USE FEELING TO UNDERSTAND YOUR THINKING
One of the best ways to identify the automatic thinking that could most jeopardize your trading is to track your strongest feelings. In the cognitive framework, how we feel is a function of our perception: how we see things and how we interpret what we see shape our emotional responses. When our interpretations of events are extreme, were most likely to respond with extreme feelings. Those occasions in which we look back at our behavior with embarrassment, wondering how we could have blown things so out of proportion, are most likely reflections of times in which we were controlled by the automatic thoughts from distorted mental maps.
If, say, I think about the times in which I most completely lose my temper, they would be occasions in which I want to accomplish something but find my path blocked for no apparent good reason. Perhaps Im trying to get to an appointment on time and find myself behind a slow driver who is absorbed in a cell phone call. Or it could be a situation in which Im trying to accomplish something with a trader at a firm, but find myself stymied by a bureaucratic response. The thought behind my temper outburst is, I have to get this done, now!
Often these are situations that arent life or death: they dont truly need to be accomplished there and then. My schema says, however, that if something doesnt get done now, that would be awful; it would be a catastrophe. I am responding to my own internal should and must, not to the objective demands of the situation. The exaggerated emotional response is a tip-off to an entrenched thought pattern that distorts my perception.
When we turn a desire into a demand, we mobilize the body and respond with stress.
In psychodynamic work, the focus would be historical: figuring out past relationship patterns that might have initiated my particular way of thinking and feeling. The cognitive framework, however, is less concerned with the origins of the thinking patterns than on what we do in the present to recognize and modify those. By tracking our extreme emotional responses as they are occurring, we can learn to recognize the thought patterns that affect us in the present and eventually challenge these. In the cognitive approach, this is accomplished literally by teaching yourself to think differently and filter the world through a different set of lenses.
For example, when I pressure myself about time and tasks that I want to accomplish, I recognize the mounting frustration and tell myself that this is going to get me nowhere. A different perspective on the situation is, Whats the worst that could happen? Will this really be a catastrophe? By pushing myself to entertain the worst-case scenario, I see how foolish it is to get worked up. Rarely is the likely consequence commensurate with the extent of the pressure Im placing on myself. That, after all, is what makes the schema distorted!
When we change the lenses through which we view events, we change our responses to those events.
What are your most exaggerated emotional responses to markets? Do you feel angry when ideas dont work out; devastated after losses; stricken by fear during volatile periods? Or perhaps you swing from overconfident, cocky feelings to feelings of despair and worthlessness? Your strongest feelings are reflections of your most entrenched thought patterns, and those feelings reflect your core schemas:
Schemas of justice I put in my work; I should make money. Schemas of catastropheIt would be terrible if my trade didnt work out.
Schemas of safetyI cant act; the market is too dangerous. Schemas of self-worthIm a total failure; I cant make money.
Schemas of rejectionIll look like such a fool if I cant succeed at this.
Its easy to see how these schemas naturally lead to exaggerated emotions of anger, frustration, fear, and depression. As your own trading coach, you want to use your most extreme feelings to figure out your most distorted ways of viewing yourself and your trading. If youre managing risk properly, there should be nothing overly threatening about any single trade or any single days trading. If you find yourself responding to markets with a high degree of threat, then you know that the problem is not the markets themselves or even your trading, but the interpretations youve placed on your trading results.
Please read those last two sentences again, slowly. If you are trading wellwith plans built on demonstrated edges, with proper risk controltrading will have its stresses, but should not be filled with distress. Markets cannot make us feel anxious, depressed, or angry; the threat
lies in how we view our market outcomes.
One exercise I like to conduct when I find myself responding to trading with strong emotion is to simply ask, Am I reacting to the situation as it really is, or am I reacting to what Im telling myself about the situation? That question forces me to confront my thinking and ask whether the magnitude of my emotional reaction is truly warranted. If it is not the objective situation that creates your feelings, then your emotion has to be internally generated, a function of how you are processing events. If the emotion is out of proportion to the situation, your thinking about the situation must be distorted.
The greater the distortion in our thinking, the greater the distortion in our emotions.
Make yourself write down what you would have to say to another personanother traderto make them react the way youve just reacted. What could you say to them that would lead them to respond so extremely? The odds are good that what you would tell another person to generate the emotion is what you are telling yourself:
Youre no good!
Its all your fault!
Youre going to lose your money! You cant win!
If you write down these messages every time you catch yourself in the throes of an extreme emotional response, youll come close to duplicating the output from your cognitive schemas. Its much easier to redraw mental maps when theyre lying open in front of you.
A common thought pattern that distorts traders reactions to markets is what we might call a justice schema: the idea that markets should be fair, should offer opportunity, or should behave as theyve behaved in the past. Once we lock ourselves into notions of how markets should behave, we open ourselves to frustration and disappointment when they take their own course. Many times, Ive seen traders grow restive, fuming at markets that just arent moving. Traders become impatient and jump all over any move to new highs or lows, hoping that this will be the breakout moveonly to find the market return to its slow range. By challenging yourself when you catch yourself thinking or talking about how the market should behave (but isnt behaving), you can use the frustration to channel your energies elsewhere: toward longer time frames in the same market, toward fresh research, or toward other instruments or markets. When we react to our own sense of justice and injustice, we no longer objectively process actual market activity.
