For some, these days can be their best money makers – they know how to push the pedal to the metal when the time is right. For others, they tend to be their worst days – the think they have missed it, they fade the move (it will revert right?) and then give up and go with it – at the exact wrong moment.

So for many traders, it is a day of frustration. For some, it is a day that induces them to prove how smart they are by 1) finding the turn 2) finding the turn again. This usually ends up with their largest loss of the month.

Want to be the pedal to the metal trader? First you have to curtail the need to be right, to be contrary or give in to feeling you missed the move. How do you do that?

Ask yourself – what am I feeling? If I am really honest with myself, what do I WANT? Don’t tell yourself not to want it and don’t try to deny it. Let yourself feel and express whatever you feel. THEN look at that and ask yourself if you want to act on that feeling, if it will make money to act on that feeling. Once you have that answer, make a decision about what to do in the market.

Then repeat the sequence –

1) Your brain will NOT make a decision without emotion and  2) Emotion signals meaning – even to your eyesight.

These facts leave us with no choice but to get better at using our emotions as data. They tend to be the communicator between the unconscious (where according to some 95% of the activity takes place) and the conscious. So… why wouldn’t you want access to the parts of your brain where 95% of the thinking is being done?

I know it isn’t easy to do but the strategy should be to re-orient your perspective to one anchored in understanding your feelings and emotions. This is palpably different than using your intellect to try to override or change how you feel.

It also is NOT about just acting on how you feel. That is confusing actions with feelings and emotions.

Knowing your own emotional (social) context is your risk management key and predicting the emotional (social) context of key influencers (Central bankers on at least two continents as well as operating M.O of HFT traders (IE what is everyone else doing?) is a key to market predicting. Work with the first and the second becomes easier.

While we wait for me to finish my book – check out The Social Animal by David Brooks.

Without talking directly to him, one can only speculate but when you ask why a billionaire risks everything – his Sutton place life, his family – for a mere 50 or 60 million, you have to look beyond the useless cries of “greed”. (Some neuroscientists wouldn’t even call greed an emotion…). The typical trader motivation is fear of future regret or FOMO – fear of missing out.

I think in this case, the feeling like he was on the inside, the feeling that he was the critical cog in a powerful wheel- in a way he probably didn’t feel deep down inside, explains the risk he took.

Looking at the social-emotional context may not avert the damages from the next crook, but at least if we look to comprehend the real reasons – we have a better shot at not getting “risked” by something we didn’t understand.

And some days I just can’t take it anymore. The avalanche of human brain research proves beyond any shadow of a doubt that feelings are more powerful than thoughts. (This doesn’t make thoughts useless just way less important that we think – hence our tag-line ReThink Thinking!). The very latest research strongly suggests that even our eyes, our eyesight, our visual cortex – will NOT work without the proper “dose” of emotional neuronal activity.

But take it from another angle. Remember the old and not-so-old saying “Actions speak louder than words”? Well we all know it is true right? But why is it? Words are cognitive, they are intellectual. Actions demonstrate how we really feel – regardless of what we say.

But this leaves the big question to be – how do you move through from feeling bad when feeling bad about something – anything – feels bad?

#1 Allow yourself to actually physically feel bad for a little bit. Believe me, it won’t kill you.

#2 Pay attention to how it does feel – in your body and in your metaphorical heart.

#3 Ask yourself, what is causing the feeling … and keep asking that until you feel a wave of relief. Believe me, if you do this iteratively – and don’t settle for the much less powerful attempts to talk yourself out of (or anesthetize your way around) – sooner or later, you will realize “The REAL reason I feel (fill in the blank – angry, sad, frustrated …) is ________________ and wow! now that I know that A) I feel better B) I have a much better (and different idea) of what I need to do!

Feelings and emotions are information. Feeling tired tells you you need rest, hungry – need food. Angry – something is wrong. Afraid – something to consider. Every time we recast our feelings and emotions as this kind of data is one more time that we move further forward faster. Ironically, this feeling thing also clears the cognitive “thinking” part of your brain so that it can do its more linear work.

Maybe, could it be, that the tools have a fundamental flaw?

IMO it is – and that flaw is literally in understanding how the brain – when dealing with uncertainty – makes a decision. Based on my research for my upcoming book (McGraw Hill, 2011) MARKET MIND GAMES, the sequence is like this.

