CHAPTER 6
RemappingPsychodynamic Frameworks
for Self-Coaching
the Mind
Cognitive Approaches
to Self-Coaching
The greater danger for most of us lies not in setting our aim too high and falling short, but in setting our aim too low, and achieving our mark.—Michaelangelo
In Chapter 5, we explored psychodynamic frameworks for self-coaching. These frameworks are especially relevant when we repeat unproductive patterns across a variety of situations over time. Fundamentally, the psychodynamic view is a historical one: it emphasizes linkages between how we coped in the past and how we now find ourselves responding to situations.
The cognitive framework, like the behavioral one that we’ll visit in Chapter 7, is less historical: it emphasizes how we process the world in the here and now. Change the viewing and you change the doing is the essential message of cognitive approaches. While the past is not irrelevant to this task, cognitive self-coaching stresses what we can do in the here and now to alter how we process the world around us.
Cognitive coaching is most relevant if you find yourself battling negative thought patterns that interfere with your motivation, concentration, and decision-making. Some of the most common cognitive patterns that traders target for change include:
• Perfectionism
• Beating Up on Oneself After Losses
• Worry
• Taking Adverse Market Events Personally
• Overconfidence
Cognitive methods help us think about our thinking and restructure our perceptions of self and world . Let’s take a look how...
LESSON 51: SCHEMAS OF THE MIND
Chapter 5 outlined psychodynamic approaches to the change process. That framework makes use of powerful emotional relationship experiences to break patterns of behavior left over from prior life conflicts. When applied to self-coaching, the psychodynamic perspective requires a dual look at past and present, with an eye toward recognizing occasions when we repeat the past in our current responses to trading challenges. The cognitive framework, on the other hand, is more present-oriented. Its focus is on how we think and the relationship between our thinking and the ways in which we feel and behave.
The cognitive approach to change, like the behavioral methods described in Chapter 7, is grounded in learning theory. Instead of emphasizing the creation of relationship experiences, the focus is on skills building. For that reason, homework exercises play a prominent role in cognitive work, which makes the cognitive modality particularly useful for self-coaching. In cognitive coaching, you learn skills for processing information more constructively.
Many cognitive psychologists draw on the analogy of the scientist when describing our thought processes. Scientists observe nature and look for patterns and regularities. Once scientists observed these relationships, they develop theories to explain their observations. Experiments test these theories and provide new observations that enable scientists to modify their theories. Over time, science arrives at ever more refined understandings of the world through the process of testing, observing, modifying, and testing further.
Cognitive researchers call the theories in our head schemas. These schemas are like mental maps, orienting us to the world around us. We interpret events and interactions with others through these schemas, assimilating new events to them when possible and accommodating our understandings to fit new events when needed. As developmental psychologist Jean Piaget explained, this process of assimilation and accommodation provides us with deeper and richer understandings of our world. We are always elaborating our maps of reality.
We never experience the world directly; all perception is filtered through our mental maps. If our maps distort the world, our perceptions will be distorted.
Schemas are not just collections of thoughts, but are complexes of thoughts, feelings, and action tendencies. Let’s say, for example, that I was beaten severely as a child and now perceive the world as a dangerous place. One of my schemas might be that, “You can’t trust people; they’ll hurt you.” When others try to get to know me, that schema becomes a lens through which I view their behavior. Instead of responding with friendliness, I raise my guard and distance myself. Because of the schema, I’ve interpreted their behavior as dangerous.
Sometimes schemas, as the lenses through which we view events, are distorted. They lead us to view and respond to events in exaggerated ways, as in the example above. Take the example of the trader who views his worth through his profit/loss statements. He becomes overconfident and expansive when he’s making money, and he turns risk-averse and self-doubting when he’s in a slump. As long as his trading results are filtered through this schema, he’s likely to think about and respond to his profitability in distorted ways.
