Okay it’s the name of this blog and a term we banter about but what do we mean? In short, we mean the power of an entire human psyche – intellect, thought, senses, feelings, emotions and energy. Each factor weighs in on the judgment, decisions and performance a trader (or investor) delivers and hence, elevating the whole (psychological capital) and leveraging the dimensions (thought, feeling etc) maximizes the performance a trader can deliver.

Underlying our zealotry for this topic is the reality that so much of our judgment and decisions is based on our senses, feelings and emotions despite society’s general reluctance to believe this. Neuroeconomics knows it. In fact the most highly respected neuroeconomists in the world say “it is not enough to know what one should do, one must feel it.” (Camerer, Lowenstein and Prelec, 2005).

Learning to read internal data – the ping pong between thought and feelings – helps one make better risk decisions. Understanding one’s emotions helps one make better investment decisions (Seo & Barrett,2007)…. so psych cap, simply put, is about using our brains (and psyches) in the way they are designed and to our fullest advantage.

Is there any good reason NOT to do this?

We didn’t believe it at first. We were amazed that traders transferred their deepest emotional architectures and echoes onto the prices… but alas, they do. In fact, it isn’t really all that surprising now that we know. I mean after all, the markets encompass and symbolize competition, winning, money, success and smarts. If you are going to have the echo of your deepest issues show up anywhere, why would it be somewhere with less stakes?

Which brings me to the question of Madoff…. last year at The Philoctetes Center (look it up? .org) he said that when he started his career everyone hated him for bringing electronics to the markets – and causing the human brokers to loose their jobs. So now at the end of his career everyone truly hates him again. And in between, he used charm and popularity to create this scenario.

This is how Freud’s Theory of The Repetition Compulsion works (see my paper published in Annals of Modern Psychoanalysis). My opinion? – this ain’t no accident and greed is a sorely insufficient explanation!

At this point I can only conjecture but my conjecture is that it was about the fear of missing out and the fear of being ostracized… the exact things he unconsciously created. This guy, for some reason, recreated being hated. This would leave the question of who hated him early on in his life open… but I for one would bet A WHOLE BUNCH on the idea that someone did.

It is horrid and shameful and everything else. There are a million things to say and that will be said…. but one of the lessons for traders and investors is – understand the emotional drivers behind market, investing and trading decisions. … whether it is you or your manager who is doing the trading …

to be continued. and… tell me I am crazy!

Were you listening to the S&P pit this afternoon? or, just watching the ES trade…. now THAT is the movie of chop and slop. Typical for rollover time – days better spent doing something more productive than trying to catch a decent intra-day trend!

Remember that nasty term from the internet bubble – day trading?

Hushhhhh! NO ONE wanted to be called a “day-trader”. All of those horrid types drove the market up and then drove it down and made everyone go broke…. right? … and they were stupid to boot.

Well day-trading is back …..but is has another name. HIGH FREQUENCY.

…and everyone is doing it. Well, at least everyone with money to trade? – which means hedge funds. Yep it is the dirty little secret of the already secretive world of money runners that one way to make back monies lost on big global macro type events is to trade intra-day.

People stand around newsrooms scratching their heads over these intra-day swings and here is their simple answer. Everyone is a day-trader. In fact if you want to get really technical, minute-trader is a better term.

(… oh yeah, under the full-disclosure rules – I started day trading in 1994. Over the past two days I did 7.82 trades with an average hold time of 3.4 minutes…. )

What is confidence?

Some of the definitions from dictionary.com say -1) full trust, 2) belief in the powers, 3) reliability of a person or thing (the market? your trading strategy?) 4) certitude.

But how is confidence experienced? I mean how do you know you have it or not? In other words, where in your psyche does confidence exist – or leave a vacuum? Is it in your brain or in your body?

You might not able to tell so ask yourself the following and listen to where the answer comes from -How much confidence is there in the new US administration? The credit markets? The equity indices? The Cleveland Browns?

