Steenbarger - The Psychology of Trading: Tools and Techniques for Minding the Markets

The Psychology of Trading

Behavior is patterned. Beginning with this premise, noted clinical psychologist and active trader Dr. Brett Steenbarger opens the therapist's door, demonstrating how traders can identify, interrupt, and change the problem patterns that interfere with successful trading. In The Psychology of Trading, Dr. Steenbarger draws upon real-life case studies and offers hands-on techniques for emotional change to assist traders in becoming their own therapists. Themes that set The Psychology of Trading apart include:

"Trading from the couch" by utilizing emotions as valuable market data

Identifying and building solution patterns that capture hidden trading expertise

Techniques for assessing and trading against the emotions of market participants

Methods for building focus and concentration for more automatic and trustworthy trading decisions

Creating shifts in states of consciousness to rapidly exit anxious, impulsive, depressed, and guilty frames of mind

In an engaging manner that provides practical solutions to real trading problems, Dr. Steenbarger walks you through the most common cognitive and emotional tendencies that distort efforts at identifying and trading market patterns. He then describes specific skills derived from years of brief therapy practice to help you become an effective observer of these tendencies and gain control over them. By blending state-of-the-art research from psychology and cognitive neuroscience with detailed case studies. The Psychology of Trading provides you with the intellectual and emotional ammunition to face yourself and transform your approach to risk and reward.

BRETT N. STEENBARGER, PHD, is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, New York, where he also serves as the Director of Student Counseling. Dr. Steenbarger has published over fifty peer-reviewed journal articles and book chapters on topics related to brief therapy, including standard reference entries in The Psychologist's Desk Reference and the Encyclopedia of Psychotherapy. He teaches techniques of counseling and psychotherapy to graduate students in counseling, doctoral students in clinical psychology, and residents in psychiatry. An active trader who conducts his own statistical market modeling research, Dr. Steenbarger has written feature columns for MSN's money site (www.MoneyCentral.com), many of which are archived at www.greatspeculations.com.

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THE PSYCHOLOGY OF TRADING

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Copyright 2003 by Brett N. Steenbarger. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Steenbarger, Brett N.

The psychology of trading : tools and techniques for minding the markets / Brett N. Steenbarger.

p. cm.(Wiley trading series)

ISBN 0-471-26761-9

1. StocksPsychological aspects. 2. SpeculationPsychological aspects. 3. InvestmentsPsychological aspects. I. Title. II. Series.

HG6041.S76 2003

332.64'01'9dc21

2002190744

10 9 8 7 6 5 4 3 2 1

For Margie,
who has made it all possible

Preface

In our debts to others, we find the true measure of our wealth.

If there is a single theme to this book, it is this: Trading is a microcosm of life. In trading, as in life, we pursue values. In both trading and life, we manage the risks of those pursuits: lost opportunities and realized losses. How we seek values and manage the associated risks will determine our personal and professional success.

Many times, our responses to the uncertainty of outcomes interfere with the achievement of our goals. In careers, romantic relationships, and trading, we find ourselves enacting self-defeating patterns: cutting promising situations short and lingering in unprofitable ones. It doesn't matter that we are virtuous people, hardworking and otherwise successful. It doesn't matter that we have attended all the latest seminars, read the hottest books, and purchased all the best trading tools. If our coping with risk distorts our efforts at pursuing values, we will fail to attain the stature that can be oursas traders and as human beings.

For the past 20 years, I have provided counseling and therapy services to approximately 130 people a year. Almost all of these people have been high-functioning individuals tackling demanding career fields. I learned during these years of practice that the problem patterns of physicians, executives, students, and traders are surprisingly similar. These patterns arise when strategies for emotional risk managementefforts to minimize pain and maximize pleasurefail to make it possible to successfully navigate life's matrix of risks and rewards. Every problem pattern we experience is a once-successful coping effort that has outlived its value. Conversely, newly created patterns that meet life's present challenges lead to success. We are best positioned to achieve our goals when we can extract ourselves from the mindless repetition of the past and fashion fresh life solutions.