Friday, April 3, 2009

Getting a Handle on Anxiety and Trading

from Dr. Brett-
In the last post, we took a look at anxiety and its effect upon decision making. Anxiety affects trading in many ways, including:

* Inhibition - Failing to take trades indicated by one's research or setups;

* Freezing Up - Failing to exit positions that have hit or exceeded one's stop loss level;

* Cutting Winning Trades Short - Exiting trades before targets are hit;

* Chasing Markets - Entering markets late in a move out of a fear of missing the move.

Notice that these include some of the most common "discipline" problems faced by traders. They are eloquent testaments to the ways in which anxiety can alter our processing of information and skew our actions.

The first step in dealing with anxiety effectively is to assess its causes. There is no "one size fits all" solution for anxiety; an assessment by an experienced, trained professional is important. Here are a few of the assessment questions I ask when working with a trader who has been wrestling with anxiety:

1) Is the anxiety a response to objective danger? - Anxiety is not necessarily maladaptive. Sometimes the dangers we face are very real and anxiety is a useful signal of mind and body telling us to trim our risk. If one's ideas aren't working and market volatility has greatly increased, anxiety may be helpful in holding back, preserving capital, and waiting until conditions (our own and the market's) right themselves. Anxiety is also adaptive in situations in which traders start trading before they've received proper training and experience: their minds are telling them that danger lies ahead!

2) Is the anxiety chronic? - Do anxiety problems predate our trading? Do they show up in areas of life outside of trading? If so, we might be dealing with an anxiety disorder, which affects an amazing 18% of all Americans during any given year. There are structured cognitive-behavioral methods and effective, non-addictive medications (not tranquillizers!) for dealing with anxiety disorders. Getting help from a professional experienced in these modalities is key to lasting progress.

3) Is the anxiety a reaction to trauma? - Very painful, emotional events can leave their imprint as traumatic stresses. Sometimes these events are trading-related; other times they reflect difficult past life events. If the trauma has been recent, the anxiety may not be chronic, but may still require the assistance of a professional who is trained in dealing with traumatic stresses. Behavioral, exposure-based methods are very effective in overcoming traumatic responses.

4) Is the anxiety part of a dysfunctional thought process? - This is a tricky one to tease apart. Anxious feelings can stoke anxious thoughts, but negative thinking can also generate anxiety. Sometimes we see traders engaging in constant worry and catastrophic thinking, especially after a period of loss. This thinking maintains the body's state of preparation for danger, which we experience as anxiety. Cognitive restructuring methods are proven modalities for changing these thought patterns and interrupting periods of anxiety.

5) Could the anxiety be part of a larger medical problem? - To complicate the picture further, a number of endocrine imbalances can manifest themselves as anxiety and mood disorders. If the anxiety is not fitting a typical pattern of situational response or identifiable disorder, getting a thorough medical evaluation can be crucial.

My book on trader performance concludes with chapters outlining behavioral and cognitive methods that can be useful in overcoming anxiety. When self-help methods are insufficient, however, seeking more formal, professional assistance is essential. I have no reason to believe that traders are exempt from the emotional problems that affect the general population. If 18% of the population experiences anxiety disorders in a given year, it means that nearly one in five traders probably are seeing their results hampered by this problem.


Brief Therapy for the Mentally Well

Dr. Brett's Brief Therapy Text

After a Devastating Trading Loss

from Dr. Brett-
The year was 1982. I had been short most the year and was doing quite nicely in this, my fourth year as a trader of U.S. stocks. For the first time I allowed myself to think about trading as more than an avocation: as a potential source of ongoing income that could help free me to do the writing that I loved best.

Then we hit mid-August. A ferocious rally drove prices sharply higher and left me in the red. I decided to hold and wait for a pullback, but the pullback was mild. We moved sharply higher again in the fall and I was forced to take losses that consumed not only most my profits, but all my dreams of supplemental income.

I'd have to say it was the most depressing period of my life overall. I was questioning the work I was doing in community mental health--a great learning experience, but not a viable career path--and I was not happy in my personal relationships. The trading losses were the icing on a not so delectable cake. The bottom came in a bar in Homer, NY after too much to drink and a smoke that I discovered too late to be adulterated. It was not a happy time.

I'm convinced that the most successful people are not those who avoid those ruts in life, but the ones who use those to turn themselves around. I discontinued trading and embarked on research regarding market timing that, I vowed, would enable me to never make the same mistake. Out of that research came the work on new highs and lows and sector lead/lag relationships that I draw upon to this day.

I also turned it around socially. After consuming a full bottle of scotch at a New Year's party at the end of 1983, I found myself too inebriated to ask the pertinent questions of the woman I had met. Had I asked the questions, I would have found out that she was not yet divorced, had three children, and was nine years my senior--not at all what I was looking for. Today, after 24 years, she remains my wife and the best decision I ever made.

With the marriage in 1984, I inherited shared responsibility for three children. The steps I didn't take for myself I had to take for the new family. Gone were the drinking and partying. I parlayed my community mental health experience into a student counseling position at Cornell University, taking a 33% pay cut in the process. One year later, impressed by the Cornell experience, Upstate Medical University in Syracuse hired me and I joined a medical school faculty.

At Upstate, I realized that my counseling skills were not ideally suited for the medical school environment. I undertook a lengthy review of the research and practice literatures and taught myself the fundamentals of an emerging approach to helping called "brief therapy". Shortly thereafter, I began teaching brief therapy in the psychology and psychiatry programs. In 1990, I published my first review paper in the field, then another in 1992. I had found my niche: one that would lead to over 50 published papers and book chapters, two books in psychology and psychiatry, and two books combining my trading and psychology loves--and, of course, this daily blog.

I look back on that trading loss in 1982 and now see it as the beginning of a turnaround, not as the ending of a dream. But it took an unflinching and unforgiving look in the mirror to make that turnaround. It also took relationships with people I loved enough to want to make more of myself.

I've received several emails and blog comments from traders who have been through devastating trading losses. This post is for you. What doesn't kill you *can* make you stronger, if only you can sustain that hard look in the mirror.


Resilience and the Courage of Your Convictions

Blueprint for an Uncompromised Life

Top Ten Reasons Traders Lose Their Discipline

from Dr. Brett-
Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:

10) Environmental distractions and boredom cause a lack of focus;

9) Fatigue and mental overload create a loss of concentration;

8) Overconfidence follows a string of successes;

7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;

6) Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested;

5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;

4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);

3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;

2) Not having a clearly defined trading plan/strategy in the first place;

1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.

Understanding Lapses in Trading Discipline

These are the three legs of the performance stool: (1) your talents and interests, (2) your trading style, and (3) markets and their personalities. The meshing of your qualities with your trading style will help determine your ability to trade that style with consistency and discipline. The meshing of your trading style and the features of markets will determine the degree to which you have a performance edge in the marketplace. The ever-shifting features of markets ensure that traders who are adaptable will be most likely to sustain expert performance over the course of a trading career.

Enhancing Trader Performance

I recently received several emails from readers asking questions about that perennial problem: maintaining proper trading discipline. Sometimes the problem is holding losing trades too long or violating stop loss levels. Other times, it's breaking rules regarding position sizing or when to trade (and not trade). On yet other occasions, the problem is failing to take trades that set up or jumping into trades before they fully set up. Always, however, the problem is a failure to fully follow plans and intentions.

