The Psychology of Winners

from Dr. Brett:

Last year I gave a talk at a conference of traders and concluded the session by giving out my email address and phone number and inviting the attendees to contact me for any help they might need. I made it clear that I would not be soliciting them as commercial clients for coaching and that I would not charge them for time spent with them.

One of the participants approached me at the end of the session and expressed surprise that I would make myself so widely available at no charge. He noted that there were over 100 traders in the session and that I could easily be swamped with calls.

I smiled and simply said, "We'll see."

Within a two week period, I counted all the contacts that resulted and tracked who initiated them. It was a very easy task, because there was only one contact. It was from a very successful independent trader. No one else followed up.
And that's the way it usually is: Of the people with professed trading passions, only a fraction will sustain keeping any kind of journal or performance record; of those, only a fraction will use the journal and performance data to set and pursue concrete goals; of those, only a fraction will reach out for assistance in achieving those goals.

On the whole, people fail to reach high levels of success because they are not doing the things that successful people do: they are not on a path that can possibly lead to success. Traders can repeat positive affirmations and invoke positive images, but nothing replaces the hard work associated with preparation, practice, and focused work on oneself and one's craft.

The motivation to trade? Everyone has that. The motivation to be more than who you are: that's what makes winners. 
And by the way, that one guy who did follow up and call me? He made well over $1,000,000 last year.

And he still calls.

More:

Turning Goals Into Habit Patterns

What Turns Goals Into Performance

Using a Bad Trade to Our Benefit

from Dr. Brett-

Let's say I think stocks will break to the upside and I take a long position. The market goes my way initially, but then reverses. What looks like a valid breakout now shows itself to be a false breakout. I stop out of the position and take a modest loss.

That is good trading.

One trader I recently talked with took exactly those actions--and one more. He saw that the breakout was false, stopped out of his position, and took a modest loss. But he had mentally rehearsed what he would do under just such a scenario. He had told himself that if this long trade didn't work out, the market could retrace the entire prior day's range.

So he stopped out, took his loss, and flipped his position to be short.

He made money on the day.

That is great trading.

The losing trade set him up for a winning day, and all because he was prepared to act on opportunity, not just prepared to limit risk.

More:

Learning From Good, Losing Trades

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.

RELATED POSTS:

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.

For more on this topic, check out:

* Using Imagery to Accelerate Behavior Change

* Bridging the Gap Between Hot and Cold States

* We Gravitate Toward Our Self-Talk

.

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:

* Discovering Your Trading Patterns

* Previewing and Reviewing Your Trading

* Preparing to Win

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.

More:

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.

More:

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

Note: Previous posts in this series are:

* How to Overcome Frustration in Trading

* The Well-Being Hypothesis: A Framework for Addressing 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.

Self Development in Trading

from Dr. Brett:

I want to thank Abnormal Returns for passing along this excellent New York Times article on the role of habits in learning and creativity.

The article highlighted a few ideas that I think are very relevant to the development of trading expertise:

1) Much of performance learning is the cultivation of positive habit patterns - If you have to make efforts to follow trading rules, that is effort not devoted to tracking markets. The key to success is turning rules into habits, so that they can be followed without effort, preserving mental capital for analysis and decision-making.

2) The development of new habits opens the door to fresh ways of thinking and behaving - I've long noticed that successful traders periodically remake themselves and their trading, adapting to changing market conditions. They cultivate new habits, which aids them in developing new skills and ways of making money.

3) We will learn and perform best by making maximum use of our learning strengths - This is an extension of the notion of operating within a trading niche. If we're engaged in a concerted program of learning and development, it makes sense to ground our efforts in learning competencies.

4) Performance improvement often occurs in small, continuous steps forward - This is an idea central to quality and performance improvement among manufacturing firms. The successful trader may set a single goal each trading session and track progress faithfully. Over the course of a year, that is hundreds of opportunities missed by the trader who lacks such goals. Take a look at this excellent New Yorker article on Toyota and the notion of kaizen. The path of kaizen is difficult to follow, but it's a sure path to excellence.

