If this line of research and reasoning has validity, it points to a central dilemma of trading psychology: At the same time that traders need to dampen emotional reactions that skew information processing, they need to be sensitive to the felt tendencies that capture their implicit knowing. On the one hand, if the general in the field (the left hemisphere) is overly sensitive to the data accumulated by the sentries and scouts (the right hemisphere), adhering to a plan of attack will be difficult. On the other hand, if the general does not heed the scouts, there is a risk of failing to update those attack plans in the face of changed realities. Learning to distinguish between the distortions of emotional arousal and the tacit knowledge of one's body—to remain open to experience while not lost within it—is perhaps the greatest challenge a trader faces in cultivating trading expertise.
MINDING THE COMPLEXITY OF THE MARKETS
This brings up a second, and perhaps even more problematic, dilemma. The patterns of the markets may be fuzzier—more nuanced and complex—than the language traders use to describe them. This would make describing trading much like describing a person's face. Although a description could capture the gross contours of shape of eyes, skin color, and so on, it is unlikely that it could fully capture that person's look. Similarly, attempts to describe markets in terms of "head and shoulders" patterns, "double tops and bottoms," and "rising wedges" capture the gross contours of price action—what I have called the market's communications—but hardly the contexts in which the action has occurred (metacommunications).
The coarse grain of language relative to market action suggests that the answer to this dilemma is not the discovery of a better indicator, chart pattern, or technical analytic approach. All of these are like the blind men's description of the elephant in the famous tale—approximations that cannot possibly capture the whole. "If you see the Buddha on the road, shoot him!" captures the understanding that Buddhahood—enlightenment—is to be found within experience, rather than in any self-proclaimed expert. Similarly, if you find a trading guru on the road, the best course of action is to dismiss him. The real trading guru may also exist within, at that tacit level of knowing.
Expertise in other fields of endeavor is similarly difficult to capture in words. Chess players, football running backs, and racecar drivers often know the right move to make without first engaging in an explicit reasoning process. Moreover, when you ask them to explain their moves, they often provide very sketchy rationales. They know how to perform, but they can't necessarily capture their knowledge verbally. This makes the development of expert systems especially difficult because the experts must somehow convey their knowledge to computer programmers for it to be expressed in an artificial intelligence language. If not all of our knowing can be captured verbally, however, any such attempt to translate expertise into words will fall short.
This, I believe, offers a compelling reason for utilizing the language of mathematics over normal verbal expression for capturing market understandings. If I have a set of market predictors, I can explore not only the relationships between these predictors and price change, but also the interrelationships among the predictors and their relationship to price change. Some simple interactions can be expressed in words, such as breakout trades working at one time of day but not at another. More complex interactions, however, interrelating a market's price change and volatility over multiple time frames, form a multidimensional conceptual space that eludes normal description. It is not surprising that statisticians rely on three-dimensional maps to describe the contours of predicted variables as a function of predictors. Pictures are worth a thousand words precisely because they convey information not readily expressed verbally.
It is unfortunate that many proponents of statistical modeling disavow any role for intuition in the markets and that many intuitive traders shun mathematics. I believe the two exist in a reciprocal relationship that is critical for successful trading. Traders' first market understandings manifest themselves intuitively, as felt tendencies, that traders can point to before they can fully describe them. These tendencies, however, can be investigated for their underlying similarities, their essential ingredients. These ingredients are promising candidate predictors in the development of empirical trading rules and systems.
In my own trading, I have found that many of my successful intuitive intraday trades reflect an awareness of an initial pullback in a nascent trend that permits a relatively low-risk entry. Although the newly developing trend can be tracked on traditional technical indicators, it is generally the case that I first experience this shift as a reluctance of the market to continue its prior direction, followed by a relative ease of movement in the new direction. By translating this experience into numerical form, translating reluctance and ease of movement in terms of the NYSE Composite TICK and short-term new highs and new lows in my basket of stocks, I can then attempt to create a more general trading model from my insight. I may find, for example, that when there is a breakout number of short-term new highs among the stocks that is accompanied by a two-standard-deviation upward move in the TICK, prices are significantly likely to continue upward for a particular period of time. In this way, I have furthered my learning by capturing in explicit form my basic intuitive understanding. No collection of expertise may be completely exhausted in verbal or even quantitative rules, but the shift from more tacit to more explicit knowing provides greater control over trading.
Indeed, this is Cleeremans's conclusion regarding the function of consciousness. People have developed the capacity for explicit awareness to facilitate greater flexibility and control over their actions. When clients in therapy become verbally aware of their tacit behavior patterns, they are in a better place to interrupt these patterns and to try something different. When traders can capture felt understandings as systematized trading rules, they retain the value of their subjective knowing, while attaining a measure of distance from distracting and distorting emotional responses. The most successful traders I have observed have been intuitive observers of the market who have been able to capture their intuitions as rules and who then trade in a rule-governed manner. Their rules—like their bodies—seem to know what to do in the market before they do.
