Friday, December 18, 2009

Dollar Continues Powerful Rise

"If you fell down yesterday, stand up today." H. G. Wells

Using Imagery to Accelerate Change

One of the most common--and useful--tools in the cognitive-behavioral repertoire is guided imagery. Used properly as a component of a change approach, imagery can help to speed the change process. (See this valuable review article for background on the history, philosophy, psychology, and cognitive neuroscience of imagery).

Mental imagery is typically employed by the psychologist as a "stand-in" for real-world experience. Of particular importance to the psychologist, therefore, is the vividness of imagery. Imagery is useful for efforts at personal change to the extent that it can evoke the cognitive and physiological responses that would be present in the real-life equivalent experience. Imagery is thus far more than thinking about a situation; it involves attempts to recreate those situations in sensory detail. Consider, for example, the difference between thinking about a sexual situation and generating a detailed sexual fantasy.

Imagery is valuable because it multiplies experience. That is, a person can face a situation many times in imagery (and practice efforts at mastery) when it would be impossible or impractical to do the same in real-world experience. For instance, it would take me days of actual experience to comprehensively rehearse responses to various opening range situations in the market. In imagery, however, I can generate a panoply of scenarios and rehearse my desired responses to each. If, for example, my research suggests high odds of breaking a two-day range to the downside, I can vividly imagine this situation (repeatedly, with variations) and walk myself through how I would enter, scale into, and exit positions; where I would place my stops; how I would honor those stops; etc.

I refer to this application of imagery as mental preparation. We use the imagery as a stand-in for anticipated situations and then rehearse desired responses. Many times, this preparation is accompanied by efforts at relaxation (muscle relaxation, deep breathing) and concentration (staying focused on the imagery). This evocation of the calm, focused state is an important component of most biofeedback exercises and is associated with the activation of the brain's executive center: the frontal cortex. In a sense, when we engage in mental preparation, we are training the brain.

A second, related application of imagery is the reprogramming of emotional experience. This is relevant in situations in which we've developed negative habits or response patterns. Getting scared out of trades that start to (normally) retrace gains or failing to honor stop levels would be common examples among traders. For reprogramming, we purposely engage in vivid imagery to recreate (with many variations) the problematic situations. While we keep the stress-producing situation vividly in mind, evoking the associated cognitive and physiological responses, we make intentional efforts at coping. Such efforts could include the relaxation methods mentioned above, but can also include cognitive restructuring (exercises to reframe situations by thinking differently about them) and rehearsal of specific coping behaviors (practicing a trading rule during the challenging situation).

As you can see, imagery can be employed to either rehearse and cement desired responses or to undermine negative ones. A comprehensive approach to change will frequently use the two in tandem.

I encourage readers to return to my recent post on hot and cold cognition and re-read that article in the light of the above discussion of imagery. A nice way to think of imagery is as a bridge between "cold" and "hot" modes, helping us develop new ways of responding when we're in the heat of battle. The keys to success in using these methods are vividness, duration, variation, and repetition. Change is facilitated by new experience; the greater the experience you generate for yourself, the quicker and more profound the change. Readers interested in applying these methods to their own trading can check out the free articles on my personal site and the self-help guides on cognitive and behavioral techniques from my book on trading performance.


What Works in Behavior Change

Becoming Your Own Trading Coach: Part One, Part Two

When Coaching Works and Doesn't Work

Using Biofeedback in Trading

My recent post discussed using biofeedback as a self-control strategy. In this follow-up, I'll outline how I use biofeedback, both in my own trading and in my work with traders.

The program I've been using most recently has been the emWave system for tracking heart rate and heart rate variability. For more on the topic of heart rate variability, please see this post. See also this post on hemoencephalography, which is biofeedback that makes use of different data, based on blood flow patterns in the brain. If you are new to the topic of biofeedback, check out this introductory article.

Basically, biofeedback is a system that monitors and provides you with real time information about your body's level of arousal. There are biofeedback systems for brain waves, skin conductance, muscle tension, heart rate, and much more. The idea behind biofeedback is that you can learn strategies that will moderate your level of arousal, which in turn reduces your stress levels. If you are focused and relaxed cognitively and physically, it is difficult to be stressed out.

