The Daily Trading Coach

by Brett N Steenbarger

  But there’s a more important reason for sustaining self-coaching efforts. When you’re trading well is precisely the time you want to be the most self-aware of your strengths, so that you can maximize your earnings at those times. The true competitors and most successful participants in sport, warfare, and games of skill such as chess are the ones who possess the killer instinct: they have a sense for when they have the advantage, and they press that advantage to the hilt. Making modest money when you are trading well is a great way to ensure poor returns when you’re not seeing markets as well. For many traders, it’s the relatively few, large gains from the best trading periods that contribute most to overall profitability.

  The measure of self-coaching is how hard you work on trading when you’re making money.

  It’s as important to work on yourself when you’re trading well as when you’re trading poorly. It’s not that you want to fix what isn’t broken; rather, you want to crystallize what you’re doing right so that you can do more of it and capitalize fully on it. Conversely, when you’re trading poorly, you don’t want to lapse into discouragement and defeat. Maintain the journal and the pattern recognition efforts to keep you in a constructive mode, even when all you may be able to do for the moment is to cut your risk when your negative patterns surface. That is still progress.

  So how do excellent traders (and competitors in any field) sustain the motivation to operate at elite levels of performance? An important driver of that motivation is an intense competitive drive and a ferocious desire to win. The traders I’ve worked with personally who have been consistent, high earners have traded quite differently and viewed markets in radically different ways. Some traders have been loud and outgoing; others have been cerebral. Some have been uncannily intuitive; others have been analytically insightful. The common feature among all of them, however, has been their intense competitive nature. They compete against peers, they compete against markets: most of all they compete against themselves. They derive pride and validation, not just from making money, but also from getting better, which is what keeps successful traders in the game long after they could have retired comfortably.

  The lesser traders? They trade to not lose; they trade to keep their jobs. They don’t hunger to become more than they are; they want to do well, not to be their best.

  The drive for self-improvement is different from the desire to make money and is far more rare.

  These successful traders can sustain their drive by staying mindful of the costs of their negative patterns and the benefits of their positive ones. When a successful trader decides to avoid a particular trade or market, it’s often because of a specific recollection that this idea has caused past losses. By staying emotionally connected to the pain created by their worst trading, traders stoke their motivation to avoid trading mistakes. Similarly, knowing their strengths is not just an abstract awareness for successful traders, but an emotional connection to the pride and sense of accomplishment over doing well.

  A best practice in self-coaching—and a great assignment for this lesson—is to not only summarize the patterns of your best and worst trading, but to actually write down and visualize the costs associated with the most negative trading patterns and the benefits that accompany the best patterns. In other words, you don’t finish your journaling until you achieve a state in which you are emotionally connected to the things you are writing about. You will want to change your negative patterns when you get to the point of hating those patterns and becoming disgusted with the ways in which they’ve set you back. You’ll want to build on your positive patterns when you see and feel their benefits. When you’re coaching yourself well, journaling is an emotional exercise, not merely a cognitive one.

  There is little to be gained from abstract positive thinking. Reciting such affirmations as, “I will be a successful trader” is empty at best, self-delusional at worst. The reason such positive thinking doesn’t work is that it is not connected to the day-to-day conduct of your trading. It’s not enough to simply make yourself feel good, and, indeed, there can be real value in feeling so bad that you’ll never repeat a mistake again. What is helpful is to associate the best emotional experiences of trading—your greatest moments of joy and achievement—with the specific practices that brought you such happiness. It is also tremendously helpful to re-create the pain of your worst trading with concrete vows to never go there again.

  Think of football, basketball, and tennis coaches. Every practice session teaches skills, offers feedback, and supplies motivation. It’s not a bad formula for self-coaching as well. You are most likely to change a negative thought or behavior pattern when you associate it with concrete costs and consequences; you’re most likely to motivate a positive behavior by attaching to it specific, felt benefits.

  COACHING CUE

  Efforts at self-change break down when people start to make exceptions and allow themselves to revert to old ways. To accept exceptions, you have to accept the old, negative patterns. It’s when our old patterns become thoroughly unacceptable that we are most likely to sustain change. When you keep a journal, you want to cultivate an attitude, not just jot down bloodless summaries of what you do. If you don’t see plenty of emotion words in your journal—constructively expressed—the odds are that your journal will summarize your changes but not motivate them.

  LESSON 34: SET EFFECTIVE GOALS

  Successful coaching requires a focus for change. Many self-help efforts among traders fail because they are unfocused. One day the trader writes in a journal about position sizing and works on that; the next day he emphasizes emotional control; and the following day he stresses taking losses quicker. By jumping from one focus to another, no single direction is sustained.

