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FOREX TRAINING

Interview with Brett Steenbarger

Traders Performance Coach

forex trainingBrett Steenbarger interview

“Only practice, learning and experience can build the skills to make someone a good trader.” 

A financial trader for over 30 years, Professor of Psychiatry and Behavioral Sciences at a medical university for 19 years and a coach for professional traders in trading firms, investment banks and hedge funds,  Brett Steenbarger has a lot to share about trading psychology, techniques and performance.

His books, The Psychology of Trading: Tools and Techniques for Minding the Markets and Enhancing Trader Performance: Proven Strategies from the Cutting Edge of Trading Psychology, are touchstones for traders seeking concrete methods to improve trading results in markets. His blog TraderFeed has been acclaimed one of the top financial blogs by BusinessWeek.

Brett Steenbarger explains to FX Trader Magazine how he works with professional traders to improve their trading performance, helping them build on their patterns of success, and he insists that, just like any performance or sport discipline, traders should build their skills by learning and practicing with trading simulators.

He also tells us about the various tools he created and uses to help traders improve results. Some are technical tools such as indicators of market sentiment, market strength and momentum. Others are psychological tools including different techniques to help traders build strength and correct some of their problems, such as cognitive techniques to change traders’ patterns of thinking, behavioral techniques to stay more focused and more in control, and solution-focused techniques to identify each trader’s positive patterns.

In his experience, the most important set of skills a professional trader should have and build in order to become successful are: market pattern recognition, trade idea generation, trade execution, trade management and self management. To private traders he recommends mentorship, learning and practicing through trading simulation.

He shares his view and experience on currency trading, advising forex traders to build a deep understanding of what makes currency markets move and talks about some of the specific patterns of successful forex traders.

FXTM

You are both an expert in psychology and a trader. Did you first start as a psychologist or as a trader?

B.S.

Really both. I started trading while I went to graduate school for my PHD in psychology. My interest in trading developed at the same time that I was training to be a psychologist. But my main career to start out was as a psychologist and for 19 years I taught psychology and psychiatry full time at a medical school.

FXTM

How did your trading evolve over time?

B.S.

I began by trading individual stocks in 1977, learning about companies and their fundamentals. I was making money and in August 1982, we began a large bull market. I was short the market at that time and as a result I lost a good amount of my profits in 1982. That’s how I realized that I needed to learn more about timing, so I developed research to study the timing of market moves. That very much changed the way I traded. I started trading shorter term with a focus on timing as well as fundamentals.

FXTM

You started working with financial firms as Director of Trader Development, which was something quite new in the industry. How did you become a trainer of professional traders?

B.S.

In very late 1990, I was reading an online column written by Victor Niederhoffer and Laurel Kenner, in which they were running a contest to see who could come up with the best market indicator. I entered their contest and came up with the idea of an indicator. The basic idea of the indicator was that there was a positive correlation between the level of the Dow Jones industrial average and the average beats per minute of popular music at the time. They liked that idea and announced that I was the winner of the contest and Victor graciously invited me to his home, where he also had his trading business. So I spent some time with Victor Niederhoffer and learned about his approach to markets and his philosophy of trading. That influenced me very much. He was taking a scientific approach to markets, studying historical patterns and trading based on those patterns. It was a tremendous learning experience, which inspired me to write my first book “The psychology of trading”. When it came out it became quite popular and a trading firm in Chicago, Kingstree Trading, invited me to work with their traders as a coach. It went well and they made me an offer to join their firm. So I left the medical school and came to Chicago with my family and began working with traders full time. It was a proprietary trading firm, which traded very actively, and I learned a lot about the futures market, about market timing, about trading with very short timeframe, trading order flow, and I learned a lot about working with traders while they were trading. It was a fantastic experience. After that, I continued with the company on a part time basis, and began working with other trading firms, including investment banks and hedge funds.

FXTM

How do you train traders? What is your approach?

B.S.

