The Psychology of Trading

by Brett N Steenbarger

  —B.N.S. Dream Journal, entry for 8/21/77

  Better than any therapist could, my dream honed in on my problem. If life is a slide, I was taking a gentle ride. In choosing a low "coefficient of daily experience," my ride was safe but unfulfilling. I needed to activate the slide, but not so much so that I would be filled with fear. A setting of 1.15—a modest, attainable challenge—was what I needed. A simple image of a slide captured beautifully the dominant life theme with which I had been struggling.

  Two years ago, I had a horrible trading experience in which I held onto a losing position much longer than warranted, magnifying my losses. The hit to my portfolio was painful, but the emotional agony was even more so. Each day I acted out a tableau of hope, discouragement, despair, and helplessness. Experienced traders wisely counsel on the importance of cutting one's losses to avoid wiping out days and weeks of hard-earned profits. They recognize the sizable psychological toll taken when traders program their minds with negative experiences and messages during those periods where they hang onto their losers.

  After one particular grueling day, in which my position started the day favorably only to reverse by the close, I had a most vivid dream. When I woke up, I immediately wanted to put the dream out of my mind—but I knew I could not. In the dream, I was in my boyhood town of Canton, Ohio. I was driving down Harvard Street along a strip that runs between 25th Street and 30th Street. I found myself dozing behind the wheel and awakened, surprised, to find that the car had remained on a straight path. As soon as I worried about it veering off the road, it began to drift and I realized that I was in the backseat. I vainly attempted to crawl to the frontseat in time to hit the brakes, but I realized it was too late. The car was headed toward other cars and a wire fence across from my old elementary school. As I cried out in my dream—passionately cried out—that I didn't want to die, I managed to awaken.

  If a client brought me that dream, I would want to get him or her into that backseat, crying out for life. I know the meaning of that dream: the horror-filled recognition of living one's life aimlessly, out of control. If anything can shake one from sleeping behind life's wheel, it is the recognition of imminent death, the impending crash. As a trader, I was asleep at the wheel. I was about to crash. The vivid, emotional recognition that I wanted to live drove home the message of staying awake in my trading far better than any words of advice.

  Once people recognize that they possess multiple minds, it isn't a great leap to view dreams as communications from one self to another. The emotional tone of a dream is more important than its outward content. Dreams that express fear usually capture something anxiety provoking in one's daily life. Dreams that are violent often speak to feelings of anger and frustration. If you're truly immersed in your trading, dreams will not tell you what to buy or to sell, but they may tell you something equally important: how comfortable Mind #2 is with the trading being done by Mind #1. My car crash dream suggested that I was aware of my self-destructiveness, even as I attempted to rationalize holding my losing trade.

  DREAMS AS EMOTIONAL COMMUNICATIONS

  Perhaps dreams are nature's way of providing people with alternate states that open them to creative reworkings of the mindscape. Dreams rarely occur in a normal state of mind; they are much more imagery and emotion filled than accustomed thoughts are. Access to that imagery and emotion can spark important trance-formations: shifts to new modes of thinking and feeling.

  Incredibly, however, many people want to analyze dreams rather than reexperience them in a trance-formative way. They assume that the meaning of the dream is in the text, rather than in the experience, the context. To understand a dream, you have to live it. Talking about the car veering off the road is far less powerful than reliving the frantic struggle to get to the frontseat and watching the inevitable collision with the fence.

  The experiential psychologist Alvin Mahrer utilizes a form of dreamwork in which clients are encouraged to actively enter their dreams in a vivid, fantasized way and to reexperience them. The dream, he believes, is less significant for its content than for the enhanced state of experiencing that it offers. He finds that when people allow themselves to fully immerse themselves in the thoughts, feelings, and actions of a dream, a transformation occurs in their experiencing. There is a breaking through the unpleasant feelings and images of the dream to a new, and often positive and integrative, experience.

  Here is an illustration. Shelley, a swing trader, reported a dream of getting caught holding a long position in a plunging market. Watching her position deteriorate minute after minute in the dream, she literally felt as though she were bleeding to death. Subsequently, she reported great hesitance in taking a position in the market, fearful of taking a loss.

  Shelley was asked to lie on her bed in a prone position and bang the mattress repeatedly, heightening her state of experiencing. After a series of bangs, she was instructed to continue hitting the mattress while visualizing her deteriorating position and screaming out, at the top of her lungs, "I'm going down! I'm going down!"

  As Shelley poured herself into the exercise, her spontaneous cries on the mattress changed their form. From "I'm going down!" she began yelling, "I can't stop it! It won't stop!" This, in turn, gave way to "I can't get out! I'm trapped! It's going down and I can't get out!" Within a matter of a minute or two, Shelley's pounding the mattress became a frenzied pushing against invisible walls, as she acted out her desperation over exiting her helpless position.

  Exhausted, she tumbled off the bed and began gasping exultantly, "I'm out! I'm free! I got out!" Her terror was replaced by an overwhelming feeling of freedom as she escaped her tormented position on the bed. Processing the exercise, she recalled a traumatic episode from her childhood in which her uncle was playing with her in the family swimming pool and held her head beneath the water for too long. Unable to emerge from the water and filled with fear, she nearly passed out before the "game" ended. She never returned to the pool again.

