A good example from the previous lesson is situations in which you find yourself losing money on a trade and hoping or praying for a turnaround. I’ve even encountered traders who engage in a kind of bargaining (not unlike the dynamics of someone facing death in the Kubler-Ross work), promising to never violate their discipline again if they could just break even on this trade. The fact that hope is dominating the cognitive picture for the trader suggests that there is more than a little desperation. At some level, the trader is aware that this is not a good position to be holding. The underlying schema, however, says that it is not okay to lose money; that losing money equals failure. This makes even normal market losses unduly distressful, triggering maladaptive coping (holding positions beyond stop-loss points out of hope; doubling down on losing trades). If, however, the trader recognizes this pattern as it is occurring, he can use the appearance of hope to stop himself and disrupt the automatic thoughts and actions.
The more vigorous your efforts at stopping, the more successful you’ll be in disrupting unwanted patterns of thought and behavior.
Thought-stopping is useful because it separates you from your ways of thinking. Instead of identifying with automatic thoughts and the feelings they engender, you separate yourself from them and remind yourself that this is what has gotten you into trouble in the past. In the beginning, as you coach yourself, you will find that you have to engage in thought-stopping numerous times during a trading day. As you become more expert at recognizing your negative thoughts and disrupting them, however, you find it easier and easier to stop yourself. A simple reminder of, “There I go again!” is sufficient to turn your mind to a different track. The interruption of habitual thoughts itself becomes a positive habit pattern.
I have found it helpful in my own trading to make the stop efforts particularly impactful, almost as if I’m shaking myself awake and mobilizing other ways of dealing with situations. One time I caught myself holding a winning trade beyond the point at which it had reversed and returned to breakeven. A cardinal rule I’ve learned to follow is to not allow trades that have moved a threshold amount in my favor to become losing trades. As I watched the winning trade hit breakeven and then turn red, I caught myself hoping that it would return to breakeven. The order flow was clearly suggesting, however, that large traders were hitting bids and driving the market lower. I gave myself a swift slap across the cheek and told myself to get out. That spontaneous act—admittedly not a coaching technique I use with other traders—woke me up and enabled me to take a small loss rather than a much larger one. However, I have remembered that slap over the years, and its impact has kept me out of trouble on multiple occasions. (Now I take a break from the screen and douse my face in cold water when I need to shift how I’m thinking about markets. The physical jolt seems to facilitate a cognitive shift.)
When the thought-stopping is dramatic, the mind-shift can be equally radical.
Some traders I’ve worked with have found it useful to post signs on their computer monitors to remind themselves of the thoughts they most want to stop. Stay Humble is one sign a trader wrote after identifying a pattern of overconfident, arrogant thinking. Such signs help traders to think about their thinking, standing apart from the patterns that would normally trigger negative emotions and poor trading decisions. They also remind traders to periodically stop, interrupt automatic thought patterns, and reengage markets constructively. You can’t be absorbed in a pattern of thinking if you’re making yourself its observer.
Here is a simple thought-stopping exercise that I have found useful in my own trading. The idea is to be on the lookout for any thoughts during trading that include the words I or me. The goal is to interrupt and disrupt those thoughts. The reason for this is that you don’t want to be self-focused when you’re concentrating on markets. You neither want to be thinking overly positively about yourself and your performance or overly negatively. When your automatic thinking turns attention inward, that’s the cue to immediately disrupt the pattern and become more market focused.
There are many examples of self-directed attention that divide your focus from markets. These include:• “I’m doing great; this is the time to be aggressive.”
• “I can’t believe how badly I’m trading.”
• “Why did I just do that?”
• “The market is killing me.”
• “I’m going to make my money back.”
• “Everything I do is wrong.”
• “I hate this market.”
Once the words I or me appear, you want to quickly close your eyes, take a deep breath, relax your muscles, and turn your attention to the markets. If you’re already worked up to that point, a quick break from the screen—clearing your head and turning your attention elsewhere—can be useful.
I find it helpful, during trading, to periodically remind myself, “It’s not about me.”
With practice, you can become quite good at proactively steering your mind from self-focused thoughts. During one recent trading episode, I caught myself looking up my P/L in the middle of a trade, wondering how well I was doing and how much I was willing to give up of my week’s gains. Of course, that had nothing whatsoever to do with the merits of the trade I was in. Because of prior practice, I was able to stop myself from clicking on the P/L summary before the numbers could get into my head. Reminding yourself that “it’s not about me”—it’s about the markets—is an excellent start to maintaining control over your decisions in the heat of market action. If you stop yourself from doing the wrong things, you clear the decks for implementing sound trading practices.
COACHING CUE
When I work with traders, one of my roles is to help them stop the flow of negative, automatic thoughts. Even when you’re coaching yourself, however, you can derive the same benefit by keeping in touch with one or more trusted and valued trading peers during market hours. This can be in a single trading office or via Skype, Hotcomm, or even instant messaging. Many times your mates will pick up on your negative thinking before you’re aware of their appearance. This can be very helpful in checking yourself and refocusing your attention.