As the quote above suggests, my new book--due out at the end of the month--tackles the discipline issue from a different angle. Discipline problems, I maintain, are not the cause of trading woes. They are symptoms of other difficulties. Just as a problem maintaining the "discipline" of monogamy in a marriage is frequently the result of underlying relationship difficulties, failing to be faithful to one's trading plans is often a sign of conflict between the trader and those trading plans.

In the book, I review research that identifies several key personality traits that affect our decision making under conditions of risk and uncertainty. These include:

1) Neuroticism - Our tendency to experience negative emotion. When people show a tendency toward anxiety, depression, and anger, the volatility of the market--and the volatility of trading results--frequently sets off emotional volatility, interfering with sound decision-making.

2) Extroversion - Our tendency to be outgoing and oriented toward the outer, rather than inner, world. When people have many extroverted features, they tend to be risk takers; when extroversion is low, they tend to be more risk-averse.

3) Openness to Experience - Our desire for novelty and stimulation. When traders have a high degree of openness, they lean toward more discretionary, unstructured trading methods; when the openness is low, they prefer highly structured, rule-governed methods.

What happens when the plans we select for our trading don't truly mesh with our basic personalities? The result is that we continually find ourselves veering away from those plans.

A trader high in neuroticism will have difficulty following a trading system that puts a large percentage of capital at risk, that trades volatile markets, or that requires large drawdowns.

A trader high in both extraversion and openness will have difficulty following a patient trend-following system.

Frequency of trading? Placement of stops? Times of day to trade? Number of instruments to follow and trade simultaneously? All are impacted by our personality traits.

When traders who are normally disciplined find themselves breaking their trading rules, the lapses of discipline are a symptom of a lack of fit between who the traders are and what their rules demand. A fine system on paper is unprofitable if it cannot be followed by a trader. A trading method not only needs to be good; it needs to be good for the trader.

The answer is not to blame yourself for lapses of discipline or exhort yourself with motivational nonsense. Rather, keep a journal and truly investigate each of your lapses. Then view those lapses as information, not as problems. What do they say about you? Which rules do you find yourself breaking, and what inside you might conflict with those rules?

Now look at your trading successes. What came naturally to you? What rules and plans can be derived from those winning trades? Don't force yourself into a pre-made set of trading plans: identify what you do when you win and see how you can make *that* into your system.

Maybe, just maybe, breaking your rules is the first step in figuring out who you really are. A variety of trading psychology articles on my personal site might further that process.

Controlling Emotions is NOT the Goal of Trading Psychology

Pick up a book or magazine article about trading psychology and you're likely to find prescriptions for success based on controlling emotions and increasing discipline.

Yes, emotional arousal can interfere with performance, but does that mean that elite performance is a function of dampened emotions?

When you look at some of the greatest performers in sports--and in trading--you'll find highly competitive individuals. They are quite emotional and don't take well to losing. Lance Armstrong? Michael Jordan? Tiger Woods? Muhammad Ali? All were quite intense, emotional individuals who managed to channel their emotional drive into victory.

Conversely, I've encountered many well-balanced individuals who have sought success in trading. They don't blow up, they follow rules faithfully, and they have no intense, competitive emotional flame burning within. I've never yet seen one go on to become successful.

Can anyone watch the really successful college basketball coaches--Coach K., Jim Boeheim, Bob Knight, Tom Izzo--and attribute their success to emotional restraint? Yes, there have been emotionally reserved winners--think John Wooden and Dean Smith--but one suspects their emotionality was that of a warm mentor, not that of a cold fish.

The important ingredient in success is not emotional dampening per se, but the enhancement of concentration and focus. That is what enables people to act with sustained purpose and stay rooted in their goals.

When we review the lives of great individuals across a variety of fields--the research of Dean Keith Simonton and K. Anders Ericsson stands out in this respect--what we find is that the greats have prodigious capacities for work. They are hugely productive. They sustain effort hours at a time, day after day, week after week, year after year.

Only the ability to regularly access "the zone"--that flow state of consciousness that comes from being wholly absorbed in an activity that captures our interests, skills, and talents--can account for the amazing dedication of the Olympic athlete, the great career scientist, or the chess grand master.

Indeed, such exemplary performers can use emotion to access the zone. Michael Jordan used to provoke players on opposing teams so that they would argue and fight back. That would arouse Jordan's competitive instincts and elevate his game.

When we operate outside that "zone" and lose our focus, we are no longer activating that executive center of our brains--the frontal lobes--that control planning, judgment, and reasoning. Left with a weak executive center, we become like the person with Attention Deficit Disorder: prone to wandering attention, reduced self-control, and impulsive behavior.

That makes it look as though "emotion" and "lack of discipline" cause our trading problems.

In reality, however, these are the results of the problem; not the causes.

The goal of trading psychology is to build consciousness, not reduce emotion. The goal is to create regular access to the flow state of heightened learning and focus. Talking to a trading coach, in itself, won't accomplish that; nor will well-intentioned efforts to calm oneself or take breaks from trading.

We can only build consciousness by working on consciousness. That is why I find meditation, heart rate and galvanic skin response biofeedback, self-hypnosis, and newer methods such as hemoencephalography to be valuable tools for traders and emphasized their use in my book on the psychology of trading.

These methods don't eliminate emotion; they build minds. If we can exercise for 30 min./day and build our cardiac fitness and our physiques, maybe--just maybe--a similar commitment could strengthen our abilities to operate within life's "zone". I'll be posting more re: my personal experiments with mind training in the near future.

Trading Discipline: Cause of Problems or Effect?

from Dr. Brett-
Among the dozens of submissions for the Trading Coach Project, the issue of discipline--sticking to plans/stops--was far and away the most common problem reported by traders. My general experience is that lapses of discipline are usually the result of a problem, not a cause. A key challenge, then, for work on oneself is identifying the cause of the departures from prudent trading.

There are three frequent causes worth investigating:

1) Personality Traits - Some people score low on a trait called Conscientiousness. They do not plan and follow through well, and they can be impulsive. This, of course, can manifest itself as a problem with discipline in trading. The key to identifying whether or not personality is a cause of discipline problems is determining whether a similar loss of discipline occurs in other facets of life (outside trading). If a person is disorganized and lacking in conscientiousness in their work, social relations, personal finances, etc., then it makes sense that this trait would carry over to their trading. Such individuals frequently need external brakes on their trading, such as risk managers at a firm who will enforce a "drop dead" level (and prevent further trading) once a loss limit is hit. Individual traders with impulsivity and low conscientiousness benefit from very explicit, structured rules that they follow without variation and reinforce with mental rehearsals. If the lack of discipline is so great that even such rules and rehearsals can't work, I personally do not believe such individuals should be trading. This includes traders with clearly addictive patterns of behavior, both in their trading and in other facets of their lives.

