The Psychology of Trading

by Brett N Steenbarger

  This is a very important concept: The very solutions to people's trading woes are apt to induce anxiety, and they are likely to invoke all sorts of defenses as a result. This means that one part of the human psyche is likely to fight change—and the uncertainty of the unknown—even as the person ardently desires it and realizes its necessity. Resolving this internal tug of war is an essential step in psychological change.

  Ironically, I see this defense against change most vividly among traders who seek me out for emotional assistance. They are often very willing to discuss their problems, including the most intimate details of their histories. To a person, they express the conviction that if they could just overcome their emotional tendencies, they would become successful traders.

  As with Mary and the dream, it is often what people are least willing to examine that ends up being of the greatest relevance. The traders who avidly seek emotional help are frequently quite reluctant to examine their actual trading methods. It is not that they fear divulging proprietary information. In fact, just the opposite is generally the case: They are uncomfortable with the acknowledgment that they have nothing proprietary to share and are trading very simple price patterns or gut hunches.

  It is when I ask how they have tested these trading strategies that the anxiety—and the defenses—rear their heads. "Oh, I'm not a numbers person," one trader informed me. Another one asserted that he was not into any form of "data mining." When I raise the provocative question of how they knew their trading strategies could be effective for anyone, regardless of the person's emotional makeup, the responses become even more defensive. "It's worked for X," is a common reply, where X is a well-known trading guru without a well-documented track record. One trader, miffed by my inquiries, justified his tactics by asserting, "It doesn't matter what system you trade, as long as you control your losses!"

  It is one of the great ironies of trading psychology that traders desperately seeking the next great system are most in need of emotional guidance, and traders desperately seeking emotional guidance are most in need of a good trading system. People generally seek that which is in their comfort zones (as Mary did), and that generally is what perpetuates old, destructive patterns. The path to successful change is rarely the most comfortable, familiar, or safe one.

  In therapy, the uncomfortable changes are often first undertaken within the relationship between counselor and client. What Freud called the therapeutic alliance is a sort of bargain between the therapist and the healthy, mature part of the individual. It is as if the therapist says, "Let's make a deal. You and I will team up to understand this other, childlike part of you. Ignoring it won't make it go away. It hasn't gone away so far. But if we can understand the part of you that seeks out unresponsive men and flings yourself headlong into painful relationships with them, perhaps we won't have to repeat that pattern again." Now, of course, all this presupposes that a person like Mary does indeed have a more mature side that can stand apart from her conflicts as an Internal Observer. Fortunately, the fact that she is seeking counseling on her own is a good indicator of such maturity. Part of her desperately wants to be happy, even as she clings to the past.

  The idea behind psychoanalytic therapy is that change begins on the couch. The client replays old patterns in the helping relationship, with the opportunity now to experience a different ending. What was missing from earlier relationships can be internalized from the therapist. And once internalized, it can become a template for future life challenges, breaking the cycle of repetition.

  Invoke old patterns, activate the Observer, shift the mind state, construct new endings: This is the very essence of emotional change. If you can initiate a new response while feeling the pull of old patterns that haven't worked, you will have made a major step toward change. The first step in transformation is interrupting old patterns as they occur.

  DOING WHAT COMES UNNATURALLY

  Mary glanced at me, a mixture of fear and defiance on her face. She had just revealed to me that she slept with a man after the first date. This, of course, ran contrary to everything we had been working on in our sessions.

  The natural reaction would be to say to Mary, "Why in the hell would you do that?" However, the natural reaction in counseling is usually the wrong one. Natural reactions are what Mary has been getting all her life. The last thing she needs from me is another confirmation of how she has fallen short.

  That's where something called countertransference comes in. Clients aren't the only ones with unresolved conflicts. When therapists fail to work through their past problems, they are apt to repeat them as well. This can have a potentially destructive impact on the therapy. To be honest, there was a part of me that was frustrated with Mary. She knew very well where this would lead, yet here she was inviting yet another rejection and more debasement. That look of defiance in her eyes was all too much like the one I've seen in my young daughter, Devon, when I ask her to clean her room or finish her meal. She'll do it, but in her time, in her way. Rebellion, independence. I'm not going to let you control me. That was the key . . . Mary, Mary, quite contrary.

  I turned to face Mary directly. In a firm voice, I announced, "There's something I need to say to you." I paused, creating a moment of anxious silence. Mary looked like a child who has just been told by the teacher, "I want to see you after school." She anticipated the worst.

  My tone softened. "I've got to give you credit. It must have been hard for you to come in here and tell me that you did things the old way. What did you expect when you came in today?"

  Mary looked sheepish, but a bit relieved. "I thought you'd be angry with me.

  "So why did you bring it up? You didn't have to talk about it."

  "Because I know it isn't right," Mary explained. "I'm going to get hurt."

  "Maybe you will," I acknowledged. "But you are going to change when you're good and ready, aren't you?"

  A small smile flashed across her face.

