The Psychology of Trading

by Brett N Steenbarger

  This, I believe, accounts for the distinctly powerful effects I have experienced from long periods of immersion in physical and cognitive stillness, immersed in the Philip Glass music. Much like the sensory isolation tanks of John Lilly, the biofeedback and music exercises create a leap so radical that it is virtually impossible to access old behavior patterns. Moreover, I have found that, enacted with sufficient frequency, these highly altered states become more familiar and more easily accessed. Where long hours once were needed to achieve the leap to a highly focused state, only minutes are now required. Moreover, I find periods of intense absorption appearing spontaneously during the day with increasing frequency. Radical departures from norms, whether socially induced or cultivated through directed techniques, appear to accelerate change, breaking old patterns and cementing new ones.

  CONCLUSION

  "I want to really make it, like you," Jack explained to me. "Do you think I can do that?"

  Jack was not referring to my income, which was embarrassingly modest by his former trading standards. He wanted to know if he could make a living by being a good person: a successful trader, husband, and father. It is interesting that Jack felt worse about his shortcomings as a family man than he did about his trading losses.

  "Then I'd really have something," Jack explained. "I want something that's really mine."

  "Your success didn't feel real?" I asked.

  "No," he admitted. "I always felt like I was screwing up, giving my family the short end. And I couldn't face the people who gave me money to invest. One of them was a bad guy. I thought he was going to come after me."

  I now realized why Jack packed his gun. And, from the depths of my flashback, I understood why his businesses imploded.

  "What I found out, Jack, was that as long as those negative voices were in my head, no amount of profits in the market were enough. I would always have to go for more, take on more risk, until everything collapsed. Once I got the voices out of my head, I could take some money off the table. It hasn't made me rich, but I can do well and feel good about it."

  There it is, the translation: The problem isn't your business loss; it's the internal script that keeps you in the role of a loser.

  "You mean if I can forget my past, I can be a success?" His tone brightened slightly.

  "No!" I stressed. "I mean that if you can overcome your past, you will be a success no matter how much money you're making at the time."

  I could see the wheels turning in Jack's mind. His gaze was intense. His shoulders, once sagged, were now straight. It was another of those trance-formations that makes this work so special.

  A smile crossed Jack's face, and I thought I detected a slight narrowing of his eyes and a shady, sideways glance. "So what do you think about this market?" he asked.

  Okay, so it wasn't a complete transformation.

  Within a few months, however, he was in a good job, making a fresh start with his children, and pursuing a new relationship. He was another survivor from the brink. Crisis—that painful, all-consuming sense of hitting bottom—provided the mood, opening him to a new set of emotional messages: You're okay as you are. Those messages could not penetrate when he was his old self, pursuing life in his usual way. Under conditions of crisis, however, the very same ideas could turn his life around.

  In one state, Jack, like myself, was locked into a pattern. In a different state, emotionally attuned to the destructiveness of his ways, he could reorganize his life. Crisis was the catalyst, the very soil from which novel life directions sprouted. Jack, like me, like Muhammad Ali, had found a way to downshift in the midst of crisis and to change his direction: He no longer needed success in the markets to be a success in life.

  Chapter Thirteen

  A Dose of Profanity

  We take our truth as coffee, with or without sugar.

  What allows traders to so utterly reject their old ways that they can leap to new alternatives? The answer, interestingly enough, is anger. Of all the emotions, anger perhaps receives the least attention among psychologists—far less than anxiety and depression. It is precisely because many people cannot tolerate their own anger, however, that they find themselves anxious or depressed in the face of aggressive impulses.

  Channeled properly, anger can be one of our most constructive emotions, generating energy that can catalyze a host of changes. In this chapter we will take a look at how we might harness the feelings of frustration and anger that stand in the way of trading and use them to propel us into leaps of change.

  UNDERSTANDING YOUR RELATIONSHIP WITH YOURSELF

  To begin the exploration of anger, take a look at the relationship you have with yourself. Once you appreciate how restructuring a counseling relationship opens possibilities for change, allowing an individual to assume and internalize new roles, it is but a small step to recognize how you can guide your own change by shifting your relationship with yourself. Many of the changes I have helped people make have entailed learning ways of talking more constructively to themselves. This was particularly evident with Joan, who transformed angry self-talk into a nurturing dialogue.

  One of the most helpful exercises traders can undertake is keeping a journal of their internal dialogues. Internal talk is a conversation between the "I" and the "me": It is a direct measure of your relationship to yourself. And, truly, what is self-esteem but the quality of the relationship you have with yourself?

  When people keep a journal of their ongoing stream of thoughts, their conversations with themselves become visible. It becomes possible to return to the conversation, to examine it, and to evaluate it. They gain the observing capacity to ask themselves: How am I talking to myself? Is this how I talk to other people? Is this how I want others talking to me?