LESSON 56: REFRAME NEGATIVE THOUGHT PATTERNS
Reframing is a psychological technique that takes a problem pattern and places it in a different context so that it can be viewed in fresh ways, opening the door to new responses. Suppose I’m meeting with a trader who is experiencing occasional bouts of performance anxiety that leave him unable to act on clear trading signals. He views himself as a weak person who can never succeed at trading. I take a different perspective, emphasizing his prudence about taking risk and his success at avoiding large losses. “Perhaps we can use that same good judgment to identify and act upon opportunity in a way that keeps you secure,” I suggest. What the trader frames as weakness, I reframe as a potential strength. Instead of fighting against his own tendencies, the trader can use the reframing to help him figure out how to use those tendencies to produce acceptable risk-adjusted returns.
Often we can find a strength underlying one of our weaknesses, enabling us to approach problem patterns in novel ways.
Reframing can often take a negative motivation and turn it positive. For a while, it seemed to me that my daughter was lazy in getting her school-work completed. I then hit on the idea that her primary motivations are social in nature: she’s a real people-person. I proposed that we do homework together, and she readily rose to the occasion. This became a father-daughter tradition during the school year and a valued bonding experience. Similarly, when my son angrily confronted a teacher at school who “got in my face” about getting work done quickly, I started my conversation with him by congratulating him for using words only and not storming out of the class or laying hands on the teacher. Instead of framing the discipline problem as a failure experience, I reinforced the important lessons of self-control. He was much more able to hear my later advice, and he left the incident feeling better about himself, having learned from the confrontati
on. The most negative thought patterns are there for a reason; identifying that positive reason and finding new ways to accomplish it makes self-coaching empowering.
Consider, for example, the example of the trader who becomes lost in hope during a losing trade. Instead of flaying him for a lack of discipline, I will emphasize that he has found a valuable market indicator: the Hope-Meter. When hope enters the picture during a trade, it’s a sign that deep down we know the trade is ill fated. By following the Hope-Meter, we can use the automatic thinking pattern to aid good trading, rather than interfere with it.
When you see problems in new ways, you gain the ability to respond in new ways. Novelty is a central element in all change efforts.
Many problems have a cyclical nature: I am afraid of losing money, so I set my stops too tight, lose more money on choppy action, and generate even more fear of losing money. When we reframe a problem, the new perspective can help us break the cycle. If I reframe the problem as one of position sizing, I can take the same monetary risk with wider stops, breaking the cycle of loss in choppy markets. How we view our patterns very much determines how we respond to them.
A useful exercise that I described in The Psychology of Trading is to reframe our inner dialogues by viewing them as actual dialogues. What we say to ourselves sounds very different when we imagine the same words spoken by someone else. This is particularly true when we are hard on ourselves after losses. What feels like worry when we are absorbed in our own thoughts sounds more like hostility when we reframe the same messages as part of an interpersonal dialogue.
Let’s say a trader misses a good trade and then tells herself, “I can’t believe I missed that trade. What is wrong with me? I wait all week for the right setup and get it handed to me on a silver platter and I don’t take advantage of it. I’m never going to make it if I keep making mistakes like this.”
Many traders actually consider such self-talk to be constructive. Traders think that being hard on themselves will help them avoid similar mistakes in the future. Suppose, however, we reframe the very same conversation as a dialogue from a friend to the trader:
“I can’t believe you missed that trade. What is wrong with you? You wait all week for the right setup and get it handed to you on a silver platter and you don’t take advantage of it. You’re never going to make it if you keep making mistakes like this.”
Clearly, when the dialogue is framed in such a manner we can appreciate that the tone is not at all constructive. Indeed, no true friend would ever talk to us in such a manner. The message is blaming and hostile, with no empathy or suggestions for improvement. Reframing the self-talk as an actual dialogue reveals the true emotion behind the automatic thoughts.
Reframing thoughts as dialogues helps us view our thinking in a new light.
Such reframing is particularly effective if we imagine ourselves speaking to a good friend in such a manner. For instance, suppose a good friend of yours went through a series of losing trades and you were to say to that friend, “I can’t believe you missed that trade. What’s wrong with you?” We can be hard on ourselves and buy into all sorts of hostile ways of talking to ourselves, but if we imagine delivering those same messages to a friend, we don’t buy into the scripts at all. When we reframe our thoughts as interactions with a friend, we draw upon personal strengths such as our ability to be supportive of others. Such strengths make it impossible to maintain a stance of angry blaming.
As your own trading coach, you want to maintain a consistent and constructive tone of voice with yourself, so that you don’t damage your concentration or your motivation. An excellent exercise for working on this process is to close your eyes and imagine yourself as another trader that you are responsible for: perhaps an assistant or a student trader. Imagine that this valued assistant of yours has just made the same mistakes in the market that you’ve made. How would you talk with this person? What would you say? What would be your tone of voice? What emotions would you convey? Imagine these in as vivid detail as possible. Then note how your approach to this other trader differs from your own self-talk. If you wouldn’t talk to a valued colleague in the way that you’re addressing yourself, then you know that your automatic thinking is distorted in a negative way. Surely you deserve to talk to yourself the way you would talk with others in a similar situation!
