The Psychology of Trading

by Brett N Steenbarger

  Suddenly the phone rang. Dave's nonstop flow of anxious talk stopped. At least, I thought darkly, he didn't try to talk while I was on the phone. Regression notwithstanding, that set him slightly ahead of my children on the developmental ladder!

  Not quite.

  As soon as I returned the phone to its cradle—not a minute after it rang—he launched into a tirade. "Don't people have any respect for your privacy? Do you always get interrupted like this?" It was clear that he did not want anything intruding on his session, even as he had intruded on a previous client.

  Narcissism. In that emotional state, people can see flaws in others that they are utterly incapable of seeing in themselves. Just like the hidden coat in the closet: In one state, people are blind; in another, they can see clearly. How can they be capable of such extremes of ignorance and insight, maturity and immaturity? Who are these people, anyway?

  THE STATES OF DAILY EXPERIENCE

  The crucial insight of Colin Wilson is that people spend their lives in relatively few distinctive states of consciousness. The Austrian psychologist Hermann Brandstätter and the American Ed Diener have asked ordinary people to maintain diaries in which they periodically describe their conscious states. This time sampling of experience is far more reliable than retrospective accounts based on self-ratings. Indeed, it is not at all unusual for therapists to make such diaries an active part of counseling. Having clients or traders keep a journal of significant weekly events is a useful way for the therapist to enter into their worlds.

  An interesting picture emerges from such diary work. Eight basic emotional states define the bulk of human experience: (1) joy, (2) relaxation, (3) activation, (4) fatigue, (5) sadness, (6) fear, (7) contentment, and (8) anger. If you imagine a grid in which the X axis is anchored by excitation on the left and inhibition on the right and the Y axis is anchored by positive at the top and negative at the bottom, you can obtain a simple view of these common states. People's states are experienced as either pleasurable or aversive, as either activating or sedating. The fear experienced by Dave is negative and activating; its opposite is a state that is positive and restraining, such as relaxation or contentment.

  Brandstätter reported an interesting finding. Low arousal states are most likely to occur in highly familiar physical and social environments. Higher arousal is found in the presence of unfamiliar people and places. The degree of emotion is intimately connected to contexts: If you want to feel sedate and relaxed, you should immerse yourself in common, routine situations. Conversely, if you are looking for emotional stimulation, you might seek high degrees of novelty.

  This makes sense when you think about the choices confronting people in everyday life. Someone who is feeling overtaxed by their work might want a peaceful, relaxing, stay-at-home vacation. A different person, less stimulated on the job, might opt for trips abroad to novel destinations. The researchers Robert McCrae and Paul Costa have found the desire for novelty to be a trait-like dimension. Some people are highly open to new experience and tend to be stimulus seeking. Others are more attracted to security and stability and avoid change. You can conduct an interesting personality test by simply asking people which restaurants they typically visit. The stimulus seeker rarely visits the same restaurant twice; the stability seeker frequents a few, favorite haunts.

  An important conclusion follows from this. In exercising control over your physical and social contexts, you are titrating your conscious experience and thereby regulating your openness to change. During most of your life, you follow rather set routines: You wake up at a certain time; you follow morning rituals of washing, brushing teeth, and eating; you travel to work via a particular route; you keep set working hours and return home for dinner; and you spend time in an accustomed way with family, television, and household chores. These routines limit the emotional, cognitive, and physical states you are likely to experience during any given day. Indeed, the work of Brandstätter suggested that routines dampen everyday experience, keeping people from states of high emotional arousal. This has the potential to both deaden daily experience and to keep the social machinery well lubricated. After all, it is taxing to deal with such highly aroused people as Dave!

  As the music of Philip Glass revealed, repetitive stimuli, such as loops of music, can be sufficient to induce a state of trance. Indeed, an entire genre of electronic dance music is based on this. Given Brandstätter's research, your daily routines might be viewed as long-duration loops, and much of your daily experience can be conceptualized as a form of trance. This is very close to the analyses of George Ivanovitch Gurdjieff, who viewed ordinary states of consciousness as forms of sleep. It is indeed amazing to think of all the information that you discard when you are in your usual frame of mind. When you are driving your car, you rarely note the uniqueness of the scenery; when you walk from one place to another, you fail to observe your surroundings. Most of your actions are performed automatically, without self-awareness. Such autopilot is efficient, but also not so far from the limitations of awareness you experience during hypnotic induction.

  This contradicts the common understanding of mind states. Hypnosis is normally viewed as a transition from one state to another—from usual, wakeful consciousness to trance. Perhaps, however, hypnosis is simply a tightening of the loop of everyday routine, reducing the duration of the loop and intensifying the accompanying focus. The transition from a normal state to a hypnotic one may be an intensification of trance, not a true induction.