  This is problematic because most learning does not occur all at once. We know from research that learning typically requires many trials and considerable feedback. If we think about important skills that we’ve learned—from using a computer to driving a car—we can see that trial and error has been the norm. I can study a map of a new city for a long time and learn quite a bit, but I ultimately only learn to find my way around by driving on various roads, following signs, getting lost, and recognizing landmarks. If we pursue this learning intentionally—organizing our trials over a concentrated period of time with immediate feedback throughout—we can greatly shorten our learning curves. It’s easier to learn to play a piano by practicing every day and taking lessons every week than by engaging in occasional efforts spread over years.

  The training of an Olympic athlete is a study in proper skill development: intensive work on specific aspects of performance, accompanied by plenty of coaching feedback and corrective efforts.

  When we lack a specific focus for change and jump from one trading goal to another from day to day, we don’t really enter a learning curve: there is nothing cumulative in our efforts. As your own coach, you need to establish—and also sustain—a specific direction to guide your growth and development. This is the key to effective goal setting. If motivation provides the energy for self-improvement, goals supply the aim, the channeling of that energy.

  When you recognize a problem pattern, it is not the same as establishing a goal for self-work, though the former usually will guide the latter. A problem pattern alerts you to what you’re doing wrong. Goal setting requires an awareness of new patterns of thought, feeling, and/or action that will replace the problem pattern. A goal states what you are going to do or not do in specific situations. If you have constructed your trading journal and pattern-identification exercises in the ways suggested in recent lessons, many of your goals will naturally follow from the patterns associated with your best trading. Your overarching goal will be to trade in the way that you typically trade when you’re trading well.

  Notice that I am defining goals in a process sense, rather than as absolute outcomes. This is very important. Many traders think of such goals as making a million dollars or being able to trade for a living. These outcome goa
ls may be motivating, and definitely have their place, but they do not focus a trader on what she needs to do today and tomorrow to become better. Traders on a short time frame do not have full control over their outcomes: a trader can make good decisions, placing all odds in their favor, only to lose money when markets behave in an anomalous fashion. What traders can control is the process of trading: how they make and implement decisions. The most effective daily goals emphasize trading well, not making oodles of money.

  The same logic guides athletic coaches. A coach may stress the goal of victory over the next opponent, but the day-to-day practices will emphasize such fundamentals as swinging at good pitches (baseball), making the extra pass (basketball), and blocking effectively on running plays (football). These process goals provide the ongoing focus for practice over time and ensure that coaching leads to effective learning. Every coach is, at root, a teacher. When you’re your own coach, you guide your own learning efforts.

  Effective goals target effective trading practices that break trading down to component skills and then set targets for these, one at a time.

  As you examine your journal entries for the patterns that distinguish your best and worst trading, the question you want to ask is, “What is the difference that will make the greatest difference in my trading?” Stated otherwise, your question is, “What are the one or two ways I can trade more like my best trading and less like my worst trading?” The answer to these questions will form the basis for your best process goals—and will guide your self-development efforts from day to day and week to week. Goals should not be so specific that they only apply to a limited set of circumstances (“I want to be a market buyer when put/call ratios hit 100-day highs”), and they should not be so broad or vague that they don’t guide concrete actions (“I want to trade less often”). The best goals are ones you can work on every day for a number of weeks. If you do not work on a goal day after day for at least several weeks, it’s unlikely that you will turn your new patterns into positive habits.

  As mentioned earlier, you don’t want to focus on too many goals at once. I’ve generally found three to be as many as I can work on with consistent intensity—and many times I will focus on fewer objectives. This means that a good self-coach will prioritize needed changes, emphasizing those differences that will most make a difference. A great exercise to try is to close your eyes and imagine yourself as a great trader. Visualize yourself as the best trader you can possibly be—or maybe visualize an absolutely perfect trading day. What are you doing differently from your usual trading when you’re the great trader? How is your trading different on the perfect day than on poor one? In your visualizations, try seeing yourself doing all the right things when you’re trading well. What are you doing? How are you doing it? Those visions, made highly specific, will form the backbones of your goals.

  COACHING CUE

  Make it a point to get to know successful traders who have had plenty of market experience. Many times you can form effective goals by simply trying to emulate their best trading qualities.

  LESSON 35: BUILD ON YOUR BEST: MAINTAIN A SOLUTION FOCUS

  To this point, the lessons in this chapter have emphasized the importance of tracking the patterns associated with both your trading shortcomings and your trading successes. It is common to focus on the former only. When we use coaching to build strengths rather than simply shoring up weaknesses, that solution focus produces surprising—and surprisingly rapid—results.

  For more on the solution-focused approach to change, check out The Psychology of Trading

  There are several reasons why a solution focus is helpful for traders who seek to coach themselves:• Motivation—It is easier to stay motivated and optimistic when we emphasize what we’re doing right, not just where we fall short. Imagine a sports coach who only harped on players’ weaknesses. Over time, that would be demoralizing. When the focus is strengths, coaching can be empowering and inspiring without ignoring changes that need to be made or the urgency of making those changes.

