15 Insights from Trading Psychology 2.0


I made so many highlights on Trading Psychology 2.0 that my kindle copy looks like a Christmas tree. I find it deeply insightful, eye-opening and a great source of fresh ideas on how to bridge the gap between where we are today and where we would like to be – not only in trading but in life.

Trading Psychology 2.0 is based on four major themes: Adapting to changing markets; Building strengths; Cultivating creativity; and Developing best practices and processes. Here are fifteen interesting quotes from the book:

1. Discipline, while necessary for success, is never sufficient. Discipline does not substitute for skill, talent, and insight. Strict, disciplined adherence to mediocre plans can only lock in mediocre results. If it were otherwise, there would be no losing automated trading systems.

2. It is not enough to find an “edge” in financial markets; as any tech entrepreneur can attest, competitive advantages are perishable commodities. Those who sustain success continually renew themselves, uncovering fresh sources of competitive advantage. That requires processes for assessing and challenging our most basic assumptions and practices. It takes a good trader to create success, a great one to recreate it. Nothing is quite as difficult— and rewarding— as letting go of what once worked, returning to the humble status of student, and arising phoenix-like from performance ashes.

3. This productivity is readily apparent on a day-to-day, week-to-week basis: The greats simply get more done than their colleagues. They organize their time and prioritize their activities so that they are both efficient (get a lot done per unit of time) and effective (get the right things done). How much time do we typically waste as traders, staring unthinkingly at screens, chatting with people who offer little insight, and reading low-priority/ information-poor emails and reports? The successful traders invariably are workhorses, not showhorses: They get their hands dirty rooting through data and make active use of well-cultivated information networks.

4. Successful traders I’ve known work as hard on themselves as on markets. They develop routines for keeping themselves in ideal states for making trading decisions, often by optimizing their lives outside of markets.

5. This, for me as a psychologist, has been one of the greatest surprises working with professional money managers: The majority of traders fail, not because they lack needed psychological resources but because they cannot adapt to what Victor Niederhoffer refers to as “ever-changing cycles.” Their frustration is a result of their rigid trading, not the primary cause. No psychological exercises, in and of themselves, will turn business around for the big-box retailer that fails to adapt to online shopping or the gaming company that ignores virtual reality. The discipline of sticking to one’s knitting is destined for failure if it is not accompanied by equally rigorous processes that ensure adaptive change.

6. Routine is necessary for efficiency; breaking routine is necessary for adaptation.

7.  We often refer to trading as if it’s a single activity. Trading, however, is like medicine: a broad set of activities and specialties. A psychiatrist is a physician; so is a surgeon, and so is a radiologist. The skills required for each are very different. So it is in financial markets. Market making is very different from global macro portfolio management— and both are quite different from the trading of options volatility.

8. In an important sense, people never change: Instead, they find fresh ways to express the core motivations that define their life themes. Solution-focused coaching works to the degree that it catalyzes those fresh expressions of who we already are.

9. We commonly hear portfolio managers worry about “style drift.” But it is precisely style that must drift if we’re to adapt to markets. It is substance— the essence of our core motivations— that must remain intact.

10.Discipline is great for doing more of what works. When the status quo no longer works, however, adaptability becomes the new discipline.

11. Skilled traders I have worked with have similarly been different traders in different markets. Will they express their views through currency markets or fixed income? Will they hold for a longer-term move or tactically take profits to benefit from market chop? The good traders find multiple ways to win. How different that is from the newbie whose decision making is limited to a few mechanical chart “setups”!

12. If we were to investigate the daily P& L of an emotionally intelligent trader, we would find occasions of trading actively and occasions of standing back. We would see periods of high-risk taking and periods of caution. All markets are not created equal: Some bring more opportunity, some less. The self-aware trader knows when “it’s my market” and goes into opportunity-seeking mode. That same trader knows when “it’s not my market” and preserves capital.

13. A small win is a small mirror. It reflects a winning image to us. Accumulate enough small wins and that winning image starts to become familiar. We internalize that which we experience repeatedly. That’s one of the reasons positive emotional experience is important….People I’ve known who are particularly adaptive have made small wins a habit pattern. They undertake many new challenges and regularly define meaningful, doable goals. They set themselves up for success. Positivity becomes a habit, a lifestyle, making the whole issue of discipline moot.

14. Perfectionism drains energy. It does not inspire performance; it turns inspired performance into something “not good enough.” The idea of small wins means that your focus should not be on perfection, but on improvement.

15. Many of our actions in the heat of battle are more biologically than logically driven.

Source: Steenbarger, Brett.  Trading Psychology 2.0: From Best Practices to Best Processes (Wiley Trading). Kindle Edition.