RELEVANT POST:

Trading Psychology Observations

Trading and Personal Development

from Dr. Brett:
Is trading a useful activity? A thoughtful reader writes:

"I am unable to reconcile as to how traders are providing any value to the society by what they are doing. I accept that we may be called providers of liquidity (which I really doubt we are) or guys who determine correct asset price helping bring market efficiency, but it still does not make trading relevant from a social perspective...I sometimes feel that as a trader we are pretty selfish guys concerned with our own well being. When we make profits, we do not regard the losses someone else made and trading seems like a zero sum game to me."

I addressed this issue in the post on the value of trading. See also the post on the dual road to trading success.

The real issue here is the assumption that one's value--and the value of one's activities--is a function of help to others.

The great scientific discoveries, for the most part, have reflected the very selfish concerns of investigators who become consumed with finding the answers to challenging questions. Doing what they love and following their passion does indeed bring benefit to others: that is the happy synthesis. In starting a business and seeking success, an entrepreneur brings jobs and needed goods and services to the world. In creating a great work of art, a painter absorbs herself in her medium and brings something of beauty to others.

When you make the most of yourself, you become a greater value to the world.

Like all performance disciplines, from sports to games of skill, successful trading requires self-development. In developing ourselves and mastering our own thought processes and behaviors, we have the opportunity to not just become better traders, but to also become better human beings. And, yes, that brings benefit to those with whom we interact: from the role modeling we provide to younger people to the fruits of self-mastery that aid our roles as parents and spouses.

Please review the post on the value of trading, particularly the last paragraphs. Trading is a useful activity to the degree that it pushes us to become more than we are: to enact the best within us, not just in markets but throughout life.

Overcoming Frustration While Trading

from Dr. Brett:
A while back, I wrote on the topic of steps to take to break patterns of frustration in trading and suggested resources for traders who find that frustration is interfering with their trading.

Much of what is viewed as a loss of discipline is actually the result of impulsive decision-making under conditions of frustration.

What that means is that you can best work on mastering frustration when you are actually in a frustrated state. It is difficult to prepare for making decisions in the heat of battle when you're in a cool and collected state.

This is where guided imagery is particularly helpful. By mentally rehearsing frustrating scenarios (such as missing a trade or getting stopped out) and including in the rehearsal a mental walk-through of what you want to be doing to handle the frustration, you can prepare yourself for adverse scenarios. This is very helpful in avoiding impulsivity, as you gravitate toward the positive coping that you've been rehearsing each day.

There are a range of brief therapy techniques that are effective in combating frustration. Check out this earlier post on short-term change methods, as well as Chapter 7 of The Daily Trading Coach, which describes behavioral techniques for overcoming stress.

In my next post on the topic, I'll address frustration from a different angle.

The Longer and More Draw-Out the Top, the More Extended the Ensuing Decline

from Dr. Brett:

As a rule, the longer a market spends topping out (i.e., the longer the time that elapses between a momentum peak and an ultimate price peak), the more extended the subsequent decline. The trick is that the decline can become extended in time (as we saw during the June to July period) as well as price.

With the September momentum peak and the October price high, I expect that any decline could be extended in time--not just price--which is keeping me so far from buying this most recent dip below the 20-day VWAP. I will begin nibbling at the long side when we see signs of bottoming in the new highs/lows, Demand/Supply, and percentage of stocks below their 20-day moving averages.

Suggested Readings

from Dr. Brett-
Here are bigger picture ideas that might stimulate some weekend thinking. Thanks to all who attended the Chicago seminar; thanks to Trevor Harnett for making it happen.

* A Must Read: Long-Term Budget Outlook for the U.S.

* Excellent Post on Concentration of Political Power: Banks and Washington

* Budgetary Implications of Proposed Health Care Reform

* Worthwhile Observations on U.S. Dollar and Where It's Headed

* Collection of Coaching Ideas for Traders

* High Frequency Trading Indeed! Two Percent of Trading Firms Account for 73% of U.S. Equity Volume

* Charting Buy and Sell Pressure in Spreads

* Which Currencies are Overvalued

* Application of George Lindsay's Work to the Current Market

* China's Stimulus Might Be Working Too Well

Self Review for Self Improvement

from Dr. Brett-

In a recent post, I emphasized that much of the development of trading expertise is a function of pattern recognition and the ability to act upon patterns promptly in real time. A classic example of performance by pattern recognition is the development of competence and expertise among radiologists. Reading an x-ray or other form of imaging means being able to detect normal variations from abnormal ones. In the beginning, to the untrained eye, most medical images will look alike. Only with repeated exposure to images and their variations will medical students learn to make and rule out diagnoses. No amount of book work can substitute for learning at the bedside and reviewing film with experienced physicians.

