Cashing in in 2010

A link to a fine article written by Bob Frick over at http://www.kiplinger.com/ on poker and investing - specifically how working on the former can greatly improve your skill in the latter.

The article features insights from MarketPsych's Frank Murtha, as well as from Daniel Negreanu, which - if you're a poker fan - is always at treat.

Fun and interesting stuff.

MarketPsych offers advanced coaching/seminars to traders, financial analysts, financial advisors, money managers as well.

If you want to get better at your game, give us a shout at info@MarketPsych.com for more information.

Cheers. And good luck in 2010.

Dr. Frank Murtha

"The Daily Trading Coach" by Brett Steenbarger and reviewed by Richard Friesen

I am giving this book to all of my clients

“The Daily Trading Coach” by Brett N. Steenbarger is the best step-by-step guide for traders who want to make steady improvements to their trading game I have read.

The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist (Wiley Trading)


I do have one complaint about the book however. Normally, when I read such a book I will mark everything I read that is of value with notes in the margin and then bookmark them with a sticky note. Then, after I finish the book, I will do a quick review of the parts that are relevant to me and create a “to do” list for action items.

This book has over 150 sticky notes and almost every page has a handwritten note in the margins that stimulated or confirmed my thinking. There is so much of value here that I will have to re-read almost the entire book to review the valuable lessons! Because this book is so practical, I am afraid I can’t summarize it and do it justice.

Seriously, Dr. Steenbarger covers every aspect of the transformational process that traders will need to deal with. Reading the book is like walking on a field of diamonds and hearing them crunch under your boots. The issues that my clients are working on are all addressed clearly along with suggested solutions.

Our mutual experience in trading and trading trainers has forged a common psychological foundation that my clients will recognize as they read this book. My process of building new satisfying behaviors (I call Mind Muscles™) sync right up with his self-coaching guide.

If you are a trader who wants to become more consistently profitable by improving your own mental abilities with self-coaching, there is no better resource. If you want to accelerate your process with professional coaching, I will send you a copy of this book for free.

Richard Friesen
RFriesen@MarketPsych.com
415.259.0652

NOBODY EXPECTS THE SPANISH INQUISITION!!!

My home page is the Yahoo! Finance page. There are two reasons I chose it: 1) If I want to check a stock price, or market action, I can do so with just one click; 2) The pre-market headlines crack me up.

Go ahead, check them out yourself one day. You will find that they are generally rendered moot/outdated/incorrect within the first hour of trading.

Look, I'm trained as a psychologist. I look at things differently. It probably makes me a "bit of an odd duck", to borrow a phrase from my father. (It's true. Ask any of my remaining friends.)

But you don't need to be the quirky type to see why this (lead) sentence from the pre-market headline article is just silly.

"The number of newly laid off workers filing claims for unemployment benefits unexpectedly rose last week as the recovery of the nation's battered labor market proceeds in fits and starts."

What's wrong with this sentence? Well for starters it notes that unemployment claims rose "unexpectedly" last week. Later on in the same sentence, it notes that the labor market "proceeds in fits and starts."

First of all, all economic forecasting is incredibly complex. Why a rise of 1% rather than a decline of 1% for one lousy week's worth of data rates as a "surprise" is beyond me. It's like standing in a rain shower and saying you got hit by a particularly unexpected raindrop. (Really? Didn't see that one coming??)

But the second clause of the sentence says the market proceeds in "fits and starts". Yes, it does. Truly. It is a point that is universally acknowledged. So how can you be suprised by a slight decrease while simultaneously noting the market proceeds in a herky jerky fashion?

For crying out loud, pick a side and stick with it!

Behavioral finance research has taught us how rarely data conform to our pre-supposed parameters. We know a coin will come up heads 50% of the time. Yet somehow we find ourselves wanting results to alternate heads/tails when we flip it. We see a run of 3 or more heads in a row, our pattern-seeking brains screams, "anomaly!"

It's not an anomaly. It is the essence of randomness.

Back to the article; if you read it in its entirety, you will see just how complex the jobs data are. You will find yourself wondering if the first paragraph still makes sense by the end of it.

The skinny: When it comes to a week's worth of economic data, market movements... the weather, don't "expect" anything.

It is sillyness that calls to mind this famous bit of sillyness .

I'm going to have my coffee now.

(Entirely too much sillyness.)

-Frank Murtha

The Golden Thread Across the Canyon

You know what you need to do to execute your trading strategy, but somehow circumstances seem to dictate different responses in the moment. With hindsight you know that had you been more "disciplined" you would have been more profitable.

Why is it so hard to be "disciplined?" Why are New Year's resolutions hardly every kept? Why does it feel like you are acting from a different brain when trading than when researching? Why does learning a new more satisfying behavior feel so hard to do?

