The Daily Trading Coach Read online

  BRETT STEENBARGER

  Acknowledgments

  If, as the saying goes, it takes a village to raise a child, it takes a small army to write a book. The last lesson of the book is dedicated to my mother, Constance Steenbarger, who passed away last year. My deepest hope is that this book carries forward the nurturing spirit that she brought to her family and students.

  If my mother represented nurturance in my life, my father, Jack Steenbarger, has embodied the virtues of hard work, achievement, and love of family. From the earliest days of my training as a psychologist, I have been fascinated by the psychology of exemplary achievement: what makes highly successful people tick. There’s no question where that passionate interest originated, and it gives me the greatest of pleasure to acknowledge my father for that inspiration.

  None of this would be possible, however, without the understanding, love, and support of my wife Margie. In 1984, I traded bachelorhood for a life with Margie and her family; to this day, it remains my one superlative trade. Twenty-five years later, I’m pleased to report we’re still riding that trend, having taken no heat whatsoever!

  I’m saddened, but happy at the same time, to be able to dedicate this book to the memory of my uncle, Arnold Rustin, MD, who also passed away during the year. A consummate teacher, Arnold represented everything I’ve admired and enjoyed in the world of academic medicine. It’s the support of Arnold and his wife Rose, even amid their own challenges, which made the greatest impression on me, however. I hope their inspiration finds expression in this book.

  Thanks, too, to Debi, Steve, Lea, Laura, Ed, Devon, and Macrae, the kids who aren’t kids any more, but who have been remarkably understanding of my hours on the road meeting with traders and my even greater hours online, keeping up with a blog and dozens of e-mail and phone calls daily. I would not be so grounded without family, including my brother Marc and sister-in-law Lisa and our three feline friends: Gina, Ginger, and Mali.

  To the traders and authors who contributed to Chapter 9, my deepest thanks and appreciation for your great work. You provide unparalleled resources for developing traders. Acknowledgments are also due to those whose work has inspired my own: philosophers Ayn Rand, Brand Blanshard, Colin Wilson, and G. I. Gurdjieff; the many psychologists and researchers who have contributed to the brief therapy and positive psychology literatures; and the traders who were formative in my development: Victor Niederhoffer, Linda Raschke, Chuck McElveen, and the many hedge fund traders I’ve been privileged to work with in the past few years. My colleagues at Upstate Medical University have been inspirational and supportive throughout my second career; special thanks to Mantosh Dewan, MD; Roger Greenberg, PhD; and John Manring, MD.

  This is also my opportunity for a shout-out to those who write and play the music that kept me company through the writing of this book: Edenbridge, Armin van Buuren, Ferry Corsten, Cruxshadows, Assemblage 23, VNV Nation, and many others that you may discover on the Become Your Own Trading Coach blog.

  Deepest thanks, as well, to the Wiley production staff and my fantastic and supportive editors, Pamela van Giessen, Kate Wood, and Emilie Her-man. They’ve been tremendously helpful in bringing this book to life. My appreciation also goes out to the many readers of the blog, particularly those who have actively participated with their comments and insights. I hope this book contributes to your continued happiness and trading success.

  Introduction

  Too few of us are play-actors of our own ideals. We have strengths and talents, dreams and aspirations. But when we look hour-by-hour, day-by-day, not many of these ideals are concretely expressed. The days become months, then years, and—at some sad juncture—we look back on life and wonder where it went.

  That could be you: the middle-age person looking back on how “I could’ve been a contender.” Or, you could live a different life script. You could become the actor of your ideals and live their realization.

  If you’re thinking this is a strange introduction to a trading text, you’re right. This book doesn’t start with supply and demand, trading patterns, or money management. It begins with you and what you want from your life. Trading, in this context, is more than buying, selling, and hedging: it is a vehicle for self-mastery and development.

  Every trader, whether he consciously identifies it or not, is an entrepreneur. Traders open their business and compete in a marketplace. They identify and pursue opportunity, even as they preserve their capital. Traders refine and expand their craft; they take calculated risks. As entrepreneurs, traders start with the premise that they bring value to the marketplace. Amid the inevitable disappointments and setbacks, the long hours and the limited resources, the risk and uncertainty, it can be difficult to sustain that optimism. It is so much easier than to keep one’s visions on a shelf and forego the daily efforts of enacting ideals.

  Some traders, however, cannot shelve their aspirations. Like the moth, they’ll pursue distant lights even if it means an occasional singe. To those noble souls, I dedicate this book.

  When I work with traders and portfolio managers at hedge funds, proprietary trading firms, and investment banks, I don’t tell them how to trade. Most of them trade strategies different from my own and know far more about their markets than I ever will. Rather, I figure out their strengths. I learn what these traders and managers do well and how they do it, and I help them build a career out of what they’re already good at. Just as fish cannot comprehend water, being immersed in it from birth, we typically lack an appreciation of our personal assets. Each of us is a curious mixture of skills, talents, strengths, conflicts, and weaknesses. But just as a new business must capitalize on the strengths of its founders, a career in the markets crucially hinges on the assets—personal and monetary—of the trader. As a coach, my role is to take traders out of their psychological water and help them see what has been around them all along: the assets that can provide a lifetime of dividends.

