Since the late 1970s, I have traded actively and gained a pretty good feel for many short-term market patterns, including patterns of volume and intraday sentiment. Many times I first become aware of these patterns with a gut feeling: something seems right or not right about the market action. I have learned through hard-won experience that I suffer in my performance if I ignore these intuitions. They are not based on hopes or fears; they are the result of implicit learning over a period of years. In my mental rehearsals, I include scenarios in which I act upon this feel for the market, recalling specific, recent trades in which I saved myself considerable grief by not overriding my judgment. This rehearsal of positive associations has created a kind of intrinsic reinforcement: I actively look forward to the emergence of those gut cues and am mentally prepared to act on them when they arise.
As I mentioned in the previous section, I have many positive associations to music. Indeed, as I’m writing this, I’m listening to music from a group called Edenbridge, a kind of music that I find both energetic and uplifting. My writing today began at 6:30 A.M., and it is now two hours later and I’m going strong. The association of the music with the writing keeps me in a positive state of mind. It keeps me looking forward to the writing, even when the editing process can become tedious. With these positive connections activated regularly, my more negative patterns of procrastination are not reinforced and gradually lose their strength. It is not necessary for me to fight my tendency to procrastinate; such internal conflict would likely create writer’s block. Rather, I create a positive source of motivation that outweighs the negative reinforcement value of avoidance.
A good example of the power of anticipatory reinforcement is occurring right now as I am writing this. I’m on a 15-hour flight to Hong Kong on my way to working with traders in Asia. The cabin is dark, and I’m feeling tired. I’ve promised myself, however, that I can take a long-awaited rest after I finish this chapter. I find myself more motivated as I get closer to my goal; by the time I get to rest, I will have earned it. Ultimately, the positive reinforcement of living up to my deal and earning the rest outweighs any negative reinforcement value of avoiding the writing out of tiredness.
Find your strongest motivations and link those to your best behaviors.
Your coaching assignment for this lesson is to create what-if scenarios for the day’s trading, rehearsing the good, planned trades you would make in each scenario. These rehearsals should be detailed and vivid, accompanied by a visualization of the pride and satisfaction you experience when you trade well. For every single what-if outcome, you should envision a concrete response that embodies good trading. In this way, you plan your trading as well as your trades, but you also strengthen the bonds of positive learned patterns and extinguish the negative patterns. As your own trading coach, you have the power to be teacher as well as student: the shaper of behavior as well as the one whose behavior is shaped. If you take the active learning role that lies at the heart of the behavioral approach, you become the programmer of your own patterns.
COACHING CUE
I find it helpful to help traders identify the highlights of their trading from the past week: what they did especially well. From these highlights, we frame ideas about what the trader is really good at—what makes her successful. We then use this what I’m good at idea to frame positive goals for the coming week: how the trader is going to enact those strengths in the next few days. Because these are goals we track together, we create a situation of anticipatory reinforcement and a momentum for continuing best practices. This is a process you can carry forward with trading colleagues: share what you do best and how you put your best talents and skills into practice. Focus on your best trading and you begin the process of extinguishing your worst practices.
LESSON 68: EXPOSURE: A POWERFUL AND FLEXIBLE BEHAVIORAL METHOD
If I had to name a single behavioral method that is of greatest value to traders, it would be exposure. As I described in my chapter on behavioral methods in the Enhancing Trader Performance book, exposure is a technique that enables you to reprogram those stimulus-response triggers that set off faulty trading.
A major idea underlying exposure is that the avoidance of negative experience itself becomes a reinforcer, preventing people from overcoming learned fears. Let’s say, for instance, that I have taken large losses on a short position and now experience fear whenever a buy program hits the tape and moves the index higher by several ticks. I can avoid that fear by simply exiting the position. While that avoidance is a relief, it never addresses the learned connection impelling my behavior. Indeed, it reinforces my fear by acting on it. It is impossible to overcome a fear when you give into it.
We overcome fear by facing it successfully.
In exposure work, we intentionally expose ourselves to the situations that set us off. Generally, this process begins with imaginal exposure (facing situations in realistic imagery) and progresses to in vivo (real time) exposure. These exposures pair the trigger situation with learned skills that invoke a state incompatible with the bad trading. Thus, in the example above, we might rehearse a calm, focused state of mind while vividly imagining the market moving higher against us.
Think about what this accomplishes. On one hand, we immerse ourselves in thoughts and images of something we find threatening. We force ourselves to experience our worst fears. At the same time, however, we make special efforts to keep ourselves calm and controlled. We talk to ourselves in calming ways, slow our breathing, and keep our bodies relaxed. We do this again and again, repeating the imagined scenarios until we are able to stay completely calm and focused throughout. In that way, we extinguish the learned connection between the situation and the fear.
Exposure methods are ways to reprogram our emotional responses to situations.
