The Psychology of Hedge Fund Traders (Insights from Elite Trading Psychologist)

Dr Brett steamer is the top trading psychologist in the US he has worked for top hedge funds asset managers and lucky for us proprietary trading firms like S&B capital in this video Dr steam Barger breaks down how hedge fund Traders gain a mental Edge over most Traders I'm Mike Bella Fury and we're one of the top proprietary trading firms located in New York City since 2005 and proud to develop numerous seven and even eight figure per year TR Traders watch take notes and learn from the number one trading psychologist in the US so you can grow your trading account what an event and look at this look at this now here's my perspective on this seeing all these people somewhere in this room is someone you can connect with and maybe multiple people you can connect with to really Move Yourself forward personally and in your trading somewhere there's a great resource or a few great resources out there and so what Mike was saying about networking is so so so important that's the value of being here in person so I would encourage you to make a commitment that you're not going to leave this conf conference until you have made at least one meaningful contact that you will continue beyond this and if you do that at each SMB event and each SMB event eventually you'll build a true Network I'll make another comment about this um based on my work at hedge funds the reason the hedge funds I work with are so successful is that they are organized in teams where I teach at a medical school in Syracuse New York which is colder than here um the the saying is in medical school Each one teach one in other words you develop a culture where each person is teaching and sharing and each person is learning from each other that's what you want in your network Each one teach one and that's how these very successful funds are organized in these teams where everyone has a different specialty everyone's learning from everyone else one thing I was sharing uh last night at the dinner event look at every High high performance field it could be the Performing Arts it could be professional Athletics it could be professional chess look at every high performance field and what do you find two things one is the presence of mentoring think about it does a person just practicing on their own become an NBA basketball star no I don't think so or do they become a world famous opera Talent just singing into a microphone themselves no there's always mentoring there's always coaching to develop ourselves in an elite way we need to learn from people who are doing Elite things and so that becomes very important the second thing and I'll be talking about this a little bit later on is that think about every performance field and you will find a mathematical relationship in every performance field developing Talent involves spending more time in practice and learning than in actual performing think about how much time is spent on a foot football field practicing plays or on a basketball court how much time is spent in rehearsals for a Broadway play a big big big reason that Traders don't succeed is that what do they want to do they want to trade they want to make money and so they don't do the practice it'd be like I want to be an NBA star so I'm gonna go right on the the floor and that didn't work for me by the way uh um so you want to be in a setting where you are immersed with Talent with mentors and where you have the opportunity to practice practice practice practice learn learn learn learn and then eventually you grow your talent and that's when you start putting good money at risk you don't just start out trading big amounts and uh getting frustrated that's a great way to ruin your trading psychology okay a few other broad points before we get into the uh the meat of the uh the presentation and I will leave time for uh questions as well a key to success and and I'm going to say something that some of you may disagree with you know because a lot of of times especially with short-term Traders uh where I started in Chicago the average holding time was six minutes okay so especially with uh short-term Traders what do they look for to to figure out what to buy what to sell they look for a setup right so how is this Market setting up and they're looking at charts and they're looking at maybe also at news information different catalysts I think that's the wrong place to start I think that's necessary for Success not sufficient your Edge begins and this is one of the most important points I'll touch upon your Edge Begins by knowing really knowing who you are making money from because you are exploiting the behavioral tendency and the trading Tendencies of some other player players in the market and the big problem for developing Traders is they don't know who they're making money from because they haven't worked at investment Banks they haven't worked at hedge funds they haven't worked at different kinds of proprietary trading firms etc etc etc I use a lot of basketball analogy as I went to Duke um it'd be like if you were in the basketball tournament and you didn't know who your opponent was or you didn't study your opponent how in the world are you going to effectively prepare for that game so you want to know who you're going to make money from now who do you think you're making money from any guesses what's that other retail Traders gamblers okay now the correct answer is you're making money from me because I really suck no uh you wouldn't be making much money in that case um I am going to argue that increasingly over the last number of years certainly the last uh five years or so you have the opportunity to make money from hedge fund participants hedge fund participants are experienced they're they're not retail rookies but what has happened in the hedge fund world is that it has expanded tremendously you now have these quote unquote multistat funds multi strategy that are truly Global in their membership and they are managing increasing amounts of capital so it's not a at all unusual for me to work with a fund that has 20 billion in capital 30 billion in capital 40 billion in capital and so forth and the smallest trading account for a beginner for a you some they just hire is 200 million and there are more and more and more of these funds that have started up literally all around the world so you have crowding you have more people chasing pretty much the same markets now in addition to that the people who fund these businesses have become more tight in their risk tolerance when I first started at a macro hedge fund the allowable draw down was 20% before you would