2) Market Volatility - Many, many times traders are quite conscientious and self-controlled in most areas of their lives, but experience lapses of discipline specific to trading. When this happens, it's often the case that the trading itself--*how* they're trading--is artificially creating the failure to follow trading rules. A key culprit in all this is market volatility. Volatility changes from day to day and week to week. It also varies as a function of time of day. Frequently, traders trade a fixed size and set fixed targets and stops, heedless of the underlying market volatility. In a low volatility environment, they fail to hit their targets and get stopped out, criticizing themselves for leaving money on the table. In an environment of enhanced volatility, the market will blow through their stops or exceed their targets, leaving them feeling that they did not trade well. This is especially true when traders find themselves unable to take what is normal heat in an environment of raised volatility. In such cases, it really isn't a lapse of discipline causing the problem. Rather, the trader is not adapting to market conditions. Adhering to fixed rules in a variable environment is not necessarily a virtue. Changing markets can prevent us from enacting those fixed rules.

3) Position Sizing - It is very common that smaller traders or aggressive traders will see a good trade and place too large a bet (i.e., a bet that is large relative to their account size). This makes it difficult to ride out normal movements against the position and leads to frustration and emotional arousal that result in loss of discipline. A good way of determining whether or not this is the case is to compare your largest trades with your smaller ones. If discipline problems tend to occur on the largest positions, you know that the increased perceptions of risk are interfering with consistency. The answer to this problem is to size all positions in such a way that individual losses in a trade cannot prevent you from making money on the day; losses during a day won't prevent you from being green on the week. Large trades relative to position size run the risk of ruin: a series of losing trades can dig a monstrous hole for the trader and cause significant emotional damage. In a sense, trades should be boring--not so large as to create undue fear *or* excitement. It is easiest being consistent and maintaining discipline when those emotional factors don't kick in.

It is common for trading psychologists to emphasize that our psyches affect our trading. Equally true, however, our trading affects our emotions. Trading inflexible strategies with inflexible targets and stops; trading size that is too large for our personal risk tolerance and account sizes: both of these can create "discipline" problems even for conscientious traders. Trading well is often the best psychological strategy of all.


Top Reasons Traders Lose Their Discipline

Understanding Lapses in Trader Discipline

Controlling Emotions is Not the Goal of Trading Psychology

Handbook of Clinical Psychology, Brief Therapy, and Coaching

from Dr. Brett--
I just received my copy of the 2008 Handbook of Clinical Psychology, a two volume reference set that covers the major topics in adult and child psychology, respectively. The first volume, covering adult psychology, consists of 33 chapters that tackle such topics as psychological assessment, research on temperament and personality, studies of psychological change processes, health psychology, and various approaches to therapy. While the reference volume is hardly light reading, it effectively summarizes a wide range of research and practice within psychology. I'll be referring to a few of the chapters in upcoming posts, as I apply the material to trading and human performance.

My own chapter in the Handbook covers the topic of "brief therapy". One of the topics I cover in the chapter is the thorny issue of who can benefit from short-term change approaches. It turns out that the effectiveness of brief interventions is partly a function of the person receiving help (their motivation and readiness for change, their lack of severe and chronic problems) and partly a function of the methods used to promote change (active, experiential, focused). The chapter is relevant to the trading arena because much of what goes under the rubric of "coaching" is actually efforts at short-term emotional and behavioral change.

That means that the issue of who can benefit from brief therapy is not so different from the question of who can benefit from performance coaching, including the coaching of traders. In an upcoming post, I'll draw upon my chapter to offer some guidelines for effective coaching.


A Consumer's Guide to the Coaching of Traders

Brief Therapy and Philosophy -- a Primer

from Dr. Brett-
My work in coaching professional traders has been shaped by my experience in the field of brief therapy, a collection of short-term techniques for accelerating change processes. Having taught brief therapy for many years to psychology interns and psychiatry residents--and having co-written a standard textbook in the field--I've been steeped in brief therapy as a philosophy, not just as a mode of helping. Here's how that philosophy impacts the actual process of working with traders:

* Seek Targeted Change - Change efforts are most likely to be effective if they are targeted to very specific changes in thought, feeling, and/or behavior;

* Stay Active - Change occurs from *doing* things differently, not just by talking to someone or by writing in a journal;

* More is Not Better - Brief therapists emphasize intermittent helping, leaving people on their own to practice and apply newly learned insights and skills, not encouraging dependence on a helper;

* Build on Strengths - People have many positive, adaptive qualities. Building on those reinforces health, confidence, and self-efficacy;

* Efficiency as Well as Efficacy - Brief therapy emphasizes time-effective methods for change, keeping the helping process affordable and not too burdensome;

* Strike While the Iron is Hot - Work on problems while they're occurring; changes are most likely to stick if they're rehearsed in realistic settings and situations;

In practice, this philosophy has me working very intensively with people for relatively short periods of time, using very hands-on techniques for altering problem patterns and applying those techniques to many situations. Weekly or monthly interactions are simply too infrequent to sustain the momentum of change; once progress has been made, then it can make sense to space meetings out over time to encourage the long-term internalization of the changes and guard against relapse.

To encourage this intensive interaction, I do not charge people for time spent on the phone or interacting by email (a far cry from the practice of coaches who run the meter at every possible opportunity); I want no barrier to regular contact. But once that contact leads to change, the goal is for the trader to sustain the process himself/herself, not meet for unlimited interactions with only a vague focus and agenda.

There is much in the brief therapy philosophy that traders can apply when they're acting as their own coaches. That will be the focus of my next post.

Thursday, April 2, 2009

Emotions and Trading: Understanding Anxiety

from Dr. Brett:

Because trading involves risk taking in an environment of uncertainty, it necessarily engages us emotionally as well as intellectually. In this series of articles, I will review emotions common to trading and their significance for trading performance.

In this and the next post, we’ll take a look at a family of emotional experiences related to anxiety. These include nervousness, tension, stress, fear, and worry. All represent a response to perceived threat. They are part of the “flight or fight” response that enables us to deal with dangerous situations.

No two traders experience anxiety in the same way. For some, it is primarily a cognitive phenomenon in which thoughts become speeded up and worry sets in. For others, the cognitive component is joined with physical manifestations: a speeding of heart rate, tensing of muscles, and increasing of shallow breathing. Sometimes the manifestations of anxiety are primarily physical and not even consciously noticed by the trader. This most often occurs when muscle tension is the main way in which the anxiety is expressed.

Because anxiety represents an adaptive, flight-or-fight behavior pattern that is hard-wired, it prompts us for action. Regional cerebral blood flows engage the motor areas of the brain, bypassing the executive, frontal cortex responsible for our planning, judgment, and rational decision-making. For this reason, we can make decisions under conditions of anxiety that are not ones that we would normally make if we were cool, calm, and deliberate.

Note that anxiety is a response to perceived threat. Such threats may be real, or they may be ones that we create through our (negative) ways of thinking. For instance, two traders with the same account balances may go through a losing month. One views it as a normal drawdown and experiences little fear or tension. The other questions his trading ability and responds with significant anxiety. It is not just reality, but our interpretations of reality, that mediate our flight or fight responses.

The two immediate challenges for traders experiencing anxiety are to become aware of the manifestations and to determine whether threats are primarily real or perceived. Knowing our unique manifestations of anxiety is invaluable in interrupting the flight or fight response and returning ourselves as early as possible to the cognitive state in which we can engage our sound, executive capacities.

