The Daily Trading Coach

by Brett N Steenbarger

  Vigilance during a run of profitability is an effective way to prevent overconfidence and lapses of discipline.

  “I also constantly research new ideas,” Ray Barros notes. He is an avid reader and seeks insights that will impact his life and trading. When he encounters a new trading idea, he outsources the testing of the idea to determine whether or not it truly possesses an edge. “My review provides a solid foundation for my activities,” he explains. “I set goals, take action, and then see if the action is leading toward or away from the desired outcome.”

  One of Ray’s best practices is the separation of his daily journals into trading and personal components. In his trading journal, he grades his entry and exit discipline, giving himself three points if he entered and exited according to plan; one point if either the entry or exit broke discipline; and zero points if he broke discipline on both. “I look to maintain a 90 percent threshold,” he explains. “I must garner 90 percent of the total possible points. If I drop below 90 percent but above 85 percent, I start looking for causes, and I start remedial actions. If I drop below 85 percent, I take time off from trading.” In the trading journal, he also tracks the excursion of each of his trades, expressing how much he took out of the trade as a proportion of what he possibly could have made. “I seek to capture around 65 percent of a possible move,” he elaborates. “If I find that I am consistently capturing significantly less than 65 percent, I take this as a warning I am entering an ebb state.”

  Like successful manufacturing businesses, traders can engage in continuous quality improvement by evaluating their processes and correcting shortcomings.

  In the personal portion of the journal, Ray notes event, feelings, and behaviors that accompany each of his trades. “The aim here,” he points out, “is to have enough details so that I can spot the patterns that warn of fundamental shifts, breaches of discipline, and ebb-and-flow conditions.” In other words, he is tracking his performance much as he tracks a market, looking for signs of trends emerging from the data. When he is flowing, he wants to be more aggressive in his trading; when his execution is ebbing, he wants to cut his risk. Toward this end, he also tracks his trading metrics, including his average win and loss sizes; his win and loss rate; the standard deviations of profits and losses; consecutive wins and losses; average holding periods for winners and losers; his expectancy ratio; his drawdowns; and his recovery periods from drawdowns. The key to Ray’s self-coaching is to study himself as intensively as he studies markets.

  John Forman echoes Ray’s point about making sure that one’s trading life fits into her personal life. “The first thing a trader needs to do,” he emphasizes, “is step back and take a big picture view of things. This is extremely important for new traders, as they need to figure out how trading is going to fit into their lives. Even folks who have been doing it for a while need to do this from time to time as well. Trading is part of one’s life, not separate from it. What part it plays must necessarily define how it is approached, and that can change over time. Periodically taking the 30,000-foot view allows one to maintain perspective.” I wholeheartedly agree with John’s insight. Even successful professional traders can become overloaded by work responsibilities, tracking markets and themes day and night. If traders allow trading to consume them, they lose concentration and efficiency—and eventually that takes a toll on performance. Successful trading means knowing when to not trade and when to conserve and renew personal energy. Often, the best trading decision is the decision to take risk off and go on a holiday from markets. This reprieve can spark good thinking about markets and performance from the 30,000-foot view, aiding performance once trading commences.

  “A second important thing,” John Forman notes of his self-coaching, “is the commitment to performance improvement. That may seem to be an obvious thing, but it’s something easy to stray from at times. It’s often hard to not become complacent with one’s trading, especially when a level of success has been achieved. In order for the self-coaching to have any value, though, the realization that one can keep getting better, and the desire to do so, must be at the fore all the time.” I have noticed this time and again among the firms where I work. The best traders and portfolio managers seek out coaching when they’re doing well, not just when they’re losing. They have a continual drive for self-improvement; not just a temporary desire to remedy deficiencies.

  The measure of a trader is how hard he works on trading during winning periods.

  “Finally,” John concludes, “setting good goals and assessing how one is progressing toward them is critical. These are things coaches in other activities like athletics do as external observers. The advantage there, however, is that they don’t have the direct link to the individual’s psyche, which complicates self-assessment. The most challenging aspect of this process for the individual is not allowing it to adversely impact one’s confidence level. That means the process needs to be as objective as possible, and the trader needs to be able to disconnect their ego from it.” Forman raises an excellent point here: goal setting and review must be pursued in a manner that does not damage confidence or motivation. Vague or distant goals offer insufficient feedback and learning; difficult goals can yield frustration. Tracking goals with a negative mindset—emphasizing shortfalls—makes self-coaching a punitive activity. The good self-coach, like the good athletic coach, uses goals to facilitate learning and build confidence. No one will sustain a process if, over time, it leads them to feel worse about themselves.

  Your assignment for this lesson is to conduct a self-assessment from 30,000 feet. We’ve talked about tracking your trading, but now the goal is to track your self-coaching. Is trading fitting into your life, or do you find yourself fitting your life into the markets? Is most your time consumed with trading, or are you spending at least equal time in performance improvement—the reviews and research of markets and trades—and the routines that help you develop new ideas and hone skills? How much of your efforts are goal-focused, and how much are you drifting from day to day? Do you get down to the hard business of grading your performance and tracking your ebbs and flows, and do you use this information to guide your risk-taking? In short, if you’re going to be a good self-coach, you have to be as aware of your own coaching performance as your trading results. The value of such meta-coaching—training yourself to be a better mentor of yourself—is a key lesson we can take away from Ray and John.