be kicked out before you had to stop trading now it's not unusual for that number to be closer to 5% to 10% so you have more and more and more people trading and you have Tighter and Tighter and Tighter risk R control so what do you think that does turning yeah that's a good way of putting it you have people who need to make money and so they get into positions and the positions start to go against them what do they do they have to get out they can't afford to lose the money and you have crowding people in crowds and they're all short fixed income and it's not working out and so they all have to exit the positions and then rinse and repeat so lots of crowding lots of unwinding lots of crowding lots of chasing opportunities lots of unwinding of opportunities and for someone who has short-term trading skills and knows how to read markets you can be quicker than that herd and you can catch those opportunities where the crowd's getting in the crowd's getting out so I would argue that you have potentially an underappreciated opportunity to take advantage of who is in the market and how they behave now what that means is that you have to think like like they think and they don't get into trades just based on quote unquote setups what gets them into a trade is an idea something they've researched something about Central Bank policy something about economic performance maybe a catalyst from geopolitical conflict they have some idea about what's going to move the market and then they translate their idea into a trade and it's when they are ready to make that translation from idea to trade that's when they look at the setup that's when they look at the chart that's where they figure where do I get good risk reward but you want to know what ideas are people chasing because that will give you a good idea of where the crowd is running the number one idea that people have been chasing unsuccessfully so far this uh in the past year has been the anticipation of weaker economy even recession and the Federal Reserve and other central banks cutting interest rates so the uh Market the hedge funds in the market have been very focused on rates have been very focused on bonds and short-term interest rates the yield curve inverted last year that means short-term interest rates are higher than longer term interest rates the two-year uh interest rate is higher than the 10year rate and historically what does that lead to recession within year and so far no we have not had recession and so a lot of people have been stuck in that trade but what that is also meant is because that has been a primary focus they haven't been actively participating in other markets the people who have been making money have been looking elsewhere Commodities have been hot look at oil look at Copper what else has been hot I think stocks at least some of them okay so many times by knowing what the crowd is focusing on you can find opportunity in the less crowded areas and I'm happy to be in touch with the group to share whatever I observe as far as where Crowds Are and where opportunities may be so if we go to the slide I titled this the positive psychology of trading positive psychology is a trend within the field of psychology which looks at our positive qualities our strengths and our competencies and the idea is that we get better better better we develop expertise not just by correcting our problems but by building on the best of who we are so that's why it's called the positive psychology of trading so why the big picture matters the largest players trade the biggest pictures so you want to know big picture where's money flowing to where's money flowing from volume is very important in terms of telling you who is in the market that's why tracking arval is so important in your trading if you see a market move and the relative volume is really increasing that means the volume for that time of day is really increasing what's that telling you new additional participants are in that market Market are in that trade who are they if you see big volume coming into a stock you're trading the big volume is not a bunch of individual Traders at home in their underwear trading three lots no it's a footprint of the larger participants in the market so you can track with volume with relative volume who's in the market what they're doing so you get a breakout move or you get a move on a catalyst you know how we uh talk about um breaking news trading you get a catalyst and you get big volume coming in some big players are participating another aspect of the big picture that a lot of people don't appreciate is you have trending momentum markets so markets that are moving in a particular direction and what's the opposite of a trending momentum Market yeah yeah what a lot of people will say is a choppy market and what they mean by Cho copy is that it's [Laughter] of money from institutions in the market is not decreasing but it's being reallocated so you're seeing money going into growth stocks and away from value stocks you're seeing money going [Music] into consumer discretionary shares away from Consumer Staples so money is rotating from one sector to another sector one part of the market to another part part of the market money is rotating from big cap stocks away from small cap these are all rotations and by tracking relative strength how one sector is behaving versus another sector we can track how relative strength is trending the trend is not in the overall Market the overall Market might be trading in a range but in terms of the relative play there's a trend there but people don't look at it you want to think in relative terms not only absolute directional terms lots and lots of opportunity there and I would argue that in the current Equity Market in the current stock market we're seeing rotation even though the Market's been going up up up and we've been making new highs certain things have been quite strong you probably haven't noticed the technology names um and what's I mentioned this to a group uh yesterday over dinner what's not making new highs what SE ERS are relatively weak Regional Banks real estate look at ETFs and look at funds that are just in commercial real estate they're underperforming considerably now in a Raging Bull Market if you have sectors that can't make new highs even in that environment that's telling you something as a rule patterns of relative strength and weakness tend to precede patterns of absolute strength or weakness so it'll be interesting to see going forward what happens with the regional banks that are funding commercial real estate in particular we get spending spending spending we suddenly get the spending translating