The Psychology of Trading: Tools and Techniques for Min… (2024)

Very disappointing.

The author is a psychotherapist who does trading on the side, presumably when the therapy business is slow. Being a trained scientist (you can argue about whether psychotherapy is a true science), he applied what he knows best (psychology) to the problems traders have -- intuitively traders tend to go through emotional roller coasters a lot. This is a book that documented some of these sessions (not always with traders) and attempted to draw some general lessons about "psychology of trading". It could be a reasonably good book under a different title, say "Random thoughts from a psychotherapist", but "psychology of trading" is way out of the league of this book -- and the subtitle "tools and techniques for minding the market" is borderline misleading as a title.

Let's start with the good part. Being a psychotherapist with a long history of practice, the author has an interesting array of client stories to relate. If these are not illuminating, they are at least an interesting collage of people and their problems. Being a (presumably) good therapist, he will also be able to convey some key insights of the business. For example, he mentions that the purpose of therapy is to "comfort the afflicted and afflict the comfortable". I thought that was cute. At least it tells you that unless you are bored by your comfort, don't go see a shrink.

Unfortunately, the list of the bad part is somewhat longer. In "How to read a book", Adler and van Doren tell you to X-ray the book in order to understand the general message. This is when I first had the feeling it's not looking good. Chapter titles are like "Evil Spiders", "The Big Man Beneath the Bed". You know the author is going to play hide and seek. Any insight is only going to be shelled out when you finish listening the long stories, their asides, and *their* asides. Unfortunately, this turned out to be the case. If the stories are interesting, and the writing is good, I wouldn't mind nearly as much. But some of the stories are downright weird, leaving you with big question marks (in the shape of WTF) floating in front of you.

You ask, do we learn anything about trading after all? And that's the biggest thing. When the lessons are finally revealed, they often feel like flimsy narrative to support some vague principles that sounded good. For example, he talks about psychotherapists "make an effort to tune out clients' words and simply absorb the feeling tone of their verbal and physical communication". I thought this was a very interesting piece of insight into how they work. But listen to the lesson when it applies to trading: "This can be tremendous help in trading, as well." and that "A tensing of my muscles and a shift in my posture in the chair at my trade station is often the first clue of a trade that is not living up to expectations." To a trained engineer, I'd say this is pure voodoo BS: there is no quantitative evidence, no control study, and you can't apply it methodologically. And it gets worse. Later on, the author explains that forehead skin temperature is associated with cortex activity and he will not issue a trade if the temperature is "below baseline". Now that *sounded* extremely hardcore scientific, doesn't it? Except it is not. I did a cursory research on forehead temperature with brain activity and found no scholarly article to conjecture and support the belief that lower temperature than baseline means something. There is no citation in the book to support the argument. This to me is worse, as it is not voodoo-presented-as-voodoo, but voodoo cloaked in scientific robe.

I get it that Dr. S needs to make a living and establish himself as an expert in some field and get a reputation to attract clients as well as speaking opportunities. And who knows, to those traders who read 0-5 books a year, there might be a lot of insights new to someone. But after spending quite some time (I don't drop a book midway) reading not at all enlightening nor entertaining 330 pages, I get angry.

Of course, YMMV. But proceed with caution.

An acquaintance recommended the book to me. When I started reading it, I had not yet thought that it would give so much knowledge that I would really apply. The book is written in simple language, thanks to this, even beginners can understand it, there are many useful examples that make it possible to understand not only the markets, but also, in particular, oneself.

Overview:
One of the longest books on trading for sure as it took me months to go through.
This book is a must-read for people who have an interest in psychology as the author basically takes us through a ride of his life experiences talking or conducting sessions with multiple traders of all kinds from all walks of life.
I think the content in this book is timeless and hence it’d relate to anybody from any profession and not just trading as it involves human behavior at the foundational level.
There is some very good psychology-analytic stuff that might blow off your mind and some very common usual ones as well that you might already know.
There are many success stories described in the book which in itself demonstrated how the author’s therapy sessions were useful, basically marketing his therapy sessions all over the book but as expected there are no failure lessons described from which there are lots to learn.

My Other Notes: (Excerpts from the book)
This is a very good note on left & right brain functionality, must-read repeatedly
Left brain = verbal processing
Right brain = emotional processing
“Schiffer's reasoning was elegant and disarmingly simple. Physiological studies have shown that the far right side of a human's visual field maps onto the left brain hemisphere. The far left side of vision is processed by the right hemisphere. In most people, verbal processing of information occurs in the left hemisphere. Much of a person's emotional processing occurs within the right hemisphere. This division of labor between the brain hemispheres is so striking that cognitive neuroscientist John Cutting has argued that humans actually possess two minds. Mind #1, as he calls it, is largely centered in the left hemisphere and helps people understand what things are. Mind #2, right-hemisphere based, enables people to perceive the value, meaning, and relevance of things and events. The crucial quality of these minds, Cutting emphasizes, is that they operate, not serially, but in parallel. At all times, these two minds are continuously scanning the world for the identity of the things a person encounters and the self-relevance of those things. What is experienced seamlessly as thought is actually a delicate coordination of these two minds.”