Problem patterns develop when our distorted responses to the world become self-reinforcing. In the example above, because others hurt me, I now perceive people as dangerous and untrustworthy—even when they approach me in a friendly way. My guardedness makes me seem hostile or suspicious to others, and they naturally stop their friendly overtures. That, in turn, convinces me that my views of them were right all along, reinforcing my distorted schema. When we are caught in such self-reinforcing patterns, we stop revising our mental maps: we become locked into negative ways of perceiving—and responding to—the world.
Automatic thoughts are the habitual ways of thinking that result from our schemas. Once a schema is triggered, it usually sets off a series of thoughts and feelings that guide our action. A schema of vulnerable self-worth might, for instance, lead us to respond to a market loss with dejection and depression and a host of thoughts amounting to, “I’ll never succeed.” These thoughts and feelings are not objective assessments of the markets or our trading. Rather, they are automatic, learned reactions that have become habit patterns.
We never directly observe our schemas; rather, we experience their manifestations through our automatic thoughts.
The goal of cognitive work is to unlearn these negative thought patterns and replace them with more realistic ways of viewing the world. This restructuring of our thinking means that we, like scientists, must revise our theories. The cognitive approach provides methods for accomplishing this revision.
There are many automatic thoughts that affect traders as they struggle with risk and uncertainty. Some of these thoughts are:
• “I need to make more money.”
• “I’m so stupid; how could I have done that?”
• “I’ve got this market licked.”
• “I can’t afford to lose money.”
• “The market is out to get me.”
• “I’ve got to get my money back.”
• “Nothing I do is right.”
The first step toward becoming your own trading coach in a cognitive vein is to identify the thoughts that automatically appear during your trading. Several traders I’ve worked with have taken the unusual step of audio recording or videotaping themselves throughout the trading day and then reviewing the recording after the close of trading. It’s a great way to identify the recurring thoughts and feelings associated with trading challenges. Many times, there are just one or two core automatic thoughts that dominate our experience. These are the thoughts that will form the initial focus of your coaching efforts.
Your assignment is to observe yourself in trading with either video or audio recording, making notes of recurring thoughts and feelings. At first, don’t worry about changing these thoughts: simply observe how your mind is occasionally hijacked when events trigger particular schemas. It is crucial that you understand, from your own first-person experience, that you do not have complete freedom of will or mind. At times, all of us can be quite robotic, replaying thoughts that have become mere habits. By observing these habitual thought patterns, you begin the process of separating yourself from them.
COACHING CUE
Our most problematic automatic thoughts often come out when we’re fatigued and/or overwhelmed. Think back to times when you’ve felt overloaded with work, responsibilities, and market challenges. What are the thoughts that go through your mind? How do those thoughts affect your feelings and behavior? Observing yourself when you’re most psychologically vulnerable is a great way of clearly seeing the negative thought patterns and schemas that affect us.
LESSON 52: 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, we’re 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 I’m 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 I’m 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 aren’t life or death: they don’t truly need to be accomplished there and then. My schema says, however, that if something doesn’t 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, “What’s 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 I’m 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 don’t 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 catastrophe—“It would be terrible if my trade didn’t work out.”
• Schemas of safety—“I can’t act; the market is too dangerous.”
• Schemas of self-worth—“I’m a total failure; I can’t make money.”
• Schemas of rejection—“I’ll look like such a fool if I can’t succeed at this.”
It’s 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 you’re managing risk properly, there should be nothing overly threatening about any single trade or any single day’s 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 you’ve placed on your trading results.
Please read those last two sentences again, slowly. If you are trading well—with plans built on demonstrated edges, with proper risk control—trading 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 I’m 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 person—another trader—to make them react the way you’ve 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:
• “You’re no good!”
• “It’s all your fault!”
• “You’re going to lose your money!”
• “You can’t win!”
If you write down these messages every time you catch yourself in the throes of an extreme emotional response, you’ll come close to duplicating the output from your cognitive schemas. It’s much easier to redraw mental maps when they’re lying open in front of you.
