I was paralyzed, do I take the position off and take my loss, or will the market come back.

“Quick drops like that reverse. See, the stock is stabilizing”

A minute passes as the cursor hops up and down, the stock trading up a few cents, then down a few cents.

“I’ll feel stupid if I get out here and then it recovers”

The next leg down. It collapses another $1.

“I don’t want to know what that is doing to my account.”

My chest is tight and my stomach is churning. I’m holding my breath as if I can make it move up by watching it intently.

“I should have gotten out an hour ago. Noon is usually a quiet time. If I can last until then..”

“My mental stop was $10 ago. I should have sold yesterday when it wasn’t acting right.”

It moves down another $1. I can feel the blood leaving my face. I feel a little faint.

I thought of my kids. I was trying to safeguard their future and here I was watching it go down the drain.

I sell at the market to get out. It might move up or down, I don’t care.

I’m out, relieved, exhausted.

(This happened to me President’s Week 2000 with the NASDAQ when we were on a ski vacation in Quebec City. I have been vague about the details here to make it timeless.)

He had dogs in two different situations.  In one, the dog got a mild electric shock after a bell was rung, and he was able to go to a switch and turn it off, which he very soon learned to do.   The other set of dogs, got an electric shock, but had no warning bell and  way to turn it off.  When the control dog, who had control, turned off the shock, the yoked dog, who did not have control, had the shock turned off as well.  That way there was no difference in their unpleasant experience.

Then the two sets of dogs were put into a shuttle box which was a large box with a low fence between the two parts of the box.  When a small electric current was applied to the floor of the box that the control dog was in, he jumped over the fence and got away from the annoying electric shock.   When the same shock was applied to the yoked dog, he just sat in the corner and whimpered.

Hence, “learned helplessness” which became Seligman’s model for depression in people.  He has written some fascinating books, easy to find in the library, for example, Learned Optimism: How to Change Your Mind and Your Life (Amazon link where you can explore further).

How does this link to individual market behavior?

The idea comes from Dan Ariely’s book on behavioral economics, Predictably Irrational, Revised and Expanded Edition (Amazon link).  In the very last section he discusses the experiment and his take is that investors have been buffeted by the market since the dot com bust in 2000, and now the credit cycle crash in 2008 still going on, without being able to affect it and control it and so have become depressed in their economic outlook.

He even hints at the solution, but veers away from it in his further discussion.  There are three main ways to overcome “learned helplessness” in the markets.  One way is to write about what you trade and why.  Or what you invest in and the reasons behind it.  As often as you look at the market to write about what is going on to try to make sense of it.  That is the second part, to try to understand what is happening.  That is also one of the comforts of technical analysis, regardless of its effectiveness, it is a tool for understanding and predicting.  Prediction is equivalent to control.  The third part to overcoming deer-in-the-headlights syndrome is to control risk, have stops that take out your position at a predetermined loss.  Action is the best remedy.

Thanks to MoneyShow for posting the following videos from my Expo visit to Los Angeles:

Be Your Own Coach The video is a little funky here, but the audio is very important to listen to.

When to Change Your Trading Methods
In this three and a half minute clip Dr. Brett Steenbarger discusses how to recognize when your trading method stops working. There are many nuggets in here.

Setting Realistic Trading Expectations

Conference Podcast: Coaching Yourself for Trading Success

My next seminar will be in July in downtown Chicago; details and registration info will be posted shortly.

This was an older videocast that I found on the moneyshow.com site. Improve your trading psychology

For this seminar, Trevor is underwriting all meeting room expenses and I am donating my time. There will be no registration fee, but attendees must register in advance (details below). Please note that seating is limited, so if you can definitely attend and are interested, please register as soon as possible. Please do not register unless you know you’ll be attending; I’d hate to see some people miss out on the event because we were saving seats for no-shows.

Now the details:

The seminar will be held on Friday, July 17th from 1-5 PM at the Club Quarters Hotel in the Chicago Loop. Please make sure you arrive a bit early and are seated by 1 PM as we will follow the S&P 500 e-mini market live for the final hour of trade, illustrating principles of market psychology with Market Delta and related indicators. Trevor will be highlighting applications of Market Delta that I have not covered in the blog; I’ll be supplementing the discussion with information that I share in real time with the traders I coach.