Volatility Tends to Top Long after Indexes Bottom

Volatility tends to remain elevated long after equity indexes bottom. The reasons are several:

1) No one is sure that indexes have really bottomed, options sellers are asking for higher premiums and buyers are willing to pay them in order to hedge underlying long positions.

2) Daily trading ranges remain wider than usual for awhile. The biggest $SPX’s daily gains and losses happen when it is under its 200dma.

The deeper and the longer the correction, the longer volatility remains elevated. For example, after the bear market of later 2007 – early 2009, the VIX remained above 20 for more than a year. In 2011, $XIV (inverse VIX ETN) bottomed months after $SPY did. In fact, $SPY was already trading above its 50 and 200dma, when XIV started to bottom. Something similar has happened during the most recent market correction. $SPY hit its momentum low on August 24. XIV bottomed days later. Such “delays” in market reactions provide opportunities to gradually build a short volatility position for days and weeks after market indexes have allegedly bottomed.


I cover this subject in a lot more detail in my latest book. It is a crash course on market corrections and the ensuing recoveries with a social media spin.

Crash Course on Market Corrections


The odds of an investor experiencing a big market crash during his/her life are 100%.

A well-diversified portfolio might save you from losing money in any 10-year period, but it might also “save” you from achieving high returns over time. Diversification won’t save you from experiencing big drawdowns during market panics when correlations go to 1.00 and all assets move together up and down regardless of underlying fundamentals.

Paul Tudor Jones says that “once in a hundred years events” have started to occur every five years. Obviously, his comment is more of an anecdote than a statistical fact, but it is also a reflection of a timeless market truth – the obvious rarely happens, the unexpected constantly occurs.

The stock market is not a place, where for one party to win, another has to lose. It is a place, driven by cycles – periods when almost everyone is a winner followed by periods when almost everyone is a loser.

Everyone could make a lot of money during market rallies when liquidity and performance chasing lift all boats and trump all bad news. Not everyone keeps that money when the inevitable correction comes.

They say that the definition of insanity is doing the same thing over and over again and expecting different results. Well, if you do the same things over and over in financial markets, you are guaranteed to get different results. Markets change; luckily in a relatively cyclical manner; unluckily the duration of each cycle is unpredictable.

Patterns repeat all the time because human mindset hasn’t changed for thousands of years. Since 1980, the S & P 500 has had an average intra-year decline of 14.2%. In 27 of last 35 years, stocks still finished positive for the year.

Corrections come a lot slower than anyone expects, but once they happen they escalate faster than most could imagine.

All corrections feel the same. At the beginning, people don’t believe them, then as prices continue lower and weakness spreads to more sectors, fear escalates and it leads to forced liquidation. Forced liquidation means selling, because you have to, not because you want to. Smart investors dream to be on the other side of forced liquidation. It is easier said than done, but there’s method to the madness.

Each correction is preceded by distribution and weakening market breadth. Stocks top individually but tend to bottom as a group. At the lowest point of a correction, the fear of losing is substantially higher than the fear of missing out.

The typical correction has distinct stages that vary in duration and require different tactical approach:

1) Quick and wide-spread leg lower that ends with a momentum low.

2) Oversold bounce.

3) Choppy period, that whipsaws both bulls and bears.

4) A Retest of the momentum lows with breadth divergence.

5) A Recovery

The history of U.S. stock markets has been a perpetual long-term uptrend interrupted occasionally, but very consistently by shocks. Most of those shocks take the form of short-term drawdowns that come and go. Some corrections turn into bear markets that last more than a year. They say that almost everyone loses money in bear markets – both bulls and bears. Bulls because they stubbornly hold on to positions in favorite companies and some stocks never recover from deep drawdowns. Bears because they get squeezed during the violent rallies that happen under declining 200-day moving averages. Bear markets should be respected, but they should not be feared. They require a different approach than what most are get used to in bull markets.

I wrote this book mainly to serve as my own guidance, to organize my thoughts and learn more in the process.
Keep in mind that everyone has his own agenda and bias, including me. The following pages present the perspective of a trader, who believes in active portfolio management and stock picking. The thought process and observations that I share here might not be suitable for everyone.

By reading this guideline, you will become better educated in the following subjects:

How to protect capital during market corrections

When to raise cash, take profits and sell long holdings

When and how to hedge

How to remain calm and protect your confidence during corrections

How to make money on the short side during market corrections

How to survive extremely choppy periods during market corrections

How to be flexible and prosper during long bear markets

How to recognize market bottoms

How to make money during market recoveries

How to use social media during corrections

A list of a hundred worthy people to follow on social media

The book is available on Amazon.