COACHING CUE
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 they’ve 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, I’ve seen traders grow restive, fuming at markets that just aren’t moving. Traders become impatient and jump all over any move to new highs or lows, hoping that this will be the breakout move—only 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 isn’t 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.
LESSON 53: LEARN FROM YOUR WORST TRADES
Alcoholics Anonymous teaches people to become aware of their stinkin’ thinkin’. But we don’t 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. There’s not much in our lives that isn’t 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 you’re 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 didn’t want?
I guarantee, if that happened to you, you’d 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. It’s 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 don’t just enter our mind; they take over. We change when we sustain the motivation to stay in control of our minds.
We’ve 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. You’ll 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 you’re 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 experience—you 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 we’ll 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 trades—the fear, the overconfidence—will 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.
COACHING CUE
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, that’s when we’re most likely to lose money. You’ll be able to identify those demands by the internal feeling of pressure that they generate. There’s 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.
LESSON 54: USE A JOURNAL TO RESTRUCTURE OUR THINKING
Review your past emotional episodes and trading mistakes as a helpful way to identify your mental maps and the ways in which they can distort your perception. The goal of cognitive work, however, is to be able to catch your automatic thoughts—those bouts of stinkin’ thinkin’—as they are occurring so that they cannot hijack your mind and your trading.
In Enhancing Trader Performance, I outlined how a cognitive journal can be used to help traders restructure their thought processes. The journal format I suggested took the form of a single page for each trading day or week (depending on the frequency of your trading), with each page taking the form of a table. The left-hand column of the table describes the events that occurred at the time you experienced a trading problem. This column would include what was happening in the market, what you were planning, and how you entered—or didn’t enter—the market.
The second column is an account of how you are talking to yourself about the problem. In the book, I took the traditional approach of using the second column to describe your beliefs about the events. What may be most helpful to your self-coaching, however, is to actually transcribe your thoughts about the events and capture what you’re thinking and feeling. This column should capture the ideas going through your head at the time as faithfully as possible, as in, “Why didn’t I take the trade when I had it? I should have been up money today and instead I’ve lost more than I should. I am so disgusted with myself. I don’t know if I even want to keep trading.”
Many times, key phrases from your transcribed self-talk will alert you to the nature of the schemas being activated. For instance, in the example above, the word should is often a good sign that a perfectionist self-worth schema is playing itself out, leading to angry self-talk and a discouraged frame of mind. Once the musts and shoulds are triggered, they turn the trader’s attention away from markets and toward the issue of self-worth. Note that this is not happening in a constructive context; rather, the self-talk is critical and punitive. It is difficult to see how such thinking could move a trader forward.
I like to think of these automatic thoughts from the second column as a kind of tape recorder in the brain that clicks on during particular situations (first column). Many times, the very same phrases and messages recur from situation to situation. This process becomes easy to observe when reviewing your cognitive journal: you see not only how negative the self-talk can be, but also how automatic and robotic it is.
Pay particular attention to emotional words and phrases that recur in your self-talk: These words and phrases are shaped by our core schemas.
The third column describes what happens as a result of the self-talk: the feelings you have and the actions you take. For instance, in the example above, those angry, perfectionist thoughts might lead you to quit for the day and sulk, missing opportunity and a chance to learn about current markets. Alternatively, the angry self-talk might lead to subsequent revenge trades that lose even more money. The third column chronicles all the consequences of the automatic thinking, both personal and monetary.
Over time, a review of this third column will cement for you the absolute toll taken by the distortions in your thinking. When you are your own trading coach, it’s necessary to sustain your motivation for change. Seeing that your thinking is both tape recorder-like in its mechanicalness and sabotaging in its consequences will sear into your mind that change is not optional . Reading entries from day after day after day that highlight the same thoughts, the same behaviors, and the same losses and lost opportunities focuses not only the mind, but also the motivation for change.
