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

First – I use feelings and emotions as synonyms even though technically that isn’t correct (feel a headache, feel angry …) But for practical purposes, they both are information and motivation that we experience primarily in our bodies versus our brains so ‘feelings’ ususally captures both. The idea of leveraging feelings/emotions begins with recognizing them as information.

Look at your feelings/emotions as data. Research them, seek to understand them in the same way you understand a chart. Now yes, that is a big endeavor as they, like price, are ambiguous but the payoff is at least as big as learning to read charts.

Once you are working with feelings and emotions as data, you then are on the path to being able to tell the difference between unconscious pattern recognition (experiential knowledge) and impulse - which generally can be thought of as the desire to trade something because you either want something to happen or are afraid of something else happening.

In the latter category, impulse. Impulses are feelings laced with the urge to act. Where we get revolutionary is the conventional advice which is to overpower that urge with your intellect and analysis. The problem is that the urge is taller, heavier and has been to the gym for years whereas the intellect is sleek, thin, wiry and doesn’t work out. It is funny though – if you look impulse in the eye, if you allow him to threaten you by actually feeling what he is sending out, he withers like a bat in bright sunlight. (OK I am mixing up my metaphors but…) To mix some more, try thinking of it like the martial arts, in other words, with training, you can use the “opponent’s” strength to the service of your goals.

Now what happens when you do this? By definition, you will take fewer impulsive trades and implicitly this improves your bottom line. This is leveraging emotion as a RISK MANAGEMENT tool first and most definitely includes knowing when to walk away because the impulse can bench press 450 pounds.

Now onto leveraging feeling and emotions as a strategic and tactical tool… as you get used to recognizing impulse and feeling the feelings (research), you will start to be able to recognize the difference between the feeling of impulse driven by the fear that your profits will evaporate and the feeling of instinct that your trade is not going towards your target at which point your can wisely make a judgment call to exit earlier than originally planned.

Now at this moment, the revolution really kicks in. But first, if you are following standard trading psychology you have to feel guilty and like you screwed up because you deviated from your plan. This feeling is always exacerbated by the market’s universal trick for rushing to your target moments after you’ve used your judgment or conversely rushing to your stop if you managed to stick to your original plan. These two phenomena always then reinforce that you should have stuck to the plan and you screwed up. This makes it very hard to feel confidence and it exacerbates the worry and impulse. If however you plan to use your judgment and you make the best call you can make at that point, you don’t’ take the same hit to your psych cap. When you don’t take that hit, you are a much better position to read the next trade (i.e. you FEEL MORE CONFIDENT) and know the difference between your intuition and your impulse.

The more you do this, the more you will feel it when you are really in a sweet spot and the market is about to move hard in your direction – and this Colin, when you press it – or in other words, use PSYCH CAP (feelings/emotions) AS STRATEGIC & TACTICAL TOOLS.

The thing is – all of this requires both a change in perspective and more importantly, putting the same effort into understanding your internal signals as you put into the ones the market is providing! It so happens to also leverage the brain’s reading of ambiguous market data and the fact that we are really only trying to predict other market player’s behaviors NOT where the bar on the chart is going!

DKS aka TP

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(Consider this Part 1. Obviously, revolutionary advanced trading psychology is a complex topic that can’t be covered fully in one blog post. Check out the other key words and also this page if the full course in Psych Cap is of interest)

In pursuit of becoming more consistently profitable, typically traders will either tweak their system (Oh if I just look at the market this way) or read a book. Trader faves when it comes to books can run the gamut from sports psychology to the current Deep Survival. Nobly, everyone is trying to understand the market and their reaction to it. In fact, many traders work harder at trading than they have ever worked at anything.

Nevertheless, there are a couple of secrets lurking out there that aren’t well publicized…

#1) The first impulse trade you take is meaningless. In other words, you can totally #&$*)@ -up, ONCE and it means almost nothing to your end of the month.

#2) It is what you do next that makes all the difference.

#3) The most profitable action you can next take is to resolve the immediate emotional/feeling dilemma. If you made a really stupid mistake, you are in BIKB – or but I know better…. and you are likely to punish yourself with more losing trades. You are mad at yourself without putting that feeling into words, you will act it out but taking it out in your account.

#4) The least profitable thing you can do at this point is to intellectualize or intentionally try to control your emotions or feelings.

How can this be? Doesn’t every book on the shelf say “control the emotion” and take ALL your signals. Yes I think almost every book does. (I don’t read them anymore but this is what people tell me).

See here is the real secret, no one can say for sure how we make a risk decision (despite books like How We Decide) but the contours appear to look something like this. If it isn’t LITERALLY mathematically precise – if you can’t solve for X, then our brains use context, senses, and feelings to evaluate what action should be taken. No one can tell you exactly how the brain uses context, senses, and feelings to assess, but the experimental evidence is mounting to the point that top neuro-researchers are willing to say “It is not enough to know what should be done, one must also feel it.” (Camerer, et. al. Journal Economic Literature)

If you turn that around it means that every single thing you do has a feeling associated with it.

Where does this leave us in relationship to consistently good trading decisions? The simple (but not easy) answer is all you need to do is understand the feelings - preferably both macro level (what you expect of yourself and echoes from your past) and micro or in the moment reactions to the result of a trade or price movement.

Every time you truly understand what you feel in the moment – you will make a better trading decision. The feelings may be ugly, they most likely are at least a bit uncomfortable but if you research and analyze them, well… as the Men’s Wearhouse hawker on local NYC TV says, “I guarantee it, you are going to like how you look“.

PS You will also automaticaly know when you feel clear and calm enough to venture back into the jungle of uncertainty that is trading.

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!

This market sell-off is bolstering that viewpoint. I can’t say I thought of it myself this time as I heard it from Dennis Gartman on FAST MONEY (CNBC) but he is right – and it made me think of Sept. 11. When there is no human to make a bid, the markets go south.

btw… this isn’t far from the argument I made a few weeks ago about how if the mortgage-related products (CDO’s and CDS’) had been exchange traded – even pit traded – then we would never be in this kind of mess to begin with. (- did you notice that the CME and Citadel are setting out to do just exactly that!)

Markets are made up of humans – and human methods of interacting. Markets are nothing more than beliefs and feelings about the future. Computers don’t have beliefs and feelings. They just do what the humans tell them – and if they do exactly what we tell them, which they do, just like in a pseudo-Matrix like event, they can take over.

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.