into inflation the inflation translating into higher rates the higher rates hurting the commercial real estate further hurting the regional Banks further so we may be setting up not immediately not tomorrow not next week not next month but we may be setting up with some themes by looking in relative terms and conversely when the Market's weak and certain sectors can't make new lows that's really information I've written quite a bit about the role of creativity in trading the ability to see new things the ability to see things differently from other people when we process multiple markets when we process different inputs to different markets when we have an open mind to seeing new and different things that's what helps us generate promising ideas it's a creativity process one of the patterns that's been most reliable in my experience and in my own trading is identifying opportunities or occasions where you have buying pressure buying pressure buying pressure but you can't make new high or selling pressure selling pressure selling pressure and you can't make new lows so one of the indicators I've talked about is the nysse tick TI K that's the number of stocks up ticking versus down ticking and that's out there from the nysse like 20 times each minute and so you can identify when stocks are ticking up stocks are ticking up and stocks are ticking up but the overall index isn't going higher and vice versa back in Chicago we looked at every single transaction every trade in every stock and is that trade occurring nearer to the bid price or nearer to the offer price if people are transacting and lifting offers it tells you there's buying interest if they're transacting and they're hitting bids it tells you they want to get out and so you can get these patterns where they're hitting bids and hitting bids and hitting bids and we don't make new lows all those people hitting bids they are shorts that are going to become trapped and you can make money when it turns around that's a reliable pattern but you need to process markets differently and uniquely to find those kind of opportunities Barbara Frederickson psychologist talks about broaden and build that when we are in an open-minded mindset when we're in a positive mindset we tend to see more of the world our perception is broader and we can build upon the breadth of those things that we see the really successful Traders I work with just look at more things and then they have the ability to look at more things in different ways so they're playing in a vastly expanded universe when I first Mike was mentioning when we first I first worked at SMB 2007 when I first started working with Kenny sharkness Shark what do you think the first thing I noticed was you have a guess Mike what what did what how is his desk different from the desks of the other people more scre hugely more screens he had so many screens open but he's looking at different things and this and this and this and this and he could quickly point out he had that speed of processing and he had that ability to see different things in different ways and he just had more opportunity as a result of that so in terms of what I've observed at hedge funds but also elsewhere a key to success is identifying and maximizing your strengths many times people keep a journal and what do they write in their Journal basically it's how I the bed another technical psychological term they write down all their problems everything they did wrong when it's just as important to learn from your successes what what did I do today what did I do this week that was really good and once I identify what I did really well how can I do that again how can I do that again how can I build upon that strengthen teams teaming up with people who have strengths that are different from yours so that you can learn from them they can learn from you the best [Music] teams are multi-p specialty so to speak they look at different things process information different ways and they learn from and with each other and finally there's research on What's called the Flow State we concentrate we focus so much that we get into to the flow we lose sense of time and we become absorbed in what we're doing and the research suggests that flow enhances creativity that we best see new things and different things when we're in a state of high focus so we want to be looking at different things in different ways with different people in a focused way so in terms of positive psychology four big Dimensions happiness doing things that we like doing that we enjoy fulfillment doing things that are meaningful to us energy doing things that give us energy and affection being close to people who are important to us what the research on performance tells us is that we are going to perform better we're going to be able to broaden and build and be more creative when we are firing on all four cylinders so you want this to become a kind of checklist for you what are you doing each day each week to make yourself happy to bring yourself fulfillment to give yourself energy and to be close to the people that matter to you there's a common perception that if you're going to be successful in trading you have to focus focus on trading trading trading trading trading and have such a passion for trading that's all you care about that's called an unbalanced life and eventually your psychology rides up and down with your p&l you want to have many sources of Happiness fulfillment energy and affection that gives you energy that gives you focus and helps your Trading big big big idea from positive psychology many challenges we Face result from the absence of positive experience not the presence of conflicts and deficits if we're having problems in our trading it's not necessarily that we have no control over our emotions or we have some inner block toward being successful many times it's the absence of the positives in our lives that makes it difficult to really focus and sustain focus in the markets I know we're moving on in time I'll just mention a couple other ideas because I do want to leave a little time for questions think of trading not as a process but as multiple processes it starts with generating an idea and that's where creativity is important so for example an idea might be that in certain assets we're seeing inflation we're seeing certain assets going up up up up up crypto we're seeing it in some commodity markets but everything is denominated in a currency you know Bitcoin versus versus US dollar copper versus US dollar maybe it's not that the numerator is going up up up maybe there's a trend that we'll be seeing for the denominator to go down down down and what would