Take the question a step further and ask what is the relationship between confidence and beliefs? How are they the same – or different? And again, ask yourself where you experience a belief – your brain or your body?

In truth the brain and body are of course an intricate machine and the parts can’t really be separated but at the same time, we do experience different psychological events in one or the other. For example, as I type these words, it is my brain that is choosing the order and the spelling but it is effected through my fingers. A third dimension of this is how much confidence do I have that I can or am making sense in my post about confidence. If I feel that it is jibberish, I will rewrite – if I feel it it is clear, I will keep going.

But where does that feeling – the one that either posts or erases – occur?

Because the existence of confidence is so critical to markets overall and to individual decision-making/performance in the markets, it is a useful exercise to examine the experience of confidence in order to be able to use it – or replenish it when it wanes.

We all know it is key to implementing a trading strategy and we all know that when a large segment of the investing population is lacking in it, we have a bear market or a trend-day down. Seen any of those lately?

So, how do you define confidence? Where do you experience it?

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

The NY Times esteemed Op-ed and they leave out the best part – as mentioned in our earlier post today.

It is all fine and well to notice that we behave irrationally, it is all fine and well to say that some things are Black Swans… what it is NOT fine and well is to ignore the reality of what we now know about decisions… ala our earlier post repeating Dr. Andrew Lo’s message.

As soon as anyone/everyone realizes that we can’t do anything without a feeling, that all decisions have an emotional-basis and that “emotion analytics” are the #1 clue to figuring out what is risky and what is not… or at least what is best… the better off we will all be.

…and besides… one you factor in “affect”, those Black Swans miracously start turning white!

It is all too easy to forget the underlying mechanics of price movement. Price chops around in a small range (remember when it did that) when very few buyers/sellers (PEOPLE) have any real conviction (FEELING) or need (MOTIVATED = feeling) to buy or sell.

On the other hand, price moves directionally when many buyers or sellers (PEOPLE AGAIN) have a strong belief (FEELING) or desire (FEELING) or need (MOTIVATED? = feeling) that the price will keep going and either

1. they are afraid (feeling) they will miss out

2. they are afraid (feeling) they will lose money.

Another reason that prices move directionally (and fast) is that the majority of people either are or want to be (out of desire or need) to be on the same side of the trade. By definition, this leaves few people to be on the other side and a relative lack of liquidity.

This may all seem elementary but it is very germane to what we have been seeing lately – from either the global macro credit crisis viewpoint or the 1 minute average true range viewpoint. How can that be you say?

Well for starters, one of the pillars of the story of where we are in the big picture is the lack of liquidity in the complex structured debt contracts dreamdt up by trading desks around the world. Once Bear Stearns admitted to trouble in those privately traded contracts, all the other players went “no bid” and the cards started tumbling – because there was no one else to take the other side of the trade. This link speaks tangentially to the resolution of this problem – i.e. hedge funds declining to trade these “OTC” (read potentially very illiquid) contracts.

The other side of the trade

On the other side of the spectrum, the ranges we are seeing both intra-day and even in very short time-frames are the result of more market-players (people) wanting or needing (which makes them want) to be on the same side of the trade.

The point of all of this? Traders make money when they correctly ascertain where other players in their time-frame are and where they are likely to WANT to be in the near future (again according to their time-frame).

In other words, it isn’t just lines or bars or even a back-tested set of probabilities. It is the probability of what other people (even if they use computers to execute) are going to want or need to do in your time-frame.

Is it possible to think of the markets this way? It is a good idea?

We’ve all heard of human capital and the importance of the human element. The concept of psychological capital takes that discussion to another level – a level where we can begin to further understand, analyze and actually build on our most significant asset.

Most people believe that their intellect – the combination of their learned knowledge and their ability to process or respond to new information – comprises the bulk of the human capital equation. But, is this really true? What about the imprecise and fluid elements of confidence or determination? Where do these feeling-based dimensions fit into the role of human capital?

It is the inclusion and specificity of both feeling and emotional elements, in addition to intellectual ones, that defines psychological capital.