  It is eye opening to examine a written journal and to see how much of your time is spent in damaging self-communications. Worst of all, these conversations tend to be most poisonous when you are emotionally aroused and, therefore, most likely to internalize their negativity. How you talk to yourself after a difficult loss in the market will play a disproportionately large role in defining your subsequent emotional reactions: your confidence going into future trades, your sense of mastery and control, your motivation. Sadly, many people carry on relationships with themselves that would be identified as emotionally abusive if conducted between two other people. Like Jack, people harbor deep insecurities that become more deeply engrained with each act of guilt, doubt, and self-blame.

  One of the ways this manifests itself in trading is the inability to reverse scratched trades. Suppose that you identify a high-probability trade based on a forecast that a particular stock will rise over the next two weeks. Instead, the stock stays in a narrow range for the next 10 trading sessions, even as the market is rising. You realize that the trade hasn't worked out and take a small loss. The question now becomes: What is your internal dialogue at the time you take the loss? Too often, the conversation consists of frustrated statements, discouragement, and negative feelings. You tell yourself that the trade was a failure, and—even worse—you might process the trade as if you are a failure.

  This negative processing takes a toll on your ability to learn from the market action. Caught in self-flagellation, you lose the focus and the motivation to take the reverse trade when conditions warrant. Many times, a failed high-probability trade is giving you valuable market information. If a stock that is expected to rise fails to move higher on a market rally, it may be particularly vulnerable during the next correction. It is difficult to reverse your thinking about the trade, however, if you are self-absorbed. A trading audit may reveal an ability to honor stops and take modest losses, but also a failure to capitalize in a positive way on this information. The inflexible trader can cut losses on the long position but not reverse and go short when conditions dictate. The internal dialogue is a likely culprit.

  This dialogue can be shifted, as you have observed in the counseling with Sue, Mary, Walt, and Jack. To accomplish such a shift
, you want to adopt new roles in your relationship with yourself, rehearsing the constructive self-talk that you would want to hear from others. Unfortunately, mere positive thinking is unlikely to dislodge the negative dialogues. What it takes is emotional experiences, like those created in therapy. How can you create such experiences for yourself? This is where anger becomes a valuable ally.

  DAVE, THE NARCISSIST

  Dave irritated me from the moment he entered my office. A short, thin, nervous-looking medical student, he arrived several days before Step One of the medical board exams. Much of the irritation was due to the last-minute nature of his request. Dave was encountering studying problems, and he wanted help immediately. Not soon—immediately.

  How people request assistance is often suggestive of larger personality patterns. Some ask for your time almost as if they are an imposition, interrupting their request with apologies for distracting you with such minor problems. Others are matter-of-fact, as if scheduling an appointment with their accountant. Still others couch their request in elaborate emotional outpourings, gushing about their problems before a meeting can even be established.

  My least favorite people are those who call directly into my office, bypassing the secretary. They immediately launch into a presentation of their problems, heedless of the possibility that a counseling session might be in progress. Or they request an appointment for a seemingly routine concern within the next few minutes or hours—something they would never do with their primary care physician or attorney. "I want it, and I want it now" seems to be the operative mind-set.

  Psychologists refer to this as regression. Under stress, people revert to modes of coping that were utilized during formative periods of their development, much as I entrenched myself in the bathroom when I moved into the home with my wife and children. The term for this particular type of regression is narcissism. Under the strain of current conflicts, the person returns to the egocentrism of childhood. Just as children might press their demands, ignoring the constraints of reality and the needs of others, clients can make demands of therapists that are breathtaking in their self-absorption.

  So it was with Dave. He knocked on my door during a meeting with a client and asked to be seen right now. "What's going on?" I asked, doing my best to place my body between him and the individual in my office, even as I contained my annoyance over an interrupted session.

  "I'm trying to study for the boards," Dave responded. "I'm totally losing it. I haven't slept in two days, I'm behind with all the material, and there's no way I'll be able to get through it all. I want to go into neurosurgery. If I don't do well on the boards, it will ruin everything."

  "I'm in a meeting right now," I said. "Could you wait for a few minutes in the waiting room right around the corner? I'd be happy to talk with you once I'm done."

  I realized that I had a committee meeting next on my agenda. This would have to take a backseat, however, given the anxiety on Dave's face. "But I can't wait. I have to study," Dave complained, practically pouting.

  I stared at him incredulously, now feeling pressured by the time taken away from my other student's session. "What would you like me to do?" I asked. I was about to add, "Kick the student out of my office so that you can talk?" but I thought better of it, partially because it might alienate him, partially because he just might take me up on the offer.

  "I'll go to the waiting room," Dave responded glumly.

  I went back to the meeting in progress, already steeling myself for a session I knew I would not like.