A simple routine that can help traders is to keep your body in a very steady, stable state for 10-15 minutes, reducing all forms of arousal. The way you do this is:

1) Fix your attention on something specific, so that your mind doesn't wander (music, a picture across the room);

2) Keep yourself completely physically still, with muscles relaxed;

3) Keep yourself in an environment insulated from outside noise and distraction (noise cancelling headphones are good for this);

4) Regulate your breathing by breathing quite deeply from the diaphragm and by breathing very slowly.

By staying in this mode for an extended time, you can enter a quasi-trance state. (See Chapter Nine of The Psychology of Trading for details on "tranceforming the mindscape"). In this state, you have enhanced attention and concentration, combined with enhanced relaxation. The combination of focus and reduced arousal is the entry point into "the zone"; it shows up in the heart rate variability feedback as regular sine-wave rhythms.

Because the biofeedback unit shows you when you're in those rhythms and when you're not, you can tweak your breathing and attention to improve your time in the zone. With sustained practice, you become quite adept at entering that zone. The benefits are substantial, not only in terms of reducing stress, but also in terms of enhancing your focus on markets.

For more, see the posts below:

Overcoming Stress and Anxiety in Trading

How I Use Biofeedback

Peak Performance and Performing in the Zone

Visualization Techniques for Traders

My recent post highlighted a simple application of biofeedback for trading. Where biofeedback can be especially helpful is in supplementing visualization techniques. In this post, I'll introduce visualization as a useful practice for traders. The next post in the series will focus on proper ways of engaging in visualization; the final post will discuss integrating biofeedback with visualization.

Visualization is a kind of mental rehearsal. Typically, traders will perform visualization exercises as part of their market preparation either before trading begins or during a break during trading.

I find that two applications of visualization are especially powerful:

1) Coping With Stressful Events - By visualizing events that have, in the past, elicited the fight or fight response and simultaneously using constructive coping methods, traders can train themselves to cope with those stressors. An example would be to walk oneself through a trade that is stopped out and, during the visualization, rehearse the kind of self-talk that would be constructive in such a situation. So you would imagine the market going against you, getting out at your chosen spot, and then directing your thoughts to learning from the market action, rather than getting frustrated over the stop out.

2) Reinforcing Best Practices - Here is where you use visualization to anticipate what you plan to do during the trading day, walk yourself through various what-if scenarios, and prepare yourself to respond in a planned manner. The idea here is that the visualization is both a preparation for market action and a preparation to respond to opportunities created by that action. If you have encountered a situation in your mind many times and prepared yourself to act, you're more likely to be ready to take the proper actions when that situation manifests itself in real time.

Unfortunately, many of us tap into the power of visualization, but in reverse. When we become caught up in negative thoughts and images, we are actually using visualization techniques, but in a way that reinforces ideas that undercut our confidence. Just as we want to replace negative self-talk with more constructive alternatives, replacing destructive imagery with constructive visualizations programs us to handle difficult situations well and recruit our best trading practices.


Thursday, December 17, 2009

Global Scamming!

Al Gore certainly has enough hot air.

Rice Drops to Two-Month Lows

Price of Sugar Not So Sweet

The weekly chart shows just how costly sugar has become:

Amazing that the price of sugar would escalate so parabolically at a time when the Dollar was rising forcefully at the same time.

Spooked Markets on Possible Sovereign Debt Disaster

Is the Dollar Carry Trade Coming to an End?

We are seeing huge sell-offs in many asset classes today. It may be end-of-year profit-taking as traders head for their holiday vacations, or it may spell the end of the Dollar carry trade.

from Bloomberg:
Dec. 17 (Bloomberg) -- The dollar rose to the highest level against the euro in three months as declines in stocks stoked demand for the currency as a refuge amid concern European nations may struggle to pay their debts.
The Dollar Index, which the ICE futures exchange uses to track the greenback versus six major currencies, rose the most in two weeks as traders closed out bets against the dollar a day after the Federal Reserve said economic conditions had improved. The pound fell to a two-month low against the dollar after data showed U.K. retail sales unexpectedly dropped in November.
“It’s the first time in a year we look at the dollar with the potential to rise over an extended period,” said Steven Englander, chief U.S. currency strategist in New York at Barclays Plc, in a Bloomberg Television interview. “The same safe haven characteristics that helped the dollar in 2008, and hurt it from March through November, is helping it again. The gap in U.S. growth relative to Europe is beginning to widen.”