  By reenacting the dream—and the episode from the pool—Shelley obtained a firsthand experience of facing and overcoming her worst fear. Mahrer finds that pushing oneself through the peak experiencing in a dream or uncomfortable event produces a qualitative shift in this experiencing, opening the individual to new modes of thinking, feeling, and acting. Instead of dampening negative states, the client is encouraged to blast through them and divest them of their power.

  A trader once reported to me that he was troubled by a dream in which he was running from shadowy, menacing characters that were pursuing him. He was convinced that they were going to kill him and could not shake the feeling, even after awakening. It later came out that he had sustained a recent large loss in his trading. Consciously, he insisted that he had "come to terms" with the experience. Nonetheless, he admitted that his troubling dream had occurred immediately following a trading day when he had increased his size beyond his normal money management guidelines. His dream strongly suggested that he felt far more vulnerable than he was admitting. Armed with this information, he was able to closely monitor his position the next day and trim his exposure down to the sleeping level.

  REPETITIVE DREAMS: THE THEMES OF LIFE

  If dreams capture the momentary themes occurring in your life, repetitive dreams encode your enduring life themes. Like repetitive themes in a market—say, the relative outperformance of small and mid-cap stocks over their larger siblings for a period of months—these dominant life themes often form the basis for your most important and durable changes.

  It is interesting that it was just such a repetitive dream that helped to shape this book. In past versions of the dream, I had the ability to fly and to move very quickly. This allowed me to remain beyond the reach of others, providing me with an indescribable feeling of freedom. During my writing of this book, early in the process, I found myself feeling stuck. To my dismay, I was facing a writer's block. When I reflected on the block, I realized that I was torn. Part of me wanted to write a book that was hi
ghly research based. I wanted a text that would be admired by my scholarly academic and trading colleagues. Another part of me wanted to write something more informal, much more personal, and geared toward the trading public. The result was paralysis: As soon as I would write in one style, a self-critic would jump in and interrupt the flow of words.

  One day, I spent hours in front of the computer. At the end of it all, I had nothing of worth to show for my time. I was tremendously frustrated.

  That night, I had a flying dream. It was one of my favorites, involving flying while playing basketball. Several players were attempting to block my shot, but I was able to soar over them en route to the basket. High in the air, I timed my descent to make a perfect slam dunk.

  As I was at my apex and about to descend, however, I noticed the outer layer of the ball unraveling. Layers were stripped from the ball like sheets of paper. Indeed, as I struggled to keep the layers together and retain the round shape, the ball changed into a book. The sheets were pages from the book, and I was descending for my slam dunk. As I "dunked" the book atop a stack of other books (the books were thick library volumes; the top one had a plain white cover and was a book on tax and estate planning), a fragment from a song kept playing over and over: "Hoppe, Hoppe, Reiter . . . "

  Please allow me a bit of explanation here. While writing the book, I was involved in establishing a family trust for estate planning purposes—a task I found necessary, but dull and time-consuming. The German phrase "Hoppe, Hoppe, Reiter" refers to a game, in which a child sits on the knee of a parent and bounces up and down as if riding a horse. The particular music in the dream was from the refrain of a song by a German group called Rammstein. The song, Spieluhr (Music Box), tells the story of a boy buried alive with his music box. When the winter wind blows through his grave, the music box is activated and the boy's heart is rekindled. Worshippers at Totensonntag, a festival for the dead, hear the music box and return the boy to the living.

  From the moment I awakened, the significance of the dream was crystal clear. I was torn between writing a dull, scholarly volume and composing something that would be fun and personal. Slam-dunking the book on top of the dusty, dry volumes was a beautiful image for what I needed to do. The dream captured an important emotional reality. I, like the protagonist in the song, felt as though I had been buried alive. Indeed, I had buried the child—the sense of fun—in my writing. I would not overcome the block until I unearthed the soaring, slam-dunking, childhood sense of enjoyment that accompanies writing from the heart.

  That dream was my personal Totensonntag. For the remainder of the writing, I never again experienced a debilitating block. The verbal, rational me could not figure out how to write the book; but another part of my self knew very well, stating the message in image and song.

  HYPNOSIS: ACCESSING OTHER MINDS

  Perhaps the most dramatic form in which life themes can be manifest is through hypnosis. It was hypnosis that convinced Freud of the existence of an unconscious mind. Indeed, it is impressive to see how people can access information in a hypnotic state that seems inaccessible in a normal mode. Changes made through hypnosis are true trance-formations.

  Of well-known therapists, Milton Erickson is the acknowledged master of hypnotic trance. He used the trance state to interrupt client patterns and introduce new elements into those patterns. Many of his therapy sessions were very different from the normal talk therapy that is commonly associated with counseling. Erickson seemed acutely aware that normal talk in a normal mind state limits access to those facets of self that define one's normal identity. Only by accessing nonnormal spots on the continuum of consciousness, Erickson found, can people make extraordinary changes.