  REGRESSION AND MULTIPLICITY

  What does it mean for a person to regress to a different level of functioning? As you saw earlier, the idea of regression presupposes a backward travel in time, a reversion to modes of perception and response more appropriate to an earlier point in development than to one's present-day context. But it also presupposes that the person is capable of occupying multiple mind spaces. Sometimes these mind spaces collide at a particular moment of insight, as when Walt recognized, "I'm acting like a little kid, not like the adult I truly am." The self-as-child, the self-as-adult, and the self-as-observer suddenly merge in a seamless testament to the complexity of personality.

  Developmental levels are often reflected in this multiplicity: This was a seminal recognition of Jean Piaget. I vividly recall the first time my daughter, Devon, saw herself in a videotape. The camcorder footage had been taken just a few minutes before and now was displayed on our television. Her eyes grew wide as she saw herself on the screen; and, in her most excited three-year-old voice, she exclaimed, "TWO DEVONS!" It was a classic Piagetian moment. Unable to reconcile the realization that she was both the watcher and the person being watched, she concluded that there must be two of her.

  If Devon had come to that conclusion as a grownup woman, her belief in two Devons might have reflected a psychotic process. Psychosis itself is a regression, a return to more literal understandings and identifications. Had the Woolworth man said that he felt like an empty department store, he would not have been viewed as mentally ill. It was his insistence that he was a store that triggered his diagnosis.

  What, then, are we to make of Rorschach inkblot test results in which a single person generates multiple developmental levels of response? Here is a classic example: A respondent will see the first card as a bat or a butterfly, outlining the markings—wings, head, and so on. This is a popular response and in no way violates the bounds of reality. The next card, however, with its red markings, may elicit a response very different in its structure and content. The client may see the top red details as seahorses and the bottom gray area as a landscape. The entire response is offered as "bloody seahorses going for a walk through the mountains."

  This is not so far from little Devon. Unable to reconcile different perceptions—red as blood, seahorse shape, and gray area as mountains—the client fuses them into a whole that violates reality. Offering a response of bloody, walking seahorses and showing no signs of the incongruity of the response—even after pointed inquiry—is an important clue that regression has occurred.

  The inkblot test is a showcase of multiplicity. It chronicles the shift in and out of mind states in response to ambiguous stimuli. Indeed, the experiments with automatic writing and the Branden sentence completion exercises are similar, projective tests: Give a person a stimulus, and then ask them to respond automatically, censoring nothing. The spontaneous flow of speech, writing, and perception reveals shifts in information processing that only make sense if it is assumed that minds are capable of moving forward and backward in time.

  If the mere color of a Rorschach card is enough to trigger a regressive response, how much more likely is it that traders will find themselves traveling backward in time in reaction to a breakout on a chart? I have seen situations in which a trader has displayed extreme behavioral and emotional patterns in response to a single wide-range bar on a real-time chart: anger, depression, self-recrimination, and anxiety. What is most striking is that these reactions were not present in any shape, manner, or form for hours preceding the market event. One trader told me of beginning the trading day calm and confident and then regressing to anxiety when market reactions to a news event threw his trading plan askew. He had an opportunity to get on board the developing market trend, but he watched the entire move from the sidelines, unable to place a trade. Later, he described the feeling as the same helplessness he had felt as a boy when larger peers picked on him.

  That trader wanted help for his anxiety problems. He didn't realize that anxiety was only the tip of the problem. The more fundamental problem was that he did not have his hand on the radio dial of his consciousness. The market was controlling his state of mind, rather than his state of mind placing him in control of his trading. It is one's lack of control over one's mind—not the specific problems associated with any particular mind-set—that poses the greatest challenge for trading.

  NARCISSISM AND REGRESSION

  A fundamental feature of that form of regr
ession known as narcissism is that a person becomes so wrapped up in his or her own experience that the person cannot properly respond to social contexts, especially the needs of others. When Dave seemingly expected me to truncate my session in progress in order to address his current crisis, he strongly resembled the client distorting a Rorschach card. Under emotional duress, he was unable to accurately assess and to respond to the social situation at hand.

  The narcissism continued well into the start of our session. Once Dave sat down, he launched into a nonstop account of his chronic anxiety, his many unsuccessful efforts to resolve the anxiety, and his fears over failing the exam because of his level of stress. He seemed vaguely aware that he was caught in a nasty feedback loop, with anxiety fueling fear of failure fueling further anxiety; but he seemed completely unable to slow himself down. He never inquired about me, about counseling, or about how much time we had available to us. He was thoroughly absorbed in his own fears and needs. I could have been anyone to him.

  For a time, I let Dave ramble, hoping that he would exhaust himself and allow me to squeeze in a few words.

  No such luck.

  He continued in a rapid, nervous monologue, jumping wildly from one topic (I've always been anxious, I always freak out on tests") to another ("There's nothing else I want to do; if I don't get into neurosurgery, I don't know what I'll do"). Once in a while, he would tell me, "You've gotta help me"; but as soon as I began to offer a question or a comment, he interrupted and continued his monologue about his nervousness.