Ag Commodities


Treasuries - after days of rising rates, this rise doesn't support end of carry trade idea

Stocks - tanking

Wednesday, December 16, 2009

A "Sign" of the Times

This is a sign erected to call attention to the plight of homeless people near a tent city in Colorado Springs. There is one in Sacramento, CA also.

Home Buyer Tax Credit Is a Failure

Dec. 16 (Bloomberg) -- President Barack Obama’s extension last month of a tax credit for first-time homebuyers failed to stir optimism among homebuilders or stock investors about the industry’s prospects.
As the CHART OF THE DAY shows, the National Association of Home Builders/Wells Fargo Housing Market Index and a Standard & Poor’s index of homebuilding shares dropped after Obama signed the legislation on Nov. 6. The chart tracks these indicators since 2000.
Homebuyers received another five months, until April 30, to take advantage of the government’s $8,000 credit. They also became eligible for an additional $6,500 credit if they owned their previous residence for at least five years.
“The extension has not materially helped traffic or sales despite the program’s expansion,” Carl Reichardt, a Wells Fargo analyst, wrote yesterday in a report.
The NAHB/Wells Fargo index, an indicator of builders’ confidence, fell to 16 this month from 17 in November. None of the 47 economists in a Bloomberg News survey expected the decline. Readings below 50 show that most participants are pessimistic.

Arabs Set Up Their Own Currency

The Arab states of the Gulf region have agreed to launch a single currency modelled on the euro, hoping to blaze a trail towards a pan-Arab monetary union swelling to the ancient borders of the Ummayad Caliphate. 

Traders at the Kuwaiti Stock Exchange
“The Gulf monetary union pact has come into effect,” said Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.
The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil reserves, and financial clout equal to that of China.
Saudi Arabia, Kuwait, Bahrain, and Qatar are to launch the first phase next year, creating a Gulf Monetary Council that will evolve quickly into a full-fledged central bank.
The Emirates are staying out for now – irked that the bank will be located in Riyadh at the insistence of Saudi King Abdullah rather than in Abu Dhabi. They are expected join later, along with Oman.
The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency – dubbed “Gulfo” – is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. “The US dollar has failed. We need to delink,” said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank.
The project is inspired by Europe’s monetary union, seen as a huge success in the Arab world. But there are concerns that the region is trying to run before it can walk.
Europe took 40 years to reach the point where it felt ready to launch a currency. It began with the creation of the Iron & Steel Community in the 1950s, moving by steps towards a single market enforced by powerful Commission and European Court. The EMU timetable was fixed at the Masstricht in 1991 but it took another 11 for euro notes and coins to reach the streets.
Khalid Bin Ahmad Al Kalifa, Bahrain’s foreign minister, told the FIKR Arab Thought summit in Kuwait that the project would not work unless the Gulf countries first break down basic barriers to trade and capital flows.
At the moment, trucks sit paralysed at border posts for days awaiting entry clearance. Labour mobility between states is almost zero.
“The single currency should come last. We need to coordinate our economic policies and build up common infrastructure as a first step,” he said.
Mohammed El-Enein, chair of the energy and industry committee in Egypt’s parliament, said Europe’s example could help the Arab world achieve its half-century dream of a unified currency, but the task requires discipline. “We need exactly the same institutions as the EU has created. We need a commission, a court, and a bank,” he said.
The last currency to trade in souks from Marakesh, to Baghdad and Mecca, was the Ottomon Piaster, known as the “kurush”. It suffered chronic inflation as the silver coinage was debased.
There is a logic to an Arab currency. The region speaks one language, has the unifying creed of “Umma Wahida” or One Nation from the Koran, and has not torn itself apart in savage wars – ever – in quite the way that Europe has in living memory.
Yet hurdles are formidable even for the tight-knit group of Gulf states. While the eurozone is a club of rough equals – with Germany, France, Italy, and Spain each holding two votes on the ECB council – the Gulf currency will be dominated by Saudi Arabia. The risk is that other countries will feel like satellites. Monetary policy will inevitably be set for Riyadh’s needs.
Hans Redeker, currency chief at BNP Paraibas, said the Gulf states may have romanticised Europe’s achievement and need to move with great care to avoid making the same errors.
“The Greek crisis has exposed the weak foundations on which the euro is built. The gap in competitiveness between core Europe and the periphery has grown wider and wider. The obvious mistake was to launch EMU without a central fiscal authority and political union, as the Bundesbank warned in the 1990s,” he said.
“The euro was created for political reasons after the fall of the Berlin Wall to lock Germany irrevocably into Europe. It was not done for economic reasons,” he said.
Ben Simpfendorfer, Asia economist for RBS and an expert on the Middle East, told the FIKR conference that the rise of China had paradoxically disrupted the case for pan-Arab economic integration.
There was a natural fit ten years ago between rich oil state and low-wage manufacturers in Egypt and Syria, but cheap exports from China have forced poorer Arab states to retreat behind barriers to shelter their industries. “The rationale for a single currency has become weaker,” he said.
The GCC also agreed to create a joint military strike force – akin to the EU’s rapid reaction force – to tackle threats such as the incursion of Yemeni Shiite rebels into Saudi territory earlier this year.
This is a major breakthrough after years of deadlock on defence cooperation.
The Sunni Gulf states are deeply concerned about the great power ambitions of Shiite Iran and its quest for nuclear weapons, to the point where the theme of a possible war between Iran and a Saudi-led constellation of states has crept into the media debate.
They nevertheless repeated on Tuesday that “any military action against Iran” by Western powers would be unacceptable.