1. Contextual pattern matching – does what I am looking at look like something I have seen before? This step is to identify what it is you are looking at it. (i.e. is this my trade set-up?).

2. Application of a percentage of belief in what you think we you are seeing. How much confidence do I have in what I think is the pattern match? THIS IS THE KEY MENTAL STEP THAT HAPPENS MOSTLY UNCONSCIOUSLY AND COMMUNICATED TO YOU ON A VISCERAL FEELING LEVEL!

3. The emergence of a perception that underlies a decision and an action.

4. Acting – or the “behavioral expression” (Credit Kerry Ressler of Emory on Charlie Rose for that exact term) – of the feeling of confidence in the contextual analysis.

So…. how much “intellect” is involved? Well in the traditional sense of the word, the intellect is the historical learning that allows step one to take place. In the new paradigm of emotions, not all that much. Eric Kandel, the Nobel Laureate, said on Charlie Rose recently – “Everything we do MUST have an emotional charge”! (May 26, 2010, Brain Series #8).

Most traders spend all of their time on the pre-cursors to all of this – gaining the intellectual background. If they don’t have the results they want, they stay stuck in the pre-step 1. Instead I and my clients who have tried it, highly recommend getting analytical about steps 2 & 3. The context of confidence or context of feelings that one brings to the perceptual process is literally EVERYTHING! Without knowing that “fC” (and the U-fC for unconscious feeling context), the only choice you are left with is to act out feelings without knowing what is happening.

Get out ahead of it – and it will put you “in the zone” much more often!

Market ambiguity compels you to make impulsive judgments … . Not enough sleep… . I can go on and on and on… and talk to you about your emotional architectures and using emotion analytics to better manage your risk as well as better deduce opportunity.

But here is a little “emotion analytics” trick -

Ask yourself – as you are contemplating entering or exiting a position “How will I feel if…. ?” … and then play out the scenarios, #1) the trade continues in my direction, #2) it pulls back and takes away some of my money, #3) it ….

By putting yourself into your potential future emotional contexts, you can make better “risk” judgments in the here and now.

(And oh yes, I know to some of you this sounds absurd…that is OK. Everyone that I have taught to do it, makes more money than when they just tried to use so-called discipline to intellectually overpower their desires to get in or out or… in and out … or ….)

The two areas in trading that separate the men from the boys (so to speak) are:

1.) The ability to divide environmental perceptions in half and process them separately. First I ask myself what I am feeling and in doing so I acknowledge and honor the feelings so that they don’t cry out for expression on the chart. Then and only then I ask the market what it is telling me. (I used to combine these two observations; I used to subconsciously deny how I was feeling because I knew it was wrong to let my feelings dictate a trade and so the feelings were bleeding into my technical observations because I had not acknowledged them and honored them.)

2.) The ability to execute according to #1 as if I am even or in the black when I am in the red. If during my 90 minutes of trading (09:30 -
11:00), I’m in the red, usually the feeling is something like “I’m afraid! I want to be in the market! I want to be in a trade!”

re A.N.N.A.:

I realized it’s not enough to intellectually understand ANNA. I had to write my own version of the ANNA software for my own internal hardware. When I learned to ride a bike, even though I’d observed someone else doing it and they told me how, I still had to write the program in my own head about how to balance and pedal. It couldn’t be just an intellectual understanding.

re trading plan rules:

I think that if you need strict rules, you’re not ready to trade cash. Strict rules mean that you’re not in control of your emotional feedback
in a live market. I’m not tape reading and I have general ideas about where I get in a trade (ideally the pullback at the end of a trend) but
I don’t have strict rules because it seems trading is an art not a science.

-Trader Diagnosis

But what is simple to me… doesn’t necessarily come easily to people who are much better at differential equations than I am. In fact, it came to my attention that a listener to a recent talk I gave on DEALING WITH UNCERTAINTY, kept typing into the chat “this is really confusing for a numbers guy”.

Well first I am literally talking about CONSCIOUSNESS. Second – I am talking about PERCEPTION. Now both topics have been debated at least since the days of the Romans and I feel fairly comfortable betting on the subjects being discussed for as long as man has had language… So granted, it isn’t easy.

But is there any game in the whole world that is more a game of perception than markets? I honestly don’t so …

Therefore, it would seem that be best way to play this game better is to get better at understanding our own perceptions.

