CHANGE YOUR ENVIRONMENT , CHANGE YOURSELF
Human beings adapt to their environments. We draw on a range of skills and personality traits to fit into various settings. That is why we can behave one way in a social setting and then seem like a totally different human being at work. One of the enduring attractions of travel is that it takes us out of our native environments and forces us to adapt to new people, new cultures, and new ways. When we make those adaptations, we discover new facets of ourselves. As well see shortly, discrepancy is the mother of all change: when we are in the same environments, we tend to draw upon the same, routine modes of thought and behavior.
A few months ago I had an attack of acute appendicitis while staying in a LaGuardia airport hotel awaiting a return flight to Chicago. When I went to the nearest emergency room at Elmhurst Hospital outside Jackson Heights, Queens, I found that I was seemingly the only native English speaker in a sea of people awaiting medical care. After some difficulty attracting attention, I was admitted to the hospital and spent the next several days of recuperation navigating my way through patients and staff of every conceivable nationality. By the end of the experience, I felt at home there. Ive since stayed at the same airport hotel and routinely make visits into the surrounding neighborhoodsareas I would have never in my wildest dreams ventured into previously. In adapting to that environment, I discovered hidden strengths. I also overcame more than a few hidden prejudices and fears.
The greatest enemy of change is routine. When we lapse into routine and operate on autopilot, we are no longer fully and actively conscious of what were doing and why. That is why some of the most fertile situations for personal growththose that occur within new environmentsare those that force us to exit our routines and actively master unfamiliar challenges.
In familiar environments and routines, we operate on autopilot. Nothing changes.
When you act as your own trading coach, your challenge is to stay fully conscious, alert to risk and opportunity. One of your greatest threats will be the autopilot mode in which you act without thinking, without full awareness of your situation. If you shift your trading environment, you push yourself to adapt to new situations: you break routines. If your environment is always the same, you will find yourself gravitating to the same thoughts, feelings, and behaviors. We are mired in repetitive patterns of thought and behavior because we are mired in routines: the same emotional and physical environments. Indeed, we repeat the same patternsfor better or for worseprecisely because those patterns are adaptations to our current settings.
So how can we change our trading environments? The key is recognizing that our physical settings are only a part of our surroundings. Here are a few routine-busting activities that can alert us to risks and possibilities:
1. Seek Out Divergent Views. Conversations with traders who trade differently from youdifferent time frames, markets, or stylescan often help cement your views or question them. Similarly, reading materials from fresh perspectives puts your ideas in a different light and pushes you to question your assumptions. I remained relatively bullish on the stock markets longer-term picture into the final quarter of 2007. Only when I pushed myself to read informed views
that clashed with my ownand consulting data that did not fit my frameworkdid I modify my perspectives and avoid significant losses.
2. Examine the Big Picture. Its easy to get lost in the markets short-term picture; how it is trading that minute, that day. I find it important to periodically zoom out to longer-term charts and place the current action into context. Indeed, some of the best trading ideas start with a big picture view and then proceed to shorter-term execution. I especially find this to be the case when looking at longer-term support/resistance, trading ranges, and Market Profile value areas. Often, shifting my field of vision will help me avoid an ill-informed, reactive trade based on the markets last few ticks. If something seems obvious in the market, switch time frames and generate an entirely new perspective. What looks obvious from one view may well be obviously wrong from another.
3. Examine Related Views. Sometimes the action of a single stock or sector will illuminate whats happening in the broader market; one currency cross will break out ahead of others. Are we seeing a broad fixed income rally, or is the yield curve steepening or flattening? Looking across instruments and asset classes keeps us from getting locked into ways of thinking. I find myself tracking sector ETFs during the trading day to see if stocks are moving in a single direction (trending) or are taking different paths within a range. If I see bond traders fleeing to safety or assuming risk, I can anticipate selling or buying stocks. Seeing the entire financial playing field helps keep us from becoming wedded to preconceived ideas.
4. Take the Break. Just as we take vacations to return to work re
freshed, a break from the screen can help us generate fresh market views. It is easy to become focused on what is most dramatic and salient in markets. Pull back and clear out the head to help you see whats not obvious and then profit by the time its recognized by others. I find breaks especially helpful following losing trades, enabling us to reflect on the losses and what can be learned from them.
If your environment is comfortable, it probably isnt conducive to change.
In short, its the mental routinesthe mental environmentthat we most need to change to break unwanted and unprofitable patterns of thought and behavior. When youre your own trading coach, you learn to think, but also to think about your thinking. Incorporate a fresh look at self and markets each day to inspire new ideas, challenge stale ones, and tap sources of energy and inspiration that otherwise remain hidden in routine. As with my adventure in Queens, you may find that the most exotic changes bring out your finest adaptations.
Many times its the market views we most scorn that we need to take most seriously, because at some level were finding them threatening. Seek out commentary from those you most disagree with and ask yourself what you would be seeing in the markets if that commentary proves to be correct. If youre quick to dismiss a market view, give it a second look. You wouldnt need to be so defensive if you didnt sense something plausibleand dangerousin the views youre dismissing.
TRANSFORM EMOTION BY TRACE -FORMATION
When traders seek coaching, they are usually troubled by a particular emotional state that affects their decision-making: anger, frustration, anxiety, or doubt. Their goal is to change how they feel, but they dont know how to accomplish that. Sometimes traders even view their emotions as fixed and unchanging aspects of personality: Its just the way I am.