  COACHING CUE

  Just as you can develop a report card on your trading to track your progress, you can grade your self-coaching efforts by assessing how much time you spend in self-coaching mode; how clearly you set goals for yourself; and how well you sustain work toward those goals. You can’t develop as a trader without working on trading skills, and you can’t develop as your own coach without working on your coaching skills.

  LESSON 89: A VIEW FROM THE TRADING FIRMS

  Mike Bellafiore is a partner at SMB Capital, a proprietary trading firm in New York City that specializes in the short-term trading of individual equities. He is also a successful trader and a mentor of traders within the firm. Most recently, SMB has extended its training to the trading public via a blog (www.smbtraining.com/blog) and a formal trading curriculum. I had the pleasure of visiting SMB Capital and was impressed by Mike, Steve Spencer, and the others in the firm. There was a good buzz on the trading floor throughout the day as traders shared ideas and breaking developments.

  Larry Fisher is a co-owner of Trading RM, a proprietary trading firm in Chicago that specializes in trading individual stocks and options on those stocks (http://tradingrm.com). Larry and his partner Reid Valfer started the firm with the desire of providing a mentoring and teaching environment for traders. An unusual feature of the firm is that Larry and Reid call out all their trades, illustrating to their traders what they’re doing throughout the day. Teaching and mentorship are thus woven into the fabric of daily trading. In visiting Trading RM, I was impressed by the learning environment. Larry and
Reid have developed a web site and blog so that they can share their insights with the trading public ( http://blog.tradingrm.com).

  It is typical of Mike that, when I asked him for the three things that most help his self-coaching, he emailed me a 14-page document. He is attuned to the mentoring process and practices it in his own trading. Number one on his list is keeping trading statistics. “Statistics are very important for my trading,” Mike explains. “I must know what trading plays are working best for me, what stocks I am trading profitably, my win rate, my liquidity stats, etc.”

  The head trader at SMB, Gilbert Mendez (GMan) created a tool for the desk called the SMB Chop Tracker. It summarizes trading statistics each day for each trader, so that they can see how well they’re doing and where their profits and losses are coming from. “Most often I struggle with my trading because I am in the wrong stocks,” Mike Bellafiore notes. He tells the story of how he traded one particular stock, MBI, quite well in the fall and then consistently lost money in it. “I felt like someone else was inhabiting my trading body,” he jokes. “So I looked at my stats. They were screaming, ‘Hey, Mike, maybe another stock for you?’ I figured out some adjustments I could make, concluded there were better stocks for me to trade, and decided to move on. I went right back to making money.”

  Statistics on our trading alerts us to hidden patterns, both problems and solutions.

  Mike also tells about a particularly vicious loss he took in trading SNDK. “I will always remember 1½1/05,” he recalls. “What a bloodbath. For weeks I walked around cussing SNDK underneath my breath and swore to never trade it again. But one day I checked my statistics and surprisingly learned that I actually traded SNDK well, save that one day. I was overvaluing that last rip. While trading, you develop a perception of how well you are trading a stock. That perception can be incorrect. When you study your trading statistics, you may discover that the stocks you thought you were killing, you weren’t. And you may discover that the stocks you thought were a disaster weren’t.”

  Mike Bellafiore’s second coaching practice is something we all do, but not with intention: breathe. “While trading, it is essential to quiet your mind so that you accurately process the data that the market offers,” he observes. “Some traders think they just need to focus better and shut out unneeded stimuli. These traders believe they can will themselves to focus better. But quieting your mind is an acquired skill. Mariano Rivera [a fast-ball pitcher] can’t just start throwing a changeup because he really wants to. He would have to spend hundreds of hours working on his grip, motion, and control. It takes 15 to 30 minutes of deep breathing a day to develop and maintain this skill. My partner and co-founder of SMB Capital, Steve Spencer, taught me how to properly breathe. Steve teaches this to our new traders on our prop desk. I used to think I accurately processed the data that the market offered. But after I learned how to properly breathe, I recognized that this was not accurate . . .You must develop the skill of quieting your mind so that you accurately process your market data and, as a result, fulfill your trading potential.”

  Mike tells the story of a young trader next to him who cheered whenever his stocks moved in his favor. The veteran traders merely smirked; that trader soon blew up. “For old-school traders like us,” he points out, “there is no celebrating intraday. You are now rooting for your stocks and not just interpreting the data that the market is offering.” By controlling his breathing, he is better able to let the market data come to him, improving his decision-making.

  If you’re celebrating or bemoaning a trade while you’re in it, you’re not focused on the market itself.