that mean if we had a weaker weaker weaker dollar so you start to look at different markets that's idea generation you look at statistics you look at different markets you talk to different people and then once you have an idea then you look at the setup you look at how to structure the idea as a trade where do I get good risk reward in my own trading and in the work I do with people we look at Trends that's a linear component of price change and we look at Cycles in markets and even the trending markets do have cycle it's just that the if it's an uptrend the troughs of Cycles may not be very deep but you can put a short-term RSI for example on a Time series that's trending and you'll see that there are relative ups and downs certainly in the recent stock market that's been true and so in terms of straight trade structuring you can use those Cycles to time when and how you get involved in the trend then once we have the trade on there's trade management how do we manage the position where do we take profits where do we add to a position in the hedge fund world there's also what's called portfolio construction they trade portfolios not individual positions and they want diversification so their portfolio at any one time may involve certain trades in commodity markets certain trades in currency markets certain trades in equities in different parts of the world and they get balanced that way so if one trade doesn't work out other trades will work out and their overall portfolio will have some diversification benefit for us shorter term Traders your portfolio is not what you own at one point in time it's what you trade over time are you trading different stocks are you trading different different patterns in other words you can achieve diversification benefit by trading different instruments different stocks different time frames different patterns and so when one thing may not be working out other things will that's your portfolio if you're o if you're a one-trick pony and you're only trading one thing in one way all your eggs are in one basket and that's a pretty vulnerable place to be financially some components of success that I've observed in the hedge fund World creativity and idea generation rigor process orientation in managing trades process orientation in terms of improving performance the teams I work with that are successful they regularly review their performance and they figure out what they could do better what they've done well so they're constantly constantly turning the wheel and learning and back to the idea of positivity managing their energy as well as they're managing their time because a common occupational hazard in the trading world is burnout and once we start to burn burn out we become less creative we become less productive and less successful okay couple ideas to leave you with that we'll do just a little Q&A and and at any point Mike uh if just just say STFU I'll get it I'll get [Laughter] it um this is so important in some measure to some degree you are already the person you seek to become you want to study you at your best now it may not happen often it may not happen all the time but at times you do things greatly and you want to learn from when you're doing things really well and expand upon that you want to reverse engineer that success psychologically your Peak experiences point the way to your path when you are having your best experiences as a Trader and it's really rewarding not just financially but emotionally it's fulfilling you're doing something right you're doing something that's meaningful you're doing something that's important to you that's your path and that's why it's so helpful early in a trading career to practice practice practice trade different markets trade different stocks trade different time frames trade different patterns because eventually you'll find to fit something that clicks for you that makes sense to you and you'll have those Peak experiences and there's your path so I'll uh leave you with a quote that I've uh shared online recently the uh novelist philosopher whose group I joined when I was in college ion Rand said anyone who fights for tomorrow lives in it today that's what we're meant to do we're meant to find the best within ourselves fight for tomorrow fight for our tomorrow and we'll experience some of that tomorrow right here right now thanks so much for this event thanks for having me so do we have time for a few questions uh my question is you mentioned about the uh trending Market versus the rotational Market how do you identify the rotational markets um the rotational Market will generally be in a Range it will have some cyclical structure and so anything that looks at Short term highs and lows a technical indicator like an RSI if if you see some patterning to that that's helpful now there is formal quantitative work on Cycles uh John Ellers ehls has done some of the foundational work in that area and he has um a program that's commercially available called Mesa Meesa and it identifies dominant Cycles in any Financial Market you're looking at any stock any Futures Contract but if you have short-term overbought and oversold levels there is some cyclical structure and you want to see if there's some regularity to that now to give a little example of creativity what's on the xaxis horizontal axis the most charts time right I was amazed when I was working in Chicago particularly with the Quant funds firms time was not on the x- axis what was on the x-axis it was volume yeah so each bar represented a certain amount of volume you didn't have 5 minute bars or 1 hour bars you had a bar that represented let's say in a Futures Market 10,000 contracts traded and that could be in a few minutes it could be in a couple of hours and each bar draws an open high low close for that num amount of volume and it turns out that when you look at markets denominated in volume rather than time those Cycles become more regular oh look at all the good I'm to dis out but a very important concept because if you can identify some Cycles in a market then you can participate in a rising market by buying the short-term oversold that's occurring at a higher price level and vice versa it really helps with timing and it helps you get good risk reward and if you have really good risk reward you can trade better better size uh my name is Zach and I've been trading uh full-time for the last four years and uh I was wondering what the uh longevity of this career as a professional Trader what's the longevity I'm sorry of this career as a as a as a as a Trader um that varies it's a very good question uh what happens is a lot of people don't survive their learning