The brain has an incredible ability to automate our repetitive behaviors so we can focus on more critical or creative activities. These repeated behaviors "emerge as a result of experience-dependent plasticity in basal ganglia-based circuits that can influence not only overt behaviors but also cognitive activity." * What this means is that repeated behaviors, thoughts, stories and activities create neural pathways and complex network connections that can become a working unit. The entire complex of neural activity can be fired by a single trigger.

Often, these complex neural patterns are copies of earlier patterns that eventually connect to our more primal needs. Even if our current response is dysfunctional, we still repeat it time after time.

But now we want to build a new trading behavior. As we do this in real time if feels so very "hard." It feels like swimming in molasses. Why is this? Because the old patterns are so well developed, so easily connected to multiple neural circuits and complexes that executing the old behaviors feels both easy and good at the same time.

Creating new behaviors means that you are building new neural circuits where none have been before. Imagine driving down an interstate highway with its overpasses, bridges, fuel stops and connecting highways. Now imagine a broad canyon with jungle, boulders and sheer cliffs. Your job is to build a new foot path to a new destination on the other side. To make it even worse, as you hack your way through the jungle, you don't know where you will end up or if there is anything of value on the other side. It is tough to be motivated to keep hacking, when you can hear the cars on the freeway zipping right along the eight lane bridge above you to their familiar destination, even if it isn't where you want to go.

Building new trading behaviors (we call them Mind Muscles™) when you have never experienced the satisfaction of the results of that new behavior is like hacking your way through the jungle. It is a big job that requires a lot of determination. That is why we recommend a different process of creating new positive rewarding and more functional trading behaviors.

This process can be visualized by imagining the broad canyon. Your destination connects to a different point on the other side than the bridge. What if, rather than hacking your way through the jungle and building a new foot path, you could have an experience of zipping to the other side, even if just for a millisecond. It's like you can taste the satisfaction of experiencing the results of the new thinking pattern or behavior? Think of this a thread across the canyon. With the thread, you can pull a cord across. With the cord you can pull a rope. With a rope you can pull a cable and eventually build a bridge.

It is the same way your brain works. As we parse out the behaviors we need to in order to trade successfully, we can then create a simulation, visualization, or experience that is rewarding for each of these parts. We have created the thread across the canyon without hacking through the jungle. Now, having that experience once, we can expand it. If we can do it for a millisecond, we can expand that experience to a second...a minute...an hour and then for all of our lives

The hard part is getting the thread across the canyon in the first place. That is why a guide who can create a scenario that allows you to experience that positive new behavior for a moment can be very helpful. When we work with active traders building new Mind Muscles™, we play out scenes that allow new behaviors to be fully appreciated and savored, even if for just a moment. This gives the client the golden thread they need to build that bridge across the canyon.

* Annual Review of Neuroscience Vol 31

[See other articles from the MarketPsych blog]

Richard Friesen
RFriesen@MarketPsych.com
415.259.0652

Emotional Trading Alarms

How do you know you have downshifted to your limbic brain?

Everyone knows that emotional decisions can create havoc with trading profits. We understand this when we are calm and working from our neo-cortex (our rational brain). The problem is, as the emotions increase we go to our flight/fight response, receive a cocktail of hormones (adrenal dump) and we downshift from our neo-cortex to our emotional limbic brain. Our problem is that we don’t have a way to measure this change because our neo-cortex has been hijacked by our limbic brain and we lose calibration.

Until now?

Phillips and ABN AMBRO are testing a concept device. The implications are staggering. The major political disasters have been caused by emotional reaction coupled with unbounded power. What if we couldn’t drive, vote, legislate or trade while under extreme stress?

Until this device arrives, you can still manage your own emotional state by building a new Mind Muscle™. This exercise could change your life.

By managing breathing, you can change your physiology during times of extreme stress. How you breathe paces the rest of your physiological response. Change your breathing and you change your physiological pattern. If truly mastered, you will be able to lower your blood pressure and counter most of the negative arousal effects and stress levels from the adrenal dump during a downshift to fight/flight.

Practice can be done on your own and works more effectively as it becomes automated. Ideally this exercise I call Upshift Breathing is most effective when practiced under actual stress. To begin, practice the mechanics of this breathing exercise through several cycles by yourself. Pace yourself so that each part takes the same amount of time as you slowly count to four during each part.

1. First inhale through your nose slowly to the count of four.
2. Hold your breath to the count of four.
3. Exhale through your mouth slowly to the count of four.
4. Let your lungs relax and stay empty to the count of four.

Start the cycle again.

Additionally, this visualization may help. When you inhale through your nose, do so with steady deliberation and imagine that you are drawing in the room around you. On the next inhale, take in your trading desk. On the next breath breathe in your computer screen, then the markets, then the whole economy. Hold the economy effortlessly in your lungs for the four second count. Then with a complete and relaxed exhale, experience the joy of returning the markets to their former state.