  "You've had an older man forcing himself on you for much of your life, Mary. Now we have a great chance for me to be another one. You figure out what I want you to do in therapy and then you'll have another man in your life controlling you."

  The smile broadened just a bit.

  "If you get hurt, you'll get hurt. We can deal with that. The important thing is that this be your therapy. That's why I'm proud of you for bringing this up. It was more important for you to be your own person than to avoid my reaction."

  The mood, then the message. Sternness, then praise. When the car slows down, you downshift before accelerating. Stay in the same upper gear, and you stall. Shift and suddenly you have torque. Change cannot occur until you have shifted gears; depressing the accelerator while in the same mental gear halts all movement. Most people come to therapy with a flooded engine: Pressing the accelerator has produced no results, but they don't know what else to do. They haven't yet found their gearshift, that pair of glasses that helps them see the world through another mind. Doing what comes least naturally disrupts their normal patterns of thinking, feeling, and behaving. It is out of this temporary chaos that novel patterns have their best chance of taking root.

  RESISTING WHAT IS BEST FOR YOU

  Ironically, Mary's greatest crisis came when she finally had the opportunity for a caring relationship. In a perverse way, it was easier to lose men who didn't care for her. The prospect of a true love was a powerful threat, posing the possibility that she would not be able to live up to her dreams.

  The opportunity arose, coincidentally, in the pursuit of her creative writing. Mary joined a group of writers in the Syracuse, New York, area and found them interested and supportive. One particular man in the group, Larry, saw Mary's large envelope and asked to read her work. To her credit, she did not complicate his request by reenacting her sexual advance toward me. Openly, with considerable vulnerability, she allowed him to read her work and to relate to her solely at that level. She was shocked and surprised to find that he did, indeed, respond to her as a wr
iter, sharing his own work and expressing further interest in hers. When he asked her to dinner, she responded with a heady mixture of hope, anticipation, and panic.

  At times Mary allowed herself to fantasize that this might be the relationship. Other times, she worried that he might see the person behind the writing and become disillusioned. Her fears mounted in direct proportion to his continued interest in her.

  "How can I tell him about my past?" Mary lamented in therapy. "What is he going to think about me?" Even seemingly simple decisions became torture for her, such as the choice of dress and makeup. "What should I wear?" she asked me several times, mindful that she didn't want to send the wrong sexual signals but still wanted to look her best.

  It is not uncommon in therapy that clients will ask for direct advice. Mary's requests, however, went beyond the usual solicitations for feedback. She wanted me to tell her what to do and how to do it. Implicit in her requests was the assumption that she could not handle the situation and make the right choices. She was the helpless female child looking to the power of the older male.

  Clearly this was a trap. Any response I could give would implicitly accept a damaging, hierarchical structuring of our relationship. If I told Mary to wear one outfit or another or to share certain things with Larry and not others, I would be conceding that she was incapable of making these decisions on her own. Temporarily gratified, she would be pleased with me, only to become even more dependent in future crises.

  This is a major pitfall in trading as well. Many analysts, newsletter writers, columnists, and trading coaches present themselves as gurus, emphasizing that they have the answers to market success. Even if these individuals were successful—and evidence of that is generally woefully lacking—it is far from clear how one could ever gain confidence in one's own trading simply by absorbing the words of the guru. Indeed, by maintaining an aura of special insight or information and appealing to individuals who feel lost, the guru inevitably feeds the very dependence and lack of confidence that undermines successful trading.

  To avoid such pitfalls, therapists develop the ability to listen to people with two ears: one for content, the other for process. The content reflects what is said, the explicit meanings of people's statements. Process captures how that content is conveyed. It is the nonverbal frame in which the person's words are embedded. "What should I do?" could be a helpless request for guidance, a mature request for advice, or an exasperated and angry challenge to a therapist. Process captures the interpersonal context of a communication.

  When the process in counseling is problematic, even amidst seemingly positive content, it is usually worthwhile to shift the focus of the session. That means interrupting the conversation and calling attention to what is happening at that moment. This is especially the case when process undercuts content, as in situations where a person might implore: "Tell me how to be more independent!" It is generally not worth discussing a topic if the mode of discussion maintains the very problem under consideration. When correspondents have tried to place me in the guru role, for example, asking me for market predictions, I generally switch to a process focus and ask why they are feeling so uncertain—and why they are feeling the need to take or maintain a position in the market in the midst of such uncertainty.

  The shift from content to process can be unsettling and difficult for people, who frequently lack awareness of their interpersonal contexts. Years ago, one of my clients, seen in couples counseling, called his wife a "bitch" in the session, much to her hurt and resentment. When I pointed out the adversarial process and coached him to speak solely in the first person about his own experience, he paused for a long time and reframed his remark: "I feel you're a bitch!" As you might imagine, his wife did not find this comforting!