I work with them as a psychologist and as a coach. So I don’t teach them how to trade. There are specific programs for that.  I work with them as a performance coach to help them perform as well as they can. So I learn about how they trade, about what they do well, and about the mistakes they make. I figure out with them what are their patterns of success and of failure, and I help them build on their patterns of success. I help them avoid some of the problems that lead them to loose money.  For example, a trader may have a lot of skills and experience but may get frustrated after losing trades, and out of that frustration they might start making some bad trades. I would teach them very specific skills for dealing with their frustration in a positive way so that it doesn’t affect their trading.

FXTM

You’ve been the first to write about training traders using  trading simulators as a main performance tool. And in your second book you also promote the idea that traders should find their niche to be successful. Do you still teach in this way?

B.S.

Yes. When I was at Kingstree Trading, we began a training program. We used simulators with real market data using order platforms where traders could place their trades but, they weren’t risking real money. But the platform would compute when they would make or lose money based on simulated trading. We worked with the new traders using the simulation to help them figure out which markets they were good at and which kinds of trading they were good at, so that they could find their niche. That was very helpful for traders. Ever since then I’ve been a big believer in using simulation and helping traders figure out what their strengths are.

FXTM

What is your advice to become a successful trader? Is it more a matter of psychology, or is it more a question of finding your own niche and trading method?

B.S.

It is first and foremost a matter of building skills. There are many skills that go into being a successful trader. There are skills of recognizing patterns on the markets. There are skills of managing risk. Just like any performance discipline, people have to learn their skills and practice those skills to become good at what they are doing. No different than sports. Psychology is very important in terms of helping people become consistent in taking advantage of their skills. Once you have the skills of a good trader, psychology will help you make the most out of those skills. But it cannot substitute for those skills. Only practice, learning and experience can build the skills to make someone a good trader.  

FXTM

Can you tell us which are the main skills that a professional trader should have to become successful?

B.S.

Skills that make a professional trader very successful begin with recognizing market patterns. The markets have different patterns at different timeframes. The patterns that happen in minutes and seconds are different than patterns that occur over days and weeks. The expert trader is someone who spends a lot of time observing markets and being able to recognize those patterns quickly. Out of that pattern recognition, they generate ideas for good trades. Part of that generation of ideas is putting the information together, synthesizing information so that the trader has an idea about how the market is likely to move.  So they might be synthesizing information from price action, from order book, from the longer term trend or fundamentals of an instrument, and they might be looking at the bigger picture, or the fundamentals of the economy. But in all cases the successful trader generates trade ideas. Another skill is execution: being able to translate the trading idea into a position in the market that has a favorable risk/reward profile. In other words the trader enters the market at a time when their risk is considerably less than their reward. So at the time they execute a trade they have an idea of how far the market would go against them to tell them that they’re long – that’s their risk – and they have an idea of how far the market would go in their favor – that’s the reward. Out of an understanding of risk and reward, and out of an understanding of how much of their portfolio or their account should be put into this idea, they come up with a position and they execute the position. So execution ends up being very important in terms of a trader’s skills. A third set of skills would be managing the position: position management. Managing a trade once it is a position. So, they would be following the position, while the markets are moving, they would decide whether to add to the trade. For example they might decide to add size to the trade to take better advantage of the idea. They may decide to take some of the trade off, to gather some profit. They may decide to get out of the trade altogether if conditions change and are looking unfavorable. So they are managing the trade as the markets are moving, integrating this fresh information from the market into ideas about what to do with the positions. So we have idea generation as one set of skills, execution, as another set of skills, we have trade management as a third set of skills, and then there is a forth set of skills that we could call “self management”. That’s the psychological part of trading, where the traders keep themselves in a calm, focused state, where they’re able to process new information in an efficient way, so that they can make quick decisions that help them manage their trades. So traders are managing themselves at the same time as they are managing their ideas and positions. Those 4 skills are some of the most important to the professional trader.

FXTM

What would you recommend to non professional traders, and more specifically to forex private traders, as a technique to acquire this set of skills?

B.S.