LEARN FROM YOUR WORST TRADES
Alcoholics Anonymous teaches people to become aware of their stinkin thinkin. But we dont have to be alcoholics to process the world in distorted ways. We develop repetitive patterns of behavior, and we follow daily routines. Most of us are creatures of habit: we tend to go through consistent morning routines, eat at the same times of day, and go to sleep around the same hour. We take the same routes to and from work, and we listen to the same music, watch the same television shows. Theres not much in our lives that isnt patterned.
So it is with our thinking. We learn ways of processing information, and these become part of our routines. We blame ourselves to help avoid conflict with others; we anticipate negative outcomes to help us not become surprised when things go wrong. In individual situations, such modes of thinking may suit us well. As engrained habit patterns, however, they impose distortions upon the world. After all, not everything really is our fault. Not every event does go poorly.
Our negative thought patterns are learned habits; the key to cognitive work is unlearning them and replacing them with more constructive ways of processing events.
Once these modes of thinking become automatic, their accompanying feelings follow along. When we blame ourselves, we feel discouraged, diminished, and depressed. When we anticipate the worst, we feel anxious and uncertain. To the extent that we bring these schemas to trading, we no longer respond to markets objectively. We are like robots, responding with automatic thoughts and unwanted feelings.
As Gurdjieff noted, it is important to become emotionally aware of this reality: At some point youre deeply absorbed in trading, observing market patterns, and acting upon those. Then a shift occurs, and you are no longer in control of your thinking. It has become hijacked. An activated schema now sets off an avalanche of thoughts and feelings that may very well have nothing to do with the situation at hand. Suppose someone hijacked your computer as you were trading and suddenly switched the screen from your markets to some other, random ones? Suppose your mouse was taken out of your control and clicked on trades that you didnt want?
I guarantee, if that happened to you, youd become very upset. You would not tolerate someone controlling your computer or your mouse. You would do everything in your power to regain control of your equipment. That has to become your attitude toward the hijacking of your mind. Its not enough to simply observe automatic thoughts taking control; you need to feel the horror of literally losing control of your mind and behavior. Much of the motivation to change faulty schemas will come from the awareness of the pain they inflict in all aspects of your life.
Automatic thoughts dont just enter our mind; they take over. We change when we sustain the motivation to stay in control of our minds.
Weve seen that reviewing your self-talk via audio or video recording and tracking your most extreme emotions during trading can alert you to your stinkin thinkin. Another powerful tool to help identify problematic schemas and thought patterns is to review your absolute worst trading decisions. Your worst trading decisions may or may not be your largest losing trades; they could be occasions in which you simply missed a golden opportunity. Youll know your worst trading decisions by your reaction to them, How could I have done that? That reaction is a fantastic tell, indicating that you truly were not in your proper mindset when you made the poor decision. At some level, when youre mystified how you could have been so mistaken or boneheaded, you are recognizing that your mind had been hijacked.
Once you identify these worst trades and this will require a review of your journal, as well as a look back on your recent trading experienceyou then want to re-create the thoughts and feelings that led to the faulty decision-making. Normally we like to put such episodes behind us, with a simple reassurance that next time well trade with better discipline and preparation. But in this exercise, you want to perform a psychological autopsy and exhume your faulty decision-making process in all its gory detail. What were you thinking at the time? What were you feeling? What were you trying to avoid or accomplish with your trading decision?
The common thoughts and feelings during these poor trading episodes will be your clue as to the schemas that were being activated at the time. Perhaps it was a safety schema: you were telling yourself that you could not afford to lose paper profits or to take a particular risk. Alternatively, it could have been a self-worth schema, as you told yourself how great it would be if this trade hit a home run. Your feelings during these tradesthe fear, the overconfidencewill provide valuable clues as to the automatic thoughts that were generated.
Our worst trades come from reacting to our automatic thoughts instead of markets themselves.
In my own trading, a common schema that is activated is a variation of the safety theme: avoid danger. To be sure, this can be a useful mode at certain market junctures, helping a trader size positions appropriately and limit losses on trades. Where the schema introduces distorted perception, however, is in defining danger as any drop from an equity peak, not as an outright loss of capital. This makes it particularly difficult to stay in winning trades, because relatively small retracements will stimulate desires for profit taking. A more realistic perspective would define danger not only in terms of lost paper profits, but also in terms of lost opportunity. Some of my worst trades have been ones in which I acted on a short-term perspective and subsequently missed the longer-term market move. The need to avoid danger exposed me to the equal danger of cutting profits short.
Notice that these worst trading episodes cut across patterns of thinking, feeling, and behaving. Once we start from the (faulty) premise, You must avoid risk, and once we define risk as any market movement against our positions, we shape our feelings and actions accordingly. Reviewing your worst trades may be painful, but it is also liberating. It tells you where your mind has gone astray, and that can lead you to corrective action.
Many of our worst trades come from the demands we place on ourselves. Keep tabs of the times you tell yourself that you need to, must, and have to participate in market moves or make money. When these demands become rigid absolutes, we end up chasing market moves, refusing to take small losses, and otherwise violating principles of good trading. When we are more focused on those internal demands than on our trading rules, thats when were most likely to lose money. Youll be able to identify those demands by the internal feeling of pressure that they generate. Theres a different feeling when you trade from opportunity versus trade from pressure. Track your worst trades and the feelings associated with them to alert you to the ways in which your automatic thoughts can sabotage your best trading.