Most trading advice focuses on getting better at the game everyone is already playing. More backtests. Tighter parameters. Better execution. Dr Brett Steenbarger makes a different argument: the traders who achieve the best long-term results aren’t just playing the same game better. They’re playing a different game. They’ve found something unique, and that uniqueness is the edge.
Brett has been a psychologist since 1985, teaching at a medical school in Syracuse, New York, while also trading and coaching professional traders at hedge funds, proprietary trading firms, and investment banks. He’s been trading since the late 1970s. The combination of clinical psychology, decades of personal trading, and close observation of how professional traders develop is unusual. When he talks about what separates great traders from average ones, he’s drawing on a large sample.
This episode was recorded in July 2021. The conversation covers what innovation actually means in trading, why traders resist it, how to find your own genuinely unique edge, and how to structure trades once you’ve found one.
Watch the full episode below, then read on for the complete breakdown.
Playing the game better versus playing a better game
Brett opens with a distinction that reframes the entire conversation about trader development.
There are two ways to improve: you can play the game better, executing the same approaches with more skill, or you can play a better game, doing something genuinely different from what everyone else is doing.
His observation from years of coaching top traders: the best performers tend to be in the second category. They’re doing something unique. Not necessarily completely novel, but distinctive enough that they’re not competing in the same space as the majority.
Brett cited Ayn Rand’s novel The Fountainhead as an early influence. The book’s central theme, that the greatest human achievements come from people who refuse to be derivative, maps directly to trading. The market is full of “me too” traders: same setups, same patterns, same ideas sourced from the same books and podcasts. Those traders, by definition, can’t achieve distinguished results. Distinguished results come from doing something the herd isn’t doing.
Why traders resist innovation
Brett described a specific example: Andrew had hosted guests presenting genuinely novel ideas about position sizing, and some listeners immediately dismissed them as scams. Not because the ideas were demonstrably wrong, but because they were unfamiliar.
Brett’s explanation is direct. Change is uncomfortable. If something is truly different, it pushes you outside your comfort zone by definition. The initial reaction is often dismissal rather than investigation. This isn’t unique to traders; it’s a basic feature of how humans respond to cognitive dissonance. But it’s particularly costly in trading because the value of any edge diminishes as more people use it. The traders who get uncomfortable first have access to the edge before it crowds out.
His own turning point came around the year 2000, when he met Victor Niederhofer. Niederhofer used backtesting and statistical methods for all his ideas, something Brett had never encountered. The approach made Brett uncomfortable initially. Then he recognized there was something real there, and learned from it. His advice: pursue your anxiety. That discomfort is pointing at your growth edge.
How to find your own innovative edge
Brett’s process for discovering genuine edge has two parts.
The first comes from positive psychology research: study your successful trades more than your failures. Most traders do the opposite. They analyze losses looking for mistakes. But winners reveal your actual strengths, and your strengths are where your real edge sits.
Brett’s personal example: he spent years trying to be a longer-timeframe trader because he thought that’s what he should be doing. When he actually analyzed his winning trades, the average holding time was 20 minutes. His genuine talent was pattern recognition on short timeframes. The innovation was accepting that and building around it rather than trying to conform to a style that wasn’t his.
The second part: narrow your search. Brett only looks for two types of edge, momentum and reversal, because looking for too many things increases the probability of finding something that’s statistically significant purely by chance. At the 0.05 level, one in 20 random tests will appear significant. If you’re testing 50 things, you’ll find two to three “edges” that are just noise. Brett’s discipline is to understand what each edge type looks like and restrict his testing to those two categories.
He uses only recent market history in backtesting, typically the last couple of years. Data from 2008 describes market conditions that don’t match today. Including it may reduce apparent performance, but it tells you nothing useful about what the current market environment will do.
The poker player approach: only trade when you have the edge
One of the most concrete sections of the conversation is Brett’s description of how he actually makes trading decisions. He shared a live example from the week of recording.
The market had sold off and was oversold on a short-term basis. He ran a statistical study looking at how many S&P 500 stocks had their 10-day RSI cross above 50. The result: over the prior two years, there had been 19 occasions when more than 50% of S&P 500 stocks crossed that threshold simultaneously. 17 of those 19 were followed by gains over the next five days. The average gain was 1.67%.
That’s the historical edge. But he doesn’t trade it automatically. He waits for price action to confirm the signal. In that instance, the market opened strong and continued strong. He entered, set his stop at the recent low (because if the bullish edge was real, the market shouldn’t revisit that level), and held.
Notably: that signal fired for S&P 500 large caps but not for the S&P 600 small cap universe. That divergence made him cautious. He scaled back his conviction on the trade.
The principle he draws from this: only trade when you have a statistical edge that price action is confirming. When neither condition is met, do nothing. He explicitly compares this to poker: when you draw a weak hand, you fold. Your edge comes from knowing the odds and only betting when they’re in your favor.
Innovation in trade structure, not just trade ideas
Brett makes a point that’s easy to miss: innovation isn’t only about finding better entry signals. It applies equally to how you manage a trade once you’re in it.
His approach to trade structure: when a backtested edge fires and price action confirms it, he sizes up. He’s not looking for the absolute low or the absolute high. He’s looking for inflection points where the reward relative to risk is favorable. Once in a position, he sets his stop at the most recent low. If the bullish thesis is correct, the market shouldn’t return to that level.
He describes this hybrid approach as increasingly common among the hedge fund traders he works with: use backtested signals to identify the edge, then use discretionary price action judgment to execute and manage the trade. Fully mechanical systems automate the entry. Hybrid approaches require the discipline to wait for confirmation before acting.
Skill versus luck: what top traders actually look like
A viewer asked Brett about the skill-luck split in trading. His response is worth quoting directly: the top traders he works with don’t win 85% of the time. Their win rate is often barely above 50%. What separates them is their ability to cut losses decisively and let winners run.
The analogy is the casino. The house has a small mathematical edge and places many bets. Over time, the edge compounds. Good traders operate the same way: small but real statistical advantage, enough bets placed over time, and position sizing that prevents any single loss from being catastrophic.
The specific application: when you have a 17 out of 19 edge, two of those 19 will go against you. Sizing must account for that possibility. Brett uses the phrase “risk of ruin”: if you bet too much on any single trade, even a favorable edge won’t save you from eventual ruin. The skill is in surviving long enough for the edge to compound.
Lifestyle as trading infrastructure
Brett’s final point is unusual for a trading conversation. Positive psychology research shows that people in a positive mindset are more productive and more creative. Being energized physically, intellectually, and socially directly impacts trading performance.
Traders who treat trading as their whole life tie their self-worth to their P&L. When trades go wrong, their mood goes with it. That emotional instability feeds back into trading decisions, usually badly. Brett’s prescription: build a full life outside markets. Family, exercise, intellectual pursuits, real connections. That fullness is what lets you wait, patiently and without desperation, for the rare occasions when the edge is clearly there and the odds are genuinely in your favor.
Related episodes
- 8 traits traders can develop to be more successful in the markets with Brett Steenbarger
- What makes a successful trader (Episode 095)
- My best losing year ever (Episode 080)
Want to learn more about developing a genuine trading edge and performing at your best? Subscribe to the Better System Trader podcast for weekly interviews with the world’s top systematic traders and quantitative researchers.