CONCLUSION
The idea that traders know more than they know they know in the markets fits nicely with the solution-focused approach to trading emphasized earlier. Traders' best trading reflects their tacit knowing, and this is the foundation on which they build in cultivating trading expertise. Although it is instructive to review errors in entries, exits, and money management, a simple elimination of mistakes will not in itself build mastery. Rather, it is by discovering what one knows tacitly and translating this into explicit rules that one can establish personal templates for success.
These templates are best cemented by powerful emotional experiences. Sheer repetition is valuable in acquiring new action patterns, but the vivid experience of a new pattern registers more enduringly than mere verbal rehashing. In the therapy of Ken, Sue, and Mary, a crucial element in their learning was the experience of a powerful disconfirmation of their beliefs and expectations. If learning—that transition from tacit to more explicit knowing—can be accelerated through emotional means, then crisis should be a powerful learning tool, both in life and trading.
Chapter Seven
The Big Man beneath the Bed
It is not the presence of stress but the absence of well-being that afflicts the soul.
If there was a formula for lasting personal change, it might approximate the following: Identify your greatest fears and face them as directly as possible, so that you find out they are not as powerful as they seemed. If you were a child who was afraid of the dark, hiding under the covers would not be the answer to your fear. Rather, turning on a light to dispel the dark would show you that there were no monsters or bogeymen. Successful therapy shines a light on your personal fears and inhibitions, allowing you to move beyond them.
Crises are powerful
catalysts for change because they force us to directly confront our worst fears. Just as what does not destroy us makes us stronger, as Nietzsche asserted, the crises we successfully face provide a sense of mastery that cannot be induced by mere conversation. Such crises, indelibly etched in our minds, hasten the process of emotional learning, moving us rapidly from tacit to explicit knowing. Brief therapy, in this sense, can be thought of as a tool for accelerated learning, truncating the normal, gradual movement from intuition to verbal understanding. In this chapter we will explore how our tacit knowledge—the solutions that lie just beneath our verbal awareness—can point the way to resolving crises and can facilitate the development of traders, much as these solutions accelerate personal change.
BIG, SILENT WALT
Walt was an imposing medical student: at least six-foot-four and 250 pounds. He was not gregarious. He had a quiet, intense demeanor and the sense of always being on edge. Walt seemed removed from most people. He had few friends and rarely smiled.
Among those feeling removed from Walt was his girlfriend, Janie. She professed a deep love for Walt, but she finally reached the end of her rope when Walt could not respond to a recent emotional dilemma that she faced. In no uncertain terms, she told Walt to get help or the relationship was over.
I generally dislike meeting with people who are referred by others under a threat of consequences. They rarely have the motivation to stick with the intensive effort needed to make life changes. Walt, however, was an exception. He made it very clear that he loved Janie and would do anything to rescue their relationship. He indicated that his emotional distance had caused problems in prior relationships, including those with family members. "I feel like there's a wall between me and other people," Walt confided, "and I don't know why. I want to be there for Janie, but I shut down. She tries to reach out to me, and before I know it, I can't even think straight." Filled with remorse, he admitted to wishes that Janie would just go away and leave him alone. "I can't control myself," Walt said despairingly. "I totally shut her out. She doesn't deserve that!"
"How many of your patients in your clinical rotations have you totally distanced from?" I asked innocently, knowing full well that any such problems would have been referred to me.
Walt looked at me, horror in his eyes. "Oh, no. I've never backed away from my patients," he assured me. Walt clearly prided himself on his concern for others.
"So in that situation, you do have control," I pointed out. "You can't tell me that school has never alienated you and made you want to back away!"
Walt smiled.
"You do have the ability to relate to people in constructive ways. You're doing it in your career every day. But for some reason that's not happening in your closest relationships."
Walt listened intently. He was open to the idea that there were at least two Walts: (1) a professional self that could cooperate with others and handle frustrations in a constructive manner and (2) a relationship self that runs from intimacy. Making a problem "ego alien"—separating the person from the problem—is crucial to the change process. "The problem is not you," I often suggest. "The problem is your pattern."
In the next two sessions, Walt allowed me into his childhood memories. His father was moody and temperamental, capable of flying into a rage at a moment's notice. Arguments between Walt's parents were regular occurrences. Walt recalled going into his room as a little boy and hiding under his bed in order to avoid the sound of the disagreements. He loved his mother and sought her support, but he also resented her for not standing up for herself when his father was angry. He recalled that his mother lapsed in and out of depression and would leave the house untended for days at a time. Walt said that he also felt depressed on occasions. It appalled him that he might be like his mother, whom he saw as lovable, but weak. Like Mary, Walt was finding himself being someone he did not want to be.
