The Legend of Trading Psychology - Brett Steenbarger
In this January 5 2025 podcast, host Etienne interviews Dr. Brett Steenbarger, a clinical psychologist turned trading performance coach. Steenbarger explains how his background in psychology led to a career advising professional traders and writing several books on trading psychology. He frames trading psychology as a subset of performance psychology, comparable to the mental training of athletes and artists. A central theme is the importance of thinking in percentage‑based risk rather than dollar amounts, which enables traders to scale from managing a few million to tens or hundreds of millions while keeping the risk per trade constant (typically a quarter of a percent). He outlines a “stair‑step” scaling process: achieve consistent profitability at a low risk level, then incrementally increase risk and capital, ensuring consistency across different market regimes before moving up. Consistent profitability, robust risk management, and the ability to learn from losses are the markers of readiness. Steenbarger stresses that losing is inevitable; the key is to lose the right way by extracting lessons about market behavior, idea generation, and position sizing. Long‑term success hinges on habits such as disciplined risk limits, continuous learning, intellectual curiosity, and maintaining life balance—family, teaching, spirituality—so that trading does not become an identity. He differentiates process‑driven discretionary trading (rules plus judgment) from impulsive trading, and highlights common traits of top traders: work‑horse ethic, curiosity, love of markets, and willingness to share knowledge. For aspiring professionals, he describes pathways through prop firms (e.g., SMB Capital) and hedge funds, noting that hiring decisions consider performance, risk consistency, eagerness to learn, and collaborative personality. Finally, he directs listeners to his Trader Feed blog and his X (Twitter) handle @Steenbarger for ongoing insights.
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They might start out managing 10 million as a junior trader and then they'll manage 50 million and then they'll manage 100 million and then they'll manage more. But it always stays is a quarter of a percent. So they think of risk and percentage terms to make it easier to scale up.
Okay, sitting on today with Dr. Breslin Barger, one of my long time favorite person, I want to get on the podcast. Been a long time for sure. So Brett, welcome to the podcast. Good to have you here. I really appreciate you. I think. Time to sit down and talk Training Psychology Today.
Oh, thank you so much, Etienne. It's great to get together.
Awesome. Let's begin with this. I want to hear how did you come across training psychology in the first place? What made you kind of go into trading?
Okay, there are a couple of different questions there. Good questions. So I went to school, majored in psychology and decided to become a psychologist and specifically a clinical psychologist. I'm really interested in how people work, you know, what makes people tick. And that's partly because I'm interested in what makes me tick. So I've had an interest in psychology for years and years and years now. At the same time, I developed an interest in financial markets. I began trading in the late 1970s, which I think is before your time, and it's like ancient history. So I began training in the late 1970s and I did that as a side activity and I did it throughout my time at school, when I was going to graduate school, but it was always a side activity. Then I decided in the year, I think it was 2003, I wrote my first book about the psychology of trading. I tried putting them together and it turned out that the book was successful and a trading firm in Chicago asked me to join them and work with their traders. And so I became part time at the medical school where I was teaching in Syracuse, New York and started working with traders full time and have been doing that for the last 20 years.
What do you find about trading psychology? Is it like different than regular psychology or is it like pretty much the same patterns that come back in trading again?
Good question. Trading psychology is like other performance psychology. In other words, if you work with people who are performing artists or if you work with people who are professional athletes, there is a psychology to performance.
And that's what we see in the trading world. And many, many, many, many, many times the problems that people have when they first learn trading occur because they're not pursuing performance psychology. They're not pursuing performance the right way.
A lot of people struggle with the idea of making money, losing money, and that's why they have issues in trading too. Do you feel like if there was no money involved in trading that would be easier people to deal with, or is it still like a sport, there's no one involved in the, in the sport, you still have to perform and kind of try to achieve something?
Yes. And I am actually a big fan of paper trading or trading in simulation mode as a way of first learning. First you want to learn patterns in markets before you have to worry about putting money at risk.
And you know, there's still, there still are performance issues. If you trade in simulation mode, there's still a P and L. It's just not your, your actual money. But once you learn those patterns, it's very important to start putting on risk. Take small risk, then larger risk, because it is different when you have money on the line. It's like the difference between.