Most of us have signature “tells” that reveal our states of nervousness and fear. A characteristic pattern of muscle tension, a typical sequence of negative thoughts, a hollow feeling in the pit of our stomach, shakiness, a surge of worried thought: all of these are common “tells”. Our initial goal is simply to become aware of what we’re feeling as we’re experiencing the emotions. We cannot change something if we are not conscious of it

A good practice is to periodically during the trading day make note of our thoughts, feelings, and physical sensations and correlate those to market behavior at the time and to our trading decisions and outcomes. Over time, you will notice distinctive patterns: certain constellations of thoughts, feelings, and sensations that recur under challenging trading conditions. Once you observe your own anxiety-related patterns and actually see how they’re interfering with decision-making, you’re in a much better place to interrupt and change those patterns. Some ways of altering those patterns will be the topic of the next post in the series.


Biofeedback for Performance

Brief Therapy Techniques

Three Steps for Breaking Patterns of Frustration

from Dr. Brett:
In my recent post, I recounted the example of Rick and the frustrated thoughts that were interfering with his trading decisions. A major idea from that post was that Rick's thought and behavior patterns were not really overreactions (as he thought they were); nor were they signs that he was "crazy" or "immature" (also things he called himself). Rather, Rick's patterns represented conflicts from his past that were triggered by events in the present, setting off old (and out of date) ways of thinking and behaving.

Research that I recently cited finds that "willpower" is much like physical energy: it can be depleted with effort. When we expend effort on following markets and containing emotions, our reserves of self-control dwindle. This, in turn, leaves us ever more vulnerable to those situations in which present events trigger automatic thoughts and actions from the past.

It is for this reason that "controlling" or fighting emotions is not helpful for the trader. Even if we succeed in keeping a lid on feelings, we take ourselves out of that performance "zone" in which we'll make our best decisions. Only by removing ourselves from the trigger situation and putting ourselves in a different physical and emotional state can we short-circuit the negative patterns (make them less automatic) and enable ourselves to re-enter that decision-making "zone".

So let's break this down: the first steps in changing negative, automatic patterns are threefold:

1) Recognizing the triggers for our patterns - Typically, there are a limited number of situations that set us off. For Rick, for example, a trigger situation was one in which the market moved suddenly against him. This set off feelings of frustration, which then triggered self-talk about markets were "rigged" by the "big guys". Those thoughts, in turn, triggered efforts to fight the big guys, leading Rick to double down on his now-losing trades. This sequence can occur relatively quickly, but notice how there are many points at which Rick could interrupt the cycle. One technique I've found consistently useful is having traders keep a journal in which they look back on periods of frustration and identify the triggers. Reviewing this journal helps us become more aware of--and sensitive to--our triggers. This brings us to our second step.

2) Recognizing that the patterns are occurring - This means monitoring your state of mind and your physical state at regular intervals during the trading day. One tool I've used with traders is a simple picture of a thermometer, in which traders can fill in the time of day and their "stress temperature". The idea is to recognize frustration *before* it triggers ongoing, negative, automatic patterns of thought and behavior. (One trader I worked with stayed hooked up to a biofeedback unit while trading for this very purpose. He stopped trading temporarily when he exited the "zone" to a significant degree). The idea is to generate a mental red flag when we recognize that frustration has been triggered. A journal can be helpful here, as well. In this case, the entries would be in real time: How am I feeling right now? What am I thinking? What is the state of my body? Such a journal strengthens our ability to act as an observer of our patterns, reducing the likelihood that we will become lost in them. This, in turn, brings us to our third step.

3) Taking the break from trading and entering a new state - Once you exit the situation that is triggering frustration, you can engage in an activity that greatly shifts your physical state. The odds are good that this will also move you to a different cognitive and emotional state. A quick round of active exercise (such as jogging on a treadmill, calisthenics, or push-ups and sit-ups) can work very well. Conversely, you may find it more effective to listen to very quieting music and then perform a meditation exercise: vividly imagining yourself in a peaceful location while you rhythmically breathe very deeply and slowly for a few minutes. If you use biofeedback, this would be the time to engage in one of the biofeedback routines. One unit I use, for example, (em-Wave) includes on-screen "games" in which you keep a balloon aloft by staying "in the zone". The idea would be to only return to the trading station once you've kept the balloon aloft for a few minutes. That completely short-circuits the negative behavior pattern. It will take some creative experimentation to find the specific activities that work best for you in shifting your state. In many cases, just taking a break, putting on some music, getting a bite to eat, and walking around are enough for me to clear my head and start fresh.

Notice that the most important step in the above is the decision that a trader makes to not buy into the frustration and the resulting negative self-talk. The market is not the problem. Other traders are not the problem. "My terrible luck" is not the problem. The problem is buying into negative thinking and letting it control trading decisions. That is why the most important step of change of all is the decision to actively fight these automatic patterns. They--not you, not trading--are the problem. Once they're triggered, your sole priority is to interrupt them and prevent them from controlling your behavior. With each interruption, you distance yourself from the patterns and make it easier the next time to extricate yourself from them.

If you find that you cannot identify the triggers and recognize them as they're occurring, you may want to try some of the techniques highlighted in the two chapters in the Enhancing Trader Performance book devoted to cognitive and behavioral methods. I wrote these chapters specifically as self-help mini-manuals for traders. If you find that even self-help methods are not working for you, that's the time to consider professional assistance. Here's a reputable website that offers referrals of licensed professionals in various geographic areas.

That having been said, my experience is that the most common reason that self-help methods don't work is that traders don't stick to them. Patterns that have been acquired over a period of years and reinforced by years of repetition will not go away simply by talking with a coach or trying an exercise a few times. If traders faithfully carried out the three steps above every day for a month, I'd expect to see significant progress in the vast majority of situations. What happens, however, is that traders don't see progress after a few days and give up. It's not the time with a coach or counselor that generates change--it's the consistency of hands-on efforts day in and day out to interrupt and change our patterns.

For my last post in this series, I will outline a specific routine that I use to work on myself. It will illustrate a different aspect of working on changing our automatic patterns: preventing them from occurring in the first place.


Brief Therapy Techniques for Traders

A Framework for Rapid Behavior Change

Solution-Focused Change

Brief Therapy for the Mentally Well: Programming Our Own Experience

from Dr. Brett-
A bit over a week ago, I described short-term applications of psychology as "therapy for the mentally well". The goal of such work is to make positive changes, not necessarily eradicate pre-existing deficits. For that reason, the first step in the change process is having a vision of the changes you wish to make. By linking these positive changes to distinctive emotional, physical, and cognitive states, we are able to become the play-actors of our ideals.

Allow me to expand on a metaphor I used in the Psychology of Trading book. Consciousness is like a radio dial, and we operate on many frequencies. Each spot on the radio dial is a particular state: a blending of our experience of our bodies and minds. The test anxious student has a spot on their dial that combines negative thinking, increased arousal, shallow and rapid breathing, and diminished access to retained information. Other spots on the dial may combine much more positive thinking, alert concentration, erect posture, and fuller breathing. When operating at those frequencies, the student has full access to the information studied and performance on the test is excellent. What we know and who we are is relative to the frequencies of consciousness at which we're operating.

