too great relative to their account sizes. They expose themselves to large P/L swings–up and down–which create outsized emotional swings between overconfidence and anxiety/doubt. We commonly look at emotions as interfering with trading, but my consistent experience is that bad trading–poor risk management and the lack of a true edge in the marketplace–cause emotional problems.
StockTickr: Among some people psychological therapy has somewhat of a negative stigma attached. Do you believe people and traders in particular put off therapy and let problems fester?
Brett: Yes, that does happen, but I’ve also seen the reverse: People are *too* eager to attribute their poor P/L to emotional issues and won’t take a hard look at their trading practices. I’m not sure all traders who experience performance stress need formal therapy. They need to learn techniques to control the inevitable pressures that accompany work under conditions of uncertainty and risk. I describe some of those techniques in the articles on my site and in my Psychology of Trading book. The last two chapters of my new book solely deal with brief therapy techniques traders can use on their own to change their negative emotional, cognitive, and behavioral patterns. The goal is not to get therapy, but to become your own therapist.
StockTickr: Are there certain personality types that are better at trading than others?
Brett: Absolutely. People with low levels of “neuroticism” (predisposition to negative emotion) and people with high levels of “conscientiousness” are best able to take prudent risks. People who are highly emotional and impulsive fare the worst. That having been said, all the personality assets in the world won’t help someone who hasn’t developed trading skills and a verifiable edge in the marketplace. It takes considerable practice to become a successful golfer, surgeon, or musician. Why should trading be any different?
StockTickr: In my experience, dealing with a profit from a position that has gone your way is probably as stressful or more so than dealing with a losing position. What exit strategy do you use for winning trades?
Brett: As I mentioned before, I calculate the odds of prices hitting particular points based upon analyses of historical performance. Those points become minimum profit targets. If momentum is good and volume is expanding with my position, I will hold until there is a volume spike and an imbalance in the proportion of traders hitting bids vs. lifting offers. I’ll then exit into that volume spike, because I know the odds of reversal are high and I can count on the market taking me out (rather than giving up a tick of execution edge). I find a program called Market Delta (www.marketdelta.com) to be particularly helpful in identifying those points of imbalance.
StockTickr: Is stress from trading usually a symptom of problems in other areas of one’s life or is it in itself often the primary cause?
Brett: Stress is inevitable in trading. Any time you take risks under conditions of uncertainty, you’ll experience a degree of stress. Stress does not have to become distress, however. That’s where finding one’s edge and managing one’s money and positions become important.
Sometimes stresses from personal life intrude on trading, as when financial pressures increase due to unexpected bills. Other times, traders create their own stresses by failing to control risk or by overtrading. It goes both ways. And there is also a subgroup of traders who have ongoing problems with anxiety, depression, attention deficits, addictive behaviors, etc. That is not necessarily a small group; epidemiological studies suggest that 10-20% of the population has a diagnosable emotional disorder in any given year. It’s very important to sort out whether your problem is one of trading disrupting your emotions or emotional problems disrupting trading. One reason I decided to write the new book was to help traders sort that out for themselves. Some of the recent articles on my website have also tackled this topic.
StockTickr: What do you recommend for beginners who are just starting to trade (and might not realize what they’re getting into)?
Brett: I recommend that beginners *don’t* trade. Beginning musicians don’t start out performing in concert halls. Aspiring surgeons don’t begin by working on patients. Beginners need to go through a learning curve before risking their hard-earned money. There is no minor leagues of trading. Once you enter the marketplace, you’re competing against the best and brightest from Wall St., Chicago, Tokyo, London, and beyond. There are many resources available for simulated trading and for tracking the results of one’s trading. Many of these are described in my articles (and will be in my new book) as well. There are also very fine online trading rooms where beginners can observe experienced traders at work. Those include Woodie’s CCI Club (www.woodiescciclub.com), Linda Raschke’s trading rooms (www.lbrgroup.com), and John Carter’s Trade the Markets service (www.tradethemarkets.com). The saying in medical education is “See one, do one, teach one.” It’s not a bad formulation for learning trading. Getting the right kind of mentoring and learning about the markets should precede trading one lots, and that should precede any trading of size. Every performance field I’ve researched–from chess to performing arts to athletics–entails a lengthy learning curve, as performers develop competence and then expertise. Many trading woes–and emotional stresses–are caused when we try to short-circuit that learning curve and prematurely put our capital at risk.
StockTickr: Thanks, Brett!
Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.
- Eyal Maoz
- Gary B. Smith, the Chartman
- Nusair Bawla (alibawla on StockTickr)
- Dave Landry, Swing Trader
- Jeff White, the Stock Bandit
Do you have suggestions for other traders you’d like to see an interview with? Let us know!