Practicing in rehearsal and playing at game time.
You work with a lot of big institutions and big firms. Tell me a bit more about some of the themes that you have to work on with these firms. Like what are some things that they have to improve in?
Yes. So with professional traders, they've already gone through the first phases of their learning curves. They're already profitable, but they're trying to grow their profitability. And so a lot of what I work on is, amounts to building their strengths, figuring out what, what are they really good at and how can they expand the best of what they do. Which is different than a beginning trader when, where a lot of times you're. I try. I've. I've talked about this in my previous books. I, I tried trading full time and I made money, but I didn't, like, wasn't for me because I enjoy working with people. I'm a psychologist. So sometimes trading is not our path and that's okay. We have to figure out what other areas speak to us and represent our strengths.
One of the things I hear a lot is people say, especially beginning traders that want to scale up, they say, oh, like it's just numbers. So they can, they think they can go from like a very small account to a big account in no time because it's just numbers and they just multiply the number together to a bigger account. Tell me a bit more about the work that goes into scaling up as a trader and going from maybe a certain position size or a certain capital amount to bigger amounts of return.
Yeah, there's a sense in which that's true. The Professional traders don't think in terms of dollars and cents, they think in percentage terms. So if they're willing to risk, let's say a quarter of a percent of their capital on a specific trade, well, they might start out managing 10 million as a junior trader and then they'll manage 50 million and then they'll manage 100 million and then they'll manage more, but it always stays as a quarter of a percent. So they think of risk and percentage terms to make it easier to scale up.
In general. And this is something I talk about in the new book. You want to scale up in a stair step way. So you start at a low level of risk taking, get profitable, get consistent. Once you're profitable and consistent, you increase the risk taking and get profitable and get consistent at that level. And then you risk more and get profitable, consistent at that level. So you're gradually in a stair step way, bumping up the capital at risk, bumping up the risk taking, and that makes it sustainable. If you try to go from a low level to a high level too fast, it becomes overwhelming and you could lose all the profits you made up to that point, which takes a toll psychologically.
I'm sure people are going to ask in the comment, how do you know when you're ready to scale up or go to that next step?
I think when you have consistent profitability for a period of time, you want to be profitable, you want to be successful in your risk management, and you want to do it for long enough that you're succeeding in different market conditions.
And once you've done that in different types of markets and you've maintained that consistency and that profitability, then it's definitely time to, to move up.
What do you think are some of the habits that people need to maintain if they want to still be successful in trading for many, many years to come? Like to be successful in the very long term?
Yeah. You know, even the best traders, I work with people who are managing a billion dollars or more of capital. When you look at the percentage of their trades that are profitable by and large, particularly in macro and particularly in directional equities, it's not much higher than 50%.
So losing is a big part of the game.
And you have to figure out how to lose the right way to sustain a long career. And the way to lose the right way is, is to always learn from losses. Maybe you'll learn something from the market you're trading. Maybe you'll learn something about how you generated the. Yeah, no, I don't think it's just about personality. I really do think you have to try many different types of trading before you figure out what your strengths are. For example, when I was in school, I played many different sports.
Most of them I was terrible at. Really bad. Okay, but that was information. Right.
I was better at basketball, and so I ended up pursuing basketball and I ended up practicing it and I practiced harder because I really liked it and learn from coaches and so forth. So I think the beginning part of trading is just looking at learning, trying out different markets, different strategies, different time frames. Figure out what speaks to you and what you're good at.
And. And maybe. And maybe I can. Maybe you're not good at trading. That's a real possibility. Maybe that's not where your future is meant to be. And that's okay. You know, I try. I've talked about this in my previous books. I tried trading full time and I made money, but I didn't. Like wasn't for me because I enjoy working with people. I'm a psychologist. So sometimes trading is not our path, and that's okay. We have to figure out what other areas speak to us and represent our strengths.
One of the things I hear a lot is people say, especially beginning traders, that they want to scale up. They say, oh, like, it's just numbers. So they can. They think they can go from like a very small account to a big account in no time because it's just numbers and they just multiply a number together to a bigger account. Tell me a bit more about the work that goes into scaling up as a trader and going from maybe a certain position in size or a certain capital amount to bigger amounts of return full time.