The trader who video records his or her trading has a powerful tool for accomplishing three learning tasks:

1) Seeing more market patterns and cementing those more firmly in mind;

2) Reviewing performance to assess areas of trading that need more work and to formulate goals for such work;

3) Reviewing performance to assess areas of trading that represent strengths, so that these can be crystallized and recruited during future trading.

When I left my full time work with proprietary traders in Chicago and began working with bank and hedge fund traders, I was surprised by the sophistication of the latter group in terms of portfolio management and equally surprised by that group's utter lack of feel for short-term market movement. Many times, a portfolio manager would describe an excellent idea to me and then execute it at the absolute worst time of day. I realized that, as savvy as the institutional traders were, they lacked the frequency of exposure to short term market patterns and hence had no real "feel" for when buyers or sellers were dominating (or losing their dominance) from minute to minute, hour to hour.

Traders who use video recording in essence double their exposure to market patterns--and to their own patterns as traders. Because pattern learning is a function of the number of repeated exposures to various configurations, the trader who not only views markets, but also reviews them, is more likely to enjoy an accelerated learning (and performance) curve.

The two most common means of recording that I've encountered in my work with traders is desktop video (software that records your screen) and actual video recording with a camcorder pointed at the screen. The former is available through programs such as Camtasia; the latter is best accomplished with a camcorder that includes a large hard drive.

Of course, it doesn't make sense to review the entire trading day, every trading day. In general, the best reviews come from your best trades and your worst: those will cement what you do right and what you need to improve. If traders only reviewed their single best and worst trades each day--what the markets did and what they did--I suspect they would be more likely to achieve competence, and would do so in less time than the trader who packs it in at the market close.

Remember, however, research suggests that it is not just what you review but how that makes all the difference in learning. The most powerful learning takes observations and turns them into concrete goals for future observation. Passive watching of markets (and one's own performance) is much less powerful than active watching and goal setting.

Dealing With Trading Addiction

from Dr. Brett:

My recent post reviewed research that suggests a link between risk-taking and addictive behavior. It's not just that an "addictive personality" will take undue risks; in addition, repeated large risk taking alters the structure and function of the brain so as to sustain addictive behavior. Many traders I've worked with never had discipline problems or out-of-control behaviors until they began frequent daytrading. When you think of traders at some firms placing 100 or more trades a day--basically one every four minutes--it's difficult to imagine that such frequent and unremitting risk/reward swings *wouldn't* affect the workings of mind and brain.

What's more, as Dr. Bruce Hong notes, is that exhausting frustration tolerance and willpower on one set of tasks appears to make us less disciplined on subsequent ones. That is how bad trading often leads to further bad trading, but also can lead to poor decision-making in other facets of life.

One of my first clues that a trader might be out of control is that he/she can't take a break from trading when he/she is losing money and can't reduce his/her risk after a series of losing days. This is very similar to the drinker who cannot stop imbibing alcohol even after the point of consequences.

If you are losing money and cannot stop yourself from trading--during a single trading day or after days of loss--I encourage you to take the hard look in the mirror at what you might be doing to your trading account, your emotions, your brain, your relationships, and your life.

Here are some posts regarding trading addiction that shed useful light--and offer helpful suggestions--regarding this painful and sensitive topic:

* When Trading Gets Out of Control

* Addictive Trading and Getting Your Life Back

* Craving Trading Highs

* Warning Signs of Trading Addiction

How Do I Handle the Mood Swings?

from Dr. Brett--
A reader asks the question:

"How do I avoid the inevitable mood swing when a couple of trades go bad? For a few days in March I was afraid to get back on the horse and had to tell myself to jump back on/trade as the only way to get over it."

My response is that you'll *always* have situations in which "a couple of trades go bad". If you average 55% winning trades, you'll have two consecutive losers about 20% of the time. For the active trader, that means that "a couple of trades go bad" occurs every week, if not daily.

