Lisa Feldman Barrett along with others such as Tor Wager lead the world in the science of emotion. Last year she published a meta-analysis of all of the neuroimaging (brain pictures) studies on emotion. While to a researcher, the work certainly generates more questions than it resolves, to us laypeople trader types there is one salient point – emotion and cognition or feeling and thinking DO NOT happen in two separate parts of the brain. In fact, it is fair to say that what are known as sub-cortical and cortical (cortex) regions work together in all sorts of emotional experiences.

Why does it matter to trading success? Two reasons – just more proof that any effort at controlling emotions is wasted and more importantly, just more proof that learning how to leverage emotional data – both as a risk management tool and as a tactical judgment factor is an investment that will pay off in spades (and trades).

See “Kober et.al. 2008 Functional Networks ….” (hey it is my blog, I don’t have to follow the science reference syntax!)

Everyone thinks the market is a game of numbers. We use complex models, umpteen oscillators or retracement calculations and even a fundamental analysis of supply and demand – all based in numbers and about numbers.

But in reality, the numbers of the market are but an illusion.

Markets are only the vacillating prices that other human beings, using the same mathematically based tools, are willing to pay. For example, what can be expensive one day can be very cheap the next if a trend has ensued.

It is only a matter of perspective. And perspective is a matter of the judgments you make.

Judgments on the other hand will be influenced by both impulsive feelings and by intuitive feelings – or pattern recognition. The trick is to have all the data on the table so you can tell the difference.

In order to do this, us market participants need to do a couple of things – give up the notion of a iron-clad trading plan based purely on historical probabilities and replace it with a trading plan based on historical probabilities (yes you read that right) AND a systematic way to leverage your judgment under uncertainty. This way you can make a decision about factors that may now be in play for the future probabilities. I mean who thought the VIX could stay over 30 for 6 months? … I am just askin.

Now in order to do this successfully, you have got to learn to optimize your judgments – which means spending more time focused on deciphering and understanding them than you spend on deciphering and understanding the charts.

This is revolutionary trading psychology – and it works.

“I return from holiday rested and relaxed, to quote Ben Lichtenstein, “I have tasted the sweetest Mediterranean tomatoes brought to me by dusky maidens and washed down with oaky red wine in the shade of orange trees, I have felt real warmth from the sun on my skin again.” Pulling up a chart once more, and looking at the comments to my previous post, I am full of good will. I have set aside my weapons of war and my heart has turned to love.

I do not quite, however, see trading as some kind of sixties group hug, where there’s plenty of weed for everyone. The money has to come from somewhere after all. So where’s the love? There are so many beautiful trades, so little time. How to choose? I should explain that I am truly a romantic. I long for commitment, for a lasting relationship. I enter each trade with the same hopes, the same fervour, the same simple faith that our love might last forever, that we will trend and trend and never look back. Once the first flush of my passion is over and my first target filled, my second half is there for as long as my lovely companion continues to show interest. And I am quick to forget the sins of the past: if I have been hurt by Cupid’s arrows before, I myself have wounded too, and will happily embrace again yesterday’s lover.

On my return, I found that the languid Euro (I always see her as French don’t you?), has invited me to join her for the afternoon. Charmed, I accept her invitation, but find her at first quarrelsome then sleepy. I take what pleasure I can, but as she dozes, I notice the door push open and her pretty blond cousin from Switzerland winking at me and beckoning to join her. Perhaps all that mountain air gives her more energy, but I am pleasantly surprised by her enthusiasm while Euro sleeps, and even more so when she introduces me to a young American friend she has made, a certain Mini Dow from Chicago, who is eager for me to help her with her extraordinarily tight shorts. Naturally, we have met before. From the window I see that the fickle Miss Soy Bean has made other friends while I was away, and seems to have had a fine old time after kicking me out of her bed just before I left for my holiday. But I forgive her already. I love them all, and I know that despite our occasional tiffs, we will always make up.

