Artigo interessante!!!

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Learning to Trade: The Psychology of Expertise
by Brett N. Steenbarger, Ph.D.

When people hear that I am an active trader and a professional psychologist, they naturally want to hear about techniques for mastering emotions in trading. That is an important topic to be sure, and later in this article I will even have a few things to say about it. But there is much more to psychology and trading than "trading psychology", and that is the ground I hope to cover here. Specifically, I would like to address a surprisingly neglected question: How does one gain expertise as a trader?

It turns out that there are two broad answers to this question, focusing upon quantitative and qualitative insights into the markets. We can dub these research expertise and pattern-recognition expertise, respectively. These perspectives are much more than academic, theoretical issues. How we view knowledge and learning in the markets will shape the strategies we employ and—quite likely—the results we will obtain. In this article, I will summarize these two positions and then offer a third, unique perspective that draws upon recent research in the psychology of learning. I believe this third perspective, based on implicit learning, has important, practical implications for our development as traders.

Developing Expertise Through Research

The research answer to our question says that we gain trading expertise by performing superior research. We collect a database of market behavior and then we research variables (or combinations of variables) that are significantly associated with future price trends. This is the way of mechanical trading systems, as in the trading strategies developed with TradeStation and the systems featured on the www.futurestruth.com site. We become expert, the mechanical system trader would argue, by building a better mousetrap: finding the system with the lowest drawdown, least risk, greatest profit, etc.

A variation of the research answer can be seen in traders who rely on data-mining strategies. The data-miner questions whether there can be a single system appropriate for all markets or for all time frames. To use a phrase popularized by Victor Niederhoffer, the market embodies "ever-changing cycles". The combination of predictors that worked in the bull market of 2000 may be disastrous a year later. The data-miner, therefore, engages in continuous research: modeling and remodeling the markets to capture the changing cycles. Tools for data mining can be found at www.kdnuggets.com.

There are hybrid strategies of research, in which an array of prefabricated mechanical systems are defined and then applied, data-mining style, to individual stocks to see which ones have predictive value at present. This is the approach of "scanning" software, such as Nirvana Systems' OmniTrader. By scanning a universe of stocks and indices across an array of systems, it is possible to determine which systems are working best for particular trading vehicles.

As most traders are aware, the risk of research-based strategies is that of overfitting. If you define enough parameters and time periods, eventually you'll find a combination that predicts the past very well—by complete chance. It is not at all unusual to find an optimized research strategy that performs poorly going forward. Reputable researchers develop and test their systems on independent data sets, so as to demonstrate the reliability of their findings.

Can quantitative, research-based strategies capture market expertise? I believe the answer is an unequivocal "Yes!" A perusal of the most successful hedge funds reveals a predominance of "quant shops". Several research-based stock selection strategies, such as Jon Markman's seasonal patterns (www.moneycentral.com) and the Value Line system (www.valueline.com), exhibit long-term track records that defy mere chance occurrence.

And yet it is also true that many successful traders neither rely upon mechanical systems nor data-mining. Indeed, one of Jack Schwager's most interesting findings in his Market Wizards interviews was that the expert traders employed a wide range of strategies. Some were highly quantitative; others relied solely upon discretionary judgment. Several of the most legendary market participants—Warren Buffet and Peter Lynch, for example—employed research in their work, but ultimately based their decisions upon their personal synthesis of this research. Quantitative strategies can capture market expertise, but it would appear that all market expertise cannot be reduced to numbers.

Developing Expertise Through Pattern Recognition

The second major answer to the question of trading expertise is that of pattern recognition. The markets display patterns that repeat over time, across various time-scales. Traders gain expertise by acquiring information about these patterns and then learning to recognize the patterns for themselves. An analogy would be a medical student learning to diagnose a disease, such as pneumonia. Each disease is defined by a discrete set of signs and symptoms. By running appropriate tests and making proper observations of the patient, the medical student can gather the information needed to recognize pneumonia. Becoming an expert doctor requires seeing many patients and gaining practice in putting the pieces of information together rapidly and accurately.