The most common mistake traders make in keeping such a journal is that they are not sufficiently specific in their entries and thus miss crucial details and understanding. Below is a sample of a journal that lacks detail and fails to help the trader understand the specific thought patterns and consequences that appear across various trading situations:
Now let’s take a look at the same cognitive journal, but with detailed entries.
Note how the added detail makes it clear what is going on in the trader’s mind. The elaboration of the trader’s self-talk also clarifies the links among the events, as one trading mistake led to another, with one schema (self-worth) first triggering overconfident thoughts and feelings, then frustrated ones, then ones of defeat and failure. We can also see how the trader’s home life is connected to the thoughts and feelings affecting trading decisions, as the trader is feeling a need to prove himself to his spouse as well as to himself.
When you are your own trading coach, you want to look between the journal entries as well as within each of them. That will often illustrate the links among your thoughts, as events trigger distortions in processing, which bring further events, and still additional distortions. Your assignment is to capture the flow of your thoughts and the connections of these to your feelings and actions. Only once you clearly see how the mental dominoes fall can you interrupt the process by turning your mind in a different direction.
COACHING CUE
What are the schemas and thoughts that accompany your best trades? Extending your journal to include how you think when you’re trading very well helps you take a solution-focused approach to cognitive work. The last lesson in this chapter may provide some ideas along this line. Also keep an eye out for the hope schema, in which trades that are losing money trigger automatic thoughts of hope for a return to breakeven. Those thoughts often lead to violation of stoploss rules and trigger subsequent schemas of regret and self-blame. There’s a role for intuition in trading, but beware situations in which you are into wishin’. Those are usually excellent points to get flat and regain perspective. When you are your own observer, your negative thoughts can themselves become reliable trading indicators.
LESSON 55: DISRUPT NEGATIVE THOUGHT PATTERNS
How do you break a habit pattern? When we have a smoking habit, or when we find ourselves eating out of habit, one of the first steps toward change is simply catching ourselves in the act of repeating our unwanted actions. By disrupting a habit pattern, we gradually make it less automatic, less capable of controlling us.
So it is with our habitual thought patterns. When we interrupt and disrupt these patterns, they become less automatic. We gain a measure of control over them; they no longer take control from us.
The most basic technique to disrupt negative thought patterns is thought-stopping. Thought-stopping is exactly what it suggests: a conscious effort to stop a train of thinking while it is occurring. When you have used cognitive journals and reviews of your trading to clearly identify your pattern of automatic thoughts, you become increasingly sensitive to their recurrence. This enables you to recognize their appearance in real time. By giving yourself the command to Stop!, you disrupt the automatic nature of the thinking. This gives you time to calm down, change the focus of your attention, and engage in other useful cognitive exercises.
A good example from the previous lesson is situations in which you find yourself losing money on a trade and hoping or praying for a turnaround. I’ve even encountered traders who engage in a kind of bargaining (not unlike the dynamics of someone facing death in the Kubler-Ross work), promising to never violate their discipline again if they could just break even on this trade. The fact that hope is dominating the cognitive picture for the trader suggests that there is more than a little desperation. At some level, the trader is aware that this is not a good position to be holding. The underlying schema, however, says that it is not okay to lose money; that losing money equals failure. This makes even normal market losses unduly distressful, triggering maladaptive coping (holding positions beyond stop-loss points out of hope; doubling down on losing trades). If, however, the trader recognizes this pattern as it is occurring, he can use the appearance of hope to stop himself and disrupt the automatic thoughts and actions.
The more vigorous your efforts at stopping, the more successful you’ll be in disrupting unwanted patterns of thought and behavior.
Thought-stopping is useful because it separates you from your ways of thinking. Instead of identifying with automatic thoughts and the feelings they engender, you separate yourself from them and remind yourself that this is what has gotten you into trouble in the past. In the beginning, as you coach yourself, you will find that you have to engage in thought-stopping numerous times during a trading day. As you become more expert at recognizing your negative thoughts and disrupting them, however, you find it easier and easier to stop yourself. A simple reminder of, “There I go again!” is sufficient to turn your mind to a different track. The interruption of habitual thoughts itself becomes a positive habit pattern.