And I made money, but I didn't. Like, wasn't for me because I enjoy working with people. I'm a psychologist. So sometimes trading is not our path, and that's okay. We have to figure out what other areas speak to us and represent our strengths. Yeah, there's a sense in which that's true. The professional traders don't think in terms of dollars and cents. They think in percentage terms. So if they're willing to risk, let's say, a quarter of a percent of their capital on a specific trade.
Well, one of the things I hear a lot is people say, especially beginning traders, that they want to scale up. They say, oh, like, it's just numbers. So they can. They think they can go from like a very small account to a big account in no time because it's just numbers and it's just multiplying. The number together to a bigger account. Tell me a bit more about the work that goes into scaling up as a trader and going from maybe a certain person size or a certain capital amount to bigger amounts of return.
They might start out managing 10 million as a junior trader and then they'll manage 50 million and then they'll manage 100 million and then they'll manage more. But it always stays is a quarter of a percent. So they think, think of risk and percentage terms to make it easier to scale up. Yeah, there's a sense in which that's true. The professional traders don't think in terms of dollars and cents, they think in percentage terms. So if they're willing to risk, let's say a quarter of a percent in general, and this is something I talk about in the new book you want of their capital on a specific trade. Well, to scale up in a stair step way. So you start at a low level of risk taking, get profitable, get consistent. What they might start out managing 10 million as a junior trader and then they'll manage 50 million and then they'll manage 100 million and then they'll manage more. But it always stays is a quarter of a percent. So they think of risk and percentage terms to make it easier to scale up. Once you're profitable and consistent, you increase the risk taking and get profitable and get consistent at that level. And then you risk more and get profitable consistent at that level. So you're gradually in a stair step way, bumping up the capital at risk, bumping up the risk taking in general. And this is something I talk about in the new book, you want to scale up in a stair step way. So you start at a low level of risk taking, get profitable, get consistent. What? And that makes it sustainable. If you try to go from a low level to a high level too fast, it becomes overwhelming and you could lose all the profits you made up to that point, which takes a toll psychologically.
I'm sure people are going to ask in the comment, how do you know when you're ready to scale up or go to that next step?
Once you're profitable consistent, you increase the risk taking and get profitable and get consistent at that level. And then you risk more and get profitable consistent at that level. So you're gradually in a stair step way, bumping up the capital at risk, bumping up the risk taking. I think when you have consistent profitability for a period of time, you want to be profitable, you want to be successful in your risk management and you want to do it for Long enough that you're succeeding in different and that makes it sustainable. If you try to go from a low level to a high level too fast, it becomes overwhelming and you could lose all the profits you made up to that point, which takes a toll psychologically.
I'm sure people are going to ask in the comment, how do you know when you're ready to scale up or go to that next step?
Market conditions.
And once you've done that in different types of markets and you've maintained that consistency and that profitability, then it's definitely time to move up.
What do you think are some of the habits that people need to maintain if they want to still be successful in trading for many, many years?
I think when you have consistent profitability for a period of time, uh, you want to be profitable, you want to be successful in your risk management, and you want to do it for long enough that you're succeeding in different years to come.
Like to be successful in the very long term?
Yeah. You know, even the best traders I work with people who are managing a billion dollars or more of capital. When you look at the percentage of their trades that are profitable by and large, particularly in macro market conditions.
And once you've done that in different types of markets and you've maintained that consistency and that profitability, then it's definitely time to move up.
What do you think are some of the habits that people need to maintain if they want to still be successful in trading for many, many years?
And particularly in directional equities, it's not much higher than 50%.
So losing is a big part of the game.
And you have to figure.
Out how to come like to be successful in the very long term.
But to lose the right way to sustain a long career. Yeah. You know, even the best traders I work with people who are managing a big billion or more of capital when you look at the percentage of their trades that are profitable by and large, particularly in macro. And the way to lose the right way is to always learn from losses. Maybe you'll learn something from the market you're trading. Maybe you'll learn something about how you generated the idea or how you structure the position or how you size the position. But you always want. And particularly in directional equities, it's not much higher than 50%.
So losing is a big part of the game and you have to figure out how to lose the right way to sustain a long curve to take away learning. And if you're a person who loves learning, then that's going to sustain you Through a long and hopefully successful career.