There are two things which are important. The first, mentorship, can be very helpful. Research on performance suggests that expert performance very often begins with mentors. That is people who help during the learning process. In fact finding a mentor who is knowledgeable and who trades in a way that you would want to trade is very useful. Mentorship can also come from following people’s books, magazine articles or websites, because many good ideas are in literature, and this is less expensive than working with a personal mentor. The second part that’s important is once you learn about markets, it is very important to practice the skills that we were just talking about. And that’s where simulation is important. When traders learn through simulation, they’re able to learn skills and learn from their mistakes without risking their capital. That’s very important because everyone makes a lot of mistakes when they start out trading. And only when you are successful in simulation should you then put some real capital at risk. So the two important things for the non professional trader are mentorship and learning, and second, practice through simulation.

FXTM

Coming back to trading psychology, one interesting point in your second book “Enhancing traders’ performance” is where you talk about a “competitive psychology”, in other words you say it is more important to want to perform than remaining “zen” or calm. Can you explain this idea?

B.S.

I would say both are important. People can be intensely competitive – and the best traders I know are very competitive people – but, in the heat of the battle, when they are trading, they are also very focused and very controlled in what they do. And again, if we think about certain sports, or certain Olympic events, you can have someone who is very focused on their task and also very controlled. So it isn’t necessary to be cool and calm in the “zen” sense but, it is very important that they be very focused on the markets. Once traders become emotionally upset, they begin to focus on money and on themselves and that takes their focus away from the market. And once the focus is lost from the market, they cannot recognize patterns anymore. And that really ruins their performance. So you can be very competitive, but as long as you keep your focus,
it’s ok.

FXTM

What does it mean for a trader to be totally “focused”?

S.B.

Intense concentration. The trader is completely absorbed in the markets and all their thinking is about what the markets are doing and what the market action means. So for instance, let’s say I’m trading the S&P index and I’m seeing the market moving, and at the same time I’m watching other markets that affect the US Stock market. So I’m watching interest rates, I’m watching the currencies, I’m watching different sectors and related markets, and I’m watching, watching, watching to see if there is underlying strength or weakness in what all of these markets are doing. If my focus is on those markets I can pick up those patterns quickly and act appropriately. If my focus is distracted from the markets, I’ll miss those patterns and I’ll end up not managing the trade very well.

FXTM

Regarding the development of trading technologies, you defined a precise road map for trading software development companies. Do you think that trading platforms currently offer the right training tools for traders today?

B.S.

There are many platforms out there that offer training tools for traders but, it’s much more common that platforms will offer information about traders’ metrics: how much they win, how much they lose and how long they stay in winning trades and in losing trades. There are many platforms that allow for simulated trading. Platforms like Ninja Trader would be an example of platforms which have become popular and have performance training tools.

FXTM

Do you only coach professional traders or do you also coach private traders?       

B:S.

No, I only coach at trading firms. So I coach traders at proprietary trading firms, and at investment banks and hedge funds.

FXTM

Do you receive requests from the retail market?  

B.S.

Yes, very many, because my blog has become very popular, so I also receive requests from the retail market.

FXTM

Are you going to enter this market or are you going to stay in the professional trading sector?

B.S.

I don’t have the time to coach retail traders and my experience is that retail traders need training in recognizing patterns in markets more than they need psychology. And many times, when retail traders have psychological concerns, like getting frustrated or discouraged about their trading, it’s because they haven’t learned the skills in a proper way. So they really need mentorship and learning before I could really benefit them.

I think that if I were to work with most retail traders, it would not be honest. 

FXTM

This brings us back to your approach about traders’ development. You say: “First, train to improve your skills like in any sport and then think about psychology. Only then you’ll know if your problem is about technique or psychology.” This is quite an innovative approach. Many traders go from learning techniques to working on psychology and then back to technique and so forth. How can traders streamline this process?

B.S.

One way of streamlining this process is to go through a good training program. There are some proprietary trading firms and investment banks that run very good training programs. The other possibility are some of the services where knowledgeable, experienced traders will trade online so you can login and observe them trading. So you can learn some of the skills by watching trades and I recommend those services to traders. 