  Mary was similarly blind to the process occurring in our session. All she wanted was relief from her anxiety and uncertainty, and this she could get by my providing her with superior wisdom. In typical therapist fashion, however, I responded by pointing out that the situation had become risky. Mary was afraid of losing the relationship; and now, in the heat of her stress, she doubted her own ability to handle matters. I expressed my confidence in her judgment and assured her that, although she may have felt unable to connect with people as a child, she did indeed have that capacity now. I suggested to her that even a wrong choice by her would be superior to a good choice made by me, because she could at least learn from her own actions and maintain her selfhood.

  That was not what Mary wanted to hear.

  To my surprise, she responded with blind rage. "If you're wanting me out of therapy, just tell me," she yelled. "I'm coming here for help, and you're just telling me to do it on my own. Well, if I could do that, I wouldn't be here!" With that, she stormed out the door, ignoring my requests that she return to talk things out.

  Though Mary did return for our next appointment, things went equally poorly with Larry. She focused on his every shortcoming to find reasons for breaking off the relationship. If he failed to call her when she was going through a hard time, she cursed his inattentiveness, ignoring the fact that he could not have known of her hardship. If his eyes strayed to any other female during their dates, she became jealous and insisted that he would not be faithful to her. At first, Larry responded with befuddlement; gradually, he became more defensive and aloof. This only heightened Mary's insistence that he was not right for her, that he didn't care for her, and that things couldn't possibly work out. Oddly, Mary was putting up walls, pushing away the very people she most wanted in her life: her boyfriend and her therapist.

  Misery loves lost paradises, writer Jorge Luis Borges once wrote, and Mary understood that she would be miserable without these supportive relationships. It was almost as if Larry was too good to be true, so she had to toss him from the pedestal. The same thing, of course, was happening with me. My expressions of confidence placed too much pressure on her, raising the stakes in the event she failed. It was easier to push me away than to allow for the possibility that she would disappoint me and I would reject her. Once she had destroyed the relationships, her worst fears would have been confirmed, as destiny completed its perfect circle. At least, however, she could find consolation in the knowledge that she, not others, had been the architect of her demise.

  I was not so quick to conduct her requiem. I knew that decisive action was necessary. The loss of the promising relationship with Larry, as well as the loss of our alliance, would set her back considerably, convincing her that she had only her body to offer to men. How to convey this to her, however? My intuition said that simply pointing out what was going on, how she was pushing away others to avoid the possibility of rejection, would probably leave her even more defensive and resentful. Indeed, as I consulted my own feelings, I realized that I was afraid to point out the pattern to her. I didn't want to risk another blowup and the prospect of her marching out the door for good.

  But why was I afraid? Was it because I feared that Mary would never return to therapy and thereby ruin her life? No, that wasn't it. A good part of her knew that she needed help and maintained our work even as she lashed out at me.

  As I consulted my Internal Observer, the truth was hard to face: I was afraid of being yelled at. I was hurt by her earlier explosion and wanted no part of another. What an interesting dynamic, I thought: Mary is the abuser; I am the victim. She is angry; I must submit.

  With a deep breath of resolve, I pressed forward. "What went through your mind when Larry didn't call you last night?" I asked innocently.

  Mary's voice began its escalation. "I couldn't believe it," she said. "For his birthday I spent so much time finding the right present for him. I called him every day when he was going through his exams. When I want something from him, where is he?"

  "Just like me," I pointed out. "When you wanted something from me and I wouldn't give you the advice, you marched out of my office."

  "I'm so sick of this," Mary yelled. "You have no idea what it feels like to not be appreciat
ed. I give and give and give . . . "

  I rose from my seat, interrupting Mary's litany. Her eyes registered surprise, then shock.

  "Please excuse me," I said in a soft voice. "I need a break. I'm going out for a minute to get some coffee."

  Mary was speechless. I had never interrupted a session in such a fashion. When I returned, I wasn't sure what to expect. Would she be angry with me for cutting her off? Would she use this as the pretext for leaving for good?

  One look and I could tell that she was afraid. She was very afraid. I had walked out on her. Angry Mary was gone. In front of me was a vulnerable child.

  I moved my seat closer to Mary, much as I had done in our second session. "I'm really sorry," I explained. "I needed to step out. I didn't feel that I was talking with Mary. I was hearing her grandfather, the angry man screaming that no one appreciated him. It scared me, and it hurt, too. Sometimes grownups need to step away when they feel vulnerable. That's one of the things that makes them different from little kids. Kids don't have the option of stepping away."

  Tears flowed down Mary's face. She explained that she didn't want to be like her grandfather. She realized that her anger at Larry hurt him, but she also knew that this was the only way she had found to make her own pain go away.

  "Maybe the problem isn't Larry," I offered. "Maybe the problem is that little grandfather that's inside your head. It's like a tape that starts playing whenever you feel hurt, lashing out at everyone."

  That idea made sense to Mary and thus, from our experience together, was born the "time-out" rule. Mary was free to do in our sessions what I had done when I felt uncomfortable: She could take a time-out and sort out her feelings. She could use the time-out to ask herself if it was really her or her "grandfather tape" that was responding to the situation. And she could direct her anger toward the tape instead of toward the people she cared about.