Do you think you can figure out who is going to be a good trader in advance? Let's say you had to find a new trader to interview or something. Would you be able to pick based on their traits whether they'd be good in trading or career?
And the way to lose the right way is to always learn from losses. Maybe you'll learn something from the market you're trading. Maybe you'll learn something about how you generated the.
Or is it based on like things that they develop over time and you cannot really figure this out beforehand?
Well, there are definitely differences.
You know the, the real idea or how you structure the position or how you size the position. But you always want really good traders are workhorses, not show horses. They they really put in effort and having to take away learning. And if you're a person who loves learning, then that's going to sustain you through a long and hopefully successful career.
Do you think you can figure out who is going to be a good trader in advance? Let's say you had to find a new trader to interview or something.
An intensity about their learning.
They build their confidence, they build their positive psychology in how they learn and how they improve their performance. Many times you can learn a lot about a training.
Would you be able to pick based on their traits whether they'd be good.
In trading or better by how they work on their trading and how they work on themselves? The really good ones work very not.
Or is it based on like things that they develop over time and you cannot really figure this out beforehand?
Well, there are definitely differences.
The really hard I think books like the Market wizard series by Jack Really Good Traders are workhorses, not show horses.
Are very helpful because you see some of the common characteristics of successful traders.
One of the things that I learned from market researchers back when I read it and this has a lot of new ones over time is that really.
Put in effort and have an intensity about their learning.
They build their confidence, they build their positive psychology.
Traders are very different. They all have their different styles like you mentioned, different maybe time frames. What would you have some of the commonalities that you've seen from traders over.
Time in how they learn and how they improve their performance. Many times you can learn a lot about a trade. Yeah, there are real differences. For instance, a purely quantitative trader is different in how they process information obviously than a purely discretionary trader by how they work on their trading and how they work on themselves. The really good ones work very where I see similarities is in process.
They do different things and they do things differently. But the process of how they learn new opportunities, how they develop skills, how they build their business, that process is a similar one. When I've done of evaluation of traders, one thing that comes out consistently is the factor of intellectual curiosity.
But really good traders love to learn markets. They love to learn, they love to disclose, they love to explore, they, they love creativity, finding new things, doing new things and that excitement about learning. That creativity is what keeps them motivated even during the times of drawdown. The really good traders aren't just interested in trading, they're interested in markets. They have a fascination for markets and learning markets. And that's that creativity, that's that curiosity that keeps them going. If they're only interested in trading in P and L, then their motivation is going to go up and down. As our trading and our P and L go up and down, something has to sustain us.
That's a good point. How do you develop that? I would say that mental stability of the ups and downs with profits and losses. For a beginning trader, that could be really hard to focus on, to kind of try to remain stable. When you have these ups and downs in your P and L, what we tell them to focus on to be able to get that mental stability.
Well, two answers to that. One is if you start small and gradually grow the way we talked about in that stair step way, then the losses will never be too big. You know, you should never lose so much money that you can't come back reasonably. So you keep the risk taking moderate and that keeps your reactions moderate. And, and that's really important because over time you build a tolerance to the ups and downs. You become familiar with those. The other thing is something I've mentioned in my other books. It's something I mentioned on the Trader Feed blog. And by the way, a lot of the topics we're talking about, if you look them up on the Trader Feed blog. T R A D E R F E E D A lot of articles, I've been writing that since 2006. A lot of articles on these kind of topics. But one thing I've emphasized on the blog, I've emphasized in my books, always, always, always, always have things in your life that are more important to you than trading and more important to you than P and L.
So I have a family, a wife of over 40 years. I have five kids, seven grandkids, four cats at home.
I also have my career as a psychologist. I also work, I do teaching, I'm involved in Spiritual activities. I have many different things that are important in my life and trading is one of them. And so if trading goes up and down, if the P L goes up and down, it's just one part of my life. It doesn't define who I am. If I make trading everything and all important, I'm going to be vulnerable. And that's a hard place to be because the P and L always does go up and down given the uncertainty of markets.
That's a good point. Do you work with traders who hate processes? They love to have more discretion in how they do things.
