In every change process, there is an intermediate phase in which old problem patterns coexist with new, positive ones. Relapse at this stage is the norm—not necessarily a sign of failure.
So what enables us to make the transition from effortful change to an internalization of new patterns so thorough that those patterns become second nature? If you think back to when you learned to drive a car, there was a period when you had to consciously focus on every aspect of driving, from signaling and making turns to changing lanes. Only with repeated experience did these activities become automatic, freeing you up to focus on road conditions when necessary, converse with passengers, and locate unfamiliar destinations. Similarly, repeated experience with new cognitive, emotional, and behavioral patterns in trading is what cements these patterns and frees you up to focus on markets. Relapse is overcome through repetition.
Only when new behaviors have been repeated many times, in many contexts, do they begin to become automatic, overcoming the tendency to relapse.
We saw in the lesson dealing with goal setting that, as your own trading coach, you don’t want to set a goal one day, another goal the next day, and still a different one later that week. This is a common flaw with many trading journals. Traders take steps to initiate change—phases three and four above—but fail to cement the changes through repeated experience. It is far better to focus on one or two changes and institute those with regularity over a period of weeks and months than to try to make many changes in a short period of time.
Your assignment, following the discussion of rules from the previous chapter, is to review your current trading goals and assess how well you sustain work on them day after day. Ideally your goals—and the changes you attempt to make—should be expressed in such a manner that you will necessarily have to work on them each and every trading day. One way to foster this consistency is to generate a daily report card, in which you grade yourself on your enactment of the behaviors you try to cultivate. The goal is to achieve good grades each day, not just hit your targets on a particular occasion.
Similarly, if you are writing about your goal performance each day, the mere act of thinking about your new behaviors and evaluating them will serve as a kind of repetition. You’re much more likely to stick with new behaviors if they command top-of-the mind awareness. Talk about the changes you’re making, write about them, grade yourself daily on them and—most of all—enact them during each day’s trade. As with the driving, before too long you’ll find yourself doing the right things automatically. At that point, you don’t need motivation; you’ve turned goals into habits.
COACHING CUE
Engage in an important goal-oriented pattern as your first activity of the day to build momentum for a purposeful day. I’ve worked with traders who stuck with their trading goals much better after they began programs of physical fitness. Their fitness work forced them to be goal-oriented to start their day, which carried over into their trading. You’re not just training yourself to trade better; you’re training yourself to sustain change efforts across all facets of life.
LESSON 39: CREATE A SAFE ENVIRONMENT FOR CHANGE
In the last lesson, we took a look at the importance of repetition in cementing new patterns of thinking, feeling, and behaving. The single most common reason why skilled traders fail to coach themselves to higher levels of performance is that they initiate changes, but fail to sustain them. As soon as they make improvements, they relax their efforts and fall back into old ways. A successful coach knows when the opponent is on the ropes and doesn’t let up. When you have a positive experience, you want it to be a motivation for further positive experiences, not a cue for complacence. The best coaching efforts develop a kind of momentum in that way, adding success to success and sustaining a sense of mastery and accomplishment.
The problem with experience is that it takes time. Particularly if you’re a longer-time-frame trader, many weeks or months of trading may pass before you have the opportunity to build a large base of new experience. If only you could multiply your experience, you could accelerate your learning curve. Changes that would otherwise take months could be accomplished in a few weeks.
The way that coaches in sports and the performing arts multiply experience is through repeated practice. A team might only play opponents on the weekend, but will practice every day to prepare for the games. Similarly, actors and actresses will rehearse their lines every day before opening the curtains for the actual production. During those practice sessions, performers condense the coaching process: they learn what they’re doing right and wrong, make conscious efforts to repeat their positive performances and correct their faulty ones, and eventually reach the point where their efforts become natural and automatic. Practice is valuable, because it creates a safe environment for making mistakes. The game won’t be on the line or the play won’t be ruined if a performer tries something new and it falls flat in practice.
Rehearsal speeds the learning curve.
Practice can be very helpful to your efforts to coach yourself. If you identify a specific change to make, the place to begin is in simulated trading where no capital is at risk. This can occur in several different ways:• Simple Chart Review—Sometimes the changes you make to your trading involve decisions regarding how you would enter, exit, or manage risk. When those are your goals, you can review charts and simply talk aloud the decisions you’d be making at each juncture. This lacks the realism of real-time trading (and cannot substitute for real-life experience), but it does slow the decision-making process down to the point where you can try new things in a very conscious, reflective manner. My favorite way of engaging in the chart review is to advance the chart on my screen one bar at a time and then talk aloud my perceptions and decisions. This is like first learning to drive a car by driving very slowly in a large, empty parking lot. It gives the learner plenty of time to crawl before walking and running.
