Once you’ve been able to sustain that focus for a few minutes, you then purposely bring to mind your greatest performance concerns—while you stay seated, focused, and breathing rhythmically and deeply. You evoke one concern at a time (for example, thoughts or fears about your recent profitability) and then dismiss the thoughts and bring yourself back to the music. Instead of having the thoughts intrude on you unexpectedly, you intentionally call them to mind and practice and then put them away, as you stay calm and focused. You might even guide yourself through imagery as you’re breathing deeply and slowly, imagining your negative thoughts as trash that you decide to put in a garbage pail. Instead of avoiding your negative thoughts, bring them to mind as your own, inner trash-talking—and then visualize yourself taking out the garbage.
Do this every day for a few minutes and you can train yourself to gain control over negative thought patterns. Most importantly, you develop the capacity to become an observer to those thoughts, rather than to identify with them. If you can observe something about yourself, you immediately introduce an element of psychological distance. Even the most negative thoughts and feelings cannot trigger unwanted behaviors if you don’t identify with them. Daily meditation is a powerful strategy for building your own Internal Observer and sustaining a change process.
COACHING CUE
Whenever you catch yourself thinking about your P/L during trading—how much you’re making or losing—call a brief time-out; take a few deep, rhythmical breaths and talk out what you’re seeing in the markets at the time. Your goal is to be market-focused, not self-focused. By repeatedly pairing a calm, relaxed state with an intense market focus, you can develop a positive habit pattern and ensure that the body keeps the mind in check.
LESSON 8: CREATE SCRIPTS FOR LIFE CHANGE
There is a bit of a chicken-and-egg challenge associated with making changes in our lives. To change a behavior pattern, you have to be able to exit that pattern. If, however, you had the ability to avoid enacting those patterns, you wouldn’t need to change in the first place.
This dilemma is a common barrier for traders who would like to be their own trading coaches, but don’t know how to stand apart from the problem patterns that they repeat week after week, month after month.
To appreciate how we can shift ourselves out of old, problem patterns and into new, positive ones, we need to understand something about drama. Specifically, it’s helpful to start thinking about life in terms of the different roles that we enact during our life’s performances. “All the world’s a stage,” Shakespeare observed, and we are the sum of the roles that we play on that stage.
Some of our life roles have an automatic, scripted quality to them. Typically we learned these roles early in life and, for years, they may have worked well for us. As a result, these roles have become overlearned. For instance, we may have learned to gain attention from parents by complaining or by acting up and breaking rules. Over time, those behaviors can crystallize into fixed roles: we automatically find ourselves whining or acting out of frustration during times of personal conflict. What worked in childhood by bringing us attention now works against us, interfering with careers and romantic relationships.
Many trading problems have just such a scripted quality: We enact the same patterns repeatedly. We start by trading carefully and conscientiously. Then we lose money and become frustrated. Out of frustration we break trading rules, ignore stop-loss points, and undergo serious losses. Then we feel tremendous relief at exiting the losing positions and redouble our determination to trade carefully and conscientiously—until the next frustration comes around. Is this really so different from couples that are determined to get along with each other, then encounter frustrations, argue and fight to the point of being ready to break up, only to experience relief as they make up and vow ever stronger to stop hurting each other? Or the person who swears that he will stop gambling, only to make a few exceptions, lose money, and then out of relief step away from the casino once again, insisting that he won’t go back?
Trading requires a mind free to process data and select appropriate action. But we no longer have a free will if we are mechanically reliving scripts from the past.
A dramaturgic perspective suggests that these repetitive patterns are enactments—cyclical reenactments—of roles that we have learned in the course of life: the role of the down-and-out person who presses for success, the role of the aggrieved spouse, the role of the independent person who refuses to be bound by rules, and so forth. One trader I worked with grew up in an overprotective and controlling home. He rebelled as a teenager and subsequently found himself chafing at any constraints on his behavior. His violation of rules in relationships (monogamy) and trading (the risk-management rules of the firm) led to one failure after another. He was living out a script that could only provide unhappy endings.
But if we can acquire scripts through our relationship experiences, then surely we can cultivate new ones by placing ourselves in different roles. One trader I worked with experienced himself as sloppy and undisciplined. It showed not only in his trading, but also in his physical condition and the state of his apartment. His breakthrough occurred when he joined a fitness club and engaged a personal trainer. The regular series of classes and exercise sessions got him into shape and imposed a structure on his efforts at self-improvement. As he experienced more energy—and felt better about himself for getting in shape—he spontaneously took the initiative in cleaning his apartment and honing his trading rules. The sessions with a trainer provided him with a new script and positive experiences that mirrored a fresh identity. By enacting a new role, he experienced himself in a new manner—and this infiltrated a variety of areas of his life.