  Charles Tart, one of the pioneers of consciousness studies in psychology, described consciousness as a "world simulator." The function of conscious experience, he proposed in his text Waking Up, is to simulate the world and to enable one to navigate within it. The simulations of action people experience in video games are more or less realistic, depending on the memory allotted to the programs. All things being equal, a 128-bit game machine will render more detailed, realistic graphics than a 16-bit one. People's states of consciousness, in a sense, determine the bits to be allocated to their world simulations. During much of routine experience, people function as 16-bit machines, generating highly partial renderings of the world. Tapping into wider values and vistas, it is as if one's simulator gains an expansion card, leaping by megabits to more vivid, realistic experience.

  Colin Wilson observed that when the mind's energy level wanes, its ability to extract meaning from events drops precipitously. In one state of mind, people, like Proust, can perceive vistas of meaning in a single event. The majority of time, however, people move aimlessly through life's rituals, as if they were blindfolded. As the analyst Thomas French once wrote of psychosomatic illness, the problem is not so much the presence of emotional conflicts as the depletion of psychological resources—like the inability to access the expansion card. William James was correct when he asserted that the human condition is as if one has developed the habit of moving only one little finger, heedless of the whole of one's bodily organism.

  EFFORT AND PARTIAL CONSCIOUSNESS

  If you are to master the emotional challenges of the markets, the following insight is crucial: Dave's problem—and the problem of most traders—is not anxiety or self-doubt. Locked in a single mind state, operating in a 16-bit mode of consciousness, Dave cannot process the information required by his board exam. In a similar way, traders trapped in states of boredom, fear, and elation are closed to wider vistas of meaning, unable to process the significance of market patterns in front of them. Acquiring new data, or new ways of slicing old data, will not help them if they cannot draw on their resources for data processing. Most traders do not need a shrink; they need help in expanding their conscious control.

  A number of approaches to self-development take James's observation quite literally. These emphasize increased awareness of physical posture and movement as a means of cultivating expanded states of consciousness. Reviewing modalities such as the Alexander Technique, autogenic training, biofeedback, progressive relaxation, the Feldenkreis Method, an
d Reichian therapy, Michael Murphy explains in The Future of the Body that altering motor patterns helps to broaden behavioral repertoires. Just as people are limited to a narrow repertoire of thought and emotional patterns, they tend to become frozen into a rigidly circumscribed set of postures and movements. Indeed, people's cognitive, emotional, and physical limitations are of one cloth, reflecting the poverty of their habitual states of consciousness. Therapies enrich people's states through differing means, some by changing thinking patterns, some by promoting novel emotional experiences, some by introducing unaccustomed postures and movements. The gateways to change are manifold.

  If you pursue an activity for a sufficient period of time, focusing all your effort in that activity, your mind will adapt to the situation with a new spot on the radio dial. And it is very likely that the problems that seemed so insurmountable in your initial mind state will be experienced very differently in this new one. Consider the following examples:

  •Thoroughly absorbed in writing, the writer loses all self-awareness and is amazed to see how quickly time has passed. In this state of flow, previous concerns simply did not enter consciousness.

  •The runner begins to fatigue, feeling discouraged about her workout. She presses on, however, and catches her second wind. Shortly thereafter, she experiences a state of runner's high, feeling completely energized and refreshed. Her prior discouragement vanishes.

  •The stressed executive enters a sensory isolation tank, which allows people to float on salt water in a completely dark and soundproof environment. Consistent with the observations of John Lilly, the executive begins to feel bored and understimulated and then adapts to his surroundings. He emerges in a peaceful state, his stress completely vanquished.

  •A trader is battling a tendency toward impulsive trading, especially at the market open, as he fears missing a major trend. He begins a trial on a biofeedback machine connected to a VCR. In this trial he has to maintain an elevated forehead temperature in order to watch a movie. As soon as his temperature falls below a threshold, the movie pauses. After 40 minutes, he learns that he can keep the movie running by keeping his body totally still and placing all internal dialogue and frustration out of his mind. At the end of the session, he feels oddly removed from the emotions of the market and places his morning orders without pressure.

  • A trader who has been overly cautious in exploiting opportunities uses her morning weightlifting routine to get herself in the proper mind-set for the market open. Using the high-intensity routine developed by the late Mike Mentzer, she concentrates her effort in a relatively short period of lifting, generating tremendous effort during her final repetitions. She emerges from the workout with her muscles feeling engorged from the enhanced blood flow, which becomes her marker for a pumped-up mind-set. Her prior hesitation is forgotten, and she aggressively pursues her edge.

  Effort is the key to the acceleration of change. You can eliminate problem patterns that have existed for years simply by placing yourself in a mind/body space that is radically different from your norm—and then programming that new space with your desired patterns. Your reluctance to make such efforts—your comfort with your existing mind/body state—is your greatest obstacle toward change. It is not coincidental that the military places recruits through rigorous exercise and training when they want to instill soldiers with the desired mental and behavioral patterns. Change cannot be achieved in comfort—ever.

  Traders of the future may pursue self-development through means that look far different from weekly talk sessions. Virtual reality domes and sensory isolation tanks may become as common as home theaters, placing technologies of consciousness in the hands of average consumers. These will be the home gyms of the mind, dedicated to expanding consciousness and identity rather than to eradicating problems. It is wholly unnecessary for basically healthy individuals to explore conflicts and problems in months and years of psychotherapy if they can acquire the capacity to navigate the mindscape. The awful music one hears on the radio of the mind is only a problem if one cannot change the station.