The clearest example of gaining trading expertise through pattern recognition is the large literature on technical analysis. Most technical analysis books are like the books carried by medical students. They attempt to group market "signs" and "symptoms" into identifiable patterns that help the trader "diagnose" the market. Some of the patterns may be chart patterns; others may be based upon the identification of cycles, configurations of oscillators, etc. Like the doctor, the technical analyst cultivates expertise by seeing many markets and learning to identify the patterns in real time.

Note how the pattern recognition and research answers to the question of expertise lead to very different approaches to the training of traders. In the research perspective, traders learn to improve their trading by conducting better research. This means learning to use more sophisticated tools, gather more data, uncover better predictors, etc. From a pattern recognition vantage point, however, trading success will not come from performing more research. Rather, direct instruction from experts and massed practice leads to the development of competence (again like medical school, where the dictum is "See one, do one, teach one").

Another way of stating this is that the research viewpoint treats trading as a science. We gain knowledge by uncovering new observations and patterns. The pattern recognition perspective treats trading as a performance activity. We gain proficiency through mentoring and constant practice. This is the way of the athlete, the musician, and the craftsperson.

Can expertise be acquired by learning patterns from others and then gaining experience identifying them on one's own? It would seem so: this is traditionally how chess champions and Olympic athletes develop. There are also examples of such expertise development in trading: Linda Raschke's chatroom (www.mrci.com/lbr) is an excellent example of a learning device that takes the pattern recognition approach. Users of the site can "listen in" as Linda—a Market Wizard trader herself—identifies market patterns in real time. My conversations with traders who have enrolled in this service leave me with little doubt that they have acquired profitable skills, eventually moving on to becoming successful independent traders. Richard Dennis' experiment with the "Turtles" is perhaps the most famous example of how expertise (in this case, a pattern-based trading system) can be successfully modeled for people with little market background.

And yet there are nagging doubts about the actual value of the patterns typically described in market books and tapes. A comprehensive investigation of technical analysis strategies by Bauer and Dahlquist found very little evidence for their effectiveness. An attempt to quantify technical analysis patterns by Andrew Lo at MIT found that they did, indeed, contain information about future market moves, but hardly as much as isportrayed in the popular literature. Because pattern recognition entails a healthy measure of judgment, it is very difficult to demonstrate its efficacy outside of the expert's hands. In other words, the expert trader may be utilizing more information in trading than he or she can verbalize. This is certainly the case for chess experts and athletes. While they can describe what they are doing, it is clear that their proficiency extends well beyond the application of a limited set of rules or patterns.

This phenomenon has been the subject of extensive study in psychotherapy research. It turns out that there really is a difference in results between expert therapists and novices. But it also turns out that there is a difference between what expert therapists say they do and what they actually do in their sessions. This was noted as far back as the days of Freud. While he advocated a set of strict therapeutic procedures to be followed, Freud's own published cases deviated from these significantly. What appears to work in therapy is not what the therapists focus on—their behavioral techniques, psychoanalytic methods, etc.—but the ways in which these are employed. Using techniques in a sensitive way that gains the client's trust and fits with the client's understandings is more important than the procedures specific to those techniques.

So it may be with trading. Expert traders describe their work in terms of price-volatility patterns, momentum divergences, or a nesting of cycles, but it might be the ways in which these patterns are employed thatmakes for the expertise. Great traders may be able to identify patterns in their work, but it is not clear that their greatness lies in these patterns.

Implicit Learning: A New Perspective

The term implicit learning began with the research of Brooklyn College's Arthur Reber in the mid 1960s. Since that time, it has been an active area of investigation, producing numerous journal articles and books.

Implicit learning can be contrasted with the research and pattern recognition perspectives described above, in that the latter are examples of explicit learning. By conducting research or by receiving instruction inmarket patterns, we are learning in a conscious, intentional fashion. The implicit learning research suggests that much of the expertise we acquire is the result of processes that are neither conscious norintentional.

A simple example drawn from Reber's work will illustrate the idea. Suppose I invent an artificial "grammar". In this grammar, there are rules that determine which letters can follow given letters and which cannot. If Iuse a very simple grammar such as MQTXG, then every time I show a subject the letter M, it should be followed by a Q; every time I flash a T, it should be followed by an X, etc.