The problem is not that some of the spots on our personal radio dials are programmed with negativity. Rather, the problem is that we lack full, intentional control over the dial itself. We change stations, so to speak, without intending to. What the brief therapies accomplish is a greater control over selecting our own frequencies: they give us a hand to turn our dials. The idea, after all, is to become our own trading coach: to develop our own ability to reach our goals.

What creates the "radio stations" that make up our dial of consciousness? Two things: repeated experience that becomes habit patterns and powerful emotional experience that is processed as a trauma. Just as some radio stations on our car radio dials are faint and others generate a powerful signal, some of our states are weak and some dominate the dial. The more repeated the experience--and the more powerful the experience--the more it becomes part of your spectrum of consciousness.

As I emphasized in the Enhancing Trader Performance book, one reason so many traders fail is that they create repeated, negative emotional experiences for themselves. Indeed, this is why I included self-help manuals for cognitive and behavioral change techniques as two chapters within the book. Quite simply, traders can find themselves operating on frequencies that they don't want to be experiencing: their dials change without their consent or control. And all it takes to shift our frequencies of consciousness, very often, is a simple shift in one element of our frequency: a few negative thoughts, a change in our patterns of posture or breathing, a fleeting emotion. Those become triggers that diminish our control over our own experience.

While the aforementioned cognitive and behavioral techniques are extremely valuable, it is also important to be able to program our own new, enhanced spots on our dials of consciousness. The way to do this is to rehearse positive patterns of thought and behavior while you are in a distinctive emotional and physical state. This is one of the quickest and most reliable ways to generate change.

For instance, let's say your desired behavior is to hold onto winning trades longer. You might mentally rehearse market scenarios of holding onto trades--emphasizing how excited, happy, and profitable you'll be by achieving this goal--while you are pushing yourself during a strenuous treadmill exercise. By setting the treadmill at an incline and a good speed, you will be jogging at a brisk pace and elevating your heart rate. With repetition, you will begin to associate the goal--and its emotional benefits--with your body's pumped up state. It will become an increasingly powerful signal on your radio dial. Then, before trading and during trading breaks, all you have to do is get back on the treadmill. Triggering your body's shift in state will trigger the desired shift on your dial of consciousness. You will access the behavior you desire by intentionally triggering the cues associated with the behavior.

Making changes entails far more than simply engaging in positive thinking or getting positive images in your head. If you don't change your state of consciousness--and your ability to shift your own consciousness--you'll be listening to the same programming day after day. Learning how to shift out of negative states is a huge achievement. Where dramatic growth occurs, however, is in learning how to create new, positive states: in becoming the programmers of our own experience.

From Problem Patterns to Solutions: Brief Therapy for Traders

from Dr. Brett:
An experienced trader writes to me:

"I am having a good year trading but today marks the THIRD TIME this year that I've made a critical error which goes against my whole philosophy of trading.

I am a trend trader. That is how I make very consistent gains regardless of what the market is doing...I was buying a stock at levels where I believed it would bounce...of course the stock didn't bounce so I added more at lower levels and more even lower...

I got out of the trade on a rally, but it cost me the next two weeks of average profits...

I knew it was stupid when I was doing it, yet I continued to compound the problem. I didn't necessarily want to be right and make money on the trade, just minimize the losses (by buying more at lower levels)...

What I am not comfortable with is WHY I engaged in such risky behavior...what is the root, how do I find it, eradicate it?...The other two times were similar trades with similar results."

This is a very typical scenario that I help traders with. In this post, I'll walk you through how I view such problems and what I typically recommend.

The framework that I operate from, broadly speaking, is one that is known as brief therapy. These short-term approaches accelerate cognitive, emotional, and behavioral change by emphasizing hands-on skills building and the creation of powerful, new experiences that change how we view things.

Brief therapy is not appropriate for all people and situations, particularly those with chronic (longstanding) emotional problems that significantly interfere with areas of life functioning. Fortunately I know my writer and can vouch for the fact that he does not suffer from any significant emotional disorders.

So what is the key to his problem? What one feature stands out in his presentation? Take a moment and look over his words. What most strikes you about the difficulty?

One such key is that this has happened before in very similar ways. That tells us that it is likely a cyclical problem. Something initiates the pattern (sets it off); something keeps it going (even though he knows it is "stupid"); and something later kicks in to get him out of the pattern.

Most cyclical patterns are there for a reason: they serve a function. The trader's intense desire to find the problem and "eradicate" it is probably part of the problem pattern itself--much as the desire to eradicate insomnia can keep a person awake all night or the desire to eradicate fat can lead a bulimic person to binge eat.

In short, fighting the pattern is a mistake. The challenge is to understand the function of the pattern and then rehearse a different way of satisfying this function. Instead of viewing the problem pattern as maladaptive, the brief therapist views it as a form of problem solving that no longer works for the individual.

Let's take a simple example: Bill grew up with a mother that was anxious and overbearing. Conflicts at home were very unpleasant, so Bill learned to avoid conflict by minimizing communication with his mother whenever she sounded upset. This worked well throughout his childhood. Now Bill is married to Susan, who at times feels overwhelmed at work and reaches out to Bill. Much to Susan's dismay, Bill withdraws at those times and fails to offer support. She feels as though he doesn't care about what she's going through. Bill feels guilty about not being there for Susan and tries to make it up to her, only to fall short the next time she is worried or frustrated.

One might imagine Bill saying the same thing as our trader: "This is the THIRD TIME I've let my wife down...I know it's stupid when I'm pulling away from her, but I continue to compound the problem." It's a cyclical problem that represents a past, overlearned response to a stressful situation.

So how do we help Bill? We don't try to "eradicate" the problem--that hasn't worked. Rather, we get him to *talk* with Susan when he's feeling uncomfortable with her emotions. Step by step, we coach him through such a conversation, opening up about his thoughts and fears instead of pulling away. For example, we teach him to say to himself, "I'm not really uncomfortable with Susan; this is my old fear of my mother cropping up again. How can I tell Susan about that?"

As it turns out, just about anything Bill says to Susan in the situation about his experience will be helpful, because it will disrupt the old pattern and show her that he truly is listening, that he really cares. That sets the stage for the two of them to develop new patterns. Instead of trying to eradicate and bury his feelings, we use them as an opportunity for Bill to connect with Susan.

So back to our trader. He has a cyclical pattern in which he adds to losing trades, eventually taking outsized losers. This is frustrating to him (note the all-caps when he describes the THIRD TIME he's experienced the problem this year), and it is something he wants to get rid of. But what is the function of the pattern? Our trader perceptively notes it himself: "I didn't necessarily want to be right and make money on the trade, just minimize losses." So there it is: our trader is trying to avoid loss by averaging down. This is his way of fighting against failure, falling short.

In a subsequent communication, the trader revealed to me, "Each of these bigger losses occured after a period of very good trading. I didn't feel cocky, but my actions were. I cannot increase my relative risk tolerance after a period of success." This is a very good observation. The problem pattern is NOT triggered by a losing trade. It is triggered by success! After a winning period, our trader becomes emotionally attached to winning: he wants to eradicate losses. This has him resisting taking normal losses at his stop points and instead averaging down to minimize the loss. It's not that he's trying for a home run trade: he doesn't want to stop winning.

