Sunday, August 13, 2006

Trader Performance: What Contributes to Profitability?

What makes a trader successful? I've spent probably as much time researching this question as researching the markets. It's a topic that has occupied my articles, my thinking about how to trade, and an entire section of my personal website--not to mention a book I've recently completed and due out this fall.

Part of the performance equation is continuous learning; turning ordinary experience into a platform for self-improvement. Part of it, too, is working on oneself and cultivating our ability to exploit edges in the marketplace and sustain our intentions. Many different problems can interfere with performance--trading woes as well as emotional ones--but hard work on these is not enough; we need to structure our development in the right ways. I've learned quite a bit from observing successful traders, including--alas--how fleeting that success can be if the trader's development process is not ongoing.

My return to regular trading in the past two months has provided a very hands-on sense for what contributes to performance. I started out a bit shaky, but have since maintained solid profitability. If I'm honest with myself, I have to say that I haven't really become better at making money. Rather, I've become better at not losing it. And I think that's an important distinction.

The chief factor that impacts my profitability, I believe, is my selectivity. There are some days--I can feel it!--when I sit down at the trade station and I'm eager to trade. Other days, I seem to hit that Zen place where I can let the trades come to me. It's like that line in Reminiscences of a Stock Operator: it's not the trading that's makes you money; it's the sitting. When I don't *need* to trade and stay selective, it's as if I allow a different part of my brain to synthesize all the research I've done and all the market action I'm seeing. Out of that synthesis, I get to the point where I truly *see* a trade developing. And I jump on board.

Here's the great dilemma of performance: It takes a phenomenal act of will to develop ourselves and become elite performers--and yet, at the moment of actual performance, we cannot will ourselves to win. The very act of trying to win--attempting to force victory--interferes with performance itself and our ability to access all of our accumulated experience. It takes, for example, considerable will to practice one hundred free throws at each basketball practice. The act of making a clutch free throw during an actual game, however, has to come effortlessly. Aim the ball--try to invoke will--and all you'll hear the the clunk of the ball against the rim.

So what is the key to performance success? Perhaps this: the ability to let go of will after having cultivated it throughout preparation. After so much effort pursuing success, the gold ring goes to those who allow success to find them.


KN said...

Good Day Dr S,

to achieve the ultimate ZEN state what visualization techniques would you suggest before, during and after the trading day?

Many thanks for a great blog.



Brett Steenbarger, Ph.D. said...


Thanks for your note. It's not clear to me that visualization in itself promotes Zen-like shifts in consciousness, though it is a common component of relaxation and meditation programs. I have found biofeedback to be an effective modality. Journey to the Wild Divine is a popular screen-based implementation. Biofeedback based on blood flow to the frontal cortex (hemoencephalography) is, IMO, the best method, but not commercially available to my knowledge.


KN said...

Thank you for your reply,

would it be inapropriate for me to ask if you can elaborate more on this subject?

I am very interested and am sure that there must be more traders that are also.

Thanking you in advance


Brett Steenbarger, Ph.D. said...

Hi KN,

I appreciate the interest. Two chapters in my forthcoming book (due out this fall) deal with specific cognitive and behavioral techniques for shifting one's states of mind and body. Those techniques include imagery and biofeedback. I may also put together an article on the topic in the near future; thanks for the suggestion--


KN said...

Thank you Brett, looking forward to your book and possible article.

I will make an effort to research this subject matter it seems to me that is the way to get grounded and move ones trading forward to a "special" place.



Brett Steenbarger, Ph.D. said...

Thanks K,

A description of my use of the blood flow biofeedback is in my book The Psychology of Trading. Googling "hemoencephalography" should also get you some good background. The idea is to use the biofeedback not just for relaxation, but to enhance concentration. I find the Journey to the Wild Divine program useful in that regard and much more affordable than clinical biofeedback units.


Roshigary said...

For a good book on the Zen state relative to performance, may I recommend "Zen in the Art of Archery" by Eugen Herrigel? IMHO a thin but valuable volume, and a minor classic in the field.

Recently (July 19th) you wrote about the two types of traders. Daniel Pink wrote something similar about the two types of geniuses.

Some of us would like to believe we're among the late bloomers!

This might also suggest that there is a breed of trader out there that learns and responds to less stimuli, not more. I recall reading a profile of a trader in Futures Magazine that successfully traded the S&P for years using only the daily closing prices printed in the paper (please don't quote me on this).

Re: The Best Psychological Test of All (August 07, 2006). This reminded me that many mentors recommend, and you probably have as well, keeping a trading diary of each trade. Both this and the emotional diary are important because according to "The Limits To Learning" (Volume 2 - Issue 41 July 3, 2006) by James Montier, "Only by cross-referencing our decisions and the reasons for those decisions with the outcomes, can we hope to understand when we are lucky and when we have used genuine skill." Or to paraphrase, when we are genuinely in the flow, or no.

Speaking of the trading diary, the article posits that as humans, we have a hindsight bias; a tendency to attribute our victories to skill and our losses to bad luck.

This comes from "Thoughts from the Frontline", a recommendation on your Trader Development Links page that I thank you for.


Brett Steenbarger, Ph.D. said...

Thanks, Gary, for those great recommendations. Herrigel's book is indeed a classic. Montier is absolutely correct: we can only learn from our performance by making performance an object of investigation and study. The best traders I've worked with are mindful of what they do that succeeds and what they do that loses them money.