Tuesday, December 15, 2009

U.S. Debt Courting Disaster

WASHINGTON, Dec 14 (Reuters) - The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday.
Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.
Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country's standard of living.
"We will be less free if we don't tackle this," said Jim Nussle, a Republican member of the commission who earlier served as a White House budget director and chairman of the budget committee in the U.S. House of Representatives.

Monday, December 14, 2009

Goal-Setting Links for Traders

For those just dropping by, this is the fifth post in a series. The previous four posts have been:

Several of the posts above discussed learning loops as the essential component of performance development. We become better performers when we learn from previous efforts and use that learning to guide future efforts.

The glue holding together these learning loops is goals. Goal-setting is what differentiates the intentional, process-driven, performance-oriented trader from the trader on autopilot.

This post provides a good introduction to goal-setting. Setting effective goals is also the subject of Lesson 34 in the Daily Trading Coach book.

Traders commonly make several mistakes in setting goals:

* Too Distant - By setting goals at very long time frames only, they do not concretely guide day to day, week to week performance;

* Too Vague - Goals should be process-oriented and spell out clearly what, specifically, you will be doing in the future and how you will be doing it;

* Too Burdensome - Traders will tackle too many goals at once and give up on the whole effort when it becomes overwhelming;

* Too Unrealistic - Traders will set perfectionistic goals ("I will make money every day of the week") that they cannot control and that leave them feeling discouraged when not reached.

One component of goal-setting that is often ignored is rewards. We're more likely to sustain an activity when we find it intrinsically and/or extrinsically rewarding. Let's face it: hard effort in any performance domain--whether it's physical conditioning in sports or countless rehearsals in preparation for a stage play--is not always fun. Even the most dedicated performers have to push themselves to reach their peak performance: that pushing means they necessarily go beyond their comfort zones.

Rewards provide an incentive for those pushes. In trading firms, one important incentive is capital allocation: traders are allotted larger buying power when they produce positive results. Trading firms that are well managed also provide meaningful psychological rewards, in terms of peer recognition.

Independent traders coaching themselves generally structure their own rewards. Those can be as simple as special vacations paid for out of market winnings: shared rewards are often doubly rewarding. In my own trading, I allocate size based upon my results during the year: that creates a tangible incentive to build profits and refrain from overtrading.