Before I let my imagination go too far, or grossly offend anyone, I should perhaps say two things: first, I would like to assure you that I am neither a psychopathic killer nor a serial philanderer. This is all part of a game to engage the psyche with the human side of trading, to connect the flickering numbers and bouncing price bars with some of the real human feeling that this strange activity has such a capacity to generate. And yes, perhaps trading does touch on the darker side of our psyches. By acknowledging this I believe there is a chance we will become better traders.

Secondly, there are of course many metaphors for trading, and I certainly don’t see combat as the only one. I have found helpful comparisons with sailing (attention to currents, the tide, the strength of the wind etc), viticulture (trading is like harvesting a crop, a stroll through a vineyard in search of the ripest and juiciest grapes, much is wasted, but the wine at the end is worth it), skiing, paragliding, the list goes on. I am sure there are many ways of visualising the process, and each trader must find what rings his or her bell. Ultimately, trading is the Lottery of Babylon in Borges’s story – it is like life itself, filled with perverse rewards and punishments, a labyrinth of both startling simplicity and complexity. Recently, though, with Denise’s help, I have come to see a particular reality in metaphors that recognise the traders on the other side of my trade, and my attention to detail, my ability to use judgement to enter or exit a trade at the right moment is linked to that sense of my enemy’s strength or weakness, or of my lover’s enthusiasm or languor.

Now, you’ll have to excuse me, but I must go and get some flowers for Euro before she wakes up.”

Trader K

April 7, 3:23 PM

Dear Denise,

I feel like I have stepped into a new area of understanding. Tracking my emotions by writing down what I am feeling during trading, is making a huge difference for me! I mean, it is FANTASTIC! I am amazed at how many emotional adjustments I do (or desire to do) to my trading. Things I never even realized, except that now I am making a conscious effort to write it down. Like realizing this morning, after I was short YM from 7807… that I had went to “deactivate” the trade as the market jumped back up, but it filled me before I could do that… literally as I was moving the mouse. At the time, I completely forgot the “impulsive” because I was so elated to be short from that area, as it immediately started going my direction… However, had I acted on that impulse, I wouldn’t have been in a beautiful trade as it tumbled 50 plus points.

But now, I realize what was happening to me. My emotions were dictating my trading in ways I never even knew. Especially in high frequency trading. Reading your work, applying it, monitoring myself, writing down my feelings, is really paying off. I am trading less, and making more money. This week and last week have been incredible.

I feel like the light just went on, the eureka moment has happened, and that I am learning to listen to my emotions, instead of trying to be the “Iron Man Trader” with cold, disciplined psyche. Am I emotional, as I write this? You better believe it! I am pumped at what I am learning.

Thanks, thanks, THANKS!

#1 (Wed, April 1): There surely can’t be anything worse in trading, than setting up a trade… entering it…. but then getting psyched out to close it with a small loss… minutes before it drops 60 pts and does exactly what you forecast. Like shorting YM at 7706. (Always enjoy your blogs)

ME: Would you like me to post this to the blog?

#2 (Later, April 1): Would it need to include me yelling and beating the steering wheel of my truck as I drove away post 4:00 close?

ME: It would be more interesting if it did

#3 (Even later, April 1): Sure, I actually did that after I emailed you… LOL. But the reason I continued with it, was your teaching on “verbalizing the emotion”. I consciously remember thinking that…

—

Point being? Counter-intuitively and certainly counter pop psychology is the power of being totally aware of what emotions are occurring. Putting them into words serves as the best risk management tool for derailing impulsive trades which are born out of acting out feelings that aren’t so conscious or are being purposely “controlled”.

To the Tpsyches way of unconventional thinking, this is the advanced trader psychology of managing psychological capital as carefully, if not more carefully, that you manage your cash capital. Addressing the first automatically takes care of the second.

I love the smell of blood in the morning. To wake at dawn and find your order filled, a steady stream of red staining your screen, and as the day progresses to the inevitable climax, when at five in the afternoon your first targets are filled, and you witness the dying dreams of the bull felled by your skill, kneeling, panting, looking dolefully into his killer’s eyes.

