Here’s how great traders develop
Trader Development: Aligning the Head and
the Heart
I had the recent pleasure of chairing a panel presentation a couple of days
ago at the Futures
Industry Association Expo in Chicago on the topic of trader
development. My distinguished colleagues, Tom Rice of Goldenberg Hehmeyer
& Co. and Doug Hirschhorn of Sperling, LLC, and I drew upon our many
combined years of hands-on work with professional traders to identify “best
practices” in trader development. If I had to put my finger on an
overarching theme of our presentations, it was that the trader development
process is one in which traders learn to align their heads and their
hearts. First traders know what they should do, but only later does it
become part of them and their feel for markets and trading.
Research on the development of expertise indicates that skilled performers
first obtain a body of knowledge about their field and only later develop an
intuitive feel for its performance. For example, medical students
typically spend their first two years studying basic science information,
learning about how the body works. Their last two years apply this
information at the bedside, as they learn how to integrate this information with
data from histories, physicals, and lab tests in generating diagnoses and
treatment plans. By the time they graduate from their residency programs,
they have had so much contact with configurations of symptoms and diseases in
their field that they develop a feel for patients and arrive at correct
diagnoses much more rapidly (and often) than they did in medical school.
One way I, as a trader, align head and heart is to supplement my intuitive
feel for the market with pattern-based statistical studies that tell me when
there is–and isn’t–an edge in the market.
For example, on Thursday we
saw the S&P 500 make a four-day low early in the trading session and then
rally sharply to make (and close at) a multi-day high. I went back to
January, 1995 (N = 3994 trading days) and found that such reversals only
occurred 19 times in the S&P. My goal was to see what happened within
the four days following that reversal. For the sample overall, we had 2206
four-day periods up and 1788 periods down for an average gain of .15%.
After the reversals, we had 8 four-day occasions up and 11 down for an average
loss of -.46%. Clearly, the reversals, as a group, did not provide a
bullish edge. If anything, were more likely to reverse than continue.
Knowing this by itself helps me maintain discipline. Instead of
becoming excited about the upside breakout and coloring my market perspective
with the most recently occurring event, I can sit back and watch how the market
trades. The information acts as a brake to any impulse I might have to
jump aboard new highs. If I see continued market strength, I can wait for
pullbacks to ride that move. If I don’t see that strength, however, I will
look for occasions where buyers, whose action is manifested in the NYSE TICK,
cannot push the market higher and then fade their optimism.
As my colleagues on the panel illustrated, there are many techniques for
helping traders align their heads and hearts. The use of research to guide
one’s market views is but one of them. The important thing is that traders
find for themselves the methods that will further their own development by
making what they know what they feel.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.