Two steps are important to make exposure effective:1. Before you try to expose yourself to imagery of your trigger situations, make sure you’ve thoroughly learned the coping skill that you’ll be using as part of the pairing. For example, you want to practice a deep breathing, muscle relaxation routine every day for at least a week to ensure that you can focus and relax yourself on demand. At first, practicing the technique may take 20 minutes or so to get quite relaxed; later it will take only 15, then 10. Eventually, with enough practice, you’ll be able to relax and focus yourself quite effectively with just a few deep breaths. You want to get to that point before undertaking the imagery work. The idea is to internalize the coping skill before you try to pair it with threatening situations.
2. Repetition is the key to effective exposure work. You don’t just imagine a stressful situation, keep yourself calm, and then go on with your day. Rather, you imagine the situation in great detail, with multiple variations. You won’t imagine very stressful situations until you’ve been able to keep yourself thoroughly relaxed with less stressful imagined scenarios. If that means you repeat a single scenario five times until it no longer elicits anxiety, that is fine. The goal is to unlearn the connection between the situation and the unwanted response and train yourself to a new connection: between the trigger situation and staying in the zone.
As a beginning exercise, here is a very basic exposure routine that you can apply to almost any trading patterns that you wish to change. I have found that this works very well for reprogramming anxiety responses to market situations and frustration/anger responses. Any time a situation evokes an exaggerated emotional and/or behavioral response from you, exposure methods can be used to alter your reactions:Step 1. Seat yourself comfortably, listening to relaxing music through headphones. While listening, close your eyes and breathe deeply and slowly. Keep yourself still physically and keep your mind focused on the music.
Step 2. Start with lower part of your body and gradually tense and relax the muscles, performing several repetitions with each muscle group before moving higher along your body. Thus you tense and relax your toes several times, then your flex your foot, then your lower leg, etc. All the while you are
tensing and relaxing, you are breathing deeply and slowly and staying focused on the music.
Step 3. Once you reach the top of your body, tensing and relaxing the muscles of your face, you then take a few more deep breaths and notice your body’s relaxation.
Step 4. With the music still playing, imagine in detail a trading situation that you anticipate. Visualize the position you’re in and the market movement. Imagine the market behaving in a way that normally would trigger your fear, frustration, etc. All the while, you are breathing deeply and slowly, keeping your muscles relaxed, and playing the music in the background.
Step 5. When you feel yourself tense up or experience fear or frustration, stop the visualization (freeze the frame) and simply go back to breathing deeply and slowly and listening to the music. Once you’re relaxed again, continue the scenario from where you left off. Make sure you freeze things and keep yourself calm and focused when trigger responses start to affect your visualization.
Step 6. If you had to interrupt the visualization to keep yourself calm, repeat the exact same scenario the same way until you can get all the way through without having to freeze the scene. At that point, you’ve extinguished the response to the situation.
Step 7. After you master one scenario, construct variations of the scenario, perhaps making each one a bit more stressful. Once again, don’t move on to another scene until you’ve been able to keep yourself fully relaxed and focused during the scene you’ve been rehearsing. If you can stay calm and focused during a visualization of a moderate stress, make the next visualizations more threatening. Don’t stop your exposure work until you have tackled your absolute worst fears.
This basic exercise enables you to extinguish emotional and behavioral responses to trading situations that can lose you money. If you rehearse staying calm and focused in stressful situations, you build a new learned connection and reprogram your behavioral responses. This process is effective for situations in which you’ve been through extreme losses, and it is also quite useful in reprogramming patterns of overtrading. When you coach yourself to face and overcome your worst fears, you build confidence, resilience, and a sense of efficacy, empowering yourself in situations where you had seemed powerless.
COACHING CUE
Imagery can be powerful in programming new responses, but consider extending your exposure work to live trading. Such in-vivo exposure, beginning with small trading size and gradually ramping up to full size with success, is the single most effective technique for reprogramming traumatic experiences in trading, such as large losses that overwhelm mood and confidence. By re-creating the market conditions that caused the trauma in imagery—and then facing those conditions in simulated and actual trading—all the while rehearsing self-control skills, we can regain a sense of mastery over trading. It takes repeated experiences of safety during exposure work to undo traumatic stresses. Eventually, the emotional learning that we can face our fears without terrible things happening sinks in and contributes to a newfound confidence.
LESSON 69: EXTEND EXPOSURE WORK TO BUILD SKILLS
In the previous lesson, we saw how exposure methods can be used to deprogram negative behavior patterns. Just a small adjustment in the technique is needed to create positive learning by rehearsing and reinforcing proper trading behaviors.
The fundamental difficulty of trading is that we know what to do (enter on pullbacks in a trend, size positions appropriately) when we are out of the heat of battle. When stressed, however, or when we face unusual opportunity, we find that other behavior patterns are triggered and it is much more difficult to do the right things. I work with a good number of experienced portfolio managers and proprietary traders, and even they make the occasional rookie errors, in which they are swayed by situational influences. Techniques that reinforce the right actions can be useful for the pros as well as beginners.