  Mike Bellafiore’s third self-coaching best practice is watching his trading tapes. “Watching my trading tapes has improved my trading more than any other self-improvement technique,” he asserts. “Many great athletes such as Alex Rodriguez use video to improve their performance. I record all my trades and watch back the important plays. Doing so has helped me particularly with my two biggest weaknesses: closing out a winning position prematurely, and adding size.” By watching tapes of his trading, Mike developed rules for recognizing when he should hold positions, when he should get back into a position he has exited, and when he should get out of positions. These rules were compiled into lists that became his system. “It gave me the confidence to add size when I see a great risk/reward opportunity that is on my list,” he explains. “I learned from my trading tapes that adding size in certain spots offered favorable risk/reward trading opportunities, and that perhaps it was even irresponsible to not add size with certain trades. So when I spot a trade from my list of When to Add Size, I just execute.”

  Once again, self-coaching boils down to directed, hard work. “In my trading space,” Mike insists, “if you are not willing to come into the office on the weekends and/or find some time after the close to watch your trading tapes, then you are not competing as a trader. Trading is a sport. It’s a competition. And the results of your trading are often determined by the effort you put in before the open.”

  Larry Fisher’s responses to the question of the three self-coaching practices that have most aided his trading reflect his teaching practices at his firm, which in turn reflect his years of trading experience. Here’s what he has to say:

  Writing a Trading Journal

  “Over the years, I have used a journal as a medium to make sure that I am in tune with my emotions,” Larry explains. “The journaling process has become a very important part of my trading routine. I have realized that writing in my journal pays huge dividends, especially when I am trading well and I am trading poorly. The process keeps me grounded, while often limiting the duration of trading slumps and extending periods of trading successes.” Notice that Larry employs the journal effectively both when he’s trading well and when he’s not. This keeps him attuned to emotions in a positive way—it grounds him in confident trading when he’s seeing markets well—and it enables him to take corrective action quickly when he’s not in tune with the stocks he’s trading. So often the difference between the successful trader and the unsuccessful one is how they handle being very right and very wrong. The journal, properly constructed, can be a tool for adjusting to these extremes, enabling you to add risk when you’re trading well and pull back when you’re not.

  The trading journal is a means for sustaining self-observation.

  Communicating with Peers

  Larry Fisher notes, “I have a network of friends and colleagues with whom I make an effort to communicate on a regular basis. This allows me to learn from others while sharing real-time market experiences. These conversations aid me in dealing with the ebb and flow associated with being a professional trader.” This theme arises again and again with the best traders: they have a rich network of contacts that help them personally and professionally. Larry’s observation echoes what we heard from Ray Barros: there is always an ebb and flow to trading; profitable times and lean times. Being able to connect with traders who have been through the cycles and know how to move beyond them can be a tremendous support. We also underestimate the power of social interaction as a means of cognition: some of us simply think more effectively when we think aloud. Sounding boards for our ideas helps us hone our market views and make better decisions.

  Trading in a Good Environment

  “In order for me to be able to coach myself,” Larry explains, “I need to trade in an environment that is conducive for success. We built our firm with that in mind. All the traders at my firm are on the same page. Willingness to be a part of a team combined with the desire to learn are characteristics each trader possesses.” I have visited many firms in which traders operate in almost total isolation of one another. One person’s learning experiences become just that: opportunities to learn for that individual alone. When a firm is founded upon a team concept, everyone’s learning becomes learning for the group. This is Larry Fisher’s central insight, and it is the greatest strength of his firm. When everyone calls out her trades, there�
��s no place to hide. That is tremendously freeing. You can learn from the successes of your peers and also from their mistakes. Their ideas spark yours, and your heads-up on news or breakouts aids everyone else. In an environment in which all traders are their own coaches, all traders inevitably contribute to each other’s coaching.

  Learning cannot occur without accountability.

  These are the real words of real traders who really trade for a living and really run successful trading firms. Their best practices can become your own, even if you don’t work for SMB Capital or Trading RM. How do your trading practices compare with those at these firms? How does your trading atmosphere compare with theirs? When you’re coaching yourself, you are—in a sense—creating your own trading firm. You are coach, risk manager, researcher, and trader rolled into one. How well you fulfill these roles depends on the time and effort you devote to each. A world-class basketball player works on offense and defense; on passing, dribbling, shooting, rebounding, and physical conditioning. There are many facets to one’s game—in sports and in trading. The successful firms pay attention to all of them.

  Mike and his partner Steve are correct to emphasize breathing in their training of traders. This exercise makes a worthwhile assignment for your development. The first step toward controlling emotional and cognitive arousal is controlling the level of arousal in the body. When we are filled with stresses and worries, we bring those to markets. When we sustain a quiet mind, we let markets come to us and free our minds to respond to the patterns we perceive. Write in journals, communicate with peers, and consult your trading statistics. These actions are all ways to make sense of your market experience so that you can then sit in front of the screen with a quiet, confident mind. It does take dedicated time each day to sustain the quiet mind, but it comes more easily with experience. Find a room with no distractions—no noise—and keep yourself totally still as you fix your attention on something in the room: an object on the wall, music in headphones, etc. Then breathe very deeply and slowly, keeping your attention as fixed as possible. You’ll find yourself able to tune out fear and greed, anxiety and overconfidence as you sustain a high level of concentration and fix your attention on an emotionally neutral stimulus. The best trading practices and environments cannot benefit you if you are not in a state to make good use of them. Quite literally, with each breath, you can be coaching yourself.