So there's the trap. Once the trader hits a winning streak, he wants to keep winning. This makes even normal losses feel threatening. So what can he do? Ironically, the answer is to purposely engage in guided imagery exercises before the trading day starts in which he mentally rehearses honoring his stop levels and taking normal losses. These exercises would be doubled following winning trading days. Just as we had Bill talk with Susan about his discomfort, we encourage our trader to openly confront his need to keep winning. Fighting the pattern hasn't worked; by facing the problem head on, he can keep a level head even when he's in his best winning streak.

I don't know our trader very well, but my guess is that there's more to his drive and desire for success. Perhaps he's *needing* to win instead of passionately *wanting* to win. There's an important difference. Once we're in the "need-to-win" mindset, losses become threatening and we try to avoid them by doing "stupid" things. By rehearsing an "ok to lose" mindset, we interrupt the need pattern and set the stage for initiating new patterns of trading well.

I enjoy trading and I find markets endlessly fascinating. But it's working with people and helping them make changes in their lives that really makes my day. Once we stop viewing patterns as "problems" to "eradicate" and simply discover fresh ways to meet the needs underneath those patterns, we eliminate many of our blocks to success and happiness. And isn't that what coaching is all about?


Therapy for the Mentally Well

Using Brief Therapy to Become Your Own Coach

The First Steps of Brief Therapy

Brief Therapy With a Solution Focus

OPEC: Oil Doesn't Cause Climate Change

from Reuters:

OPEC said oil was not to blame for climate change and consuming countries should pay to fight the threat, while the CEO of Royal Dutch Shell (RDSa.L) said drivers could help by not buying Hummer sports utility vehicles.

"Oil is not responsible," the producer group's Secretary General, Abdullah al-Badri, told reporters on Thursday on the sidelines of the International Oil Summit in Paris.

"It is the industrialised countries which are making all this pollution in the world".

Scientists say the burning of fossil fuels, such as oil, is a key factor in climate change.

Badri said the revenues from high taxes that some industrialised countries, including most western European nations, place on oil products should be diverted to environmental projects.

OPEC, whose member countries pump more than a third of the world's oil, has supported the United Nations Convention on Climate Change and its Kyoto Protocol, which encourage reductions in emissions of greenhouse gas carbon dioxide (CO2).

This is an interesting article because it is written to give the impression that the science is decided. It would have been accurate to say that some scientists say that fossil fuels are a factor. Instead, they state it as a decided fact. This is absolutely not a proven fact at all.

Using Emotions to Change Emotion

from Dr. Brett -

In my recent post, I suggested that many of us avoid emotional upset by substituting action for feeling. This is a pattern that lies at the heart of many impulsive trading decisions, including many lapses in trader discipline.

Let's take a common example: a trader is working a bid a bit below the market and suddenly a ferocious sell program takes the market five ticks lower. The trader's order is filled and, in an instant, the market is several ticks against him. He reacts first with shock, then with anger at people who "manipulate the market". In a flash, he buys more contracts, even though this sizes his position much larger than his plan allows. It's a classic revenge trade: he's going to get even. The market moves a few ticks lower, and he is forced out at the worst possible price with a much larger loss than his initial trade planned for. In remorse, he makes a note in his journal that he needs to be more disciplined in his trades.

As long as the trader views "discipline" as his problem, he is sunk psychologically. He sets up a condition in which he is split: part of him is impelled to do something under particular conditions, another part attempts to exercise control by dictating what *should* be done. This is how anorexic and bulimic patients fight with food intake; how addicts fight with drug abuse; how many of us fight with sticking to diets and exercise regimens.
We cannot substitute thought for emotion: shoulds cannot overcome emotional impulses.

The key to moving past an emotional reaction is to experience it fully and then substitute a different emotional experience. Psychologists such as Leslie Greenberg and Robert Elliott have developed emotion-focused techniques to accomplish just that. The basic principles and techniques are straightforward, well-supported by research, and described in detail in a growing professional literature.

What is happening with the trader in the example above is that he first experiences hurt and disappointment. He might also experience a fleeting sense of failure and loss. These are too painful to feel, so he has learned to respond to hurt with anger. He transforms sad to mad and then acts on the angry feeling. What appears to be the problem--loss of discipline--is his way of coping with the *real* problem, which is vulnerability.

Suppose, however, I ask our trader to go more deeply into the experience of having his order taken against him. As he talks, I notice an unhappy look on his face and a slight slumping of his shoulders. I point that out and ask him to give voice to what he's feeling. He talks about how it seems as though nothing is working in his trading, how he and his wife just bought a new house, and how they're concerned about making the payments.

When I ask what that's like, feeling as though he can't support his family, he acknowledges, "I feel like such a loser". Then, however, he speaks with a different voice: "But I know I can trade. If I would just stop trying to catch exact tops and bottoms with these orders, I can ride moves once they happen."

"So when you're working orders in the book...", I begin.

"I'm being an idiot," our trader interrupts. "I know I shouldn't be working orders that close to the market. It's too thin."

"But you're trying to catch a top or bottom to feel good and help your family," I offer.

"Yeah," he acknowledges. "But I'm f*****g it up."

"So it all starts with you feeling concerned about your family. You have to get something going in the market to make some money, so you throw an order in the book to catch a turning point," I suggest. He nods.

"Could you pretend your wife is in the room right here, right now and talk to her about that concern and what you want to do about it in the market?"

We set up an exercise where our trader talks aloud his concern for his family finances. He has no problem telling his wife that he needs to be patient and trade well in order to regain his success. By the end of the exercise, there's no hint of the angry revenge trader. In its place is the direct experience of facing his worst fear--his feelings of inadequacy--and emerging with a different emotional experience: empathy for his wife (and for himself).

Greenberg notes:

"People can recognize that a feeling is not helpful to them once it has been accepted fully. The paradox is that, if the feeling is judged as not acceptable--as "not me"--it cannot be changed, because it hasn't been accepted. Only when a feeling has been accepted can it be evaluated and changed if necessary" (Emotion-Focused Therapy, p. 93).

Doing can be a way of avoiding feeling, and that keeps people stuck in problem patterns. Ironically, the solution is to deepen the feeling that is being avoided. At the other end is a very different--and usually quite constructive--emotional experience.


Brief Therapy Techniques for Traders

What Works in Trader Coaching

Tips on Using Trading Journals

from Dr. Brett -
In my last post, we took a look at trading journals and how those can be used to improve performance. The report card format for journaling is particularly helpful for goal-setting, tracking progress, and recognizing patterns in our own trading. In this post, I'll review some of the patterns that most often appear across journal entries--and that are important to work on.

1) Patterns of Negative Self-Talk: These occur during frustrated moments in markets. We miss a trade, a trade blows through our stop, we give back our money on the day: all of these create frustration. This frustration then triggers an anger response that we direct toward ourselves. For example, we might find ourself saying, "Here it goes again! Other people are killing these markets, and I can't get it going." At that point, your frustration is no longer about the specific trade or market event, but is directed to *you as a person*. Trading should be about trading; not about you. After all, you wouldn't be boasting and crowing in the journal if the trade went your way. If you wouldn't like to hear your message coming from someone else (imagine your buddy at the workstation next to yours saying, "Whoa, dude, other people are killing these markets, and you can't get it going!") and if you wouldn't be speaking that way to your trading buddy, then you shouldn't be speaking that way to yourself. Interrupting that negative self-talk and turning your frustration toward a constructive kick in the pants ("C'mon, Brett, you know you shouldn't be trading so large in the chopfest. Let's stick with the rules!") can be very helpful in preventing frustration from snowballing.

