Given that we are in the midst of a chaos-themed campaign showing traders how to get through the most chaotic market periods using the TT® platform, we wanted to get Brett’s take on the industry and how analytics and psychology drive decisions in times of chaos. Read on for his perspective.
– Brian Mehta, CMO
How did you get involved with futures trading and what path took you where you are now?
Dr. Steenbarger: My first exposure to trading came as a child when my grandfather talked to me about markets and his experience in the Great Depression. During my junior high years, I had an assignment to research a career and interview someone in that career. I chose a stockbroker and learned about what was involved in investing. My first trading took place when I was a graduate student and involved researching the fundamentals of individual companies and placing trades based upon trending fundamentals. I did well and continued my involvement in financial markets over the course of the next 35+ years.
My training was as a psychologist, and trading was always a side activity for me during 20+ years working in clinical and academic settings. Around 2000, I was introduced to professional trading and futures markets by the legendary trader Victor Niederhoffer. From Niederhoffer I gained an appreciation for trading as a science and began viewing markets quantitatively. My first book on trading psychology came out in 2003 and was discovered by a Chicago trading firm that was a market maker in electronic futures. They hired me full-time as a trading psychologist and that provided me with a very detailed exposure to the world of futures. It also shaped my understanding of the auction structure of futures markets, which has proven helpful in working with hedge fund portfolio managers and prop traders.
In all, I started with psychology and trading as parallel paths and interests and wound up integrating them in ways that have been personally and professionally fulfilling. Success always comes when you find the right outlet for your talents and passions; we succeed when we exercise our strengths.
Who is your greatest trading influence and what did they teach you?
Dr. Steenbarger: Per my answer to the first question, Niederhoffer was clearly a major developmental influence. He encouraged a multidisciplinary understanding of markets and human nature, and he understood the need to make trading as objective and scientific as possible. Another major influence has been the mathematical finance research of Dr. Marcos Lopez de Prado and colleagues. They have generously published a wide array of work that has major implications for futures trading.
Other important influences in my trading psychology have been the philosophy of Ayn Rand, which emphasizes the heroic dimensions of human life, and the writings and research that fall under the umbrella of positive psychology. I’ve also been influenced greatly by the school of applied psychology known as solution-focused brief therapy, which is a structured way of helping people build on their strengths and competencies. I often joke that my work can be considered “therapy for the mentally well.” I’m interested in ways that ordinary people can achieve extraordinary goals. Markets just happen to be an interesting arena for such achievement.
What are your top three requirements in a trading platform?
Dr. Steenbarger: I’m perhaps different from many traders in that I don’t make use of charts and myriad canned indicators when I’m generating ideas. I only trade stock index futures, and my trading makes use of quantitative models that predict the market three to ten days forward. The variables that comprise these models are derived from market data, including high-frequency (transaction-level) data. As a result, my chief requirement for a platform is access to detailed and accurate market data that can be readily downloaded for analysis. Other requirements include the reliability of the platform and the ability to cover multiple global markets. The latter provides me with helpful macro perspective on the index futures. Largely, however, I use a trading platform as a research platform. Speed of getting to market is important to me, but not as crucial as it is for high-frequency traders.
What tip can you provide to traders when chaos has taken over the market? Is there a centering method or trading tool you recommend?
Dr. Steenbarger: When chaos takes over the market, this generally shows up as volatility and volume. A new set of market participants has entered the auction. I look at upticks and downticks among all listed stocks; the volume of put options and call options for all listed names; the percentage of stocks trading above their day’s VWAP; and the number of stocks making fresh new highs and lows on the day session as ways of gauging which way the new, large market participants are leaning. The short-term trader wants to go with those flows. At a psychological level, you don’t want the market’s chaos to become your own. That is where meditation and self-control techniques learned through biofeedback can be very helpful. If market volatility has picked up, there will be plenty of movement to participate in. The key is standing back, slowing yourself down, consulting the data and then looking for opportunity. Because the volume and volatility are coming from large participants in the marketplace, their behavior can create significant directional opportunity. You just want to be at your mindful best at those times so that you size positions properly and don’t let the excitement lead to overtrading. A lot of money can be lost quickly under chaotic conditions.
What is the next big thing in trading? Analytics? Virtual reality? Artificial Intelligence? Something else?
Dr. Steenbarger: I definitely see a trend among professional traders toward a greater integration of discretionary and quantitative approaches to trading. That integration takes different forms, from the econometric modeling of macroeconomic data to the use of machine learning to guide trading decisions. My own trading is based upon a conceptual framework of market cycles and a breakdown of market drivers into such researched factors as momentum, value, volatility, carry, sentiment, etc. I use ensemble modeling to generate predictions from these factors, but the predictions are not mechanical trading signals. Rather, they are signposts to tell me where we stand in market cycles. Market cycles are like snowflakes: structurally similar, but none exactly like the others. I use the waxing and waning of factors as a roadmap for navigating market cycles. I do believe there is value in the discretionary judgment of experienced and skilled traders, but I believe that this value is maximized when it is informed by solid research and a clearly articulated and well reasoned conceptual framework.
Thanks for the opportunity to share my perspectives! I try to keep traders abreast of ideas in trading and trading psychology via the TraderFeed blog.