OK, let’s not get too poetic here, but what better way to start the week than with a three hundred point fall in the Dow, with a position that took no heat even as I slept? Short overnight from the break of Friday’s low, I have had a good day. I got a nice entry, got out of half, and got to move my stop to break even, so I’m not going to get gored in the groin, even if the bull does lumber to its feet again.

Yet still it is not enough. The pleasure of a clean, well-executed kill, of dispatching an animal that behaved perfectly, is always tempered by regret. I am not just speaking about the tragedy of exits: the sadness of scaling out when it goes still further, the sorrow of the trailing stop that gives back so much. All this is the necessary regret that every winning trade must bring; no, it is worse than that. For once again, I am in mourning for the Euro, for the one that got away.

How did I miss thee? Let me count the ways - I should have been short on Friday morning, from early in the European session. My setup was coming together in multiple time frames, I was relaxed and confident, and had a little extra time on my hands. I thought I would watch the market review offered by a well-known and likeable commentator who was cheerfully bullish on the Euro. A shadow passed over me. I don’t listen to others when I trade, I know that I have often found myself in conflict with this other trader’s analysis and come out on top, and yet it is curious how little it takes to sow the seeds of doubt in your subconscious when you let your guard down. Once the intellect and the rational arguments of others had started to interfere with my judgment, my resolve weakened without me realising it.

I should have left my orders in place and gone about my business. Instead I scratched my chin, looked at a couple of e-mails, and decided to make a nice cup of tea and to shave. Perhaps my pattern was not as clear as I thought. Why not leave it for a little bit to mature like a nice Camembert (it was a Euro trade after all)? Nothing would happen in the next 20 minutes, and I could be back at my desk before whatever dull news announcement there might be at half past.

Of course, what with one thing and another, it was more like 40 minutes before I was back, the Euro had rolled over along with the other currencies, and my entry was gone. The pain is doubled by the fact that this is the second big Euro trade I’ve messed up in the last few weeks.

So how did it really happen? Was I unconsciously repeating the previous experience in order to relive the pain of the unrequited trader? Was I afraid of the trade, and looking for other reasons to be elsewhere? Did I let the fellow who wanted to be long get under my skin? Well, I haven’t had a chance to talk to Denise at length about it yet, but I suspect all of these, and probably something else too. Whatever it was, it bugs me far more than today’s success. And to make things worse, I cut myself shaving while I should have been trading. So there really was blood that morning too.

Trader K

…because a few have asked where on the blog they can find info yet I would prefer to keep the blog as a discussion, here is the link to the info on the new self-driven study course.

http://traderpsyches.com/selfdirected.php

A more complete description and the download of an introduction is available here.

Merci beaucoup for inquiring – DKS

I have to start by declaring my genius. This is no place for false modesty. I am the bee’s knees. The caterpillar’s spats. I was long 30 year Bonds last Wednesday before the Fed spoke, from 124/13, and exited the second half of my trade at 131/16.5, lower than I intended, because my charts locked up after the Fed belched the latest piece of news on to the world’s financial stage provoking a reaction like a teenager overdosing on speed and Viagra. And I got pretty much the whole monstrous day’s range.

Of course, you, my dear readers, want to know my secret. Well, it all started with a weekly chart, that looked promising above 127/11, and somehow didn’t seem to want to make new lows to me. But we were far from that level last Wednesday morning. The 60 minute chart was bobbing about doing nothing, but that prickly feeling in my upper arms told me, along with something close to my normal setup, that a break upwards was worth holding for the longer term. A cheeky little bar popped up and teased me into action, along with the tickling up the back of my neck and the slight increase in heart rate as I leant towards my screens, sat straighter, visualising the blood of those on the other side of my trade dripping from my trading knife, and I was in, expecting to hold for a week or so. I was prepared to stalk the kill for a while, but it was quite a surprise to be gutting the great beast in front of the fire a couple of hours later.