• Simulated Trading—My charting software comes with a simulation feature in which I can place orders and track my profits and losses over time. This is helpful because you’re making decisions with real market data in real time, but placing no capital at risk. By trading in simulation mode, you can gain many days’ worth of experience in a single day. You can also focus your attention on the most problematic and challenging market occasions, concentrating your skill rehearsal in contexts that most call for your new patterns.
• Trading with Reduced Size—Not all of the changes I seek in my own trading are revolutionary. Some are evolutionary tweaks. Recently I altered the criteria by which I set profit targets, allowing me to hold certain trades for a bit longer. I reduced my trading size in half when I traded with the new criteria, knowing that the extended holding times would, by themselves, be uncomfortable for me. Once I developed a comfort level with the lowered size—and made my mistakes with the smaller risk exposure—I then gradually returned to my prior level of risk.
Learning is best started in very safe environments and only later tackled in riskier situations. If you violate safety and security, you create distractions that interfere with learning.
Note that if I were to make radical changes in my trading—say, switch from trading equity indexes to trading agricultural commodities—I would need an extensive period of time with chart review and simulation prior to putting any capital at risk. Those more substantial changes take longer to internalize; there is a more extensive learning curve. On average, we’ll make more mistakes when we attempt large changes rather than small tweaks. When you are your own coach, you provide more security and safety for big change efforts; the smaller pattern shifts can proceed with live trading and reduced risk exposure.
One of the greatest mistakes traders make is to make a change once or twice and then jump immediately into larger risk-taking, giddy with the prospects of new returns from new habits. It is not unusual in my coaching and trading experience for trading results to get worse before they get better when tackling meaningful changes in trading
practice. Just as you wouldn’t learn how to use the car’s brakes and gearshift in a couple lessons and then jump into highway driving, you don’t want to greatly alter your decision-making process while running full risk. As the Enhancing Trader Performance book stresses, the worst psychological mistake you can make is to traumatize yourself. If you create large drawdowns in your account because you weren’t prepared for your changes, the result will be damaging to both your trading performance and to your self-coaching. You want to structure the change process as much as possible to provide frequent successes and no emotionally damaging losses. This is how you sustain confidence and self-efficacy, even as you make your mistakes.
Many traders are too eager to trade. They crave excitement and profits and find it difficult to trade in observation, simulation, and reduced risk modes. This short-circuits the process of generating repetitions that cement new patterns. Once traders undergo losses while making changes, they become self-doubting and pull back from their change efforts. Instead of generating success and confidence, traders learn to fear change. An important key to coaching yourself is to turn yourself into a generator of concentrated experience by making maximum use of practice and feedback. We often seek change after periods of loss; it’s human nature to want to jump back into markets and regain the lost capital. But the goal is to instill the right trading behaviors, not to make money back all at once. If you internalize the right patterns, the results will naturally follow.
Your assignment is to embed concentrated learning into your schedule by allocating time for daily rehearsal of new skills and patterns. An excellent goal is to generate two day’s worth of learning experience into every day by rehearsing new patterns outside of trading hours as well as during them. Replay market days, either in video mode or through a simulation platform that has a replay feature, to accomplish this goal.
I know from the traffic statistics on my blog and others that traders spend less time gathering market information after the close of trading and especially during weekends and holidays. Traders use the hours outside of trading to get away from markets. No one argues with the need for and desirability of life balance, but a nine-to-five approach will work no better in trading than it would in running a business or building a career as an artist, scientist, or athlete. When you read about elite performers in any field, one fact stands out: they are not the clock punchers. They are absorbed in their interests and, as a result, learn far more than others. They develop new skills and competencies far more readily than their peers simply because they multiply experience.
Many traders back away from the screen when they have trading problems, thereby reducing their experience. During the worst drawdowns, you want to minimize your trading and risk exposure, but maximize your work on markets.
When you create safe environments for changing yourself and your trading, you mimic the learning behaviors of the greats, from concert pianists to chess champions to Olympic athletes. When you start with practice that encourages errors and learning from them, development becomes a joy, not a burden. This is self-coaching at its finest.
COACHING CUE
The video recording of markets for later review is an excellent way to multiply experience. Replaying the market day allows you to watch patterns unfold again and again under different market conditions. Reviewing market moves that you missed sensitizes you to future occasions of opportunity.
LESSON 40: USE IMAGERY TO ADVANCE THE CHANGE PROCESS
The previous two lessons have emphasized the importance of repetition in cementing new ways of behaving and unlearning old patterns. By creating new opportunities to rehearse fresh skills, insights, and behavior patterns we accelerate their internalization, freeing our minds for the basic tasks of trading.
A huge advantage of the human brain in this context is the ability to generate experience virtually, through the use of imagination. If we vividly imagine a specific trading situation and visualize ourselves, step-by-step, enacting a new way of handling that situation, the mental rehearsal approaches the power of actual experience. You do not have to trade to rehearse many trading-related behaviors. By creating realistic situations in our minds and using imagination to summon our desired patterns, we can also cement these patterns.
