In many ways, many traders end up shrugging their shoulders to the tune of “oh well I will do better next time”. The question becomes /what exactly/ will make them perceive, decide and act “better” the next time? I mean it isn’t like there aren’t tons of methods and tools to help a trader with their decision making, their psychology and their emotions.

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!

I knew I needed emotional help the day I became so angry that I punched my bedroom door, stomped down the stairs, and kicked over a living room end table—shocking my wife and two boys, and, most of all, myself. I’ve always been known as the “laid back, non-emotional German from Minnesota.” I was furious because I could not follow my trading plan, no matter how sound it was, because my emotions trumped everything I was trying to do. It was in that moment that I remembered coming across someone named Denise Shull who had spoken about trading and emotions.

So, I found your website and purchased Access Your Psychological Capital, which then led me to devour books on emotional intelligence, mindfulness, neuroscience, and sports psychology. During this time of self-reflection, I combined my life experiences, education (Masters of Divinity in Biblical Theology), your workshop and group meetings, and many other resources, and applied them to arrive at a greater self-awareness. I’d like to share the journey of becoming acquainted with my echo with you—a journey that has led me to greater emotional understanding, less impulse trades, and no more door punching.

Your E-Learning Course introduced me to another stage of trading development: what is going on inside of me. For the first time I took responsibility for what was happening while I was trading. I realized who the enemy was—me. Why do I do the things I do? I’m a mess. Where do I start according to what Denise teaches?

I began by focusing on my body before, during, and after a trade with no self-judgment. Before getting in a trade I felt anxious, sat on the edge of my chair, and breathed heavily. After I finally pulled the trigger, I was in the trade at a less than ideal location and trying desperately to seek new information to reassess the trade. During the trade, my chest felt heavy, I clenched my thumbs, making a fist, and prayed I wouldn’t get stopped out. At this point I had no idea what other traders were doing—I was completely consumed with myself. Then, sure enough, I would get stopped out on a pull back or exit after only a couple of ticks, afraid that it would come back and I would lose what little profit I had. Even two ticks profit felt like a loss to me especially after watching it march on without me, reminding me with every tick that I just lost an opportunity. . . DAMN IT, SHIT, I lost!

I was so angry that I got upset at a simple question from my wife or the noises my kids were making, blaming them for my bad trade—as if I had lost because they were distracting me. Well, after experiencing this a number of times, I knew I had issues. It was not my wife’s or my kids’ fault, and after apologizing to them, I admitted to myself that I was afraid to lose, and didn’t want my family to think I was a failure.

But I noticed my fear of failure was just as strong when I risked only $50 as when I risked $200. So I asked myself: “What do I feel and believe about myself when facing risk?” I turned my focus from my physical response to my emotional response, for emotions reveal my true beliefs about who I am and how I relate to the world around me and, in particular, how I relate to the market.

I realized that when facing risk, I feel fear, and my earliest memory of fear happened at four years old. I was sitting on my Mom’s lap in the front seat of the car while my Dad clutched the steering wheel and peered through windshield wipers that were frantically trying to clear the window of the indefatigable rain. Lighting bolts were everywhere. Thunder crashed around us. I cried and held my blankie tight. My Dad yelled some disparaging remark about my being a baby. I felt embarrassed and ashamed.

Sitting with this memory and the emotions of it, I realize I have heretofore associated fear with being a baby and losing the affection of my dad. Looking back, I see that whenever I hurt physically or emotionally, I tried to prove to myself that I wasn’t a “baby” by rebelling against my instinct to cry and instead doing dare-devilish stunts on four-wheelers and snowmobiles, tight narrowly escaping paralysis and even death a number of times. I now know I was trying to prove to myself and others that I was fearless. Early in my trading days, I took some crazy, risky trades. I won a few and lost a bunch. It didn’t take long before the losing trades hurt, and I knew I couldn’t control the market like a motor vehicle. In front of my computer screen, I started to experience real fear, and I was angry because it reminded me of feeling like a baby, as if the market was my dad saying: “What’s wrong? Are you scared? You must be a baby!” My response didn’t help; I’d make another impulse trade, another trade out of regret and another loss. Another failed attempt to prove, to my father or myself or whomever, I’m somebody.

I realized then that part of my echo was, “I can’t have what I want because I’m not as talented or strong as everyone else”—I’m just a scared baby. I was afraid of screwing up a trade because losing meant I wasn’t strong enough or talented enough to deserve acceptance or love from those closest to me. When trading, I felt like a timid kid playing against confident giants, so I had a tendency to get out after only a couple ticks because I felt as though it wouldn’t work out. I was sure I wasn’t going to get what I want, so I better get out NOW.

This feeling of “I can’t have what I want,” was further reinforced by 1) my parents pessimistic view of adversity in life—you will never win, everyone else will come out on top, because they are stronger/more talented than you are—and 2) my parents frequently complimented other kids who were talented musically or academically, yet rarely paid me compliments about my talent in sports. Since I felt my parents were always comparing me with others and there was an absence of affirmation towards me, I felt that I had to perform in order for them to be proud of me.

I think my fear of not gaining the affirmation of my parents was most strongly imprinted on my mind when I quit taking piano lessons in 9th grade. I hated piano and, as my wife will testify, I am basically tone deaf. Yet, because the children of my mom’s friends were talented musicians, I HAD to take piano. The day I told her “I quit,” my mom blew up, cried and then tried to convince me that playing piano was “good for me,” regardless of the fact that I hated it and wanted to put my time into athletics. Her reaction communicated to me that in order to gain her acceptance and love, I had to do what SHE wanted me to do. I was only acceptable if I played piano, which was pure misery for me; therefore, I believed I couldn’t have what I wanted—success, love and acceptance in something that I wanted.

From that moment on, I feared that pursing things I enjoyed meant risking my parents’ acceptance and approval. So, I put pressure on myself to perform perfectly in basketball and football, thinking that maybe then they would accept and love me for me. I thought: “if they see how good I am at sports, piano [or whatever else] won’t matter so much.” Then when my performance wasn’t perfect, I blamed myself for BOTH my poor performance AND the fact that my parents didn’t love or accept me. This line of thinking led me to believe that their lack of love and acceptance was “my fault.”

Interestingly enough, any time I pursued something, my parents said, “Well, if it doesn’t work out. . . . ” As a kid, I interpreted that statement to mean my pursuit will fail because I’m not good enough, which will result in failing to gain my parents’ acceptance. Consequently, the fact that they don’t accept me is MY fault. . . . If only I’d just worked a little bit harder. . . .

So, when I trade, my self-worth is dependent on whether I make it or not. When I take a bad trade, I realize my full echo is, “I can’t have what I want because I’m not as talented or strong as all the other traders out there, and, the fact that I’m not as talented and strong is ALL MY FAULT!” If I don’t make it, I risk losing the love and acceptance of those I care about because I project my parents’ line of thinking onto them. The greatest revelation came one day, when after three bad trades, I just started saying, “I’m sorry, I’m sorry.” At first, I had no idea to whom I was apologizing. I was apologizing for having failed and disappointed everyone important to me. I was telling them that I was sorry for not being “good enough” and, ultimately for not making it as a trader. That is a reality I dread.

After walking, wallowing, and writing, I am finally able to name my hindering emotions: fear that I can’t have what I want because I’m “a baby,” anger and regret over the fact that I’m not “good enough,” and despair over the fact that this is all my fault. Now that I’ve named my emotions and beliefs, I’m free to channel my psychological capital towards what other traders are doing by using market profile and order flow. I have finally given myself permission to succeed and I am confident when I trade.

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?