Improving Your Trading Performance: The Single Most Important Step You Can Take


61 ratings



Brett Steenbarger

01 Dec, 2005

in Psychology and 1 more

A chess player analyzing the board for the next move; fighter pilots maneuvering their planes to get a lock on enemy aircraft; a baseball player tracking the release of the ball from the pitcher’s arm; ballet dancers executing their leaps; an oncologist diagnosing a rare form of cancer; a bodybuilder sculpting a small muscle group to achieve symmetry: all of these are examples of performance activities.  They are also examples of fields that have been widely researched in the past two decades, uncovering important clues as to the factors that create successful performance. 

This research raises fascinating questions:  What makes expert performers different from less successful ones?  Is expert performance a function of inherited personality traits and skills, or can it be cultivated in the proper environments?  Which techniques has research found to dramatically improve performance?  Will the performance-enhancing techniques that benefit chess grandmasters and Olympic athletes also assist traders?  The book I am currently writing will tackle all these questions and more.  This article has a more modest aim:  It will draw upon research studies with chess experts to identify the one most important thing traders can do to accelerate their development.

Trading as a Performance Activity

Not all trading is a performance activity, of course.  A computer can be programmed to enter, manage, and exit positions, but the computer does not perform in the same way as the athlete, dancer, or fighter pilot.  Performance, in the psychological sense, begins with the human element in competition.  Humans choose when to take action and when to refrain; they can select various courses of action on different occasions and can invent new strategies when needed.  The trading computer does not have good days and bad days—only profitable ones and unprofitable ones.  Human traders can perform poorly even if they make money, and they can have good days even when they’re in the red.  That is because performance is a function of the chosen actions of performers, the correctness of those choices, and the skill with which the actions are carried out.  Once an element of discretion enters into trading, it becomes a performance activity: one in which outcomes are dependent upon the choices of the performer.

 There are several common features of performance activities:

  • They can be executed well or poorly.  Activities that are performed well on a consistent basis require a high degree of skill.  A lucky outcome, such as winning a lottery, is not a skilled performance.
  • There are individuals who can be identified as expert performers.  With very rare exception, expert performers are ones who have developed their talents over time.  Most expert performers undergo specialized training to cultivate their talents.
  • They require a specialized knowledge base.  The knowledge may be the “how-to” knowledge of a gymnast or the research knowledge of a scientific researcher.  To perform well in a field, a person must master the information and skills specific to that field.

Trading, as a performance activity, has much in common with chess.  It is competitive, requiring a high degree of concentration and strategy.  It also features a limited number of actions that, in combination, create a large array of possible strategies and actions.  This makes both activities easy to learn, but difficult to master.  Chess can be played in lightning fashion, with very little time between moves, or it can allow players many minutes to plan moves—or even days (postal chess).  Trading can also be conducted on a very short-term basis or can be planned and executed over hours or days.  These similarities make chess an excellent starting point for examining the performance dynamics of trading, especially since chess is one of the performance fields most studied by researchers.

The Performance Ingredients of Chess

A well-replicated finding in chess research is that the memory processes of experts are different from those of non-experts.  One intriguing set of studies took chessboard arrangements from a past tournament games and briefly showed them to expert players and novices.  Afterward, the expert chess players were able to recall the positions of many more pieces than the novices.  When the two groups were shown chessboards with randomly arranged pieces, however, their recall of the positions of the pieces was quite limited.  The researchers’ conclusion was that experts do not have better memories than non-experts; rather, they have better memories for meaningful relationships among chess pieces.  Instead of remembering where each individual piece was on the board, the experts viewed the board as clusters of pieces and remembered these.  When the board was randomly arranged, there were no meaningful clusters of pieces and the experts had no effective means for encoding their information.

How do expert chess players gain this ability to perceive meaningful patterns among pieces?  Because chess players are given ratings based upon their tournament play, it is relatively easy to compare experts (masters and grandmasters) with less accomplished players.  When a variety of factors are incorporated into multiple regression equations to predict chess ratings, two stand out as highly significant:

  1. The number of books owned – Research conducted by Neil Charness and colleagues finds that the correlation between books owned by chess players and their current performance ratings was .53.  
  2. The cumulative number of hours spent in practice – Those same researchers found that the correlation between the amount of time spent in practice and current performance ratings was .60.

To appreciate these findings, it is necessary to understand what chess books are and how they are used.  These texts typically break the game down into components (opening, endgame, defenses, etc.) and present historical games from tournaments, along with annotation from an expert author.  Readers do not merely skim over these games; they learn specific opening or defensive sequences and then see how these were utilized in actual games.  They recreate those games on their own boards and carefully play through the positions, so that they can see what the expert players saw.  They also play through alternate sequences to observe where these might lead. 

Interestingly, chess experts do not have significantly more chess-playing experience than non-experts.  Rather, a higher percentage of the experience of experts is spent in the systematic practice of various facets of the game.  Non-experts tend to spend a higher proportion of their time in games against similarly-skilled opponents.  This experience neither exposes the learner to the moves of experts, nor does it provide time for a careful review of moves, exploration of alternate lines, etc.  In the Charness work, the correlation between solitary practice and chess ratings is almost twice as high as the correlation between practice with others and ratings.  This is because solitary practice with chess books allows learners to obtain chess knowledge in context.  Instead of focusing on the moves of an opponent, learners encounter—again and again—those meaningful configurations of pieces that appear in the games of experts.

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Finally a chess analogy! Insightful and well written!

Dec 28, 2013

Member (4 posts)

Very good article.
I do video my trades - which has given me another problem. The sheer time it takes to review my trades in real time (my average hold is only 7 minutes).
to review the day takes a lot of time but............ it pays in bucketloads.
You can see and hear ( I talk to myself as well on the video) yourself making mistakes and often stating what I should do and then not doing it.
But that;s a whole other area that I am now working on.
By the way I have Brett's previous article to thank for guiding me toward Camtesia software - I paid though Brett - I went and brought your book!

Dec 05, 2005

Member (207 posts)

Definately suits those that can plan and then keep to their most direct route to a trading strategy. However imho It may be better for some to be wandering around and around the problem before settling where it is best for them.

Dec 03, 2005

Member (11181 posts)