Although I prefer process goals (goals that entail trading well) to outcome (P/L) goals, I do emphasize in my own trading the goal of being profitable each month. This helps me manage risk during the month and also provides a benchmark for success that can be a focus each day and week.

Open your trading journal: What is your goal for today's trading? For this week? How will you know that you've reached your goal? What, specifically, will you do to achieve your goal? These are the questions that bring learning loops together. If they're not in your journal, the odds are good they're not there in your head--or in your trading.

Preparation and Time Perception

Note: This is the fourth post in a series dealing with trading performance and self-coaching. Prior posts in the series were:

One of the more interesting interviews I conducted for the Trading Performance book was with the heads of a school that trains pit crews on the NASCAR circuit. Talk about a performance discipline! Pit crews have to change tires, make needed repairs, and conduct routine maintenance on cars in a matter of seconds, or they will cost their drivers precious time in the run to the finish line.

An interesting observation from the training school was that they train pit crews to "go slow in order to go fast." Smooth operation is better than hurried activity, as the latter leads to mistakes. When tasks are trained to the point where they become automatic, crews can operate very efficiently and yet not in a frenzy. The preparation slows the perception of time, because crews feel in complete control of what they're doing.

As I observe in the book, markets "seem to move more slowly when we're prepared, when we know what to look for. If I am frantically searching for trade ideas as markets are moving, the markets will feel fast regardless of how much business we're doing at the time" (p. 165).

I have seen this consistently in my own trading and in work with traders: when we are not prepared for various market possibilities, we feel behind the market. Time seems to be moving quickly, and we become reactive, getting in and out of positions at the worst possible prices. When we are prepared, however, we're in a position to anticipate. Time slows down with the perception of control: our decisions become deliberate, not forced.

What are key price levels from the previous trading day? From pre-opening trade? From the opening range? How are we trading relative to those levels? What are the price targets we're likely to hit if those price levels hold? Where would we have to enter a trade to achieve a favorable risk/reward level for a trade to those targets?

Pit crews practice every possible scenario with their cars, from routine stops to major maintenance and repairs. Each move is choreographed; everyone knows their responsibilities. That is how trading can be.

Preparation slows perception of time, because it instills perceptions of control. Prepared traders are never frantic traders.

Discovering Your Trading Patterns

(Note: For those coming to this strand late, the first two posts in the series were about preparing to win and the preview/review process in trading).

When you preview the day ahead and review the day just traded, you are doing the same thing that you do with markets: you're looking for patterns. This time, however, you are looking for *your* patterns as a trader. Your pattern search is for the common threads that underlie your best trades and your worst.

We can think of learning loops as intentional processes that turn our best patterns--what we can call our "best practices"--into habit patterns. Those same loops can be used intentionally to disrupt our worst practices, so that they cannot activate themselves in habit-like fashion.

The challenge is that we can enact patterns of behavior without being consciously aware of those patterns. This happens in all spheres of life, from our moods (automatic negative thinking making us feel angry or depressed) to our relationships (misreading what another person is saying by taking it personally).

Many times, traders do not have multiple problems. They have a single pattern that appears in their trading multiple times. If they can isolate and change that pattern, the improvement in performance can be significant.

Even less recognized are our solution patterns. We enact patterns of positive behavior all the time and yet are not necessarily aware of what we're doing and how we're doing it. If we don't know our "best practices"--whether in work or relationships--we cannot harness those and make them more consistent parts of ourselves.

One way in which trading journals can be useful is in identifying the patterns that make up our best and worst practices. By cataloging our best and worst trades each day or week and then examining them to see what made them succeed or fail, we will begin to see patterns jump out at us over time. These may be patterns of market conditions and specific kinds of setups; they may also be personal patterns: how we prepared for the trade, how we executed it, our mindset at the time of trading, etc.

When keeping such a journal, the important thing is to track both what was happening in the market *and* what was going on with you at the time of your best and worst trading. After dozens of journal entries, you'll notice the same themes cropping up day over day: these are the ones that speak to your patterns.

Knowing your patterns does not guarantee that you will change those patterns, but it is the first step in the direction of change. You cannot work on yourself if you don't know what to work on. Acting as your own coach means knowing where your strengths and weaknesses lie, so that you can make the most of who you are, build the best within you, and minimize your weak areas.

