Download PDF “Brett Steenbarger’s Three Vices of Trading”

Source: Brett N. Steenbarger

Steenbarger’s paper identifies perfectionism, overconfidence, and revenge trading as the three primary psychological patterns that interfere with systematic trading execution. The paper is valuable not only for identifying the patterns but for providing practical methods to recognize each one in real time before it produces trading behavior.

The recognition step is the one most trading psychology resources skip. They identify the problem clearly but leave the practitioner without a way to catch the pattern before it produces an action. Steenbarger’s framework is built around observable signals that each vice produces in the body and the mind before the trading behavior occurs, giving the trader a moment to interrupt the pattern rather than experiencing it only in retrospect.

Perfectionism announces itself through a specific emotional signature: the pain of a loss that feels qualitatively different from other discomfort. When a losing trade produces not just disappointment but shame, self-criticism, and the conviction that something is fundamentally wrong with the trader rather than with the trade, that qualitative difference is the perfectionism signal. The trader who recognizes this signature can pause before taking the next action, which in the perfectionist’s pattern is often holding the losing position longer than the stop allows or avoiding the next valid signal entirely.

Overconfidence announces itself through urgency and expansiveness. The trader who has just had several consecutive winners will notice a shift in their relationship to the screen: markets seem full of opportunities that weren’t visible before, the next setup seems more obviously valid than usual, and there is an energy pushing toward action. This state, which Steenbarger calls the hyperactivation of the behavioral activation system, is the overconfidence signal. The appropriate response is not to suppress the energy but to redirect it: check the setup against the defined criteria rather than acting on the felt urgency.

Revenge trading announces itself through a very specific cognitive state: the mind is focused backward on the loss rather than forward on the current market. The question running in the background is not “what is the market doing?” but “how do I get back what I just lost?” When the motivation for the next trade is recovery rather than signal, the trade is a revenge trade regardless of whether it ultimately wins or loses. The recognition is the backward orientation of the attention.

Each vice has a specific behavioral antidote in Steenbarger’s framework. Perfectionism is addressed by reframing the definition of a good trade from “winning trade” to “correctly executed trade.” The process standard replaces the outcome standard. Overconfidence is addressed by returning to the checklist: does the current setup meet the defined criteria? Not “does it feel like a good trade?” but “does it pass the rules?” Revenge trading is addressed by the most direct intervention of the three: step away from the screen. The trader who is in a backward-focused cognitive state cannot make forward-focused systematic decisions until the state changes.

The connecting thread through all three vices is that they involve the trading decision being made by an emotional state rather than by the system’s rules. Systematic rules prevent the emotional state from producing trading behavior by requiring that a defined condition be met before any action is taken. The emotion can be present and can be experienced. What it cannot do is fire the entry signal.

Frequently Asked Questions

How can traders recognize perfectionism before it produces a bad trade?

By noticing the qualitative difference between normal trade disappointment and the shame/self-criticism signature that perfectionism produces. When a loss feels like personal failure rather than a statistical outcome, that qualitative difference is the signal. The recognition creates a pause before the next action, which is typically holding the loser past the stop or avoiding the next valid signal.

What is the specific signal that overconfidence is operating?

An urgent, expansive state where markets seem full of opportunities and the next trade seems obviously right. This is the behavioral activation system in a hyperactivated state, driven by a recent winning streak. The appropriate response is not to suppress the energy but to return to the defined entry criteria and check the current setup against them objectively rather than acting on the felt certainty.

How is revenge trading different from a legitimate re-entry after a loss?

By the direction of attention. A legitimate re-entry after a loss occurs because the system produced a valid signal. The attention is on the current market conditions and whether they meet the entry criteria. Revenge trading occurs because the trader needs to recover the previous loss. The attention is backward on the loss rather than forward on the market. The motivation is recovery, not signal. Steenbarger’s prescription is to step away from the screen until the forward orientation is restored.

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