Unlike Mary, however, Walt spent much of his time in the sessions out of touch with his emotional experience. When I first met him, with his large body and intense glare, I expected stormy sessions. Nothing could have been further from the case. Walt dutifully responded to my questions and seemed quite aware of the link between his father's anger and his own passivity. Indeed, he recognized that his father had felt belittled by his own father, leaving a generational legacy of insecurities. Walt was verbally attacked by his father on a regular basis, and he felt tremendous insecurity as a result. He refused, however, to get angry and fight back. He might feel depressed like his mother, but he would not be his father. He would not continue the generational pattern.
All of this Walt knew. Yet it didn't change a thing. The rational, professional self and the self caught under the bed, hiding from childhood turmoil, found little intersection.
I found myself becoming frustrated with our sessions. We were doing a good job talking about the problems, but we weren't touching the problems themselves. I knew that if therapy were going to be successful, we would have to effect an integration of Walt's "personalities." And that meant bringing the mother-father experiences into our sessions.
This is as close to an immutable law as one can have in psychotherapy. Change cannot occur unless problem patterns are happening in real time. Those provide the "gear shift" occasions when it becomes possible to introduce new understandings, new skills, new contexts, and new experiences. No amount of rational discourse can touch John Cutting's Mind #2.
Somehow, I needed a way to touch Walt's nonverbal mind.
CREATING POWERFUL NEW EXPERIENCES
Consider the idea that you can only change patterns once they have been activated. To overcome anxiety, you have to become anxious. To master depression, you must allow yourself to become depressed. No amount of avoiding anger, fear, self-doubt, or conflict will allow you to master these.
For traders, this means that the greatest opportunities for change occur when trades are on and the emotional ebbs and flows are at their strongest. It is on those occasions that traders can consciously make efforts to break their repetitive patterns and initiate new responses.
Mental rehearsals—playing out challenging situations in your mind and imagining using various coping methods—can be quite effective in breaking old patterns. But nothing substitutes for what behaviorists call in vivo exposure—when individuals create actual stressful situations and push themselves to institute coping measures. A patient with panic disorder who purposely accelerates his breathing, mimicking hyperventilation, can recreate many of the symptoms of anxiety. By conjuring up these symptoms and then practicing cognitive and behavioral self-control methods, the patient develops the capacity to face real-life anxieties.
My own most successful in vivo exposure came about in an entirely unplanned manner. For years, I had been uncomfortable with heights but never had to deal with the discomfort. The fear was only triggered when I had no barrier or support around me. In a plane or at a secure point on a mountaintop, I had no problem.
During a summer visit to a local recreation area, my son, Macrae, wanted to take a chairlift ride to see the scenery. I was a bit uneasy at the idea of sitting in a chair suspended from a cable; but because people were strapped into the chair and further protected by a bar that swung down in front of them, I decided that there was no danger of falling.
As we started up the lift, little Macrae sat on my lap, smiling and taking in the view. I quickly noticed that the restraining bar had become stuck and would not descend. We were traveling in an entirely unprotected chair. I realized that I could not afford to let Macrae see that I was concerned. If he became fearful and made a sudden move, he could fall from the ride. So, with a mammoth effort, I disregarded my fear and held Crae tight, pointing out features of the scenery and otherwise engaging his attention. He never realized that the ride was unsafe.
From that point forward, my fear of heights was never so great. I had faced the worst imaginable situation, and I saw that I could handle it. Having me experience heights, but in a way that I was responsible fo
r someone else, was the best possible therapy. The immediacy of the situation forced me to cope in a novel fashion.
One of my favorite tools for trading development is a biofeedback unit that measures forehead skin temperature. As you shall see later in the book, forehead temperature offers a sensitive measurement of blood flow within the prefrontal cortex of the brain—that portion of the brain most responsible for focus, concentration, and attention. Temperature readings tend to rise when people are in states of relaxed focus ("the zone") and tend to fall during periods of frustration and distraction. By establishing a baseline for myself prior to the market open and hooking myself up to the feedback unit throughout the trading day, I can follow the rises and falls in my "zone" as a function of the movement in the markets—and in my positions.
By establishing a very simple rule—never enter or exit a position when the biofeedback readings are below their baseline levels—I can force myself to break old patterns in real time. The biofeedback values become part of an entry/exit strategy in which frustration cannot drive my placement of orders. Either I find a way to relax and focus, or I don't trade. This real-time discipline has proven far more effective than any out-of-market exercises I could have undertaken. Like the chairlift ride, the biofeedback forces me to experience old threats in new ways.
The Psychology of Trading Page 19