A technique that makes use of this kind of visualization is the stress inoculation approach first described by Donald Meichenbaum. By mentally summoning stressful market scenarios and imagining in detail how we want to respond to these, we inoculate ourselves against those stresses by priming our coping mechanisms. This mental preparation can be applied to a range of situations, from ones that are psychologically challenging to those that require new trading methods.
Our coping is mobilized when we imagine anticipated stressful situations, preparing us for when those situations actually occur in trading.
The key to making effective use of imagery is ensuring that the imagery is vivid and evokes real feeling. Unlike a simple verbal repetition of a trading goal, imagery has the power to evoke the emotions associated with situations. This imagery turns the verbal recitation into a much closer approximation of trading experience. When we vividly imagine a trade going through our mental stop-loss level before we can execute an exit, we summon some of the fearful or frustrated feelings normally associated with unexpected loss. While we experience a mild version of the trading emotions (imagery can rarely fully duplicate actual experience), we can rehearse our best practices, keeping ourselves planful and disciplined in the face of stress. This mild exposure to the trading stress is like the body’s exposure to a weak form of a virus: it inoculates because it is strong enough to arouse adaptive responses, but not so strong as to pose a major threat.
Few psychological techniques are as recognized and recommended as imagery, and few are executed as poorly. There are several facets of effective imagery exercises:• Specificity—It’s not good enough to imagine a stressful situation, such as losing money or missing an opportunity, in the abstract. The imagery should be very specific and guided, visualizing a specific market and market situation, specific price levels, and specific market action. It is the realism of the imagery that enables the exercises to serve as substitutes for actual experience.
• Dynamism—The imagery should be more like a detailed, realistic movie rather than a broad, static snapshot. If you read a newspaper description of a situation, your reaction isn’t as strong as it would be if you were to see the same situation dramatized in a movie. The dynamic nature of imagery is essential to its realism, which in turn is essential to the inoculation process. Flat, unconvincing images won’t arouse our coping, and they surely won’t be effective approximations of real trading experience.
• Elaboration—If I had to identify the most common shortcoming in people’s use of imagery as a change technique, it would be their tendency to cut the imagery work short. Longer, more elaborated exposures to imagined challenges are more effective than very brief exposures. Indeed, if the exposures are too brief, you may unwittingly reinforce the pattern of fleeing from stresses! The best practice is to imagine a situation from beginning to end in elaborate detail—and then repeat the scenario until it no longer evokes emotion. This practice not only reinforces coping, but mastery and success.
An interesting technique from the behavioral literature is flooding: prolonged exposure to imagined situations that are highly stressful. Traders learn to stay in control even during a flood of stressful imagery, so they prepare themselves for most anything the markets throw at them.
• Variation—Traders commonly imagine a challenge scenario, evoke the imagery, and then quickly move on to something else. As we’ve already seen, repetition cements learning. By failing to use the principle of repetition in the area of imagery, traders open themselves to the risks of relapse. Once you evoke a detailed, realistic trading scenario and how you would handle it and once you repeat the scene to the point of mastery, you then want to create variations on the scenario. For instance, you might begin by ima
gining a frustration associated with a fast-moving market. If your goal were to learn new coping patterns during periods of frustration, you would master this first scenario and then create variations, such as frustrations associated with slow markets or not getting filled on orders. Vary the scenarios and you can generalize your learning and make it increasingly applicable to actual trading conditions.
• Consistency—Any single imagery session will not affect behavior over days and weeks. It is the daily repetition of the sessions that yield enduring results. Many traders derive some benefit from initial imagery work and then promptly return to business as usual. Consistency in the use of the exercises ensures that the new patterns you’re rehearsing will remain top of the mind over time. Frequent use of imagery work is a great way to sustain mindfulness about change and the need for change.
When you are your own trading coach, you want to see and feel yourself to be successful, not just engage in occasional thoughts of success. In your internal world, you can practice skills, engage in new thought patterns, and achieve goals with consistency long before you actually accomplish all of those in live trading. Your assignment is to generate powerful, elaborate imagery scenarios of stressful, challenging market situations; the thoughts, feelings, and behavior patterns associated with those; and the specific steps you want to take to master those situations. When you construct your guided imagery, you want to feel the emotions of fear, greed, frustration, and boredom and imagine yourself tempted to engage in your usual, negative patterns in response to those states. In your imagined scenario, you will vividly envision yourself keeping those negative patterns in check and purposefully enacting your best practices. Thus, for instance, you might imagine yourself tempted to add to a position when it goes through your stop-loss level, but checking that temptation and instead acting on the stop.
The Daily Trading Coach Page 18