Once you have the mechanics down, take a private moment, become comfortable, and create an imaginary threatening situation. This situation can range anywhere from mildly stressful, such as an argument with a spouse, to a truly terrorizing fear you have carried for years. We recommend that you start with a visualization of an event that is mildly stressful and work your way up to your core fears.

Set an alarm for five minutes (you can adjust the time with experience) and start the fantasy. Imagine the peace you feel before you see signs of danger or stress. See, smell and hear the argument, stressful situation or danger. Visualize it in all its details with all of your senses as if it were a surround sound, 3D movie playing in your mind. Notice the effects on your body as the experience intensifies. Allow yourself to feel the full impact of the stress, anger or danger. Allow your body or voice to respond out loud.

When the five minute alarm goes off, notice what is going on in your body. Notice everything you can. Inventory your entire body: breathing rate, vision, hearing, muscle tension, stomach etc.

Now, start Upshift Breathing. Breathe slowly. Focus on your body. Notice the changes as you slow you breathing. Practice this breathing several times until you feel you have the cycle of fear and relaxation automated.

Then the next time you are staring at disbelief at your trading screen as you are stopped out of you sixth trade in a row, your boss yells at you or your spouse makes an accusation, start your Upshift Breathing cycle. Pay attention to your body at the start of the Upshift Breathing cycle. Then notice your state as you cycle through the breathing exercise. This real-time awareness is an important part of the experience. As this breathing becomes part of your life, it will happen automatically in the very real high stress trading situations where you really need it. Law enforcement officers who use this technique report that it has become automated when they feel threatened, helping them asses danger and save lives.

If you can automate this breathing response during trading, it will eliminate the majority of emotional trading mistakes. The challenge is that most of us have a resistance to deep breathing because we have contracted our bodies to protect ourselves over the course of a day, week, year and lifetime. Slow breathing not only takes you out of the fight/flight downshift to your limbic brain, but has the potential to open other life pains. So, be gentle with yourself. Notice if you intend to do this exercise but don’t. Your resistance is there to protect yourself, even if that protection is no longer necessary.

To learn more about building Mind Muscles™ and a free consultation please call.

Richard Friesen (415) 259-0652 RFriesen@MarketPsych.com

Turning Your Uniqueness into Market Edge and a Trading Strategy

We are all wired differently. We all bring different skills to trading. We all have distinct dispositions. We also have our own unique mental baggage that we deal with day in and day out.

This is good news.

Because you are unique, you can build a trading process that works for you. The ultimate goal is to accept who you are, know your skills and limitations and find a way to turn you internal trading machine into a statistical trading “edge.” Once you know your own “edge,” you can then create a trading strategy that emphasizes your edge and ameliorates your mental baggage.

Some traders need control. Others love excitement. Some traders want a clear system to execute. Others feel imprisoned by mechanical systems. We all have trading weakness that can be triggered in certain market conditions with certain positions.

A system that is built on who you are, your trading needs and ameliorates your emotional triggers can turn a volatile P&L into more consistent profits.

The first step is to determine what you really need. Not just what you say you need, but what is the underlying need. And don’t be shy here. It is ok to know that you need an adrenaline rush. There is no shame in this. It is fine to recognize a need to avoid being terrified.

Try this exercise to see if it reveals any deeper needs. Make a list of what you need out of trading. This will probably include money, but be sure to look for other needs as well…perhaps recognition, proof of your intelligence or escape.

Once you have written down all the benefits of trading, take the one that seems the most important. Then ask yourself, what you get out of this benefit. Write that down. Then ask again, what do you get out of that benefit? Write it down. Keep drilling down until there are no more underlying benefits. Then, go to the next most important trading benefit and drill down again.

For example, if you start with money as an important benefit, ask yourself, what benefit to I get out of money? The answer may be security. Then ask, what benefit do I get out of security? And keep drilling. The answers may surprise you.

You can also learn more about yourself by taking the MarketPsych Trader Personality Test gratis. It returns scoring on personality factors and biases.

The next step is to find out what your “edge” is. Edge is anything that gives you a statistical advantage for a trade. It might be pattern recognition, fearlessness in the face of market panic, discipline to follow a system, or an algorithm. What is your edge? How does it work? Why does the market not discount this edge? Why is the market going to give you profits? Make sure this edge is in sync with your skills, temperament and emotional baggage.

Once you have defined your “edge,” you can then create a system. The more clearly defined it is, the more it can be followed, tested and improved.

Understand who you are, use the best of yourself to create a statistical edge and build a system based on this foundation. The MarketPsych trader training coaching programs are built on this process. Please call if we can be of help.