One trader I worked with was bedeviled with the problem of regret. He would enter a longer-term position and, while it was going his way, he was fine. As soon as the position retraced some of the gains, however, he began to regret that he hadn’t lightened up at the more favorable price levels. This regret was a very tangible psychological influence for him. At times, it became outright guilt as he convinced himself that he had done the wrong thing.
What happened as a result of this pattern is that he would inevitably assuage this guilt by waiting for the profits on the trade to move back to their high water mark so that he had an exit approximating the one he had missed. The problem was that this cut his original trade idea short. Many times he would take his profit on the first rebound from the retracement, only to see the position move toward his initial target without him on board. Then the trader experienced massive regret and guilt. This led him to seek additional home run trades (to relieve his newest guilt), only to make the same mistakes on these trades as well. By the time I met with this trader, all he could talk about was how much he could have made if he had just traded the way he planned.
Many traders are shaken out of good trades when they aim to not lose, rather than aim to maximize profits.
The exposure work for this trader was straightforward. As the previous lesson outlined, we first just worked on the skill of staying calm and focused. I used the heart-rate variability (HRV) biofeedback unit for this work (www.heartmath.com). He had to concentrate and breathe rhythmically and deeply while keeping his HRV readings high. The trader was able to use the biofeedback unit for practice at home and he could track his skill-building by keeping the majority of his readings in the highest bin for a continuous period of five minutes or more. He found that he could keep his readings high by focusing his attention (counting in his head), keeping physically still and relaxed, and breathing from his diaphragm in a smooth, gradual fashion.
Once he had mastered the skill of keeping himself in the HRV zone, he used visualization to walk himself through his trade setup, including his profit target and stop. He vividly imagined the market moving in his favor, but instead of imagining himself being pleased with this outcome (which was what happened in his usual trading), he mentally reviewed his original trade plan and told himself that nothing had changed to alter the plan: it was working as anticipated. I asked the trader to simply repeat this part of the visualization over and over until he no longer reacted to the initial gain with excitement (and with a mental accounting of his paper profits). Instead, he visualized staying calm by reaffirming his plan for the trade.
Getting excited by gains in a trade is the first step toward getting panicky when those gains are threatened.
Only after the trader had mastered this aspect of the trading situation did we proceed to imagining that the market retraced some of its initial move, eroding a portion of his gain. Again and again, he imagined this retracement while breathing deeply and slowly and staying focused on the computer screen (which displayed his biofeedback readings), until the imagery of the retracement no longer brought fear or concern. At that point we mentally rehearsed the pullbacks all over again, this time while not only staying calm and focused but also while mentally reviewing his trade idea and his exits. Our trader spontaneously began to focus his attention on how proud he would feel if he just stuck with his ideas and saw them through. This pride, for him, was the opposite of the guilt he had been feeling. When he invoked this sense of pride, he not only extinguished his old behavior, but also positively reinforced his discipline.
The key to making this work is mentally rehearsing the right trading behaviors while you’re in the state that normally triggers the wrong ones. When you’re your own trading coach, your challenge isn’t simply to figure out the right things to do. Rather, your job is to be able to act in the right ways in situations that normally pull for all the wrong trading behaviors. If you practice good trading when you’re not in realistic trading situations, it is much less powerful than overcoming learned connections as they’re occurring.
Of course, we can extend the power of exposure by shifting from imagery-
based work to actual trading. Typically I’ll have a trader start trading small size at first while engaging in the deep breathing and concentration and implementing trading plans. While the trade is on, the trader keeps her biofeedback readings in the optimal range and rehearses the plan for that trade. During the troublesome retracements, the trader simply repeats what she had practiced in the imagery: staying focused on the trading plan and keeping physically calm through the regular, deep breathing. Once this process is successful with small trades, the trader can gradually increase size back to the normal level of risk, performing the biofeedback work at each new size level.
Utilize biofeedback during trading and you can often detect departures from the performance zone before you are consciously aware of them.
If there are challenging market situations, the best approach to master them is to face them directly while you stay grounded in your best trading practices. With the use of imagery, this conditioning work can be accomplished outside of market hours and without taking risks. With repetition, the mentally rehearsed patterns feel increasingly natural, as the old, learned connections fall away. It is not always comfortable doing exposure work—and the better you do it, the less comfortable it will be—but you cannot coach yourself through discomfort unless you’re willing and able to tackle it directly. Rehearse your best trading practices while you’re in your most stressful situations; it is one of the most effective training techniques you can employ.
COACHING CUE
It is helpful to formulate your best trading practices as specific, concrete rules so that these rules can be rehearsed in detail during the exposure work. Among the rules I’ve found most helpful for this work are:• Generating trading ideas by identifying themes that cut across sectors and/or asset classes.
The Daily Trading Coach Page 30