The key in the research is that subjects are not told the rules behind the grammar in advance. They are simply shown a letter string (QT, for example) and asked whether it is "grammatical" or not. If they get theanswer wrong, they are given the correct answer and then shown another string. This continues for many trials, generally in the thousands.

Interestingly, the subjects eventually become quite proficient at distinguishing the grammatical strings from the ungrammatical ones. If they are shown a TX, they know this is right, but that TG is not. Nevertheless,if you ask the subjects to describe how they know the string is grammatical or not, they cannot verbalize any set of cogent rules. Indeed, many subjects insist that the letter arrangements are random—even asthey sort out the grammatical ones from the ungrammatical ones with great skill.

Reber referred to this as implicit learning, because it appeared that the subjects had truly learned something about the patterns presented to them, but that this learning was not conscious and self-directed. Reberand subsequent researchers in the field, such as Axel Cleeremans in Brussels, suggest that many performance skills, such as riding a bicycle and learning a language, are acquired in just this way. In such cases,we learn complex competencies, but cannot fully verbalize what we know or reduce our knowledge to a set of patterns or principles.

Such implicit learning has been demonstrated in the laboratory across a variety of tasks. Cleeremans and McClelland, for example, flashed lights on a computer screen for subjects, with the lights appearing at sixdifferent places on the screen. The subjects had to press a keyboard button corresponding to the location of the light on the screen. There were complex rules determining where the light would flash, but theserules were not known by the subjects. After thousands of trials, the subjects became very good at anticipating the location of the light, as demonstrated by reduced response times. Significantly, when the lightswere flashed on the screen in a random pattern, no such reduction in response time was observed. This was a meaningful finding, since the patterns picked up by the subjects were not only outside their onsciousawareness—they were also mathematically complex and beyond the subjectsomputational abilities! (Like the markets, the patterns were actually "noisy"—a mixture of patterns and random events.)

It appears that much repetition is needed before implicit learning can occur. The thousands of trials in the Cleeremans and McClelland study are not unusual for this research. Moreover, it appears that the state ofthe subjects' attention is crucial to the results. In a research review, Cleeremans, Destrebeckqz, and Boyer report that, when subjects perform the learning tasks with divided attention, the implicit learning suffersgreatly. (Interestingly, conscious efforts to abstract the rules from the stream of trials also interfere with learning). This has led Cleeremans to speculate that implicit learning is akin to the learning demonstrated byneural networks, in which complex patterns can be abstracted from material through the presentation of numerous examples.

The implicit learning research suggests a provocative hypothesis: Perhaps expertise in trading is akin to expertise in psychotherapy. While therapists say their work is grounded in research and makes use oftheory-based techniques, the actual factors that account for positive results are implicit, and acquired over the course of years of working with patients. Similarly, traders may attribute their results to the research orpatterns they are trading. In reality, however, the research and patterns serve as rationales that legitimize the absorption of markets over a period of years. It is the implicit learning of markets across thousands of"trials" that makes for expertise, not necessarily the conscious strategies that traders profess.

Implications for Developing Expertise in the Markets

Such an implicit learning perspective helps to make sense of Schwager's findings. There are many ways of becoming immersed in the markets: through research, observation of charts, tape reading, etc. Thespecific activity is less important than the immersion. We become experts in trading in the same way that subjects learned Reber's artificial grammars. We see enough examples under sufficient conditions of attention and concentration that we become able to intuit the underlying patterns. In an important sense, we learn to feel our market knowledge before we become able to verbalize it. While simply "going with yourfeelings" is generally a recipe for trading disaster, I believe it is also the case that our emotions and "gut" feelings can be important sources of market information.

The reason for this is tied up in the neurobiology of the brain. In his excellent text The Executive Brain: Frontal Lobes and the Civilized Mind, New York University's Elkhonon Goldberg summarizes evidence thatsuggests a division of labor for the hemispheres of our brains. Our right, nonverbal hemispheres become activated when we encounter novel stimuli and information. Our left, verbal hemispheres are more active inprocessing routine knowledge and situations. When we first encounter new situations, as in the markets, we tend to process the information non-verbally—which means implicitly. Only when we have made thesepatterns highly familiar will there be a transfer to left hemisphere processing and an ability to capture, in words, some of the complexity of one's understandings. As we know from studies of regional cerebral bloodflow, the right hemisphere is also activated under emotional conditions. It is not surprising that our awareness of novel patterns, whether in artificial grammars or in markets, would appear as felt tendencies rather
than as verbalized rules.

o finally we get to the traditional domain of the trading psychologist! How do we know when our feelings convey real information for trading and when they merely provide interference from our conflicts oversuccess/failure, risk/safety, etc.? Developing trading expertise is not so simple as following such slogans as "tune out your emotions when you are trading". Much of what you might know about the markets maytake the form of implicit knowledge that is encoded nonverbally and experienced viscerally.