A very good note on the second mind
“In a similar vein, Robert Ornstein, in his book The Right Mind, described case reports in which a split-brain patient attacked his wife with his left hand while trying to restrain the aggressive hand with his right. Another split-brain patient, when asked to point to words describing his ambition in life, chose "racecar driver" with his left hand (right hemisphere) and "draftsman" with his right hand (left hemisphere). Summarizing a wealth of literature from cognitive neuroscience, psychology, and philosophy, Cutting concluded that people possess a second mind, one that governs emotion, will, and needs-directed action and that is grounded in the right hemisphere and operates separately from the verbal, thinking mind.”

A nice perspective of the market with small fishes vs whales
“A couple of years ago, my 10-year-old daughter, Devon, and I were looking at market charts and preparing a joint e-mail to the Speculators List inspired by Laurel Kenner and Victor Niederhoffer. Laurel and Vic were kind enough to memorialize Devon's e-mail in a subsequent publication of Spec List insights. The market, Devon asserted, was like a school of fish. There are two types of fish that diverge from the pack: (1) the weak and infirm and (2) the leaders. The entire school will shift position in response to the leaders, leaving the weakest behind. To anticipate a prospective move, she suggested, it is necessary to identify the leaders.”

A good one about how Muhammad Ali faced the big boy
“The best athletes create their own moods and messages. That is a big part of what makes them special. Few people gave Muhammad Ali a chance to win against the undefeated George Foreman in Zaire, Africa. By 1974, Foreman had devastated every foe in the heavyweight division, including multiple knockdowns and a quick dispatch of that consummate warrior, Joe Frazier. Ali, even after his imprisonment for failing to participate in the Vietnam draft, still had speed, but Foreman had unquestioned power. The only hope for the aging "Greatest" one was to keep away from Foreman's vicious hooks, much as he had stayed away from the similarly intimidating Sonny Liston.
Interviewed before the fight, Ali explained the source of his strength. If he only thought of himself and big George Foreman, he was scared. But if he believed that God was with him, Foreman didn't seem big at all. He was little, conquerable. For weeks before the fight, Ali taunted Foreman as a "mummy," emphasizing his foe's slowness and inability to keep up with someone who could "float like a butterfly, sting like a bee." Clearly, Ali was talking himself—and the public—into believing that this was a real fight, a match that he could win”

A good name for this therapy where you’ve to tell this bad word to those negative thoughts you get all the time
“I said, looking him deeply into the eyes. "Good for you. You do like yourself after all. You were able to get angry. You were able to say, 'f*ck you!' to those negative thoughts.
Dave caught on immediately. He nodded in recognition of this unexpected development.
"Do you think that you can say 'f*ck you!' to your negative thoughts at home, the way you just did here? All you have to do," I suggested, "is imagine that I'm standing over you, saying those angry things to you. Close your eyes, and get an image of me hovering over you, telling you how far behind you are. Then really let it out. I don't care if you wake up the whole neighborhood. Tell that voice in your head, "f*ck you! I'm not going to let you make me hate myself."
Thus was born an innovation in counseling: f*ck You Therapy.”

Implicit learning is what defines the identification of patterns by experienced traders but they themselves don't know why that happens or a reason for it.
Nice one
“In his book Implicit Learning and Tacit Knowledge, Arthur Reber pointed out that subjects are capable of learning even highly complex grammars under noisy conditions. For instance, in one set of studies, participants were asked to predict the appearance of an event, a flashing light. The appearance of the event on any trial N, however, was dependent on what had occurred at trial N–j, where j was varied between one and seven across trials. Surprisingly, participants were able, over time, to predict the appearance of an event based on what had happened many trials ago—again without being able to verbalize the basis for their predictions.”

Superbly written, fascinating book.

Dr Brett Steenbarger is a professional Psychiatrist and also a Trader. There is no other better qualified person I could think of to write this book about Trading Psychology.

Book contains various examples of real patients who have variety of different mental problems and past that cause personality and social disorders. Dr Steenbarger explores his deep perspective of these psychotherapy and relates it to trading psychology (various issues that many traders face).

I believe that success as a Trader really comes down to two points, Edge and Psychology. This book is one book that can help tremendously on Psychology of trading and also psychology to live a happier and more fulfilling life. If you are a Trader or an investor, and you havent herd of Dr Brett Steenbarger, I strongly recommend you read this book (earlier the better).

I'm stoked to read Dr Steenbarger's other books and I'll finish this review with a great quote from the book:

"It is far better to struggle in the service of one's dreams than to find instant success at meaningless work."

I am frankly shocked by the effective utility of this book. I watched a conversation with Dr. Steenbarger on YouTube, posted by SMB Capital (generally not useful content to me), and thought his insights were pertinent enough that it would be worth reading this book. Indeed, rather than the excessive verbosity employed throughout Douglas' 'Trading in the Zone' (still worth reading though), Steenbarger's book was full of significantly more pertinent insights and far less fluff. Sure, perhaps you've explored trading psychology via other avenues or you think you already know everything you need to (in which case, good luck, seriously), but if you want a solid volume emphasizing the work necessary to improve your mental game rather than just rehashing more TA, this is definitely a book worth picking up. I will definitely be rereading this at some point.

I've read several trading psychology books, including the famous Trading In The Zone.

I read that book first because of its popularity, and I expected it to be better than this one.

However, I was pleasantly surprised because The Psychology of Trading is just as good, but written through the lens of stories, which is quite a unique journey.

Highly recommend all aspiring traders to read this book, don't skip it just because you read trading in the zone for they serve in different ways.