Brett N. Steenbarger: Q&A (Part II)

Over the past two months, Brett Steenbarger was gracious enough to take and answer questions from us and his unique insight has proven quite valuable. This morning I posted part II of the Q&A in which readers could submit their own questions about trading and enhancing one's own performance in the market. I think you'll find it as helpful as last month's Q&A.

As a preview, here are a few questions and answers Brett answered last month that I think you'll find of interest:

Kirk: Prior to this Q&A, I had the pleasure of reading your latest book "Enhancing Trader Performance: Proven strategies from the cutting edge of trading psychology" and found it instructive, insightful and inspiring. Far and away, it's the best book I've read about trading in a long-time. Not only were you able to create a book that is useful for the new trader, but also for those of us who've been around the block a few times which is no easy accomplishment. One thing that is stressed in the book is the importance of finding your "performance niche" in trading. In fact you said that "discovering your trading niche may well make the difference between a hall-of-fame trading career and a disappointing one that never quite makes prime time." Can you explain what a "performance niche" is?

Steenbarger: A performance niche is a field of work that takes advantage of three factors:

1) Your talents - Inborn abilities
2) Your skills - Competencies you've developed through practice and learning
3) Your interests - What turns you on

The research in psychology tells us that, when elite performers find performance fields that maximize their talents, skills, and interests, their learning process is quite different from the learning of average performers. They become absorbed in their performances and organize much of their time to rehearse and hone their skills. You know you're in a performance niche when you're doing work you feel you were born to do.

Kirk: How does a trader find their own "performance niche?"

Steenbarger: Well, one principle I think is useful is that whatever your niche might be in trading, you're probably engaged in it long before you ever started trading. In other words, find what you've been really good at and what you really love doing and then figure out how to do it in markets.

When I was a kid, I collected baseball cards and memorized all the stats from the players. So now I collect markets and memorize their stats. Analyzing and synthesizing is an essential part of my niche. I do it with my clients in therapy, and I do it in the markets. It's who I am.

I'm a strong proponent of trying out different time frames and markets before you commit to a trading style or market. Stocks don't trade like agricultural commodities; daytrading is not like investing. Date the market and trading style before you marry it. Your emotional reactions to the trading will tell you if this might be your niche.

For instance, I hate trading currencies. Absolutely loathe it. There is no central marketplace and no reliable source of volume information in the all-important cash market. As a result, I have no feel for volume flow and market movement. I also have tended to avoid individual equities, simply because so many patterns I trade are based on the discrepancy between an index and its individual components. It's back to that analyzing and synthesizing.

Bottom line: If you have to motivate yourself to trade a certain way, it's probably not your niche. Your niche in life captures you; you don't cultivate it. And, sometimes, trading is not a person's niche in life. Once again, the important thing is not to trade; it's to have a meaningful and purposeful life.

Kirk: You wrote the following: "Trading success in the present so rarely ensures future success. Market conditions - and the edges that we find in markets - change so radically that ongoing success is guaranteed to no one. The winners in the trading world are not only those who train, but those who sustain enhanced learning processes." Obviously, new traders have a lot of skills and knowledge to obtain, but what about those who've traded for many years, even with lots of success. How does one sustain the learning process even at those levels?

Steenbarger: It's a great question. One way I sustain the learning process is by always doing research, finding new patterns, and reviewing my performance. My goal is to keep one step ahead of market changes. I always consider myself a student of the markets. If I ever get to the point of thinking of myself as a master of the markets, it won't be long before I get a rude awakening.

I also think it's important to stay on top of new markets. Many of the best inefficiencies are found in newer trading markets and instruments. As we conduct this interview, I'm doing a fair amount of research into the panoply of ETFs, including commodity, sector, international equity, interest rate, and currency ETFs. There are some intriguing patterns there that are unexploited, simply because these instruments still are not on most traders' radar.

The musician John Mellencamp once had his band-including himself-learn an entire new set of instruments. The result was the Lonesome Jubilee album that produced a number of hit singles, including "Cherry Bomb" and "Paper in Fire". There's much to be said for reinventing ourselves-before market shifts force change upon us. A different time frame, a different instrument to trade: we can be like Mellencamp.

To read the rest of this fascinating Q&A as well as part II, please visit the members' only website.