  Never has self-coaching been more important for traders. As I write this, we have witnessed levels of market volatility unseen in the post-World War II period. Price volatility brings potential opportunity, but also risk. Traders who could not step back, recognize unfolding developments, and make adjustments have lost significant money. Those who have used the crisis to step out of the trading water, limit risk, and find fresh opportunity are the ones who are poised to reap those career dividends.

  The book you are reading is intended to be your companion in this trading journey. It is organized in 101 lessons. Each lesson outlines a challenge and proposes a specific exercise for moving yourself forward with respect to that challenge. The lessons are intended as meditations to begin your trading day—coaching communications to help you enact the best within you. Eventually, as you read and live these lessons, the coaching communications become your own self-talk. You begin by play-acting the book’s ideals and end up living them and shaping them into your own. You become your own trading psychologist.

  If reading a short passage each day and planting the right ideas into your forebrain helps you prioritize your life and trading goals—and if that in turn helps you make one less bad trade per week and take the one good one you would have otherwise missed—think of how you will personally and financially profit. But just as pills can’t work when they stay in a bottle, no one learns from an unopened book. The first step in becoming your own trading psychologist is to set time aside for self-mentorship—every day, every week—because that’s how behavior patterns turn into habits. The great individual is simply one who has made a habit of self-development.

  So there they are, staring at you from the shelf across the room: Your ideals, all those things you’ve wanted to do in life. You look longingly toward the shelf, but you can’t reach it from your comfortable chair. Yet you hold a book in your hands. Perhaps that book can make that chair just a little less comfortable, place the shelf just a bit closer.

  You turn the page.

  The next step is ours.

  CHAPTER 1<
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  Change

  The Process and the Practice

  The mind has exactly the same power as the hands; not merely to grasp the world, but to change it.

  —Colin Wilson

  You are reading this book because you want to coach yourself to greater success in the financial markets. But what is coaching? At the root of all coaching efforts is change. When you are your own trading coach, you are trying to effect changes in your thoughts, your feelings, and your behavior. Most of all, you are trying to change how you trade: how you identify and act upon patterns of risk and reward, supply and demand.

  There is a rich literature regarding change, grounded in extensive psychological research and practice. If you understand how change occurs, you are better positioned to act as your own change agent. In this chapter, we will explore the research and practice of change and how you can best make use of its sometimes-surprising conclusions. Coaching is about making change happen, not just letting it happen. It’s about making the commitment to being a change agent in your own life, your own trading.

  First, however, let’s learn about the process and practice of change.

  LESSON 1: DRAW ON EMOTION TO BECOME A CHANGE AGENT

  For some of us, the status quo is not enough. We experience glimpses into the person we’re capable of being; we yearn to be more than we are in life’s mundane moments.

  That yearning starts with the notion of change. We desire changes in our lives. We adapt—we grow—by making the right kinds of changes. All too often, however, we feel stuck. We’re doing the same things, making the same mistakes again and again. Do we wait for life to change us, or do we become agents of our own life changes?

  The easy part is initiating a change process. The real challenge is sustaining change. How many times does an alcoholic take the initial steps toward sobriety, only to relapse? How often do we start diets and exercise programs, only to return to our slothful ways? If we focus on starting a change process, we leave ourselves unprepared for the next crucial steps: keeping the flame of change burning bright.

  The flaw with most popular writings and practices in psychology and coaching is that they are designed to initiate change. These writings and practices leave people feeling good—until it becomes apparent that different efforts are needed to sustain change. Successful coaching doesn’t just catalyze change: it turns change efforts into habit patterns that become second nature. The key to successful coaching is turning change into routine; making new behaviors become second nature.

  That’s where emotion comes in.

  For years I had attempted—unsuccessfully—to sustain a weight loss program. Then, in the year 2000, I was diagnosed with Type II diabetes. My diet had to change; I needed to lose weight. If I didn’t, I realized with crystal clarity, I could lose my health and let my wife and children down. Literally that same day I began a dietary regimen that continues to this day. My weight dropped 40 pounds (I shed the pounds so quickly that friends were concerned that I had a wasting illness) and I regained control of my blood sugar.

  What was the catalyst for the change? Years of telling myself to eat differently, exercise more, and lose weight produced absolutely no results. A single emotional experience of the necessity for change, however, made all the difference. I didn’t just think I needed to change: I knew it with every fiber of my being. I felt it.

  So it is with traders.

  Perhaps you’ve told yourself that you need to follow your rules, that you need to trade smaller, or that you should avoid trading during certain market conditions or times of day. Still you make the same mistakes, lose money, and build frustration. Like my initial efforts at weight loss, your attempts at change fail because they lack emotional force.