FXTM

You created some tools that help traders improve their results. Can you tell us more about them?

B.S.

There are two kinds of tools. The first are market tools. What I use are different indicators of market sentiment and market strength and momentum. I’m very interested in tools that help me identify whether buyers or sellers are more aggressive in the market. So there are tools such as the NYSE Cumulative Tick that identify how many stocks are up-ticking or down-ticking at the moment. And there are ways of using this information to figure out the short term sentiment of the market. There are also tools that help you identify whether trades are occurring more at the market offer price or at the market bid price. If more volume is transacted at the offer price, it means that buyers are more aggressive. If more volume is transacted at the bid price, then you know that sellers are more aggressive, and you can follow that for each market moment to moment. There is a tool called “Market Delta” that is very helpful for identifying that information. Those very short term sentiment indicators help identify the underlying tendency or trend on a very short timeframe. There are also indicators that help identify market momentum and strength. So, for example I follow how many instruments are making short-term new highs or lows. I also look at how many instruments are closing above or below their moving averages. These are examples of strength and momentum indicators. All of these are put together to help recognize patterns in markets.

The psychological tools are different techniques to help people build strength and correct some of their problems. There are cognitive techniques, which help people change their patterns of thinking. There are behavioral techniques that help people stay more focused and stay more in control, by literally controlling their body. And there are also what are called “Solution-Focused Techniques” that help people identify their positive patterns, what they are doing right so that they can build on their strengths. Those 3 techniques are the most common ones that I use. The cognitive technique, the behavioral technique and the solution-focused technique.

FXTM

What is your view of the Forex market?

B.S.

The forex markets are becoming increasingly important, both to traders and to trading. The world has become more global. Financial markets have become far more global. What happens in Asia and what happens in Europe affect each other and affect the United States. What happens in different currencies affects what happens in other asset classes. So I don’t think you can be an informed trader of any one thing. You can’t be an informed trader of interest rates, you can’t be an informed trader of stocks and not know what’s going on with currencies and the facts that move currencies. So forex markets are important not only to currency traders but, to traders who try to understand what is making markets move. And we see this right now. There is a huge correlation between movements in the US dollar and movements in the US stock market. Forex markets are also affected by many different factors. I work with traders who are successful forex traders. I’m personally not an FX trader but I work with people who are, and of all the traders I work with, who are successful in currency trading, I can’t think of a single one who trades exclusively with technical analysis. They may look at charts, at support and resistance levels and certain patterns so, it’s not that they ignore technical analysis but, that they trade with other information besides technical information. And they have an understanding of shifts in interest rate markets, in yield curves and how those affect currencies. They have an understanding of central bank policy and how economic reports in different countries affect currencies and how the currencies affect each other. So they have a deeper understanding of what makes currency markets move than simply looking at charts. And I encourage traders in the currency markets to really understand what makes currency market move because there is much more to it than just shapes on a chart.

FXTM

Of the successful currency traders that you know, is there any pattern that can be identified? Are successful forex traders working more in the long term, swing trading, or scalping? Are there any relevant statistics, based on your experience?

B.S

Yes, and of course my experience may not be representative of all traders but, in general, I find that people who are day-trading currencies successfully are the exception, not the rule. I do know of people who trade currencies short term and make money, but they are the exception. The ones who I’ve seen be more successful are trading over a period of days to weeks and trading longer term patterns in those markets. They are very difficult markets to scalp mainly because of the lack of centralized volume information in the spot markets and the typical spreads to get in and out.

FXTM

Finally, what would be THE best advice you’d like to give traders?

B.S

My advice would be to make use of the affordable information that’s out there. There are many good books, magazines, articles and websites. So look for quality information because that can help you begin your education in an affordable way. It is important to protect your capital and preserve your money. So don’t spend too much money on goods, services and promises that people offer but, look for people who are doing worthwhile research and worthwhile trading so that you can learn from them. Everything after that is practice and skill building.