Here are some posts that will aid your process of self-discovery:

Formatting Trading Journals for Success

When Coaching Works, and When It Fails

Key Steps Toward Becoming a Better Trader

Previewing and Reviewing Your Trading

The recent post described the importance of learning loops in cultivating trading expertise. I would go so far as to say that elite performers reach their status by becoming learning machines: performance becomes a stimulus for learning, and learning becomes a stimulus for performance. The loops ensure that learning becomes cumulative, not simply the same sets of lessons learned many times over.

Learning loops can be broken down into two components: preview and review. Previewing trading means setting plans at the start of the day, both with respect to markets and one's trading of those markets. The key question for previewing is, "What do I want to accomplish today?" You want to clearly identify what would make the day a success for you: what would constitute good trading of today's market. Previewing is both establishing intentions and goals: it is a forward-thinking process that guides one's behavior over the course of the trading day.

Reviewing means going through the trading day and evaluating one's own performance. Did you accomplish what you set out to do? If so, how did you achieve your goals and how might you bring that achievement to tomorrow's trade? If not, what interfered with your goals for good trading? How can you deal with those interferences effectively tomorrow? Reviewing also means reviewing markets: How did we trade? How well did you identify opportunity? Where were the good setups? What could you have done better?

Every day you preview, every day you review: the combination of the two keeps you in the self-coaching role. They also keep you on the path toward expertise and elite performance.

In Enhancing Trader Performance, I quote General George Patton: "Courage is fear holding on a minute longer."

Training, I note, provides that extra minute.

Day after day of previewing and reviewing creates the inner strength and confidence to move forward even under the most daunting conditions.


Resilience and the Courage of Your Convictions

The Will to Prepare to Win

One of the challenges of trading is acting as both trader and coach: performing, but also working on improving performance. I consistently find that the time and energy traders spend on this self-coaching function is positively correlated with their career longevity. That makes sense from a performance standpoint: no athlete or performing artist would enjoy a long, successful career without practice and focused work on their skills.

In my book on Enhancing Trader Performance, I emphasize the concept of "learning loops". These are activities in which performance is followed by evaluation and goal setting, followed by further goal-focused performance. These loops are characteristic of expert performance; more properly, they drive expert performance:

"We often talk about expertise as if it's a quality that one possesses. One person is an expert, another is not. Such talk makes it sound as though expertise is an all-or-none thing. Research tells us, however, that expertise is a process--one that unfolds over a considerable period of time" (p. 9).

Coaching oneself most often fails because the trader's time and efforts are not structured in a way that supports the process of expertise. Instead of learning loops, there are learning oops! Mistakes are made and never become the concrete focus for directed efforts at improvement.

This is why we see among elite performers an intense competitive drive, where the focus of competition is against oneself. It is a passion not just for the game, but for the process of self-improvement. That is why a Michael Jordan or Tiger Woods will compete long beyond the time when they could comfortably retire financially. It's not about the money: it's about winning--and that's about becoming the best they can become.

Self-coaching begins with reflection:

* What am I doing right that is working for me?

* What am I doing wrong that is losing me money?

* What are my strongest areas of performance?

* Where am I weakest?

* How can I take more advantage of my strengths?

* How can I minimize my weaknesses?

* What can I do today that will improve on yesterday's performance?

* What can I carry over from yesterday to sustain good performance?

"The key is not the will to win... everybody has that. It is the will to prepare to win that is important," Coach Bob Knight once observed. It is that will that sustains learning loops and builds expertise.


What Makes an Expert: Three Surprising Conclusions

Frustration and Trading Lapses

The first post in this series highlighted the link between frustration and loss of discipline in trading. Stated in a different way, lapses of discipline tend to be state-dependent: we enter a frustrated, angry, confused, or discouraged state and that colors how we process and act upon information. A major way in which these states disrupt decision-making is by interfering with the cues that provide an experienced trader with his or her "feel" for the market. One of my best posts details how this happens.

There are many psychological techniques for quelling frustration, from cognitive techniques to change our thinking to behavioral, relaxation methods. Ideally, however, a trader's goal should be to prevent frustration in the first place.

