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!

Ambiguity is one of those words that to me is both ambiguous and onomatopoetic – in other words, it is easy to be not quite sure what it means and the words itself sounds like being not quite sure what it means. … (Or, at least it does to me given the relatively lousy education I got in high school).

But beyond linguistics and back to the regularly scheduled program of Psychological Capital, why does ambiguity matter – particularly to sophisticated traders?

Ambiguity matters because it is the hallmark of markets. At any point and from any perspective, markets of all types are always ambiguous. They are never ever certain – no matter how many algorithms or sophisticated studies of historical probabilities a trader wraps around them. These techniques lure us into thinking that our results can be certain – i.e. we have a 67% chance of generating X points if we get long or short according to this relationship of these four factors – when in fact we cannot be certain.

How much time will it take? How much “negative drift” will it incur? Just these facts alone mean the possibilities are essentially endless and therefore the question is at its core ambiguous.

But why does THAT matter you say if you have tested your 67% chance and believe in it? Well first because how immutable are your beliefs? Confidence levels (feelings mind you) are variable i.e. creating more ambiguity even if this portion is actually in your psyche versus in your data.

This dilemma if you will is the exact reason that the vast majority of traders lose money. In order to be successful, it is necessary to understand, appreciate and even love the ambiguity. It is also necessary to know what to do with it. And for the latter it helps to know how your brain handles it – which is not as a serially updating computer solving a calculus or even a basic statistics question.

Faced with ambiguity, your brain naturally resorts to filing through unconsciously stored patterns and communicates with you through your feelings as much as your thoughts. Which adds even another challenge to this already daunting mental exercise of taking money from other traders (that is what the game is btw – alas, but for another post).

So… what have you been taught to do with your feelings? Discount or ignore them, right? Now you are in the position of purposely overlooking the very data you need to fully interpret what is going on in front of you – at which point, in this sea of ever-changing ambiguity, you are lost. This is why sometimes seems if you just took the opposite of every trade you would make money. How many traders have said “if I could only use myself as a counter-signal”?

The question is – instead of me lecturing – how do you handle these facts of trading?

….but inside he was terrified. “I can’t believe this is happening.” he said – Today’s NY Times reporting on a Katie Couric interview with Captain C.B. Sullenberger.

Not surprisingly, the hero pilot of flight 1549 unconsciously used a technique that works – his feelings were put into words – even if only in his head. This kind of acknowledgement of anxiety actually helps the brain to focus because it isn’t wasting energy on trying to suppress a feeling that is a very real reflection of the situation.

This works in much less dire circumstances where the only risk is a loss of capital. Giving voice – verbally or internally – to one’s acutal feelings – without edit or judgment – allows one to much more easily see (and execute on) what needs to be done. I have said it before and will say it again, FDR was wrong. It is not that the only thing we have to fear is fear itself, the only thing we have to fear is no fear at all.

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?

Treasury Acts Ridiculously _____________________? …. fill in the blank.

If the markets are based on confidence (or lack thereof) then where are we in the spectrum between panic and overconfidence? We are certainly on the left-end of this tug of rope. The panicked selling seems to be gone but now we are in a market rhythm where it is just relentless. In other words, there may not be panic but there surely isn’t any confidence that the government funding banks, insurance companies and now apparently the auto-industry is going to work.

Without confidence for the future, we will continue to look towards the lows of October and maybe beyond… is there any reason to do anything else?

and furthermore “Decided that purchasing illiquid assets wouldn’t help” …since when does bringing in a solid bid in a falling market NOT stabilize the market. Paulson may be from one of the great trading houses in the world but he doesn’t get that. The underlying problem in all of this is there was and is no market for the complex debt instruments that are for sale. If someone could make a market then the price would stabilize… and once that happened then the mark-downs on the books of banks would stop and once that stopped, they may be more willing to lend.

…. Can we get a trader in there? Can someone from the Chicago floor environment teach them something about making a market?

PS Thursday the 13th – okay there is the m-t-m accounting issue but they could solve that if they wanted to. I predict that in some way shape or form the new Treasury and Administration in DC will sooner or later end up buying some of these assets. Who else is ever going to make a market in them?