  • Goal Setting—Knowing what you’ve done wrong, in and of itself, does not tell you what you need to do right. When you focus on your best trading, you can identify specific patterns that are associated with your success and turn these into concrete goals for future work.

  • Bang for the Buck—Working solely on improving weak areas is unlikely to create strengths; at best, you’ll take a deficient area and bring it to average. It’s making the most of strengths and learning how to work around shortcomings that produces optimal performance results.

  One of the reasons I emphasize the importance of paper (simulation) trading and playing with different trading styles and markets is that this experience enables you to observe your own strengths firsthand. Many, many times, traders stumble across their performance niches when they discover something they’re good at. If you don’t know your strengths, it’s unlikely that you’ll be able to systematically build on them and turn them into drivers of elite performance.

  But you might wonder, “How do I stay solution focused if, day after day, I’m in a slump and losing money?” It is difficult to stay connected to our strengths when our failings are written all over our P/L summaries!

  We’ve seen that this question is a particular challenge when we identify winning days as good trading and losing days as bad trading. This thinking makes it difficult to observe and appreciate good trading when we’re not making money. But traders can trade well—they can take setups with demonstrated edges, size positions well, and manage the risk of their trades—even if trades happen to go against them. After all, even a 60 to 40 edge per trade ensures that a trader, over time, will have sequences of consecutive losing trades and/or days. If you define good and bad trading in terms of process, not just outcome, you can observe strengths during performance slumps and also you can detect flaws even when you’re making money.

  To keep yourself solution-focused, you want to ask yourself, “What did I do well today? What about this trade did I do right?” You’ll find that, over time, your performance is varied. Not all trades are poorly conceived, poorly executed losers. If you lost less today than the past several days, what did you do better? If you had a number of winning trades during several losing days, what distinguished those winners? Focus on the improvements in your trading and then isolate the specific actions you took to generate those improvements. These actions can be meaningful additions to a daily to-do list.

  “What did I do better this week than last week?” is a great starting point for guiding next week’s efforts. Do more of what works—it’s the essence of the solution focus.

  Another technique for sustaining the solution focus referenced at the end of the last lesson is to identify a mentor or trader you respect and ask yourself how he would be trading a particular idea. Sometimes it is very helpful to try out solution patterns that you borrow from others. Over time, you adapt these patterns to your own ways of thinking and trading, so that they become distinctly yours. For example, I’ve worked with quite a few hedge fund portfolio managers and have learned from them the importance of thinking thematically about markets: observing various sectors and asset classes and creating narratives that guide a longer-term perspective. The specific themes I track and the time frames I monitor are completely different from theirs, but there is a similarity of process. When I’m not trading well, I can model their processes and place myself more in line with market’s trends.

  Still another way to keep the solution focus is to make special note of mistakes that you don’t make in your trading. These notes represent exceptions to problem patterns. If there’s a mistake you’ve made lately, it helps to hone in on occasions when you haven’t made the mistake. What are you doing differently at those times to avoid the mistake? Perhaps you’re anticipating the problem and consciously doing something different. Maybe you’re avoiding the mistake by following a particular rule or practice. Whatever helps you do less of the wrong things can also form the basis for
solutions.

  Look to situations in which you don’t make your worst mistakes. Many times those situations hold the key to avoiding problem patterns more consistently.

  The real power of the solution focus is that, when you discover what you do during your best trading, those positive patterns are uniquely yours. Instead of ceding the role of expert and guru to others, you’re turning yourself into your own guru by finding the best practices that are unique to you. You become your own role model. This is one of the most promising facets of self-coaching: by discovering who you are at your best, you can create goals that are specific, unique, and relevant to you. The learning, as a result, will be more relevant and empowering, reinforcing strengths as you build them.

  A great assignment is to review your trading journal and assess the ratio of problem entries (writings about your bad trading) to solution entries (writings about what you’re doing best). If the ratio is lopsided in favor of the problem focus, consider structuring your writing to force yourself to address a few basic questions:• What, specifically, am I doing best in my recent trading?

  • How, specifically, am I avoiding old trading mistakes when I’m trading well?

  • How, specifically, am I trading like my idea of the ideal trader during my best trading?

  A good sports coach never loses sight of a player’s potential, even when correcting weaknesses. The challenge of self-coaching is never losing sight of your strengths, and then working daily on how you can maximize them.

  COACHING CUE

  We have solution markets as well as solution patterns of behavior: specific markets and market conditions that facilitate our most successful trading. Knowing these intimately is very helpful in allocating risk to your trade ideas. It can also be helpful in staying out of certain kinds of trades and emphasizing others.