2) Patterns of Impulsivity - Out of excitement, boredom, desire to regain profits, or overconfidence, you find yourself trading too frequently or with too much size. This, in turn, leads to uneven performance and outsized trading losses, which then produce discouragement. Many traders keep their goals--and their trading rules--taped to their screens; this helps keep them in the forebrain as a check on impulsivity. One trader I worked with actually had a brief checklist that he had to check off before placing any trade. This prevented him from acting hastily. If you can figure out the triggers that make you impulsive (sometimes these are winning trades, where you start playing with "house money"), you have a good chance to put on the brakes before you act on impulse.

3) Patterns of Fear - Particularly after losses, but sometimes after making money and being afraid of losing it, traders fail to act on good signals or do not size their trades adequately. The result is missed opportunity. Often this occurs if the trader is engaging in "catastrophizing": making a normal potential loss into something much larger. Worry, physical tension, and feelings of nervousness are great clues to track in a journal. Once you recognize your fear patterns, you can take some deep breaths, calm yourself, and focus on assessing opportunity (and focus on those trading rules). One way of breaking overwhelming fear after large losses is just to put on some small trades when your signals are good and get your rhythm and confidence back. Then you ramp back up to normal size in a gradual, but steady manner. Playing defense is not giving into fear: having rules about risk control and hanging onto a day's profits can help you distinguish the two.

Once you notice your patterns, it's easier to construct specific goals for the next day's and week's trade. The overarching goal is changing your patterns: controlling how you think and feel rather than having them control you. It's difficult to imagine changing your patterns if you're not aware of them in the first place!


Using Emotion to Change Emotion

Some 2007 Posts on Trading and Emotions

Formatting A Trading Journal for Sucess

from Dr. Brett--
My recent posts have focused on using journals to improve trading. Everyone has a journal format that (one hopes) works best for them. Here I'll suggest a format that I find particularly useful.

The reason I'm offering the suggestion is that I continue to find that traders use journals in ways that are less than constructive. The greatest mistakes in journaling, I find, are:

1) Lack of Specifics - The journal contains vague, general intentions such as, "I need to trade less aggressively", without any indication of how the trader will accomplish this. If the intent is to trade less aggressively, then the journal should create a specific goal. An example from my own trading would be: "I'll enter positions with one unit and scale in with a second unit on the first pullback in NYSE TICK when my position is profitable." Notice how this makes the general intention so much more concrete. Now I have something constructive to implement and can grade myself on the implementation. If I only say, "I need to trade less aggressively", that's not goal-setting. That's Monday-morning quarterbacking, or me just wagging my finger at myself. Self-criticism by itself never improved anyone: it's self-criticism followed by constructive problem solving that does the trick.

2) Focus on Negatives - The worst journals are the ones that simply vent fear or frustration. They recite every bad or missed trade, everything that went wrong during the day. Not only is there an absence of constructive suggestions for improvement, but there is also an absence of ideas re: what the trader has done right. The idea is to learn from what you do right, not just what you do wrong. Indeed, focusing on strengths will enhance motivation and the sense of competence and efficacy. By staying exclusively problem-focused, it's all too easy to drain motivation and optimism.

So, how can we improve the above in a format for a trading journal?

My suggestion is starting the journal with a listing of your specific goal(s) for that trading day.
Those goals should be: a) chosen from your previous day's or week's trading; and b) taken from your trading rules. The goal should be either to improve a mistake you made, or to build upon something you did right. The goal should state specifically what you expect yourself to do during the coming day, so that you can rehearse the goal in your mind before the market opens and so that you can evaluate how you performed on the goal at the end of the day.

Notice that, before creating the journal, it's important to write out your trading rules in advance: everything that you want to follow to trade well. You can't hold yourself accountable for a rule that you don't create; that's perfectionism, and it's not helpful either. Rules should clearly state how you want to size positions, enter them, exit them, set stops, set exits, scale in and out of trades, etc. Your journal will track how well you follow these rules, not just whether you make money or not.

So you start with rules, notice when you do a particularly good or poor job following the rules, and then set goals for the next day based on the good or poor performance. The journal entry then gives yourself a grade at the end of the day for how well you performed on your goals and why you earned that grade. Include your daily P/L with your grade, so that you can quickly see how your performance rises and falls with your grades.

The journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day or voicing your feelings; it is your tool for self-development: your means for coaching yourself.

The Dropping Dollar

Gold Seeks Support at $900/Oz.

Some Good News Sends Stocks Soaring

From AP -

Investors were encouraged after U.S. car sales jumped by nearly 25 percent last month from February, beating the typical rise and underpinning hopes of a turnaround in the American auto market - critical for Asia's giant auto companies.

(AP) Graphic shows percentage change for major marketplaces.
Full Image
A rebound in pending U.S. home sales in February from a record low, as well as improving manufacturing activity, added to a growing belief the most severe global downturn in decades may be moving close to a bottom.

Still, the upbeat evidence distracted investors from more sobering news the U.S. private sector continued to shed hundreds of thousands of jobs last month - a worrisome sign as investors brace for Friday's report on nationwide job cuts. Meanwhile, there were signs of widening divisions between major nations at the G-20 meeting.

Stocks Rise on "Worst Is Over" Sentiment

from Bloomberg:
U.S. stocks rallied, extending a global advance, as accounting regulators approved a rule change that may boost bank profits and world leaders agreed on measures to fight the recession. Oil rose the most in three weeks, while the dollar and Treasuries fell.

The Dow Jones Industrial Average exceeded 8,000 for the first time since Feb. 10. Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. gained at least 7 percent as the Financial Accounting Standards Board voted to relax so-called fair-value rules. General Electric Co., Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. climbed amid growing speculation the world economy is stabilizing. U.S. stocks increased even as new claims for unemployment insurance benefits jumped to a 26-year high.

The Standard & Poor’s 500 Index rose 3.6 percent to 840.08 at 11:39 a.m. in New York. The Dow average added 3.4 percent to 8,025.39 and climbed as high as 8,002.46. Europe’s Dow Jones Stoxx 600 Index rose 4.9 percent and the MSCI Asia Pacific Index soared 4.8 percent, the biggest gain since October.

“Right or wrong, the belief is we may have seen the worst of the economic side of things,” said William Stone, the chief investment strategist in the wealth management unit of PNC Financial Services Group Inc., which oversees $110 billion in Philadelphia.

G-20 Meeting

The Group of 20 policy makers, meeting in London, called for stricter limits on hedge funds, executive pay, credit- rating companies and risk-taking by banks. They also boosted the resources of the International Monetary Fund and offered cash to revive trade to help governments weather the economic and social turmoil. They sidestepped the question of whether to deliver more fiscal stimulus in their own economies.

Obama and Brown Get Their Way

from Bloomberg:
World leaders agreed on a regulatory blueprint for reining in the excesses that fed the worst financial crisis in six decades and pledged more than $1 trillion in emergency aid to cushion the economic fallout.