Those are not different. You discretionary traders can be very process driven. Being process driven means that you follow certain rules, that you follow certain procedures, but you use your judgment. And so I may use my judgment to enter a trade. Let's say I'm trading stock index futures and we're breaking out of a range to the upside. And I'll buy that breakout because I see it's coming on increased volume. That's a discretionary trade. But how I prepared for that trade, there is a process to it of what I look at, how I look at it, how I size trades, et cetera, et cetera, et cetera. So I think process and discretionary trading go hand in hand. Otherwise it's just trading on impulse, and that's a waste of time.
What we tell traders who want to maybe are not professionals yet, but they want to be able to build their trading to where they can be professionals. They can work in a big field firm. They can really kind of work with the traders like you work with. What could they do to increase their skills to get there?
That's a good question and a tough question because to some degree, what people are doing at hedge funds and investment banks are different from the individual trading that you or I might do. A lot of what goes on is at hedge funds is investing, not trading. They will have many different positions at one time and hold those positions for days or weeks, sometimes months.
So they are building a portfolio of many different positions and hopefully positions that are not very correlated with each other. I might have a trade in Brazilian currency. I might have a trade in crude oil. I might have a trade that's long the US stock market. Hopefully those are relatively uncorrelated so that if one trade doesn't work out, other ones can. And that smooths my equity curve. That's what hedge fund management is all about. Money management is all about. The individual trader would need to join a hedge fund at a beginning level, which is usually as an analyst and literally learn that business from the ground up.
Doable.
The challenge is to get in the door, so to speak, and learn those skills that you would need as an analyst. And sometimes people.
Go to school for that. They get certifications for that in order to qualify. But it's a different game. The hedge fund investing is a different game from short term trading. Many short term traders, if they're initially successful, decide to join proprietary trading firms. Now prop firms trade more like I might trade as an individual trader, but you are trading the proprietary capital of the firm so you can really grow quite a bit.
They organizes teams in many prop firms. The people I work with at SMB Capital would be a good example of this. So you start out on a team and you start out with a relatively small level of risk taking. But you're constantly learning from team members who are successful and you gradually grow. Your risk taking and profits are shared between the trading firm and the trader. That's a very doable growth path. And there are a number of successful.
Prop firms with good track records around the country and around the world.
Might be a tough question for you to answer, but what do you think a trader can do to get noticed by a Prof. Firm like SMB?
Because I work with the folks at SMB, I can most easily answer from that perspective. They run classes. In fact, I join the classes every so often. And if they stand out in the classes and if they stand out in their trading while they're taking the classes, then they might be interviewed for a position.
The person I work with who coordinates the hiring, his name is Jeff and he gets to know all of the people taking the classes and he goes over their performance and it's like a tryout, you know, that's how you are accepted as part of the firm.
You think it's only based on performance or is it based on traits and what they see in traders?
Good question. Performance is part of it, but not the entire part. Obviously they care about the person.
They want someone who's eager to learn, but also eager to share what they've learned with others. So personality does matter. Total profitability is not the only thing. They want to see how well the person has managed risk. So someone who makes a lot of money and loses a lot of money and makes a lot of money, loses a lot of money. They're not going to be interested in that. That's true at hedge funds also, you know, they want to see consistency of profitability. So there are many different things that they'll look for that's awesome.
Interesting. I want to mention earlier your blog Twitter feed has a lot of value for traders at all levels. I've reading this for multiple years myself has been a really good resource for learning and getting better. Tell people where they can find you and connect with you after this interview if they want to reach out to you or maybe learn about your upcoming books. Where can they reach out to you?
Yeah so I'm active on Twitter X and my handle is sign Steenbab S T E E N B A B.
But that's, that's really the best way to follow me and people if they have a specific question can direct message me DM me on Twitter. But I share every week I share ideas and usually more than one idea on the Trader Feed blog. I don't do any individual coaching coaching of individual traders just because I'm so busy with the hedge funds.
I'll put a link below for your Twitter profile. Your X profile. People can follow you there for sure. Brett, I really appreciate the advice you give my listeners here. It's been a lot of fun to see what you're up to and discuss trading of course and hopefully we can bring you back here in the future.
I really appreciate the opportunity to talk and want to wish you and want to wish your community all the best in the new year.
