A Lesson in Trading Psychology

by Brett N. Steenbarger, Ph.D.

Back in 2004, I joined Kingstree Trading, LLC, a proprietary trading firm in Chicago. There, I had the good fortune to get to know--and observe--many successful traders at work. One lesson particularly stands out in my mind. A trader saw buying come into the market, and he quickly jumped on board. He saw that the odds of taking out a recent high were good, given the size of the buying. To his surprise, however, the trade stalled out before the target and reversed. He quickly exited with a tick loss. He turned to me and said, "I just paid for information." When the market bounced higher a few ticks several minutes later, the volume was weak. No big players were taking the long side. He aggressively sold and quickly made a couple of points. He placed a good trade, and it didn't work out. He didn't view that as a threat, as a loss, or as a failure. He viewed it as information. The market was telling him that we weren't going to take out the recent high. How he entered the first trade and exited it and how he used the loss to prepare himself for the winning trade: *There* was a clinic in trading psychology. If your setups are valid, there are only two kinds of trades: Those that make you money and those that give you information.