Summary of The Psychology of Trading

Brett N. Steenbarger

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Recommendation

This is a handy, engaging guide to the psychology of trading. Author, psychologist and trader Brett N. Steenbarger identifies the cognitive and emotional risks that doom so many traders, and offers very specific guidance on techniques and practices for managing those risks. He focuses on teaching traders to observe their emotional and psychological patterns, to correlate their patterns with their trading success and failure, and then to take appropriate action. That’s probably plenty for you to work with, though traders caught in the worst self-destructive patterns may need more than a book to break their bad habits. getAbstract.com recommends this well-written, entertaining guide, which will be very useful to anyone who takes trading seriously. Steenbarger draws on psychological research and his practice as a therapist to tell traders what self-knowledge they need, how to get it and how to use it.

About the Author

Brett N. Steenbarger, Ph.D., 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. An active trader who conducts his own statistical market modeling research, Dr. Steenbarger has written feature columns for MSN’s money side.

Summary

Patterns and Habits

Psychotherapy research indicates that people benefit most from therapy when they are in the middle reaches of distress. People who are in too much pain can’t go on, while people who are not in enough pain have no motivation to change. So failures, those events that cause you pain, are good sources of information. They tell you when you have fallen short, and help you find reasons to change. By contrast, they also point out your strengths.

To use this information as a trader, keep a careful log of your investing victories and defeats. Such logs reveal patterns and make you consciously awareness of your investment and emotional trends, although such configurations may ordinarily be unconscious. Your log should include the results of a trade, the reason you had for making the trade, the anticipated profit, the stop loss, and the mental and emotional state you were in during the trading. This type of log will help establish a feedback loop that can lead to continuous improvement in the quality of your trades. Reading the log, you will see what worked and what didn’t. Of course, you cannot know in advance whether you will win or lose on any given trade...

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