This response provided me with the opening to use the guided imagery method. I asked the trader to close his eyes and vividly imagine a situation in which he has made money early in the day and now is considering packing it in for the day and sitting on his profits. I told him to imagine that the markets were moving and opportunity was present, but to visualize his mother saying to him everything he has been saying to himself during his risk-averse self-talk. He thus had to imagine his mother, with a worried, overprotective look on her face, warning him to not trade, to not lose the money he made, to not get hurt in the markets.
Personalizing a pattern you want to change can heighten your motivation to change that pattern—and help you sustain that motivation.
Before we had finished the exercise, the trader opened his eyes and exclaimed, “Yuck!” The idea of being a little boy controlled by his mother disgusted him. “But isn’t that your mother talking,” I asked, “when you’re telling yourself to not lose your money, to not get hurt in trades? Isn’t that your Mom’s voice within you?”
That reframing was what the trader needed to separate himself from his pattern. The last thing he wanted to do was repeat his overprotective childhood. Whenever he felt uneasy about participating in a market with opportunity, he simply closed his eyes and visualized what his mother would say in that situation. That visualization gave him the motivation to push the negative thinking aside and act on his trading instincts.
As I noted in The Psychology of Trading, most of us have someone in our past who we don’t like or who we associate with negative thoughts and influences. If you imagine your least favorite person—someone who was mean to you, who hated you, who was abusive to you—saying to you what you have been saying to yourself in your worst self-talk, it will become much easier to push back. If that hated person were actually standing in front of you while you were trading, voicing negativity, you’d have no trouble telling him to shut up. When you use imagery to associate your worst thinking with the worst people from your past, you learn to shut yourself up. And that is a major triumph of self-coaching!
COACHING CUE
There are many other powerful applications of imagery in combating negative, automatic thought patterns. One trader I worked with took up martial arts and used the workouts to imagine striking out against the patterns that had held him back. After he rehearsed that mind frame in practice after practice, he only needed to adopt certain postures during the trading day to regain his fighting form. Another trader found that he was sharpest in his trading when he felt physically fit. He used his exercise routines to rehearse ways of thinking about himself and trading that reinforced his strengths. During the midday, he took a short exercise break, which helped clear his mind, but also placed him in greater touch with the mindset that he was cultivating. Not all effective imagery is visual; sometimes associating a way of thinking with a physical state can help us use body to affect mind.
LESSON 58: CHALLENGE NEGATIVE THOUGHT PATTERNS WITH THE COGNITIVE JOURNAL
One way to use a cognitive journal, we have seen, is to track automatic thought patterns, so that you can become highly aware of negative self-talk and how it is connected to your emotions and behavior. A simple extension of the journal, however, is useful in restructuring our mind maps.
In the journal described earlier, we divided pages into three columns, with the first column representing a description of situations in which automatic thoughts occur; the second column captures the self-talk; and the third column highlights the consequences (in mood, behavior, trading) of that self-talk. The added fourth column represents your systematic efforts to change the internal dialogue and replace the automatic, negative thoughts with more realistic, constructive alternatives.
Let’s start with an example. Suppose a trader is dealing with a perfectionist pattern in which she frequently criticizes her performance as not good enough. Even when she makes money, she focuses on how much she left on the table by not catching highs and lows. The result leaves her feeling discouraged, and it also leads her to take bad trades in order to try to catch exact highs and lows.
In the fourth column of her journal she engages in a Socratic debate with those negative thoughts, challenging them and coming up with different ways of viewing the situation. This is truly self-coaching, because, just as the second column is the voice of the negative self-talk, the fourth column becomes the voice of the inner coach.
The cognitive journal can become a forum in which we vigorously and emotionally challenge our most negative thought patterns.
Here are sample entries and what they might look like:
Notice how the fourth column, the trading voice, is close to what you might say to someone else who might be going through your situation. It is an attempt to provide a perspective that is not so blaming and self-critical. As with other parts of the journal, it’s important that this fourth column be detailed, so that you have an opportunity to really think about and absorb the alternative view. Writing, “I shouldn’t be so hard on myself,” is less effective than writing, “This is the same kind of talk I heard from the boss at my old job who couldn’t stand me. I hated him, and I hate how he treated me. I don’t deserve this and I’m not going to do it to myself.” It is also effective to elaborate the negative consequences of the automatic thinking in that fourth column: “This kind of thinking has interfered with my trading all year long. I’m not going to let it cost me any more money!”
You want to counter your automatic thoughts with emotional force; it is the emotional experience of challenging your ways of thinking that will cement the new patterns.
The reason the journal is effective is that it provides a regular, structured opportunity for you to take the self-coaching role: it’s a great way to practice mentoring yourself. The use of the journal may feel artificial at first, but—with repeated entries—you’ll begin to internalize that coach’s voice and start challenging your negative thinking as soon as it pops up.