In the second half of the seminar, I will share the proprietary model that I use to calculate pivot points and targets for the S&P 500 Index and explain the uses of this information in setting up solid risk/reward trades. The remainder of the time will be devoted to questions and answers, as we hold an open group coaching/mentoring session.

Interested participants will find the registration details on the Market Delta blog site; please make sure you use the dedicated email address to send in your registration. (Note: You cannot register by emailing me). If you’re coming from out of town, Trevor’s registration blog post notes that the hotel has generously made a block of rooms available at a very reasonable price; details for making hotel reservations are also on Trevor’s post.

Because we decided to make this a larger event than initially planned, I will do the potluck idea (each trader sharing a best practice trading idea with each other trader) another time in a smaller, sharing environment. Trevor and I will also conduct a webinar in the not so distant future for traders unable to attend July’s seminar. As part of our keeping overhead down and making the seminar free of charge, the July session will be live only, not webcast/videorecorded.

I believe this will be a unique opportunity to learn from real time market application and group interaction; it will also be a great occasion to meet traders with similar interests. Hope to see you there!

(PS – If you have questions about the seminar, please write them as comments to this post, so that I can answer for all readers. Thanks as always for your interest.)
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8:26 AM CT – Just talked with Trevor and we’re adding an hour to the program, so it will start at 1 PM and go until 5 PM on Friday, July 17th. The extra hour will give us more live market time, so that we can add a feature in which Trevor will be the trader, I will be the coach, and we will role play working together in trading the market. That will be a great way to illustrate both market and trader psychology: real time trading/coaching!
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Note here that the trader Dr. Steenbarger worked with had a colleague that “was trying to tell him that for weeks” but it was when the doctor pointed it out that the trader heard it. Maybe he didn’t trust the colleague’s opinion, maybe he was paying the doctor so he thought he should pay attention.

I have combined the two separate posts into one from Brett Steenbarger’s TraderFeed:

Social cognition has been a prominent topic of study within psychology for many years, as psychologists have attempted to understand how we make sense of our social worlds. Related to social cognition is the study of how we process information within social contexts: thinking as a social, not just individual, process.

We are accustomed to viewing thought as something that occurs wholly within our heads. Even casual observation, however, suggests that much of how we process information occurs within social interactions. Physicians consult one another over problem cases; teens sort out their problems together; and children learn to make sense of the world through their interactions with parents and peers.

I would argue that much of the value of counseling and therapy is that it provides a social context for processing self-relevant information and experiences. Many times, an individual in isolation cannot understand why he behaves in a particular manner and why he seems incapable of changing his patterns. Through the social medium of counseling, he gains a fresh understanding of self, which opens the door to new ways of acting and interacting. Indeed, many times the changes rendered by successful therapy first appear within the counselor-client relationship, only later generalizing to wider social networks.

In the business world, we commonly find work teams tackling difficult problems; group processes–rituals and ceremonies–also provide fresh perspectives within religions. Executives hire consultants; alcoholics seek peer groups through AA. It is difficult to find spheres of life in which people do not turn to social networks to guide themselves and their understandings. Indeed, the entire phenomenon of social networking in the online world–from Twitter and Facebook to virtual communities–reflects a recognition that much of how we think overlaps how we interact. To a surprising measure, thinking is a team sport.

There are interesting corollaries to this view. For example, intelligence may not simply be a function of how well one can solve problems in a test, but also a function of how well one can marshal the interactions needed to arrive at such solutions. When I interact with others, I experience my own ideas in a new context. That can either strengthen my convictions or lead me to modify them. You would be surprised at how much time hedge fund portfolio managers spend on the phone with peers, analysts, and brokers: they think by interacting, catching patterns in others’ thoughts that cannot be viewed in market data. To a large degree, they are not trading the markets; they’re trading the biases and consensus views of others.