I have found it helpful in my own trading to make the stop efforts particularly impactful, almost as if I’m shaking myself awake and mobilizing other ways of dealing with situations. One time I caught myself holding a winning trade beyond the point at which it had reversed and returned to breakeven. A cardinal rule I’ve learned to follow is to not allow trades that have moved a threshold amount in my favor to become losing trades. As I watched the winning trade hit breakeven and then turn red, I caught myself hoping that it would return to breakeven. The order flow was clearly suggesting, however, that large traders were hitting bids and driving the market lower. I gave myself a swift slap across the cheek and told myself to get out. That spontaneous act—admittedly not a coaching technique I use with other traders—woke me up and enabled me to take a small loss rather than a much larger one. However, I have remembered that slap over the years, and its impact has kept me out of trouble on multiple occasions. (Now I take a break from the screen and douse my face in cold water when I need to shift how I’m thinking about markets. The physical jolt seems to facilitate a cognitive shift.)
When the thought-stopping is dramatic, the mind-shift can be equally radical.
Some traders I’ve worked with have found it useful to post signs on their computer monitors to remind themselves of the thoughts they most want to stop. Stay Humble is one sign a trader wrote after identifying a pattern of overconfident, arrogant thinking. Such signs help traders to think about their thinking, standing apart from the patterns that would normally trigger negative emotions and poor trading decisions. They also remind traders to periodically stop, interrupt automatic thought patterns, and reengage markets constructively. You can’t be absorbed in a pattern of thinking if you’re making yourself its observer.
Here is a simple thought-stopping exercise that I have found useful in my own trading. The idea is to be on the lookout for any thoughts during trading that include the words I or me. The goal is to interrupt and disrupt those thoughts. The reason for this is that you don’t want to be self-focused when you’re concentrating on markets. You neither want to be thinking overly positively about yourself and your performance or overly negatively. When your automatic thinking turns attention inward, that’s the cue to immediately disrupt the pattern and become more market focused.
There are many examples of self-directed attention that divide your focus from markets. These include:
• “I’m doing great; this is the time to be aggressive.”
• “I can’t believe how badly I’m trading.”
• “Why did I just do that?”
• “The market is killing me.”
• “I’m going to make my money back.”
• “Everything I do is wrong.”
• “I hate this market.”
Once the words I or me appear, you want to quickly close your eyes, take a deep breath, relax your muscles, and turn your attention to the markets. If you’re already worked up to that point, a quick break from the screen—clearing your head and turning your attention elsewhere—can be useful.
I find it helpful, during trading, to periodically remind myself, “It’s not about me.”
With practice, you can become quite good at proactively steering your mind from self-focused thoughts. During one recent trading episode, I caught myself looking up my P/L in the middle of a trade, wondering how well I was doing and how much I was willing to give up of my week’s gains. Of course, that had nothing whatsoever to do with the merits of the trade I was in. Because of prior practice, I was able to stop myself from clicking on the P/L summary before the numbers could get into my head. Reminding yourself that “it’s not about me”—it’s about the markets—is an excellent start to maintaining control over your decisions in the heat of market action. If you stop yourself from doing the wrong things, you clear the decks for implementing sound trading practices.
COACHING CUE
When I work with traders, one of my roles is to help them stop the flow of negative, automatic thoughts. Even when you’re coaching yourself, however, you can derive the same benefit by keeping in touch with one or more trusted and valued trading peers during market hours. This can be in a single trading office or via Skype, Hotcomm, or even instant messaging. Many times your mates will pick up on your negative thinking before you’re aware of their appearance. This can be very helpful in checking yourself and refocusing your attention.