Richard Friesen
RFriesen@MarketPsych.com
(415) 259-0652

Profit When Market Patterns Shift

All trading systems work. All trading systems fail. It is difficult to find a trading system that DOESN’T work in some market at some time. It is also difficult to find a system that DOES make consistent returns in all market conditions.

Here is the really good news.

Independent traders have the luxury of picking and choosing their trades. They don’t have to trade all of the time. This is their edge. They can wait until the market patterns are working for them.

It is in the evolution and transition of trading patterns that a lot of money can be made and lost. Because trading patterns are driven by humans who trade repeatedly with the same behavioral responses the destruction and emergence of new patterns create profit opportunities.

The problem we have as traders is that if we have a system that is making money in one market pattern, we get attached to that system. We build our ego on the fact that 15 of our last 18 trades were winners. This rewards our dream that we have found the secret to trading.

It’s like one of those Zen puzzles…any belief you are attached to, the market will destroy. As a trader, it is your ability to see new trading patterns emerge that create the most profit potential. To do this, the mind needs to see the markets as they are without the prejudicial filters we all carry around. If our ego is attached to a trading system and its success, the ability to see new patterns emerging is difficult.

When I was an option floor trader, I would get a “sense” that a market pattern was about to change. This “sense” was built on years of experience. Even though I might not be able to articulate what was happening, I could feel it.

At these times I would go to the market to reduce my risk. It was expensive because I would have to trade with other market makers to change my positions quickly. More often than not, nothing had changed. I would have paid $10,000 or more for the insurance. However, a few times a new pattern would emerge and I could see it because I didn’t have positions based on the previous pattern. Other market makers, with large complex positions based on the previous pattern would need to believe that the current change was an aberration and that the markets would come back to their previous patterns. As the market continued the shift, it would get more and more expensive to realize the losses, and the more stubborn these market makers would get.

Here is the cool thing. Since I no longer had a risk position, a few times I was able to visualize the new patterns very early in the shift, reset my option volatility tables and start building a new position. I would often be trading with other market makers whose values were based on the previous patterns. Slowly, one by one, the other market makers would see what was happening and the options would come in line with the new pattern. With the new option values, I made a lot of money.

As a market maker, I had to be trading and make markets for incoming orders at all times and it was expensive to shift positions. But as an independent trader, you can pick and choose the times to trade. This is a powerful advantage. You can get out of a position with a click of the mouse when you sense a market pattern is changing.

Here are some potential indicators of changing market patterns:

Psychological:


-Unusual Emotions in yourself such as exuberance, fear or cockiness
-Emotions in other traders you talk to such as exuberance, fear or cockiness
-Overwhelming consensus of where the market is going
-Physiological changes in yourself such as stomach pain, tenseness, funny taste in your mouth, back ache etc.
-Emotions in the news and headlines

Market Indicators:


-Volume
-Daily Range
-Volatility and implied volatility in options
-Momentum
-Size of trades or unusual large orders
-New chart patterns
-Unexpected price moves
-Time of day pattern shfits
-Opening market patterns changes
-Closing market pattern changes
-Changes in your ability to execute trades
-Changes in your P&L patterns
-Unusual price gaps
-Sudden quiet
-Shifts in how the market reacts to news
-Changing margin requirements

Remember, all trading systems work during certain market periods. All trading systems eventually fail. It’s the law. If you can free yourself from the belief in your system as the holy grail, you can see new patterns as they emerge and profit.

Easy to say, but how do you see new patterns? In my coaching practice we create a series of Mind Muscles™. These are neurological circuits that help us create new responses to market conditions. Creating concrete visualizations is one way of building new Mind Muscles™ and behavioral responses. If you want to create a Mind Muscle™ for new pattern recognition try this exercise.

First, get comfortable in a place that you won’t be interrupted. Take a moment do some deep breathing exercises. One exercise that works well is to slow count to three on your inhale through your nose. Hold the inhale for another count of three. Exhale through your mouth to a slow count of three and rest at full exhalation for another count of three. Repeat 10 times or until you feel your body settling in.

Then close your eyes and imagine a dog, a well trained bloodhound. He is sniffing the air, the ground and various objects. Imagine this hound dog in detail, his colors, movements and sounds. He is looking for some scent that is out of the ordinary. Spend some time with him as he sniffs his world. Now give him a name. Sniffer works great if nothing else comes to mind. Call the dog to your side. Pet him and give him some love. Then tell him to go and sniff out new patterns and to bay at the top of his voice when he finds one. Call him back, reward him with love, and send him out again.

Now, when you are trading and have a moment, visualize your new bloodhound. He represents a new behavior you have created in your brain. Call him by name. Give him some love. Tell him to go sniff out pattern changes. Watch him as he sniffs both psychological indicators and market metrics. And wait for the baying to begin.

For more on the how and why of creating Mind Muscles™ please call.

Richard Friesen
RFriesen@MarketPsych.com
415.259.0652