I read your book "The psychology of trading" (Wiley and sons) a few years ago. I was very interested and I noticed a lot of things. In particular, you wrote: "Successful traders do not eliminate emotions. Indeed, they experience emotions fully, so fully that they become consciously aware of what they're feeling. At that point, however, they don't become lost in their emotional state. Instead, they adopt the vantage point of the Observer, standing apart from the feelings and making sense." Can you develop this point?
Brett.Steenbarger - Yes, thank you for the interview opportunity. Emotions provide information: they reflect our appraisals of the world around us. To shut off emotions is to miss out on that information. If, however, we become lost in emotion, we can act impulsively and also fail to learn from the information contained in our feelings. So the idea is to identify feelings and acknowledge them, but not to treat them as automatic guides for action. That's what I mean by being an "observer": we notice our emotions, but also stand apart from them. It's a skill that is learned in meditation, as well as in many behavioral methods within psychology.
Many traders begins the trading by taking an amount of losses. That seems almost like an initiatory rite to understand the true nature of the trading. What do you think about it and how can one explain it?
B.T.- Yes, losses can be very good learning experiences. The key is figuring out why a loss occurred, so that we're either learning something about the market or learning something about ourselves and our trading. By keeping risk small early in the learning process, we can contain losses and make sure we financially (and emotionally) survive our learning curves.
A lot of people have problem to take their losses. They can't tolerate a loss. They don"t accept the real nature of trading. How do you explain this fact?
You're right; many people are quite risk averse, and trading might not be for them. Or they may need to trade a method and position size consistent with their risk aversion. Sometimes it's not the monetary losses that people can't tolerate: it's any kind of loss. It's psychologically dangerous to base our self esteem on our winning and losing. We can't control whether any particular trade will make or lose money.
Do you think that some people are more gifted than others to make trading? Which are qualities that a trader must have to succeed and the defects which it must absolutely remove?
Yes, I do believe that some people are more gifted at pattern recognition than others and have superior short-term memory and information processing abilities that aid them in trading. I also believe that much of trading involves practice and skill development; otherwise, talent never finds its expression in performance. Personality traits can hamper success in trading, but I'm not convinced that personality is a great predictor of elite trading outcomes apart from talent and skill.
Trading implies to combine three elements: strategy, money management and psychology. Which of these three elements is the more important for you, is there is one?
Well, without strategies that have favorable expectancies, psychology will only help to curtail losses. Good trading requires strategies that have a favorable "edge"; i.e., a non-random, positive set of outcomes. Money management is an integral part of strategy, not something separate. Once you have a successful strategy, *then* psychology is important in implementing the strategy with consistency.
As a trader, how can you define your trading's technique? Could you briefly detail your approach?
My blog (www.traderfeed.blogspot.com) has a number of posts describing my approach to markets. I'm mostly an intraday trader who uses patterns of volume and numbers of stocks trading at the market bid vs. offer to identify short-term directional moves in stock indexes. My average holding time for a trade is 20 minutes, and I'm looking for moves of several S&P 500 points on average.
I think that we learn even more of our losses than our gains. Have you experienced a loss or a serie of losses that increase your trading'skills?
Yes, I go through series of losses every year, and every one has been a good learning experience. As I lose money, I trade smaller and cap my losses. That way, I never lose too much as a total % of my portfolio. Many times the losing trades tell me something that I'm missing in the market and force me to go back to my research and revise my views. When I return to trading with new views, I'll pick my size back up and making back the losses isn't so difficult.
Do you have any special advices for "young" traders?
Yes. Don't be too quick to trade. Observe markets. Practice trading in simulation mode. Learn how to read short-term market strength and weakness so that you enter trades at good prices. Learn how to size positions properly and control risk. Learn how to set profit targets for trades so that your ratio of reward to risk is favorable each trade. Learn how to take losses. Only once you've learned these component skills thoroughly in paper trading should you put actual money at risk. Young traders tend to be more interested in trading than in learning markets. It's a quick path to losing money.
Thank you.Bon trading à tous