LESSON 56: REFRAME NEGATIVE THOUGHT PATTERNS
Reframing is a psychological technique that takes a problem pattern and places it in a different context so that it can be viewed in fresh ways, opening the door to new responses. Suppose I’m meeting with a trader who is experiencing occasional bouts of performance anxiety that leave him unable to act on clear trading signals. He views himself as a weak person who can never succeed at trading. I take a different perspective, emphasizing his prudence about taking risk and his success at avoiding large losses. “Perhaps we can use that same good judgment to identify and act upon opportunity in a way that keeps you secure,” I suggest. What the trader frames as weakness, I reframe as a potential strength. Instead of fighting against his own tendencies, the trader can use the reframing to help him figure out how to use those tendencies to produce acceptable risk-adjusted returns.
Often we can find a strength underlying one of our weaknesses, enabling us to approach problem patterns in novel ways.
Reframing can often take a negative motivation and turn it positive. For a while, it seemed to me that my daughter was lazy in getting her school-work completed. I then hit on the idea that her primary motivations are social in nature: she’s a real people-person. I proposed that we do homework together, and she readily rose to the occasion. This became a father-daughter tradition during the school year and a valued bonding experience. Similarly, when my son angrily confronted a teacher at school who “got in my face” about getting work done quickly, I started my conversation with him by congratulating him for using words only and not storming out of the class or laying hands on the teacher. Instead of framing the discipline problem as a failure experience, I reinforced the important lessons of self-control. He was much more able to hear my later advice, and he left the incident feeling better about himself, having learned from the confrontation. The most negative thought patterns are there for a reason; identifying that positive reason and finding new ways to accomplish it makes self-coaching empowering.
Consider, for example, the example of the trader who becomes lost in hope during a losing trade. Instead of flaying him for a lack of discipline, I will emphasize that he has found a valuable market indicator: the Hope-Meter. When hope enters the picture during a trade, it’s a sign that deep down we know the trade is ill fated. By following the Hope-Meter, we can use the automatic thinking pattern to aid good trading, rather than interfere with it.
When you see problems in new ways, you gain the ability to respond in new ways. Novelty is a central element in all change efforts.
Many problems have a cyclical nature: I am afraid of losing money, so I set my stops too tight, lose more money on choppy action, and generate even more fear of losing money. When we reframe a problem, the new perspective can help us break the cycle. If I reframe the problem as one of position sizing, I can take the same monetary risk with wider stops, breaking the cycle of loss in choppy markets. How we view our patterns very much determines how we respond to them.
A useful exercise that I described in The Psychology of Trading is to reframe our inner dialogues by viewing them as actual dialogues. What we say to ourselves sounds very different when we imagine the same words spoken by someone else. This is particularly true when we are hard on ourselves after losses. What feels like worry when we are absorbed in our own thoughts sounds more like hostility when we reframe the same messages as part of an interpersonal dialogue.
Let’s say a trader misses a good trade and then tells herself, “I can’t believe I missed that trade. What is wrong with me? I wait all week for the right setup and get it handed to me on a silver platter and I don’t take advantage of it. I’m never going to make it if I keep making mistakes like this.”
Many traders actually consider such self-talk to be constructive. Traders think that being hard on themselves will help them avoid similar mistakes in the future. Suppose, however, we reframe the very same conversation as a dialogue from a friend to the trader:
“I can’t believe you missed that trade. What is wrong with you? You wait all week for the right setup and get it handed to you on a silver platter and you don’t take advantage of it. You’re never going to make it if you keep making mistakes like this.”
Clearly, when the dialogue is framed in such a manner we can appreciate that the tone is not at all constructive. Indeed, no true friend would ever talk to us in such a manner. The message is blaming and hostile, with no empathy or suggestions for improvement. Reframing the self-talk as an actual dialogue reveals the true emotion behind the automatic thoughts.
Reframing thoughts as dialogues helps us view our thinking in a new light.
