Eight months into 2004, the broad market is basically flat for the year. All those trading days, all the experts' talk about the best strategies and sectors, all those weekly reports of Dow points up and Dow points down have brought stocks to roughly the same spot where they started 2004.

If you're a trader -- or even an investor -- the futility of it all is enough to make you want to pull up the bedcovers and sleep a bit longer in the morning. But perhaps there is something to be gained in a period of net slop for the big indices. Maybe we should take advantage of the multimonth lull in the action to reflect on our mental approach and refine our technical methods.

Few are better at peering inside the heads of traders than Dr. Brett Steenbarger, the former New York clinical psychologist and university professor who gave up his hospital whites two years ago, first for a career as a short-term futures trader and then, shortly after, as in-house shrink for a major Chicago futures-trading firm. He published an illuminating book in 2002 called The Psychology of Trading , but says he has since learned a lot more working side by side with some of the most successful pros in the world.

His prognosis for an improvement in your approach to this eerily range-bound market?

  • Learn to use your emotions, not avoid them.

  • Trade the time frame that's right for your personality.

  • Adapt your style and expectations to the conditions of the market.

  • Distinguish between a good trade and a profitable trade.

  • Avoid perfectionism.

  • Develop a personal "success template."

  • Focus on the process to be consistent.

Investing by Gut Feel

The good doctor's most surprising finding is that many pros flourish without using any of the tools most commonly discussed in books and the media: They spurn technical analysis, quantitative analysis, accounting, discounted cash flow analysis, earnings projections, insider transactions and macroeconomic conjecture. Instead, they trade intuitively off a "feel" for the market honed during long hours of market observation and participation.

Forget about unemotional investing. Trading superstars are "very aggressive, very emotional guys" capable of using their unusual perceptive capabilities to process information quickly and make split-second decisions, Steenbarger says. "They have an intelligence of a sort, though you would not necessarily say they are book-smart."

No schools teach this stuff, so top trading companies start with men and women who meet the personality profile of a riverboat gambler -- definitely not MBA types -- and then train them to hone their instincts to take advantage of the repetitive flat-footed reactions of their competitors.

"You can't be analytical -- no big-picture stuff," he says. "You've just got to know when to go for the kill, when to add aggressively to your position when it's winning, rather than taking profits." In other words, just as in the days of Wyatt Earp, they're the quick and the dead.

Tips for the Average Joe

For those of us who don't have the tools or desire to be a gunslinger in the bond or crude-oil pits, here are a few ideas to work on over the remainder of the year:

  • Adapt to the market. Steenbarger says he sees many traders who want to trade this range-bound market as aggressively as if it were a trending, momentum market; they keep trying to buy potential breakouts or short-sell potential breakdowns. But they just get chopped up. The problem is that the big ego required to be successful gets in their way. In times like these, he says, traders need to subordinate themselves: Be a bit more humble and just take what the market offers. Expect breakouts and breakdowns to fail and play excursions out of the range only for a reversion back to the range.
  • Sometimes the right play is no play. The successful poker player knows he isn't at the table to play cards, but to win money. He knows when to hold 'em and when to fold 'em. In the market, periods of extremely low volatility hold scant opportunities for traders. Don't force it. It may be best just to hold cash and wait for better, higher-volume opportunities.
  • Set process goals, not P&L goals. Setting ambitious goals to make a certain amount of money in a nontrending market may put you on a path to disaster. It takes your attention away from trading well -- doing your homework and following your rules. It's like a baseball player who'd rather hit 30 home runs than execute his swing properly. If they fall off pace, they start to press and swing wildly instead of focusing on a smooth, solid stroke. The most successful traders are ones who develop a set of rules that work in most markets, and then painstakingly follow those rules day in and day out without regard to the precise amount of money they're making. Set a goal of consistency, not of dollars.

  • Avoid the urge to be perfect. Many traders look back over a week or month and see trades they feel they "should" have done, or positions they "should" have pursued more aggressively. Steenbarger finds that this attitude can be damaging. "You are psychologically translating a modest success into a frustrating failure," he says. Traders don't develop confidence by finding fault. Fault-finding often leads to the dangerous step of "revenge trades," in which you try to make up for a perceived past failure by pushing the next trade twice as hard, regardless of merit. Good traders accept missed trades and underleveraged trades as a natural part of the lifelong learning process.
  • Develop self-knowledge by creating a "success template." Steenbarger says his trader-patients always want to talk about their losers rather than their winners. He recommends they develop a "solutions focus" by dwelling on their winners while still acknowledging their losers. To start this process yourself, write down the one thing you did best each day in the market and which you want to repeat tomorrow. Likewise, write down the biggest mistake you made each day, and wish to avoid tomorrow. If you keep up this simple two-entry diary and review it regularly, you will be on the path to achieving self-knowledge and developing the ability to observe and change your behavior. "Change starts slowly, but then it gets momentum and starts turning faster and faster," the psychologist says.
  • Collaborate with a colleague or mentor. It's useful to work with someone who can help you build self-awareness -- not in a didactic, teaching environment like a classroom, but in a collegial atmosphere. It could be two traders in the same office or someone on the phone or over instant messaging with whom you can exchange ideas with goodwill and honesty. Talk about what worked and didn't work each day or week, and probe each other's comments without bravado or self-flagellation -- as if you're in a group-therapy session.

Each trader is different, of course. If you can explain in two sentences or less a simple, consistent strategy that works for you, email me at jon.markman@gmail.com ; I'll collate and publish some of the best submissions in a column later this fall.

Fine Print

In my Sept. 2 column , I left the impression that dividends from real estate investment trusts got the same favorable tax treatment as dividends from common stocks. That wasn't what I meant to say, and of course it's not true -- sorry for the confusion. I still think, however, that REITs are likely to benefit from a second Bush administration.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, Markman was long Paxar. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; please write COMMENT in the subject line.

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