Here’s another example: For years I tended to be impatient—with myself, with others, with trading, and even with the pace of change among people I met in therapy. When Margie and I had two children, however, I found myself in a new role that did not allow me to be impatient if I were going to be a good parent. Because it was clear that both our children had personalities very different from mine, I had to figure out ways to communicate with them on their terms. The new role as a patient parent provided me with a discrepant set of experiences; I subsequently found myself more patient in a variety of situations, whether it was behind the wheel of a car or during counseling work with a client who felt stuck. The new role generated novel, positive scripts. With the favorable mirroring over years of parenting, I’ve actually changed how I see myself. I now experience myself as a relatively calm, patient person: it has become an integral part of my identity.
For more on how new experiences generate new roles and scripts, check out my blog: http://traderfeed.blogspot.com/2006/11/cross-cultural-journey.html.
So here’s your challenge and your assignment: Identify the person you would like to be and then throw yourself into a structured social activity—a role—that requires you to enact those ideals. If you want to be more disciplined, take on a discipline: martial arts, work with a personal trainer, etc. If you want to be more patient and focused, undergo meditation training or work with young children that you care about; if you want to become more socially confident, immerse yourself in public speaking; if you want to trade more aggressively, join a trading room that mirrors the style you want to adopt and actively participate in its discussions. Create the roles that mirror your desired identity; live scripts of your choosing. If you can place yourself in situations where you routinely practice being the person you want to be, you’ll rapidly make that person your own. Change begins with novel experience, but is sustained through repetition.
COACHING CUE
To be the trader you want to be, consider taking on a student/trainee. When someone is observing you and learning from you, you’ll be on your best behavior. With the teaching script, you’ll access behavior patterns that you would never enact in isolation. Alternatively, take on a peer mentorship role. The social motivation to live up to your best for your trading budd
ies will enable you to access your best behavior patterns.
LESSON 9: HOW TO BUILD YOUR SELF-CONFIDENCE
Trading is one of the most challenging occupations, because traders routinely face working conditions that they cannot control. Psychological research suggests that one important basis for self-confidence is self-efficacy: the perception that we can control outcomes that are important to us. But how can we sustain self-confidence as traders if we cannot control whether we make money from day to day?
A trader recently called and expressed frustration with his performance. Markets were moving well and, for the most part, he was catching the direction correctly. He entered positions aggressively, but then was stopped out at the worst times when the market made sharp, short countertrend moves. When we reviewed his trading statistics, we found that his average win size exceeded his average loser, but that he had many more losing trades than winners. The steady drumbeat of losing trades was eroding his self-confidence.
So what was the problem?
Our trader was waiting for markets to begin moving in the anticipated direction and then entering with full size. By the time he lifted an offer or hit a bid, the market had already made a short-term move and was ripe for profit taking by scalpers. His full size made these countertrend moves intolerable, and his risk management rules ensured that he had no staying power with his ideas. The market was controlling him; he was not in control of his trading. The loss of self-confidence was inevitable.
The key to regaining self-confidence in such a situation is to turn the focus from making (or losing) money to the actual process of trading . We initiated a simple unit-sizing rule in which the trader could only enter positions with one unit (his maximum size was three units). If the position went his way, but then experienced a normal retracement, he added a second unit. If the position did not go his way, he maintained a defined stop-loss point and ensured a minimal loss, given that his size was one-third his maximum. The trader could not control the market’s movement, but he could control his position sizing. This process focus promoted a sense of self-efficacy, which was essential to recapturing his confidence.
You control how you trade; the market controls how and when you’ll get paid.
This is one reason that trading with rules is so important. You can’t control your P/L statement, but you can control whether you adhere to trading rules. Your focus becomes one of trading well, not one of making money. Every rule followed—every market traded well—is a success experience in the process sense. Over time, profits result (as long as the rules are sound!), but the confidence comes from self-mastery.
Another powerful source of self-efficacy is preparation. When you prepare your trading ideas for the day or week, you generate a sense of mental mastery. This is particularly the case when your preparation includes what-if scenarios that guide your decision-making under a variety of market possibilities. Successful experience is a powerful source of mastery, and the mental rehearsal of trading plans under various contingencies generates a form of experience. As a psychologist, I am impressed by the degree to which traders who prepare rigorously feel as though they deserve to win. That same sense is missing among those who casually scan newspapers, charts, or web sites and then plunk themselves down at the trade station to place their orders.
Many traders confuse self-confidence and positive thinking. Self-confidence is not expecting the best; it’s knowing, deep inside, that you can handle the worst. The self-confident trader can look a stop-loss level in the eye and know that he will be okay if it is triggered. The self-confident trader knows that loss is part of the game—and that some of our best market information comes from good trade ideas that don’t work out. Self-confidence is not cockiness, nor is it viewing the world through rose-colored glasses. It’s the quiet sense of, “I’ve been here; I can handle this.”
Confidence doesn’t come from being right all the time; it comes from surviving the many occasions of being wrong.
Nothing is so important in building self-confidence as successful experience in the face of adversity. When you serve as your own trading coach, a major task you face is generating your own positive trading experience. Just this morning I read an e-mail from a trader who had experienced harrowing losses in the markets over the past two years. Now he was having difficulty sustaining the optimism needed to weather normal losses. His failure was not as a trader, but as his own trading coach. When we traumatize ourselves, we generate negative experience. We create a sense of helplessness, rather than mastery. We create deep emotional connections between trading and loss, rather than between trading and self-efficacy. We undercut self-confidence.