With this as backdrop, allow me to advance an important idea: Much of the emotional disruption experienced by traders is a function of cognitive isolation. Facing only a screen, largely cut off from social processing, traders become–in a manner of speaking–less intelligent. They lose access to normal ways of talking out and testing out ideas. Without the perspectives of others, isolated traders lose perspective: small moves take on disproportionate significance; small pieces of market data are blown into biased views.

The decisions we make in a group/social context are not the same as those we would make in isolation. To be sure, group processes can dampen creativity and divergent thought; there is more to truth than democracy. But group processes can also serve as a check on our cognitive and behavioral biases. Many a spouse serves as a grounding influence on their partner; many a business partner has reined in a colleague’s impulsive tendencies. When we place a person in situations of heightened risk, reward, and uncertainty and *then* isolate that person from normal social regulatory interactions, the results are predictably dire.

Could it be that many struggling traders could succeed if placed within the right social contexts? The next post in this series will demonstrate that this is, indeed, the case.

Above I made the case that much of thinking is a social process; isolated from the back-and-forth testing and revising of ideas, traders lapse into internal feedback loops that magnify perceptual biases and action tendencies. In other words, many problems of discipline may boil down to problems of isolation–in lesser measure to be sure, but perhaps similar to the cognitive distortions and disordered behavior that occur during prolonged exposure to sensory deprivation.

What brought this to my attention was an experience with a large trader a little while ago. He had been losing significant money, much of which could be attributed to poor money management under conditions of frustration. My work with him, like much of my work in prop environments, took place while he was trading and was highly interactive. This is useful in two respects: it offers immediate feedback as to whether the coaching is helpful or not (P/L is a merciless judge!) and it offers windows into the processes that make the coaching more or less helpful.

With this particular trader, the results were notable. Significant losses, in a short period of time, became significant gains. Because this trader was placing dozens of trades per day and we worked together over many days, it was highly unlikely that the difference in performance was due to chance. Something about the coaching made a meaningful difference, but it was certainly not any grand market insights that I provided. In fact, I limited my discussion with the trader to observations of the trader’s trading and occasional observations of the behavior of volume, indicators, sectors, etc.

Nor did I provide what I thought were grand psychological insights; the coaching was not psychotherapy. The discussions simply focused on what the trader was doing that was working and what wasn’t effective, interspersed with normal social banter. One trader who observed us shook his head in disbelief. “I’ve been trying to tell him the same thing for months now!”

I think that was an astute observation. It wasn’t so much the content of the communications that was effective as the process: what had been a damaging internal dialogue of losing money, blaming self, becoming frustrated, and wanting to make the money back changed into a constructive social dialogue that was performance and market focused. Under conditions of positive social dialogue, the trader could access his skills at reading markets and executing good trades. Under conditions of negative internal feedback loops, the subtle felt cues of pattern recognition were overwhelmed by emotional upheaval.

The takeaway here is that what we know is at least in part a function of how we interact. In one mode of cognition–isolated from self-correcting feedback from interactions–we lose access to information and lose the ability to recruit skills. In another mode–grounded in constructive dialogue–we suddenly become exemplary performers.

Does this work for all traders? Not at all. There are plenty of traders who have benefited far less dramatically–and sometimes not benefited at all–from work with me. It may well be that traders who are most attuned to the social processing of information (the trader in my example is an extremely social, extroverted individual) will benefit most from interactive coaching. A different trader, one who is more analytical, might gain more benefit from interactions with a statistician or market analyst.

In either case, social interaction can augment traders’ cognitive processing styles, enhancing native strengths. This may not require formal coaching; rather, it may simply call for participation in the kind of peer dialogues that bring out the best in oneself. In talking to others, we inevitably hear ourselves and hear reactions to what we say. This, in turn, shifts how we view and respond to situations. It’s difficult to have a meltdown when you are sustaining constructive dialogue with a valued colleague.
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Just a quick note to help interested traders with planning: The earlier mentioned summer trading seminar will be held on Friday, July 17th from 2 PM to 5 PM in downtown Chicago. There will be no fee for attendance; I’ll post registration and program details tomorrow, so keep an eye out!

This will be an excellent opportunity to meet other traders and learn about both the psychology of markets and trading psychology.

Thanks as always for your interest–

Brett
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