It is true that our traits and temperaments affect how we experience the world. They also play an important role in defining the range of our emotions. Some people feel thingsgood and badvery strongly; others are quite even-keeled. Neuroticism, the tendency to experience negative emotions, is one of the big five personality traits identified by researchers. Like all such traits, it has a strong hereditary component. Though we like to think of ourselves as masters of our fates, the sobering reality is that much of our emotional experience is hardwired.
Does that mean we cant change how we feel in particular situations? Not at all. If psychological methods can help people overcome posttraumatic stresses and anxiety disorders, they certainly can help us master our feelings in normal life situations. For the most part, we cannot change personality, but we can change how our personalities are expressed. The trap many traders fall into is trying to control feelings with thoughts. We attempt to talk ourselves into feeling better or differently. Rarely does that work. When people are grieving over losses, telling them theyll be okay doesnt really touch what theyre experiencing. The feelings express a psychological reality; asserting a logical reality ignores the personal meaning and significance of the situation. Feelings are surprisingly refractory to willpower: if wanting to feel differentand talking ourselves into feeling differentwere possible, there would be many fewer psychologists in the world.
If you serve as your own trading coach, a great place to start is with the perspective that feelings contain information. Research in cognitive neuroscience finds that emotion is an essential component of rational decision-making. When the brain is damaged and becomes unable to engage in emotional processing, the result is profoundly distorted behavior. Your coaching goal is not to banish the feelings associated with difficult trading a strategy that only prevents resolutionor to blindly act upon them. Rather, the most constructive step you can take to change a feeling is to give it full acknowledgment and extract its vital information.
Feelings inform us about our appraisals of self, others, and world.
The research of James Pennebaker, a professor at the University of Texas, is quite relevant here. He and his colleagues found that writing in a journal or talking aloud for a half hour a day had a powerful effect on enabling people to cope effectively with challenging emotional circumstances, including traumas and crises. When we make implicit feelings explicit, we view them from different angles and place them into a different context. For example, someone who has been angry and frustrated with himself over poor trading performance might journal about these thoughts and feelings at length. As he is writingand reading over his writingshe suddenly realizes, Whoa; Im being awfully hard on myself. Im not that bad! With that, he is able to throttle back his negative self-talk and turn his attention back to markets.
When we fail to acknowledge emotions, we lose their information and thus the opportunity to shift perspectives. The frustrated, angry trader who brushes aside his tensions and forges blindly ahead finds them easily triggered the next day. This is particularly the case when the frustrations are triggered initially by trading mistakes. I recently met with a trader who fought a market trend all morning, built frustration through the day, and then blew up in the late afternoon. Had the trader used the frustration to examine his trading, he could have ridden the trend and made significant money. Brushing emotions aside doesnt change them. Ironically, acknowledging and accepting them, giving them free expression, sets the stage for transformation.
Does that mean that we should give full vent to whatever were experiencing? No, psychological research also suggests that unbridled expression of emotion interferes with concentration and performance. Simply yelling when were angry or pouting when were discouraged does nothing to alter the feelingsand certainly does not place us closer to resolving the situations responsible for the upset in the first place. The trader from my example, for instance, spent much of his afternoon fuming, but never resolving his anger. Reflexive acting on such emotions only reinforces them; you cant overcome frustration by behaving in frustrated ways.
Blindly venting or acting on emotion is as unproductive as blinding ourselves to emotion; both prevent learning from the information in our feelings.
The idea, then, is to transform feeling, not ignore it and not revel in it. One way to do this is to replace one emotional state with another: to substitute feeling for feeling, not thought for feeling.
In my Psychology of Trading book, I explained how I used the early music of Philip Glass to enter a meditative state and trance-form experience. Actually any stimulus that evokes calm, focused attention can be effective as a tool for shifting emotions. The key is to evoke and sustain the Yoda statethe calm focusduring periods of high frustration or discouragement. Biofeedback can be especially useful in this regard, as computer-based applications provide real-time feedback about your success in sustaining the altered state. It is virtually impossible to sustain a worked-up stateanger, anxiety, and stresswhen keeping yourself calm and focused. Even better, in the relaxed state, youll arrive at perspectives and insights that remain unavailable while youre immersed in the flight-or-fight mode.
One exercise I recommend to traders is to draw two thermometers side by side on a sheet of paper and then run off a number of copies of the paper. One thermometer records your emotional temperature with respect to frustration; the other records your temperature with respect to confidence. The sheet stays by your trade station; all you need to do is make a mark on each thermometer to indicate how frustrated and confident youre feeling at the time.
When were most frustrated, but also most overconfident, were likely to make our worst decisions and violate our trading principles. If you require yourself to take your emotional temperature during each trading session, you create a mechanism for catching your state of mind before it can disrupt trading performance.
Once you identify an elevated frustration temperature, a valuable, automatic rule is to take a few minutes away from the screen and enter into a trance-formation. This can be done by regulating your breathingmaking it particularly deep and slowand fixing your attention on something that captures your attention: music, imagery, or a picture in front of you. If you slow your body and take your attention away from the situations that may be elevating your emotional temperature, you shift your state and make it easier to act calmly, in a planned fashion. With practice, this can be accomplished in a matter of minutes, short-circuiting many disruptive patterns before they lead to poor trading decisions.
The key is to keep yourself aware of your emotional state throughout the day. The thermometers are an easy, visually arresting way of becoming your own observerand coach.
Check out the insights about breathing in Chapter 9. Mike Bellafiore of SMB Capital explains how he and partner Steve Spencer teach the traders at their prop firm how to breathe as part of training them to trade. As
practitioners of meditative disciplines understand, emotional self-control begins with physical control.