Many times it’s the tone of our self-talk, not just its content, that disrupts our trading.
When you conduct this guided imagery exercise day after day, particularly after you’ve interrupted some of your negative thoughts, you gradually learn to talk with yourself in more positive ways. In one variation of the exercise, I have traders imagine that they are the other trader they are talking to, so that they literally are practicing talking to themselves in ways that they would support someone else they cared about. During these exercises, traders who have been the most volatile and angry can access a wealth of caring, supportive messages as they view themselves as people they truly care about.
You are your own trading coach. Do you want your coach to berate you, to focus on your every mistake, to threaten you with dire consequences? Or do you want your coach to bring out the best in you? When you cast your thoughts as dialogues, you have a chance to reframe the mental maps that guide your thinking, feeling, and acting. Inevitably, we do talk to ourselves. We are coaching ourselves. The only question is whether we do so consciously and constructively or automatically and destructively.
COACHING CUE
If you have a mentor or peer trader who you are working with, pay particular attention to how they talk to you when you are having problems. Many times we can internalize the voices of others in reframing our automatic thought patterns. “What would my mentor say to me?” or “What would a good coach say to me?” is an excellent start toward constructive reframing.
LESSON 57: USE INTENSIVE GUIDED IMAGERY TO CHANGE THOUGHT PATTERNS
The value of imagery is that it stands in for actual experience, with an unusual power to access emotional responses. Here is an effective cognitive exercise that makes active use of the emotional power of imagery.
The first step in the exercise, as emphasized in recent lessons, is to identify the repetitive, automatic thoughts that are disrupting your trading. As noted earlier, these thoughts will generally form the self-talk that accompanies your most emotional trading episodes. The clearer you are in your capturing this self-talk, the more realistic and vivid your imagery work will be.
Let’s take a specific example. A trader I recently worked with uncovered a pattern that was greatly holding him back in his success. He was a profitable trader over many years, but always had the nagging feeling that he was not fulfilling his potential. When we examined his trading and thinking patterns, it became clear that he became more risk-averse as he hit new peaks in his trading account and new P/L highs for the day. He was upset to finish off his highs (for the day, for the week), so he became unusually risk-averse as he hit these highs. He cut his size, traded less often, and behaved like a person who had just undergone a drastic drawdown.
His self-talk at these times was revealing. “You’ve had a good day,” he’d tell himself. “Let’s hang onto the gains. There will be more opportunity tomorrow.” When it became clear that he missed opportunity because of this unusual caution, he felt vaguely guilty, but he reassured himself that his equity curve was positive and “you never go broke taking a profit.”
This was a difficult pattern to break because, while the trader realized the pattern’s limitations, he also bought into it at an emotional level. The trader who beats himself up truly suffers as a result of his self-talk and will want to change that, simply to feel better. The risk-averse thinking, however, kept our trader feeling safe. He liked the consequences of over-caution: it helped keep his emotions in check.
We are less likely to change a pattern if we buy into it, if we’re not in at least a moderate amount of distress over the consequences of that pattern.
A key step
in changing his self-talk was to reframe the “let’s not lose money” talk as “I don’t think I can make money” talk. The trader thought of his self-talk as messages of safety; I reframed them as messages of low self-confidence. He doesn’t want to finish off his highs, because at some level he’s not sure that he can get past those peaks. He doubts his ability to bounce back from drawdowns, so he desperately tries to avoid drawing down. He settles for a steady, but modest equity curve because he doesn’t have confidence that he can generate and sustain more robust returns. Perhaps he even feels, deep down, that he does not deserve large rewards.
Note how, in this situation, my reframing was not a way of helping a trader view a negative pattern more constructively; rather, I was framing the pattern in a way to accentuate the trader’s discomfort. It’s back to that notion that coaching is all about comforting the afflicted and afflicting the comfortable. Our trader was far too comfortable in his risk-averse ways; my goal was to move him forward in his readiness for change by helping him highlight the costs of his ways of coping. In your own cognitive self-coaching, you are not simply reframing negative thought patterns positively; you also will frame them in ways that summon your motivation for change. Earlier, I mentioned the value of viewing negative patterns as personal enemies: this is an example of a reframing that afflicts our comfort.
When I reframed his self-talk as a lack of confidence, the trader’s immediate response was to describe his mother. He loved her and felt close to her as a child, but said that she was overprotective. When other boys went out to play, she held him back, afraid he would into fights. She tried to dissuade him from dating later in life, because she thought that girls might “take advantage” of him. The trader explained, with some sadness, how he never had the opportunity to excel in sports despite early promise, because his mother worried about injuries.
The Daily Trading Coach Page 25