The cognitive journal also offers an excellent tool for reviewing your trading, particularly if you add a simple fifth column and track your profitability each day and/or grade the quality of your trading for that day. That column enables you to see how your progress in changing your self-talk is related to your trading progress, adding to motivation. Another alteration to the framework is to create an audio journal, so that all of your entries are spoken out loud in real time. This not only helps you restructure your thinking during breaks in the trading day, it also provides a useful day’s end review and cements your lessons.
COACHING CUE
Where traders often fall short with the cognitive journal is in making it more of a logical exercise than a psychological one. Traders challenge their negative thoughts in a calm, rational manner, but that doesn’t carry emotional force. The research literature in psychology suggests that we process emotional material more deeply than ordinary thoughts. You want to make your challenging of negative thought patterns into an emotional exercise where you vigorously reject the thinking that is holding you back. It helps to keep in mind that these are the thoughts and behaviors that have sabotaged your trading, cost you money, and threatened your success. If there was a person posing such a threat to you, you would surely confront him and reject his influence. When you personalize your automatic thoughts, you can create more powerful emotional experiences that aid the restructuring of your perception.
As your own trading coach, you want to use tools such as the journal in a way that helps your trading, not that becomes burdensome. It takes a bit of experimentation to see how the journal best fits into your workflow and routine. An excellent rule is that you won’t make significant progress until the time you spend in the self-coaching mode exceeds the time you spend in the throes of negative, automatic thinking. The journal is a useful way to ensure that you get that coaching time.
LESSON 59: CONDUCT COGNITIVE EXPERIMENTS TO CREATE CHANGE
If people are like scientists, who construct their th
eories of the world based on their observations and experience, then it should be possible to treat their expectations as hypotheses that could either be confirmed or contradicted. When you generate new observations and experiences that disconfirm negative thought patterns, you gradually modify those patterns and eliminate their distortions.
Sometimes just a review of recent experience in a Socratic dialogue can be enough to challenge and modify negative views. “Whatever I do in the market is wrong!” might be one negative thought that automatically kicks in when the trader is losing money. A simple review of recent results, however, may bring the trader back to reality: “Wait a minute. I’ve had some excellent trades this week. I need to step back and figure out what’s working for me.”
When you’re in the midst of negative thoughts, we’ve seen that it helps to take the role of the observer and ask, “Is this really true? Is this what I would be saying to someone else in my shoes? Is this what I would want someone else to be saying to me right now?” By disconfirming those negative thoughts, you make them less automatic—less able to take control of your decisions.
Sometimes, however, constructing specific experiments to challenge your negative thoughts and expectations can provide the right experience to jar and reshape your beliefs. One trader I worked with insisted that diversification didn’t matter to him; he just wanted to be right on his trades. When he saw a good idea in a sector, he bought every name in the group, piling into the trade. Of course, the stocks moved in a correlated way; he probably would have been just as well off if he had bought the sector ETF and had saved some commissions. His thought pattern, “This is a great idea; I have to go all in,” led him to risk a large amount of his capital on a single idea, even as he tried to convince himself that he was diversified because he held many names in his book.
For this trader, good enough wasn’t good enough. He couldn’t view his trade as a success unless it was a home run. For every home run he hit, however, he took a harrowing loss, leaving him discouraged and worried about his future. His pattern of needing to be “all in” to make his money back was taking an emotional as well as financial toll.
I suggested that we try an experiment. The gist of the experiment was that he had to divide his capital into four equal segments. No more than one segment, at his normal leverage, could go into any single trade idea. Thus, if he thought gold was going up, he could use up to a quarter of his normal buying power to buy the gold ETF and/or to buy gold miners. If he bought five names among the mining stocks, that quarter of his buying power would be divided among the five. To utilize the other quarters of his buying power, he needed to have different ideas. For instance, while he was long gold, he might have a short position on an individual stock or sector because of unfavorable news that had just been released.
An experiment, properly constructed, can provide a powerful, firsthand disconfirmation of our schemas.
What this meant, of course, was that our trader wouldn’t be using all his buying power all the time, because he wouldn’t always have four truly independent (noncorrelated) ideas. When he did deploy a good amount of his capital, it would be evenly distributed among setups and ideas. Some would be devoted to short-term scalps; other money would be used for longer-time-frame ideas. Some would be long; some might be short. This process would even out his returns, enabling him to benefit from the fact that he tended to have more winning trades than losers. By eliminating the large losers through diversification, the trader could actually take less risk (experience lower volatility of daily returns) and make more money.
The trader agreed to the experiment for a week. “What do I have to lose?” was his attitude. During the week, however, he actually saw that he made more money than he had during any week of the past several months. This result convinced him to continue the experiment. “I don’t need to be banging my head against the wall,” he explained after a few weeks. He was making more money—and he was happier doing it. Had he not actually conducted the experiment, however, he wouldn’t have truly known—in his own experience—how wrong his thinking had been. Pointing out the destructiveness of a negative thought pattern (and the benefits of a more positive one) is one thing; actually seeing it for yourself and experiencing the difference is far more powerful.