curves and so they have short care years and the reason they don't uh survive their learning curve is not because they lack ability or lack motivation it's because they put their money at risk too quickly and they just lose too much and and so that shortens their careers the really great Traders and I've worked with a couple of people who uh are in Market Wizards books um they are not just trading to make money they're trading for other purposes and as a result it's meaningful to them even when they don't need the money and they enjoy building a business they enjoy mentoring others they enjoy giving to charitable causes and so they tend to have very long-term careers so it really varies but my experience is that the primary motivation for trading when people are beginning and when people are young evolves to a different motivation for trading later in life there's a good book uh by David Brooks called the second mountain and that's relevant here you know his thesis is that successful people climb the first mountain and they achieve success and you know they do well Fame and Fortune and then what do I do okay you know I'm not I'm not ready to retire and I've achieved these things they find a second mountain to climb and the second mountain is often different from the first and is more about what they can do in the world how they can make the world better make others better uh a and so they stay in what they do but for a different motivation what is the psychology behind traed buyer or traed sellers so uh some of the indicators that I mentioned uh you want to have measures of buying pressure and selling pressure that are different from your measures of price change and so uh looking at upticks versus down ticks looking at where trades are occurring in the bid offer Matrix or trades going off near best bid or best offer that will tell you if buyers or sellers are dominating and then you look at Price action how much price change are you getting for the amount of buying pressure selling pressure going on now what's happening in the real world is if you have people buying buying buying buying and the market can't go up or the stock can't go up why is that happening there's a big seller you the iceberg orders you there there there are larger players absorb in that buying or absorbing that selling and so you get people trying to push the market down push the market down you can't make new lows because underneath bigger players are buying so you need some measures like that to identify where people are trapped so you talk a lot about trading a lot of different ideas but I've also heard you talk previously about tracking a lot of your statistics so was curious about how you would recommend doing that most effectively when you are trading so many different ideas because I know for me sometimes when I do trade so many different things it makes it really hard to track all the details about my trading yeah that's a great question and you want to track performance details that would be relevant across markets so what's the average size of your winning trade compared to the average size of your losing trade when I place more trades do I tend to be more profitable or more unprofitable you can track all of these things and it doesn't really matter whether you're trading a Futures Contract or individual stocks or or some combination thereof um my average holding time you know I'll break it down what's my profitability for trades I hold longer for trades I hold shorter I had a Trader reach out to me this morning and we studied his performance and in the vast majority of situations his trades would start out profitable and then what would happen exactly it would just reverse on now so we tracked profitability as a function of holding period and that could be done in any Market when you have low volatility on average you're going to have more reversals you don't have that momentum effect so what was happening is that he was trading a momentum long volatility strategy when in fact the mark his entries were good but the market wasn't sustaining that kind of momentum your statistics if you keep the right stats can tell you all of that so you're an active Trader not doing as well as you want not doing as well as you deserve and you just can't figure out why you can't become profitable no matter how hard to try well let me show you why this is your competition the traders in this room this room right here is full of elite Traders some of whom are making seven and even eight figures a year in fact our top guys have made nearly 20 million each and net trading profits in a single year let's head to my office so I can share more so you're probably used to seeing videos of lavish Trader Lifestyles trading gurus trading off of a laptop for an hour a day heck maybe even 15 minutes a day and then them relaxing on some secluded beach for the rest of the day well all I can tell you is that our Traders train like pro athletes they live and breathe the markets and are continually working on their trading skills because at our firm that's what we found it really takes to to make it in this game I'm Mike Bella Fury co-founder and managing partner of S&B Capital One of the world's top proprietary trading firms located in Midtown Manhattan and we're always looking for trading talent to hire and develop and not just to trade in-house on our desk but also to trade from their own home entirely using our firm's capital and we have numerous Traders doing just that allowing them to make upwards of seven figures trading the firm's Capital without risking their own money but to even get a shot at something like that you need to have the right training that's why we're doing a new free online presentation in which we share how you can get an interview with SMB to become an in-house a remote Trader trading firm Capital without risking yours and getting access to all of our firm's coaching and resources and the best part you don't have to be a profitable Trader yet in fact we prefer to mold profit profitable Traders with our methods and our techniques that's why we have just three simple criteria that can earn anyone an interview we're looking for highly ambitious and determined traders who fit our culture first and foremost so if you believe that could be you sign up for the free 1-hour online presentation by clicking the link that's in your top right corner of your screen now for

Channel: SMB Capital

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Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, trading psychology, trading mindset, smb annual conference

Id: mKQq33Rtdfo

Length: 50min 40sec (3040 seconds)

Published: Thu Apr 25 2024