In coming weeks, I'll be reorganizing this site and its content. Meanwhile, market updates will be available on the TraderFeed blog. Trading the financial markets is among the most challenging of human endeavors. At its best, trading is a celebration of the human mind's capacity to master complexity.
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The Artful Trader Series 1 Episode 7. Rhyme or Reason? Applying the science of psychology to the art of trading. How are emotions involved in the decision making process of a trader? Do traders set aside their emotions or analyse them to make better decisions? Dr Brett Steenbarger is a psychologist and a performance coach who counsels traders and hedge fund portfolio managers in the US, Europe and Asia.
He discusses the need for traders to have cognitive flexibility and open-mindedness, and explains why cultivating creativity and a life outside the trading room is essential to the work inside it. Steenbarger, Ph. Brett also works as a performance coach for traders and portfolio managers at hedge funds and other money management firms and authors the TraderFeed blog www.
Brett and his wife Margie live in New Canaan, CT and enjoy travel and their five children, six grandchildren, and three rescue cats. Download speaker show notes. Download Brett Steenbarger's 'Four Psychological Strengths of Successful Traders and Portfolio Managers' where he draws upon years of performance coaching at hedge funds, investment banks, and proprietary trading firms to arrive at four dimensions of strength. Episode 7: Applying the science of psychology to the art of trading with Brett Steenbarger.
Michael McCarthy: So many times traders are told to follow their heads, and not their hearts. But can traders be more self aware, and apply the science of psychology to the art of trading? Brett Steenbarger: So my role is to help them literally think about their thinking.
Step back, become aware of that perfectionistic self talk so that they can truly serve as their own coach. Michael McCarthy: Today we chat to Dr. Brett Steenbarger, a psychologist and performance coach for hedge fund portfolio managers, who analyzes the cognitive, behavioral, and emotional reasons why traders make the decisions they do. Hi, and welcome to The Artful Trader. In each episode we'll hear the highs and lows from the trading experts, and discover their journey to mastering the art of the financial markets.
Brett Steenbarger is a psychologist and performance coach to traders. Each week he has coaching sessions with traders and hedge fund managers in the US, Europe, and Asia. Giving them techniques to better understand the vagaries of the markets, and offering critical advice to improve performance. He applies the latest research and findings in psychology and behavioral finance to give traders practical takeaways. Unlike many other psychologists, Brett is also a trader, giving him that deeper perspective into the thinking behind the trades.
Joining me from New York, welcome Brett. Brett Steenbarger: Doing very well. Thank you for having me. I appreciate it. Michael McCarthy: Thanks Brett. Brett, you're a psychologist and a trader. So in many ways you've got a unique perspective on the markets. What goes on in the minds of traders is an important part of your brief naturally, and we'll get to that. But what came first for you, was it the psychology or the trading? Brett Steenbarger: Yes.
The psychology came first. I have a PhD in clinical psychology, and I worked for many years applying psychology to professionals in the field of medicine.
I've had a longstanding interest in trading myself. I began trading in the late s during my graduate school time, and it was always a side interest of mine. So while I was training to be a psychologist I was following financial markets and trading.
It was only later in my career that I decided to put those together and write a book called The Psychology of Trading. That was discovered by some firms, and by some traders, and that's how I started applying the psychology to their work. Michael McCarthy: So each week now you're at different trading firms coaching traders and hedge fund managers. You're coaching people all over the world from the US, to London, to Asia.
Is there a main issue, or a common theme that you see recurring in traders all over the world? Brett Steenbarger: There are common issues and challenges. Many of those are based on the experience level of the trader. So that we have more beginning traders who are dealing with the challenges, and the frustrations of their learning curve.
We have more experienced traders who may be managing significant capital, and are dealing with the pressures of making and losing large amounts of money when markets move quite a bit. So there are different issues depending on where traders are at in their developmental curves.
Michael McCarthy: What are some of the problems more experienced traders face? Brett Steenbarger: There are several. They experience performance pressure issues.
So for instance, if they draw down, if they lose money they feel a lot of pressure to make that back. They have a responsibility to the investors. It's the investor capital that they're managing. So they can feel quite a bit of pressure. They have to make sure that that pressure doesn't unduly interfere with their trading decisions. So that's one common set of issues.
A second set of issues happens at the other end of the spectrum when the portfolio managers have been making money, and making money, and they become confident, and then they become overconfident. When they are overconfident that can interfere with good decisionmaking. So those are a couple of scenarios that I help them with. He described what you were just talking about there, the hot hand theory. That one of the dangers for traders is that they'll extrapolate their current success into the future without taking the time.
Do you see that much? Brett Steenbarger: That's right. Richard Thaler has done some very good work in behavioral economics. Many of his studies have shown that we are less rational than we like to think of ourselves as being. So we will fall victim to what are called recency biases. So if recently we made money we think that that's going to extend to the future. If recently we lose money, we can also extrapolate from that. When in fact many periods of winning and losing are just relatively random occurrences.
Michael McCarthy: How do you coach a trader through that hot hand experience? How do you bring them back down to earth?
Brett Steenbarger: That's a good question. What we try to do is help them stand apart from their recent experience. So when a trader feels that he or she has the hot hand, it's my job to press them with questions of, what would tell you you're wrong in this situation? How would you recognize that? Helping them make that a regular part of their process. To be self aware, to be asking themselves those questions. It's during the overconfident times that we tend to not doubt ourselves.
So I will use exercises where they have to pretend that instead of making a lot of money recently, they've lost money. Would you put those same trades on if your recent experience was losing money instead of making money?
Those kinds of questions and exercises help them be a little more thoughtful, a little more self aware. Michael McCarthy: But is it possible to coach anyone to become a trader? Brett Steenbarger: It is definitely possible to help coach them to be a trader. It's definitely not possible to necessarily coach them to be a successful trader. That's an important difference. Trading is a performance activity, no less than athletics, no less than being a virtuoso opera singer.
Can anyone become a professional athlete? Can anyone become a professional on the stage, or as a musician? No, I don't think so. I think people can become competent with practice, but it takes particular inborn talents, and it takes real ongoing training to reach a level of expertise.
Brett Steenbarger: It depends on the type of trading it turns out. I've done research at several different firms about what makes traders successful.
It's very interesting, different skills and talents play into different forms of trading. For instance, I work with some firms that emphasize day trading. They're trading very actively, very frequently, every single day.
Rhyme or Reason? Applying the science of psychology to the art of trading with Brett Steenbarger
The Artful Trader Series 1 Episode 7. Rhyme or Reason? Applying the science of psychology to the art of trading. How are emotions involved in the decision making process of a trader? Do traders set aside their emotions or analyse them to make better decisions? Dr Brett Steenbarger is a psychologist and a performance coach who counsels traders and hedge fund portfolio managers in the US, Europe and Asia. He discusses the need for traders to have cognitive flexibility and open-mindedness, and explains why cultivating creativity and a life outside the trading room is essential to the work inside it.
How WINNING TRADERS Think: Brett Steenbarger
Simply written, motivational with unique content that leads any trader, novice or experienced, along the path of self-coaching. This is by far Dr. Steenbarger's best book and a must-have addition to any trader's bookshelf. I'll certainly be recommending it to all my friends. Steenbarger has been helping traders help themselves for many years. Simply put, this book is a must-read for anyone who desires to achieve great success in the market.