Mood swings when trades go bad are *not* inevitable. The professional trader *plans* to be wrong and manages positions accordingly. That trader knows that you can trade well and still have a couple of trades go bad. Embracing risk and uncertainty, the successful trader limits losses by controlling position sizes and establishing loss limits (per trade, per day).

The good trade gone bad often provides a trader with valuable information--if the trader is open to the message. Today I worked with a trader who tried to buy the market in the afternoon, only to get stopped out. Shortly after, he noticed weakness in the 10-year Treasury notes and reversed his position. By day's end, he was profitable by a healthy six figure sum. The "bad trade" offered opportunity, not threat.

If you do experience mood swings around losing trades, it's probably because you are evaluating yourself by the criterion of being right--not by the criterion of trading well. It isn't the losing trade making you feel bad; it's the perfectionistic expectation that you should always be right. By embracing uncertainty and staying open to learning from it, the threat of losing can turn into the opportunity of rethinking market assumptions.

The Psychology of Behavioral Premises

from Dr. Brett-

I'm going to try to explain an important psychological concept and why it's of paramount importance to trading. The concept is something I call "behavioral premises". A behavioral premise is a rationale for our actions; it's the set of assumptions that drive our choices and responses in various situations. The network of our behavioral premises represents our belief system about ourselves, others, and the world around us. These beliefs may not be enunciated, but they are the filters through which we perceive the world, thus coloring how we respond.

An important principle is that our behavioral premises tend to evoke responses from other people that, in turn, reinforce those premises. That is, people's responses toward us will be shaped, in part, by how we approach them--and the beliefs that underlie our approach. Here are a few examples:

* A person has been hurt in past relationships and doesn't want to face rejection again. Her behavioral premises are that relationships are dangerous and that others don't really care about her after all. As a result, she maintains a guarded stance with people who might otherwise want to get to know her. Seeing that she is not approachable, others keep their distance from her and make no effort to open up themselves. This reinforces her premise that people are uncaring and unavailable, convincing her that she must stay all the more guarded.

* A job applicant believes that he has no chance to land a desirable position. His behavioral premise is that he lacks the charm and personality to come across well in an interview. As a result, he is nervous throughout his visit to the firm and comes across as unsure of himself. Sensing this, the interviewer concludes that he won't be an effective representative of the company and turns him down. This confirms the man's belief that he is not cut out to be hired for a good job, and he approaches the next interview with even less confidence.

* A businessman is convinced that others are out to cheat him. His behavioral premise is that he needs to be on guard at all times, because his employees can't be trusted. He establishes strict rules and maintains stifling oversight of his employees, even after their training phase has been completed. The employees, feeling untrusted and not valued, leave the business one by one to find a more suitable work environment. This convinces the businessman that he's right; that employees will just take his training, use him, and move on. As a result, he trusts the new group of employees even less.

Notice that each of these scenarios is one in which there is a vicious cycle. The behavioral premise leads to actions that bring outcomes that reinforce the premise. This is one major reason people stay stuck in self-defeating patterns.

The same dynamics occur in trading. Imagine that, feeling like a defeated trader (per the recent post), you act on the behavioral premise, "I just can't make money in the market." You follow your rules, enter a trade, and it moves a few ticks against you. This only reinforces your negative belief and you quickly exit the position before the loss becomes too great. Meanwhile, the market chops around a bit before eventually moving in the direction you had anticipated. All you can do is shake your head: your premise has proven true once again.

So how do people escape from these vicious cycles? Most people can't talk themselves out of their premises; they need direct, powerful emotional experiences to show them that their beliefs are wrong. This is one reason I emphasize solution patterns with the traders I work with. We spend extra time examining trades that have worked out and isolating what the trader did right on those trades. By creating a model for good trading out of these successful trades, we increase success and disconfirm negative behavioral premises.

One of my favorite exercises is to look at what happened in the market after exiting a trade. Very often the basic trade idea was right all along; it was the timing that was off. This also disconfirms negative premises. The message is that it's not that you can't read the market; it's just that you need to refine your execution: when you enter, how large you enter, and where you stop yourself out. I've often seen big results from such seemingly small refinements. Why? Because the process of making those refinements challenges the behavioral premises that led to the "stuck" patterns to begin with.

We will always live up to our most deeply held behavioral premises--for better or for worse.

RELATED POSTS:

Solution Focused Trading

The Question to Ask When You're in a Slump