A great way to build self-confidence is to focus on how you trade when you’re in the hole. If confidence comes from successfully navigating adversity, you can build your confidence by working on how you trade when trades go against you. The idea is to focus on trading well by giving yourself a chance to dig out of the hole by not exiting a losing trade prematurely, but also to not allow the losing trade to move so far against you that it creates trauma. Every planned loss that you take provides you with an experience of control; every drawdown that you battle back from is an experience of mastery. When you come back from losses, you reinforce your emotional resilience. You can’t control whether you win or lose on a particular trade, but you can control how much you lose and how you lose it.
Every trader needs a plan for losing. Your stop-loss is your plan for a losing trade. Cut your size after a series of losing days and focus your efforts on your highest probability trades as your plan for a drawdown period. In Ranger school, the Army exposes recruits to the most harrowing physical conditions possible. Once recruits have completed their training, they have the deep conviction that they can handle any and all battle conditions. You want to view your losing trades and your losing periods in markets as your Ranger School, your trial by fire.
Your losing trades and losing periods are your trials by fire that build resilience and confidence.
How will you handle a significant losing trade? How will you handle a significant losing day? Week? Month? How will you ensure that you can draw upon your strengths and come back from these losses and build your resilience? Your assignment is to develop your plans for losing, to always know—and mentally rehearse—what will get you out of trades and out of markets, so that you can retool your efforts.
In psychology, crisis does offer opportunity: it shakes up our assumptions and forces us to make changes in how we think and act. Your challenge as your own coach is to find the opportunity in your crises by generating and rehearsing plans for anything and everything that can go wrong. To prepare for hurricanes and tornadoes, communities not only draw up disaster plans, but also conduct drills to put these into practice. Change is a function of preparation and training: drilling the right responses, so that they are second nature when market disaster looms.
COACHING CUE
Just before I wrote this section of the book, a savvy trader contacted me and explained that he broke some of his rules and lost the profits from the prior week. He was very upset and wrote a memo to himself to ensure that he learned from the experience. He sent the memo to me and insisted that we talk in a few days to ensure that he followed up on the memo. It’s a great example of how a trader takes a losing situation and turns it into an opportunity for self-improvement. He won’t let the issue go until he’s rectified his errors.
That’s how traders turn losing experiences into confidence builders. Next time you blow up in your trading, write yourself a detailed memo that explains what went wrong, why it went wrong, and what you will do to avoid the problem going forward. Then send the memo to a valued trading buddy for follow up to hold yourself accountable. That way, every big mistake becomes a catalyst for meaningful change.
LESSON 10: FIVE BEST PRACTICES FOR EFFECTING AND SUSTAINING CHANGE
The first two years of my career as a psychologist, I worked in a community mental health center, helping in
dividuals, couples, and families with the full array of emotional disorders, from depression to drug abuse. The following year I shifted my practice to student counseling at Cornell University, which afforded my first opportunity to work with a relatively healthy population dealing with normal, developmental issues. I then took the community and student experiences to Upstate Medical University in Syracuse, New York, where I coordinated the counseling and therapy for medical, nursing, and other health sciences students and professionals for 19 years. It was in this latter setting that I learned to apply brief therapy methods to the challenges of young people who were in high-stress, high-achievement occupations. That experience would prove invaluable to my work with traders in the financial markets.
During my time in Syracuse, I met on average about 150 students a year for about eight sessions each. Multiply that times 19 and you have a sense for the changes I’ve seen happen and not happen. The shining successes, the disappointing failures: all stand out in my mind as if they occurred last week.
When you’ve worked with that many people over the course of a career, you develop a good sense for change processes and what makes them click or stall. It doesn’t matter if you’re working with a victim of abuse in the community, a student with test anxiety at an Ivy League school, or a medical student dealing with the first loss of a patient. Change has a particular structure and sequence; there are factors that speed it up and those that impede it. Below I share five of the most important change elements that affect my work as a trading coach. When you harness those elements, you will be well positioned to succeed in your self-coaching:1. Timing and Readiness. Timing is everything, in psychology as in trading. The research of Prochaska and DiClemente suggests that people are most likely to make changes when they’re ready to make changes. Many times we’re conflicted about change; we’re not really sure that we want to abandon old ways. I talked with a trader recently who lost much more money than he should have (and than his plan called for) because he simultaneously traded three positions with full size when those positions were highly correlated. He was wrong and he blew out. But when we reviewed the unit sizing by trade idea rather than simply by position, it was clear that he wasn’t sure he wanted to make smaller bets. He was upset because he was wrong on the idea, not because he had violated risk-management discipline. My job was then to help him become more ready for the change he needed to make, just as an alcohol counselor must help an alcoholic become more ready to commit to sobriety. You will change when you’re ready to change, and you’ll be ready to change when you recognize that you need to change. As we saw earlier, by becoming more emotionally connected to the consequences of our behavior, we cultivate that need to change.
The Daily Trading Coach Page 5