The successful self-coach creates powerful and vivid experiences that undercut old habit patterns.
A common myth held by traders is that they need to be hard on themselves to maintain their motivation. This is another situation where a week’s experiment can be helpful: make a conscious effort to stay constructive and positive every day for a week, and let’s see how you feel and how you trade. When a trader sees that when he gives up the negative pattern he actually improves his concentration and the process of his trading, he gains considerable incentive to extend the experiment.
Your assignment, as your own trading coach, is to create a simple experiment—even if it’s just for the span of a single day—in which you disrupt the negative thought patterns you’ve identified and just see what happens to your mood and your trading. If you don’t like the results of the experiment, you can always go back to old ways and retool. If, however, you find that you can focus on trading better, that you stick to your plans better, and feel better about your work as a result, then you can decide to extend the experiment in time and perhaps also to other facets of your life. Our negative thought patterns have been the result of learning; surely we are capable of acquiring new ways of viewing our trading and ourselves. Well-constructed experiments provide us with the catalyst for changing that viewing—and that can change our doing.
COACHING CUE
Every trading rule can be turned into a cognitive experiment: See what happens when you follow the rule religiously—your trading results, your mood, and your decision-making. Many times, traders harbor fears in the backs of their minds as to negative consequences of sticking by their rules. By constructing experiments around the rules, we can see, firsthand, that these consequences are manageable and nothing to be feared.
LESSON 60: BUILD POSITIVE THINKING
The lessons for cognitive coaching thus far have emphasized ways to identify and restructure negative, automatic thoughts. What, however, of positive thought patterns? How can we become more intentional in building these? Fortunately, many of the cognitive techniques that work well to unlearn negative thought patterns can also be used effectively to cement positive ways to view self and world.
Note that the positive thinking we’re looking to build is not necessarily positive in the superficial sense. Look into a mirror and tell yourself how you’re the best trader, how you’re going to make so much money, etc. This process is not positive thinking; it is delusional. It also reinforces unrealistic expectations, setting traders up for disappointment.
Rather, positive thinking is thinking that leads to constructive responses to challenging situations. For instance, a trader may make a rookie error and might chide himself for the mistake, using the incident to firm up his execution and attention to detail. This is very positive. A trader might also simply tell himself, “You’re really not trading well; you can do better than this.” That might be an accurate assessment and a prod toward greater motivation.
Positive thinking is not necessarily optimistic thinking; it is constructive thought.
How do you know the schemas and thinking patterns that are best for you and your trading? Fortunately, we can create a customized cognitive journal precisely for this purpose. Recall that in the traditional journal, the first column describes specific incidents of problematic trading; the second column summarizes the self-talk associated with the incidents; and the third column lays out the consequences of the self-talk. To create a format to track positive thinking, we use the journal to highlight episodes of positive trading. The first column describes what was happening in the markets at the time of the exemplary trading. The second column features the self-talk that occurred before and during these incidents; the third column i
dentifies how the self-talk contributed to good trading practice. In other words, you use the journal to highlight what you’re doing when you’re trading at your best.
Observe that this doesn’t mean that you only focus on your profitable trades, though many of your positive journal entries will be profitable occasions. Rather, you want to focus on all occasions when you traded well, even if you took normal losses. For instance, if you took a trade with very favorable risk/reward but were stopped out at your preset level and later reentered the idea for a gain, which would be a very positive episode of trading. The role of the journal is to isolate the thought processes that enabled you to keep your losses small and your trading flexible.
The cognitive journal can be used to identify the best practices in our thinking and trading.
One example of such a positive-oriented journal appears below. Once again, we are keeping the journal entries detailed so that we can crystallize in our minds the kinds of self-talk that are associated with our best trading. Some of the most useful entries will come from occasions when we don’t make our usual mistakes and manage to break free of old, unhelpful patterns.
Notice how the journal highlights the specific thoughts that led to the good trading decisions. By rehearsing this thinking, you can turn it into a positive set of habit patterns. Some of the best ways of thinking, I’ve found, have come from my interactions with successful traders. Talking with them has provided a model for how I can talk to myself during challenging trading occasions. For instance, one trader set his entry price at a level that would ensure a favorable risk/reward for the trade and said, “The market has to come to me.” Instead of telling himself that he had to chase after opportunity, he insisted that he would only play when the market action fit his parameters. This kept him out of bad trades, but it also gave him an ongoing sense of control over his trading. It is difficult to feel stressed out by markets if you feel in control of your risk. I eventually adapted this way of thinking to my own entries, simply by never entering long trades on a high NYSE TICK reading and never selling the market on low readings. By making the market come to me, I found that I greatly reduced the heat I took on trades, maximizing profits. “The market has to come to me,” became one of my cognitive best practices.
The Daily Trading Coach Page 26