Last week an author named Fowler made the comment “Almost everything we think, do or feel is a result of our social networks”. He is a professed at UC-San Diego and he has a point. We here call it the “social/emotional context”. To make the social emotional context explicit – even in trading (hec always in trading) sets us up to make better decisions.

Call it the human condition – under risk.

Reflecting now – two plus weeks post – I realize I haven’t drastically changed my long-standing opinion regarding the difference in content and value between the field of behavioral finance and neuroeconomics. BF (for short) describes and documents the inordinately probable likelihood of not seeing all the data, of seeing only yesterday’s data and of making so called “irrational decisions”. In fact, at Harvard in November, BF even demonstrates that a room full of 75 portfolio managers fall prey to the exact same perceptional “deficits” as the general population. Neuroeconomics on the other hand is attempting to reveal exactly what is happening in our brain (or at least where it is happening) as we make these well-known errors in judgment.

Anyone who has followed our thinking for any period of time knows that we explain these behavioral tendencies under the general rubric of acting out unconscious emotions and I didn’t hear a single word that dissuaded me from that position. What I did however hear and realize is  that BF as a body of work gives us a list of cognitive/intellectual strategies we all can use simultaneously alongside the pursuit of greater emotional awareness and skill to help us make better decisions.

I think however the problem is in categorizing the list of so called “biases”. To BF’s way of thinking, our sometimes funny, sometimes sad tendencies to not see information that is either right in front of us or glaringly obviously missing (and we should therefore realize we have to look for it) are called biases. For example, we have a confirmation bias – the tendency to see all data in a way to proves what we already belief. (If you can think political leanings here.)  We also have a tendency to research a problem in terms of data we already have and fail to look for data we don’t. Generally, this is considered the availability bias.

As the weeks go on, this blog (and our upcoming December online workshop) will outline the biases and how to work with them from an intellectual point of view.

Before we get started on that however I submit for your consideration the research that shows we update our beliefs, preferences and decisions in ways that keep us feeling good (Kuhnen and Knutson, 2008) and suggest that the real underlying cause, regardless of where it happens in the brain, is the emotional impact of finding, seeing, using new and possibly contradictory data.

One more thing for today – speaking of “where” in the brain … many a respected academic still talk about the triune model of the brain proposed by Maclean in 1990. Theoretically, we have a higher reasoning brain, a mid emotional brain and a lower “keep the heart” beating brain.

With NO disrespect meant, this idea is outdated. Beginning in the late 1990′s we started getting pictures of real live healthy brains and it is clear now that emotional neural networks infuse, integrate and work reciprocally with those ostensibly higher brain centers. In essence they are higher yes  – but only because they are at the top! The most recent research however shows they are non-functional without infiltrations from the emotional networks (Damaraju et. al., 2008) so I again submit the idea that understanding the reciprocity and sequencing between brain centers offers us our best possibility of defeating our otherwise seemingly entrenched “biases”.

My actual attachment is to the idea that the human unconscious plays an enormous role in all decision making and an even more specific role in risk decisions. As Freud was the first to really bring this idea to the public, I must credit him with that. There are glimmers of it in Shakespeare and earlier writings but no one before Freud is considered the father of the idea. (Additionally, I personally credit MODERN psychoanalysis and Dr. Hyman Spotnitz for my individual victory over the world of market demons but that is another story altogether.)

Today’s neuroscience of emotion, (see this post) neuroeconomics and even neuropsychoanalysis is revolutionizing our understanding of the brain literally with every passing day. While we still have a long way to go (think Christopher Columbus’ map to what would be “America”), we know orders of magnitude more than we knew a decade ago.

For example, did you know that essentially the old triune idea of the brain is out or that it appears we need functional EMOTIONAL neural networks for our visual cortex to work? Furthermore, did you know that your brain will see the market much more like a jigsaw puzzle in which 1/3 of the pieces are missing – and it will fill in the blanks through referring to context. How often does context change in a market? (I.e. what does Dow 10K mean in 2009 vs. 2008?).

I could go on – but alas won’t. I will invite anyone interested in the new psychology of risk to wander around here. Hopefully you will find a thing or two that gets you started on the path to ReThinking Thinking.

Somewhere down the road, you just might find you agree with more than you expected. Or worse, learned a thing or two about making better decisions in the face of UOUP (rhymes with soup) – uncertain outcomes uncertain probabilities.