Such reframing is particularly effective if we imagine ourselves speaking to a good friend in such a manner. For instance, suppose a good friend of yours went through a series of losing trades and you were to say to that friend, “I can’t believe you missed that trade. What’s wrong with you?” We can be hard on ourselves and buy into all sorts of hostile ways of talking to ourselves, but if we imagine delivering those same messages to a friend, we don’t buy into the scripts at all. When we reframe our thoughts as interactions with a friend, we draw upon personal strengths such as our ability to be supportive of others. Such strengths make it impossible to maintain a stance of angry blaming.
As your own trading coach, you want to maintain a consistent and constructive tone of voice with yourself, so that you don’t damage your concentration or your motivation. An excellent exercise for working on this process is to close your eyes and imagine yourself as another trader that you are responsible for: perhaps an assistant or a student trader. Imagine that this valued assistant of yours has just made the same mistakes in the market that you’ve made. How would you talk with this person? What would you say? What would be your tone of voice? What emotions would you convey? Imagine these in as vivid detail as possible. Then note how your approach to this other trader differs from your own self-talk. If you wouldn’t talk to a valued colleague in the way that you’re addressing yourself, then you know that your automatic thinking is distorted in a negative way. Surely you deserve to talk to yourself the way you would talk with others in a similar situation!
Many times it’s the tone of our self-talk, not just its content, that disrupts our trading.
When you conduct this guided imagery exercise day after day, particularly after you’ve interrupted some of your negative thoughts, you gradually learn to talk with yourself in more positive ways. In one variation of the exercise, I have traders imagine that they are the other trader they are talking to, so that they literally are practicing talking to themselves in ways that they would support someone else they cared about. During these exercises, traders who have been the most volatile and angry can access a wealth of caring, supportive messages as they view themselves as people they truly care about.
You are your own trading coach. Do you want your coach to berate you, to focus on your every mistake, to threaten you with dire consequences? Or do you want your coach to bring out the best in you? When you cast your thoughts as dialogues, you have a chance to reframe the mental maps that guide your thinking, feeling, and acting. Inevitably, we do talk to ourselves. We are coaching ourselves. The only question is whether we do so consciously and constructively or automatically and destructively.
COACHING CUE
If you have a mentor or peer trader who you are working with, pay particular attention to how they talk to you when you are having problems. Many times we can internalize the voices of others in reframing our automatic thought patterns. “What would my mentor say to me?” or “What would a good coach say to me?” is an excellent start toward constructive reframing.
LESSON 57: USE INTENSIVE GUIDED IMAGERY TO CHANGE THOUGHT PATTERNS
The value of imagery is that it stands in for actual experience, with an unusual power to access emotional responses. Here is an effective cognitive exercise that makes active use of the emotional power of imagery.
The first step in the exercise, as emphasized in recent lessons, is to identify the repetitive, automatic thoughts that are disrupting your trading. As noted earlier, these thoughts will generally form the self-talk that accompanies your most emotional trading episodes. The clearer you are in your capturing this self-talk, the more realistic and vivid your imagery work will be.
Let’s take a specific example. A trader I recently worked with uncovered a pattern that was greatly holding him back in his success. He was a profitable trader over many years, but always had the nagging feeling that he was not fulfilling his potential. When we examined his trading and thinking patterns, it became clear that he became more risk-averse as he hit new peaks in his trading account and new P/L highs for the day. He was upset to finish off his highs (for the day, for the week), so he became unusually risk-averse as he hit these highs. He cut his size, traded less often, and behaved like a person who had just undergone a drastic drawdown.
His self-talk at these times was revealing. “You’ve had a good day,” he’d tell himself. “Let’s hang onto the gains. There will be more opportunity tomorrow.” When it became clear that he missed opportunity because of this unusual caution, he felt vaguely guilty, but he reassured himself that his equity curve was positive and “you never go broke taking a profit.”