The Group of 20 policy makers, meeting in London, called for stricter limits on hedge funds, executive pay, credit- rating companies and risk-taking by banks. They also boosted the resources of the International Monetary Fund and offered cash to revive trade to help governments weather the economic and social turmoil. They sidestepped the question of whether to deliver more fiscal stimulus in their own economies.

The G-20 commitments amount to a transatlantic compromise and an effort to rewrite the rules of capitalism to address an integrated world economy that has outgrown the ability of individual governments to keep it in check. The leaders met as mounting unemployment demands a response even as stocks rose amid signs the global economy may be stabilizing.

“Global problems require global solutions,” U.K. Prime Minister Gordon Brown told reporters after hosting the talks. “Our prosperity is indivisible.”

FASB Relaxes Mark to Market Accounting

from Bloomberg:

The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive. The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more.
Interestingly, the lack of transparency for these instruments was one of the primary factors that created the crisis in the first place. The mark-to-market rules were instituted to correct this error. This appears to be calibrated more to reinflate the bubble -- not to correct it.

Just About Everything Is Inflating

We have seen just about everything inflating overnight, including stocks, grains, crude oil, and other commodities. Only gold and treasuries, the traditional "safe havens", have backed off. Is this a bet -- and a rather large one -- on inflation? It sure looks like it!


Is the Entire Nation to be Degraded By Chicago-Style Politics?

by Carl Rove on the Wall Street Journal:

"The President is Keeping Score"

"Don't think we're not keeping score, brother." That's what President Barack Obama said to Rep. Peter DeFazio in a closed-door meeting of the House Democratic Caucus last week, according to the Associated Press.

A few weeks ago, Mr. DeFazio voted against the administration's stimulus bill. The comment from Mr. Obama was a presidential rebuke and part of a new, hard-nosed push by the White House to pressure Congress to adopt the president's budget. He has mobilized outside groups and enlisted forces still in place from the Obama campaign.

Senior presidential adviser Valerie Jarrett and her chief of staff, Michael Strautmanis, are in regular contact with MoveOn.Org, Americans United for Change and other liberal interest groups. Deputy Chief of Staff Jim Messina has collaborated with Americans United for Change on strategy and even ad copy. Ms. Jarrett invited leaders of the liberal interest groups to a White House social event with the president and first lady to kick off the lobbying campaign.

Its targets were initially Republicans, as team Obama ran ads depicting the GOP as the "party of no." But now the fire is being trained on Democrats worried about runaway spending.

Americans United is going after Democrats who are skeptical of Mr. Obama's plans to double the national debt in five years and nearly triple it in 10. The White House is taking aim at lawmakers in 12 states, including Democratic Sens. Kent Conrad, Ben Nelson, Mary Landrieu, Blanche Lincoln and Mark Pryor. MoveOn.Org is running ads aimed at 10 moderate Senate and House Democrats. And robocalls are urging voters in key districts to pressure their congressman to get in line.

Team Obama is also ginning up the Democratic National Committee. A special group at the DNC has been created called "Organizing for America." It is headed by Mr. Obama's campaign manager, David Plouffe, and is lobbying for the administration's spending proposals.

Organizing for America's first effort has not been terribly effective. It emailed 13 million Obama election workers, recruited 1,200 neighborhood canvassers, and, after a couple of weeks and more email pleas to the Obama list, produced 642,000 signatures. Having less than 5% of your own activists sign a petition is unimpressive and perhaps evidence that adding $9.3 trillion to the deficit alarms even some of Mr. Obama's most fervent supporters.

Every White House is faced with finding ways to nudge Congress without antagonizing it. But this overt campaign could infuriate members who won't appreciate being targeted by a president of their own party. They could react by becoming recalcitrant. Should that happen, team Obama will have to recalculate its efforts, especially as the public sours on big spending plans.

In March, a Gallup Poll found that positive impressions of the Obama budget dropped five points. Only 39% now harbor supportive views of it. A CNN/Opinion Research Poll in mid-March found that support for the stimulus bill Mr. Obama signed into law shifted 11-points against the bill in five weeks, with 66% of Americans opposed to a second stimulus bill.

Support continues to decline for the proposition that a big boost in government spending will lead America to prosperity. A NBC News/Wall Street Journal Poll early last month found that 61% of Americans were concerned that "the federal government will spend too much money" (up 12 points from December), and only 29% were concerned "it will spend too little money to try to boost the economy."

This growing skepticism will not be assuaged by White House Budget Director Peter Orszag's bewildering response when asked by a reporter last week about increasing federal debt. He said, "I don't know what spiraling debt you're referring to."

Members of Congress should also worry about how Mr. Obama is "keeping score." He is steeped in the ways of Chicago politics and has not forgotten his training in the methods once used by Saul Alinsky, the radical Chicago community organizer.

Alinsky's 1971 book, "Rules for Radicals," is a favorite of the Obamas. Michele Obama quoted it at the Democratic Convention. One Alinsky tactic is to "Pick the target, freeze it, personalize it, and polarize it." That's what the White House did in targeting Rush Limbaugh, Rick Santelli and Jim Cramer. (The president's press secretary, Robert Gibbs, went so far as to lash all three from the White House press podium.) It may also explain Mr. Obama's comments to Mr. DeFazio.

After all, Alinsky's first rule of "power tactics" is "power is not only what you have but what the enemy thinks you have." Team Obama wants to remind its adversaries it has plenty of power, and it does. The question is whether the White House will wield it responsibly. The jury is still out, but certain clues are beginning to emerge. "Don't think we're not keeping score, brother," even if said with a wink and a smile, isn't quite the "new politics" we were told to expect.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Wednesday, April 1, 2009

Corn, Wheat Give Up Gains

From Arlan at Farm Futures:

After a day of trying to trade fundaments, grain prices were once again looking over their shoulders to outside markets on Wednesday. What they saw wasn’t particularly helpful.

Traders continue to debate Tuesday’s acreage estimates. Further analysis of Farm Futures planting intentions survey data showed farmers who responded during the first week of March committing to planting corn, as USDA reported. However those who answered during the second week of March, when December futures failed to reach break-even levels, said they intended to plant much less corn. That suggests that final acreage intentions remain volatile, with weather and finances keeping some producers undecided until the last possible moment.

Nonetheless, today’s action could be signal prices are trying to following the typical seasonal pattern for a normal year, when December futures puts in a short-term top soon after the plantings report.

This is an interesting seasonal aspect to trading grains that I was previously unaware of.

Gains Yield Up Yesterday's USDA Gains

Grains have failed to follow through on yesterday's gains. Corn and wheat are both significantly lower. Only soybeans (not shown) remains barely in the black today.


Financial Rescue Nears Value of Entire GDP

From Bloomberg:
The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

“The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.”

Commitments include a $500 billion line of credit to the FDIC from the government’s coffers that will enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-Backed Lending Facility and the Public-Private Investment Program. FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures.

‘Within an Eyelash’

The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.

“The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas.

“Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.”

Federal Reserve officials project the economy will keep shrinking until at least mid-year, which would mark the longest U.S. recession since the Great Depression.

The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.

--- Amounts (Billions)---
Limit Current
Total $12,798.14 $4,169.71
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
he FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.