This brings us to what I will call "the well-being hypothesis". (See this post for a detailed presentation of emotional well-being and its components). The hypothesis is that frustration tends to occur against a backdrop of diminished well-being. That is, if we are generally happy and satisfied in life, normal events that interfere with our goals will not be experienced as overwhelming frustrations. It is only when such well-being is relatively absent that the frustrations of normal life become emotional focal points.

Relationships are a good example. A happy marriage can weather the frustration of an occasional disagreement or conflict. I can think of plenty of disagreements in my own marriage, but I can't recall a time of yelling, arguing, or fighting. The disagreements occur against a backdrop of general goodwill and connectedness. If we lacked the well-being that comes from common values, shared experiences, and an emotional bond, it would be easy for those frustrations to accumulate and fester.

Similarly, when I'm having a good day and everything seems to be going my way, getting caught in traffic is but a minor annoyance. I turn on the music in the car and make the most of my wait. If it's been a day without gratification, however, the traffic jam just might be the straw that breaks my emotional back, causing me to fuss and fume throughout the wait.

Happy, satisfied people, on average, don't experience frustration to such a degree that it will dominate thought and behavior. Indeed, for a reasonably fulfilled person, stresses can actually contribute to well-being over time.

If the well-being hypothesis is correct, then an important way to prevent frustration--and hence its disruptions of trading--is to maximize positive emotional experience. Said in another way, the problem with discipline may be as much about a lack of positive experience in trading as the presence of overwhelming negatives. Instead of working to eliminate frustrations--probably an impossible task--we need to find ways to sustain well-being during the most challenging market periods.

The next post in this series will address this challenge.

Goal-Setting and Frustration in Trading

In the most recent post in this series, we saw that frustration generally only disrupts thought and behavior when it occurs against a backdrop of diminished well-being. If people don't feel fulfilled, happy, and satisfied with their lives, they're more prone to react--and overreact--to the normal frustrations of daily life.

What is well-being? A previous post outlined four pillars of positive psychological experience. That post concluded: "The wise trader structures his or her day to maximize experiences of well-being: that is what sustains motivation, concentration, and the ongoing learning needed to adapt to ever-changing markets."

This is an important principle: how we structure our trading determines the level of well-being we are likely to experience.

Consider the recent article that I linked about basketball superstar Kobe Bryant. At 31 years of age--and after 14 years in the NBA--he can no longer sustain his old feats of athleticism. Surely that would have to be a source of considerable frustration to such a competitor.

The article makes clear, however, that Kobe is not beset with frustration in the least. Rather, he has focused on developing new aspects of his game that compensate for his lost abilities. This positive focus is what sustains his well-being, balancing any frustrations that he encounters from game to game.

Check out the linkfest on goal-setting; it makes clear that goals cement learning and development in trading. When we have goals, we have tangible yardsticks for measuring our progress. Those yardsticks, when properly chosen, provide the basis for joy, satisfaction, and energy: they move us forward, even as we encounter day-to-day and trade-by-trade frustrations.

My experience is that the vast majority of traders do not set daily, weekly, and longer-term goals. Even fewer concretely track their progress toward those goals and make needed adjustments. In short, they are not pursuing their careers the way that a Kobe Bryant or Tiger Woods might.

This absence of goals and structured development not only prevents a trader from excelling: it robs the trader of potential positive experience. Every bodybuilder knows that specific goals--whether they be goals to lift particular weights or goals to improve the definition of certain parts of the body--are what sustain competitors through grueling training. Without the opportunity to achieve goals, physical training (like training in trading) is mere drudgery.

Few traders make the link between discipline problems and the absence of performance-oriented goals. You can do all the psychological exercises in the world, but if you're not structuring your development process to yield well-being, you'll miss out on the optimism, drive, and determination that propel elite performers.

U.S. Debt Courting Disaster

WASHINGTON, Dec 14 (Reuters) - The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday.
Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.
Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country's standard of living.
"We will be less free if we don't tackle this," said Jim Nussle, a Republican member of the commission who earlier served as a White House budget director and chairman of the budget committee in the U.S. House of Representatives.