More than a surprise: my euphoria was overwhelming: I immediately celebrated by looking at what my other markets were doing. The pain a glance at Euro futures inflicted on me was at least as great as the pleasure of the Bond trade: I should have been long from 1.2653; as I write, that trade is just over at 1.3514, over $10k per contract. I was in the trade at the start, and with the help of a migraine and a sleepless night, I over-managed it and stopped myself out for a nice little loss right at the beginning and quite senselessly ? fear, and a feeling of vulnerability and inadequacy brought on by my headache, made me quite incapable of staring at the possibility of a modest loss: I took a certain, smaller loss and a huge lost opportunity instead. About the same time I should have been long ES and missed it for the same reason.

So how was I to celebrate? The Euro upset me so much I took a quick impulse long at the high of the day that cost me a few points. At last I had the sense to turn everything off, and share the tale of my extraordinary deeds with my wife. Used to bringing back rabbits and the odd antelope to the family cave, I had dragged a full size woolly mammoth home to feed the family. I encouraged her to spend as much as she could on clothes the next day while I stayed off the charts, drank beer and generally basked in my astonishing prowess. And yet, the Euro still gnawed away at me?

Denise has written persuasively about the fear of missing out being the worst fear of all. Having missed out in a big way last week due to physical feebleness and incompetence, at the same time as getting rewarded massively for a mixture of intuition, timing and an awful lot of luck, I am struck by the longevity of the pain of the former set against the ephemeral nature of the pleasure afforded by the latter. Coming up for a week later every glance at a daily Euro chart is torture: I need at least five minutes with a punch bag to overcome the urge to revenge trade again whenever I look at it. The glow from the Bonds is fading, but I am still mourning my lost Euro trade.

The fact is, every day there is a new opportunity to experience fear, disappointment and elation. How to deal with it all? From one day to the next I’m still not really sure, but I know that sooner or later, if I acknowledge my own weakness and frailties, keep sharpening my spears, and ensure that when I enter battle I am prepared mentally and physically for anything, most of all my own limitations, that prickly feeling will come again, the blood of my adversaries will flow once more, and another great beast will meet its end at my hands.

Last night’s post resulted in a bit of chastisement directed at me for calling myself an idiot and this brings up a fundamental difference between? the Trader Psyches/Psych Cap approach and that of cognitive-behavioral psychology, the best selling The Secret and most other popular theories about psychology.

Language DOES NOT make reality. Language DOES NOT change how you feel. You feel how you feel and that influences your language.

Want the absolute quickest way to work through a negative feeling? Verbalize it! Put it out there in full-view – for yourself (and even others if you care to). This works because feelings are the foundation of our existence, we can’t decide what to wear in the morning without them and there is no point in wasting energy on trying to change them using JUST language or the intellect. In other words, if it is NLP – it doesn’t work – and I do not care that Tony Robbins is a gazillionaire for espousing the idea that it does work. Don’t believe me? Check this out -

http://en.wikipedia.org/wiki/Neuro-linguistic_programming#NLP_and_science

Trader Psyches #1 mission is to help traders of all sorts make better decisions. The only way to do that is to help them understand the reciprocal role between acting, feeling and thinking …. and then to help them learn how to deal with, manage and even LEVERAGE their emotions.

At the extreme, how are you ever supposed to recognize gut-feel or what is called experiential knowledge if you cut yourself off from your feelings? In the interim to learning this, you have to feel what you feel, use emotion analytics to understand the message and not waste any energy on trying to change how you feel.? When you handle emotions this way, everything – LITERALLY everything – particularly in trading – will take care of itself.

Fear … well of course fear. But what is the other one?

Frustration.

In fact, tell me if I am wrong. The emotions most difficult to deal with are

1) fear of missing out on a move

2) frustration that you did miss out or got stopped out

3) fear of losing money….. IN THAT ORDER.

Trader after trader after trader tells me it is #1 that is the most troublesome i.e. causes the most losses. I have even heard a quant from a big hedge fund admit to feeling that way. (Quants have feelings?) ….

In fact, a few moments ago, I fell prey to #1 and #2 – and you know why? Because I was tired. I just finished reviewing the new self-driven workshop and I just reviewed the research that says if we are tired we take greater risks… and I guess I felt obliged to prove them right. Now I am my own self-inflicted victim of #2 because I acted out #1 because I broke my BIKB rule – and traded when I was tired.

Idiot.