  Research into the process of successful versus unsuccessful therapy finds that emotional experience—not talk—powers change. No one ever felt valuable and lovable by standing in front of a mirror and reciting self-enhancing statements. The experience of a meaningful romantic relationship, however, yields the deepest of affirmations. Yes, you can tell yourself you’re competent, but experiencing success in the face of challenge provides a lasting sense of efficacy. Pleasure, pain: nature hardwires us to internalize emotional experience so that we can pursue what enhances life and avoid what harms us. That ability to internalize our most powerful emotional experiences helps us to sustain the changes we initiate.

  The enemy of change is relapse: falling back into old, unproductive ways of thinking and behaving. Without the momentum of emotion, relapse is the norm.

  Are you going to work on yourself as a trader today? Are you going to use today as an opportunity to learn and develop yourself, regardless of the day’s profitability? If so, you’ll need a goal for the day. What are you going to work on: Building a strength? Correcting a weakness? Repeating something you did well yesterday? Avoiding one of yesterday’s mistakes?

  An important first step is to set the goal. We cannot succeed as change agents if we don’t perceive a clear path from the person we are to the person we wish to become. A valuable second step is to write down the goal or talk out loud into a recorder. This step helps cement desired changes in your mind. But will the pursuit of your goal truly possess emotional force? Will it transform you from one who thinks about change to one who truly becomes a change agent?

  The secret to goal setting is providing your goals with emotional force. If your goal is a want, you’ll pursue it until the feeling of desire subsides. If your goal is a must-have—a burning need, like my dietary change—it becomes an organizing principle, a life focus. You won’t become a better trader because you want to be. You will only coach yourself to success when self-improvement becomes your organizing principle: a must-have need.

  Try this exercise. Before you start trading, seat yourself comfortably and enter into a nice slow rhythm of deep breathing. Imagine yourself—as vividly as you can—starting your trading day. Watch the market move on the screen; watch yourself tracking the market, your day’s trading ideas at your side. Then turn your goal for the day into part of your visualization: imagine yourself performing the actions that concretely put that goal into practice. If your goal is to control your position sizing, vividly imagine yourself entering orders at the proper size; if your goal is to enter long positions only after a pullback, imagine yourself patiently waiting for the pullback and then executing the trade. As you visualize yourself realizing your goal, recall the feeling of pride that comes from realizing one of your objectives. Bask in the glow of living up to one of your ideals. Let yourself feel proud of what you’ve accomplished.

  It’s important not just to have goals, but also to directly experience yourself as capable of reaching those goals. Psychologists call that self-efficacy. You are most likely to experience yourself as a success if you see yourself as successful and feel the joys of success. You don’t need to imagine yourself making oodles of money; that’s not realistic as a daily goal. But you can immerse yourself in images of reaching the goals of good trading and experience the feelings of self-control, mastery, and pride that come from enacting the best within you.

  We are most likely to make and sustain changes when we perceive ourselves as efficacious: capable of making those changes.

  Many traders only get to the point of self-coaching after they have experienced harrowing losses. The reason is similar to my experience with my diagnosis: it was the vivid fear of consequences—the intense feeling of not wanting to ruin my life—that drove my dietary change. Similarly, after traders lost a good deal of their capital, they never want to experience that again. They trade well, not because they talk themselves into discipline, but because they feel the emotional force of discipline’s absence.

  Contrary to the teachings of proponents of positive thinking, fear has its uses. Many an alcoholic maintains sobriety because of the fear of returning to the pain of drinking’s consequences. Emotion sustains the change.

  With guided imagery that you feel as well as see, y
ou can create powerful emotional experiences—and catalyze change—every single day. That’s when you become a change agent: one who sustains a process of transformation. The key is adding emotional force to your goals. Your assignment is to take those lifeless goals off the piece of paper in your journal and turn them into vivid, powerful movies that fill your mind. Try it with one goal, one movie in your head, before you start trading. It is not enough to set goals; you must feel them to live them.

  COACHING CUE

  To each of your goals, add an or else scenario. Vividly imagine the consequences of not sustaining your change. Relive in detail specific failure experiences that resulted from the faulty behavior you want to change. When you add an or else condition to your goal setting, you turn fear into motivation. The brain is wired to respond first and foremost to danger; you will not gravitate toward the wrong behaviors if you’re emotionally connected to their danger. To this day, my diet is firmly in place. Fear has become my friend.

  LESSON 2: PSYCHOLOGICAL VISIBILITY AND YOUR RELATIONSHIP WITH YOUR TRADING COACH

  If you are to be your own trading coach and guide your trading development, we have to make you the best coach you can possibly be. That means understanding what makes coaching work—and what will make it work for you.

  Research informs us that the most important ingredient in psychological change is the quality of the relationship between the helper and the person receiving help. Techniques are important, but ultimately those techniques are channeled through a human relationship. Studies find that in successful counseling, helpers are experienced as warm, caring, and supportive. When helpers are seen as hostile or disinterested, change processes go nowhere. There’s a good reason for this: relationships possess magic.