  Jay Haley, in his book Uncommon Therapy, described some of the innovative techniques employed by Erickson. Erickson realized that it is not necessary to engage in elaborate inductions in order to promote a hypnotic state. Indeed, any situation that can firmly fix the attention of a client is sufficient to introduce an element of trance. Accordingly, many of Erickson's cases involved an element of shock and surprise in order to completely absorb a client's attention. Haley recounted the case in which Erickson met with parents who could not stop their adolescent daughter from sucking her thumb. Erickson agreed to meet with the girl on the condition that the parents would cease all efforts at getting their daughter to stop. They were not to discuss thumb sucking or in any way to comment on it.

  Desperate, because nothing else had worked for them, the parents agreed. In an individual meeting with the daughter, Erickson took a different stance. He feigned indignation that the parents were ordering him to change their daughter, expressing the sentiment, "Who are they to be telling me what to do?" This, of course, gained the girl's attention. Furthermore, Erickson told the girl, he could not understand why the hell she just sucked her thumb daintily if she wanted to irk her parents. To really irk them, she should suck her thumb as noisily as possible.

  The girl was completely absorbed in Erickson's advice, particularly when he used profanity. Once she was in the highly attentive state, he gave his instructions: She was to sit beside her father for 20 minutes each evening and "nurse your thumb good and loud, and irk the hell out of him for the longest 20 minutes he has ever experienced." Then, she was to join her mother for 20 minutes and do the same.

  The girl faithfully executed the instructions, and the parents dutifully refrained from either commenting on the sucking or otherwise trying to make it stop. After several days of loud and effortful thumb sucking, the daughter began to lose interest in the task. She reduced the amount of time spent sucking her thumb and then skipped the exercise altogether. It had become a chore, with little reward. Within a few weeks, she had discontinued altogether.

  Erickson recognized the power of highly focused, attentive states, realizing that these open people to processing information in a deep and lasting way. Thoroughly capturing a person's attention with unorthodox interventions, he could induce a degree of hypnotic trance without going through the usual process of induction. Changes that might have otherwise taken months or years were accelerated, given the deep level of processing associated with the attentive state.

  Hypnotic procedures can be especially powerful in helping people induce emotional and behavioral changes, bypassing the usual conscious resistance to change. One of my favorite inductions is to have people sit in a chair in a very quiet, still manner and close their eyes. I ask them to hold their hands in front of them, spread apart by about two feet, with the palms facing each other. While they breathe deeply and slowly with eyes closed, I ask them to imagine that there are magnets slowly, slowly pulling their hands together. I suggest to them that as their hands are coming together, they are feeling more and more relaxed, more and more focused. When their hands finally touch, I suggest, they will feel completely calm and at ease. Moreover, I add, whenever they bring their hands together in this manner in the future, they will find themselves in the same calm, focused state.

  This is a handy exercise, because it can be easily practiced at home, either with self-instructions (telling yourself that you will feel at peace when your hands touch) or with an audiotape. With sufficient rehearsal, the hand gesture becomes associated with the state of focused self-control, allowing you to enter the state simply by closing your eyes, taking a couple of deep breaths, and bringing your hands together.

  One trader with whom I worked, Al, discovered how hypnotic work is internalized as part of a working repertoire. He had learned a new entry technique after attending a trading seminar. The entry worked well in backtesting, as long as it was accompanied by strict money management. The basic concept required the trader to identify short-term, low-volume pullbacks within markets trending upward on rising volatility. These became entry points to get on board a high-momentum market. (The risk, of course, was that of a reversal in a particularly high-volatility market; hence the need for careful stops.) Psychologically, Al found the pattern difficult to trade, as it require
d entering a market that had already moved nicely higher. He felt more comfortable trying to buy low and sell high, which required a bottom-picking clairvoyance that he, like most traders, lacked.

  We adopted the magnet hands exercise to the trading pattern, having Al breathe deeply and slowly with his eyes closed. He moved his hands closer and closer together, as if pulled together by magnets, all the while imagining the pattern he was to be trading. When his hands came together and his fingers touched, I suggested, he would feel calm and confident in placing his trade per the system rules. After a few trials, using historical charts as his guide, Al became quite good at visualizing the pattern and entering a relaxed, focus state as he held his hands in front of him and moved them together.

  His breakthrough came just several days later. Al was sitting in front of the monitor when a stock he had been watching paused after a morning spurt upward. The low-volume pause, coming early in the day after an opening gap upward, had the potential to trigger his system. Without even thinking, Al watched the stock carefully, while holding his fingertips together, as if in a praying position. This was the self-suggestion he had been rehearsing, now manifesting itself in real time. According to Al, he felt unusually clearheaded in placing his trade—almost emotionless. He had learned to create his own shift, anchoring the trading pattern to a new physical, emotional, and cognitive state.

  Had observers been in the trading room with Al, they would have noticed the same kind of marker that therapists observe in their sessions: a change in breathing, in physical movement, and in emotional tone, signifying a transition to a focused and calm state. Moreover, the observers would probably notice that such shifts preceded Al's best trades, whereas those trades placed under greater physical and emotional agitation showed poorer results. Once Al could activate his own Internal Observer and control his state shifts during the trading day, he truly was trading from the couch.