  ACHIEVING A NOVEL MIND FRAME

  The relationship between novelty and states of consciousness sheds important light on the approaches most psychologists would take to the situation with Dave. Although he is an experienced student, Dave approaches each test as a novel situation. He becomes immersed in the threat of failure, sending his level of bodily arousal through the roof in a classic fight-or-flight response to emergency. For Dave and for traders, the key to overcoming performance anxiety is to eliminate the sense of emergency. By introducing elements of familiarity and repetition into the equation, Dave can shift toward less-aroused states, and he can experience less interference with his studying.

  A common way this is done is through a method known as "systematic desensitization." Anxious individuals are shown how to focus and calm themselves, using such techniques as deep breathing and progressive muscle relaxation. Once they become relatively proficient at these methods, the state of relaxation is paired with stressful situations in a gradual manner. Typically, this is accomplished through the use of a hierarchy. People are asked to create a scale of stressful events that extends, say, from 0 to 100. At the 0 end of the continuum are situations that are minimally stressful; toward the middle are somewhat stressful circumstances; and at the 100 end of the hierarchy are severe stressors. They are then encouraged to imagine various scenarios, starting at the bottom of the hierarchy and working their way up—all the while performing the relaxation technique.

  The idea is that through repetition people learn to associate calm and relaxation with formerly anxiety-producing situations. Dave, for instance, might begin by pairing relaxation with looking at his textbook, then reading in his book, then taking sample tests, then taking the actual test. He would not move to the higher spot on the hierarchy until he had fully achieved relaxation at the current level. This work can be greatly facilitated by the use of imagery. A trader, for instance, could pair the relaxation with imagined scenarios of facing drawdowns before tackling live trading situations. The use of imagery creates practice situations that would be difficult or impossible to construct in everyday life.

  With only days left until the board exam, I naturally gravitated to such techniques for Dave. Cognitive-behavioral methods are well suited to between-session homework assignments, thereby taking maximum advantage of time. Seeing our time passing quickly, I interrupted Dave's flow of anxious talk and slowly, calmly explained to him that there were techniques available to help people reduce their level of arousal. "These are techniques that draw upon our body's ability to calm down by changing our rate of respiration," I explained.

  Dave looked a bit uncertain, so I stressed, "We have enough time to put this into practice." I looked him squarely in the eye. "If necessary, I'll meet with you every day between now and the exam to make these techniques work." Bomaye!

  Dave blinked and, as if emerging from a daydream, sat up straight and began to sputter, "No, I've tried that, and it doesn't work. You can't understand what I'm going through. I try to open the book, and I just start freaking out. I keep thinking there's too much material, I'm too far behind, I'll never pass. I'm going to have to decide on my specialty next year, and what if I can't get into neurosurgery? That's all I want to do. How am I going to explain to my parents that I can't get a residency? I need to be studying, but I can't."

  My gaze was quite fixed on Dave as he spoke. My awareness felt unusually sharp and clear. It was absolutely apparent that he hadn't heard a word I had said. He had dismissed the desensitization idea without even hearing what it was all about. Then, like an activated tape loop, he launched into his previous litany of worries. During this worry mode, his speech was nonstop; he never once looked to me for a response. I had the distinct feeling that he was talking at me, not to me. Seeing him, hearing his litany of worries, I knew that he was not in control in a very fundamental sense. Something had taken him over.

  Realizing that
my attempt to speak slowly and calmly had not made a dent in Dave's aroused state, I took a different approach. Of all the self-change schools, the method known as NLP—neurolinguistic programming—is perhaps most attuned to the importance of states of consciousness in change. Inspired by the hypnosis work of Milton Erickson, NLP relies on shifts in the pacing and the framing of communications with clients to induce states of "trance." John Grinder and Richard Bandler, in their text Trance-Formations, emphasized the need to establish rapport with clients before attempting shifts. This rapport can be cultivated by carefully tracking the tone, speed, and content of the client's communications and pacing one's own communications to match those of the client.

  So, instead of slowly and calmly invoking hope, I mirrored Dave's state. I sat up straight and talked to him in the same tone that he used with me. Almost in a single breath, I stressed, "You're telling yourself that there's too much work, you'll never get through it all, you'll fail the exam, your life will be a failure, and that is getting you worked up, and the more worked up you get the more these thoughts flood into your mind, and the less able you are to study, so you get more worried and fall further behind and feel like there's even more work and you won't ever get through it all . . . "

  Dave did not smile at my anxious rendition of his problems. But he did slow down a notch. "You have to help me," he pleaded. "The test is only a few days away."

  "Then we're going to have to break that vicious cycle," I said, also slowing down slightly.

  "I can't," Dave exclaimed, his tone sounding far more like, "I won't." "You don't understand. My anxiety isn't like what other people go through. I pick up the book and just start freaking out. I keep thinking, 'This is too much. I'll never get through it all . . .'"