This was a difficult pattern to break because, while the trader realized the pattern’s limitations, he also bought into it at an emotional level. The trader who beats himself up truly suffers as a result of his self-talk and will want to change that, simply to feel better. The risk-averse thinking, however, kept our trader feeling safe. He liked the consequences of over-caution: it helped keep his emotions in check.
We are less likely to change a pattern if we buy into it, if we’re not in at least a moderate amount of distress over the consequences of that pattern.
A key step in changing his self-talk was to reframe the “let’s not lose money” talk as “I don’t think I can make money” talk. The trader thought of his self-talk as messages of safety; I reframed them as messages of low self-confidence. He doesn’t want to finish off his highs, because at some level he’s not sure that he can get past those peaks. He doubts his ability to bounce back from drawdowns, so he desperately tries to avoid drawing down. He settles for a steady, but modest equity curve because he doesn’t have confidence that he can generate and sustain more robust returns. Perhaps he even feels, deep down, that he does not deserve large rewards.
Note how, in this situation, my reframing was not a way of helping a trader view a negative pattern more constructively; rather, I was framing the pattern in a way to accentuate the trader’s discomfort. It’s back to that notion that coaching is all about comforting the afflicted and afflicting the comfortable. Our trader was far too comfortable in his risk-averse ways; my goal was to move him forward in his readiness for change by helping him highlight the costs of his ways of coping. In your own cognitive self-coaching, you are not simply reframing negative thought patterns positively; you also will frame them in ways that summon your motivation for change. Earlier, I mentioned the value of viewing negative patterns as personal enemies: this is an example of a reframing that afflicts our comfort.
When I reframed his self-talk as a lack of confidence, the trader’s immediate response was to describe his mother. He loved her and felt close to her as a child, but said that she was overprotective. When other boys went out to play, she held him back, afraid he would into fights. She tried to dissuade him from dating later in life, because she thought that girls might “take advantage” of him. The trader explained, with some sadness, how he never had the opportunity to excel in sports despite early promise, because his mother worried about injuries.
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 theories 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 identifies 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.
Your assignment is to identify the ways of thinking that put you into your best trades and that enable you to manage risk most effectively. Once you identify how you think at your best, you have a model that you can replicate day after day in your trading, turning virtues into positive habits. You don’t have to be mired in cognitive distortions to benefit from a cognitive journal. Use the journal as a discovery tool for your best practices. It’s an exercise even the most experienced, successful traders can benefit from.
COACHING CUE
A trader I worked with used the phrase make them pay (and other, choice colorful phrases) when he saw that the longs or shorts were overextended in a market. He would not exit until he saw evidence of high-volume puking from the traders running from cover. The idea of make them pay engaged his competitive instinct and kept him in winning trades. Frequently, he would add to his position on retracements, eager to make them pay even more. You may find that you use similar phrases during your best trades. Cement those phrases into cognitive patterns that you can rehearse. The phrases keep you grounded in best practices.
RESOURCES
More material on cognitive approaches to change can be found in my chapter on “Cognitive Techniques for Enhancing Performance” in
Enhancing Trader Performance. See also the chapter on “Cognitive Therapy: Introduction to Theory and Practice” by Judith S. Beck and Peter J. Bieling in
The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2004). Of additional interest might be the article “Remapping the Mind” from the articles section of my personal site:
www.brettsteenbarger.com/articles.htmI like books that interview successful traders and portfolio managers; these books provide positive models for how to view markets and trading decisions. Among the most popular are the
Market Wizards books by Jack Schwager;
Inside the House of Money by Steven Drobny (Wiley, 2006), and
Hedge Hunters by Katherine Burton (Bloomberg, 2007). Other models can be found in the writings of the contributors to Chapter 9:
http://becomeyourowntradingcoach.blogspot.com/2008/08/contributors-to-daily-trading-coach.html. See also the Daily Speculations site (
www.dailyspeculations.com) for interesting ways to think about markets and trading.