This is an area that I am currently researching, and I welcome readers to stay in touch with me about the results. I will make sure updated information is posted in a timely way to my personal page atwww.greatspeculations.com. I also hope to have my own book out on the topic early in 2003; my page will also keep readers abreast of that development. But in the remainder of this article, allow me to engage in afew speculations of my own regarding the implications of implicit learning for trading success.

Many are called, few are chosen – I believe the implicit learning perspective helps to explain why so few traders ultimately succeed at their craft. Quite simply, they cannot outlast their learning curves. If,indeed, it takes thousands of trials to generate successful implicit learning, a great number of traders would have been bankrupted by then. Many others might not survive that number of trials simply due to the timeand energy required. It is impossible to hold a full-time job and generate the degree of immersion in the markets needed for implicit learning. On the other hand, it is impossible to obtain a full-time income fromtrading without developing the mastery conferred by years of experience. Part-time traders never develop expertise for the same reason that part-time chess players or athletes are unlikely to succeed. For purelypractical reasons associated with raising a family, making a living, etc., few people can undergo the "starving artist" phase of skill-building.


Emotions interfere with trading – This is a near-universal observation among full-time traders and captures an important understanding. Fear, greed, overconfidence, self-blame—all of these can undercut eventhe most mechanical trading. Indeed, when Linda Raschke and I surveyed 64 traders for their personality and coping patterns, the factor of neuroticism—the tendency to experience negative emotions—emerged asa major factor associated with trading difficulties. This makes sense from an implicit learning perspective. To the degree that a trader is focused on his or her fears, self-esteem, fantasies, etc., attention is drawnaway from the learning process. The problem may not be emotionalism per se; there are many highly emotional, but successful traders. Rather, the issue may be the degree to which emotions interfere with one'scognitive processing by competing for attention. Focusing on negative emotions may be a much larger problem than actually experiencing them. Many outstanding traders "explode" when they make a rookie error.For them, however, the storm blows over quickly; less successful traders appear to be less able to let the issue go. As a result, they become caught in a cycle of blame, increasing self-consciousness, and furtherblame. As a psychologist, my leaning is to help traders experience their frustration and get over it quickly, rather than "overcome" it altogether. (In my chatroom session with Linda Raschke, I will be addressing how
to accomplish this).


The advantages of learning trading vs. investing – If the internalization of complex patterns requires many thousands of observations across different market conditions, the challenge for the trader is makingthis process as efficient as possible. My sense is that there may be an advantage to learning trading, as opposed to investing, simply because short-term traders are apt to observe many patterns in the course of asingle day or week. The investor, conversely, may note a pattern every few months or years, greatly extending the amount of time needed for implicit learning. This dynamic would help to explain why many of themost successful traders I have met have had experience working on the exchange floors. In the fast-paced environment of the floors, a trade may last seconds to minutes, with many trades placed per day. Complexresearch strategies and chart analyses fly out the window when time frames are compressed to that degree. Instead, traders become so immersed in the markets that they acquire the (implicit) ability to read
moment-to-moment patterns of momentum and price change. This creates an ideal implicit learning environment; having so many patterns to read per day makes the development of expertise much more efficient.Ironically, it also might help account for difficulties floor traders often experience when they attempt to trade off the floor. Without the contextual cues that help them process those price and momentum shifts, floortraders lose their edge—even though they may think they are employing their same, successful trading methods.


Developing technologies for training traders – If we look at how experts are trained in other fields, we notice a common factor: an intensive period of apprenticeship in which the student works under a masterand obtains continuous instruction and practice. Consider, for example, the cultivation of expertise in the martial arts. Many years will be spent in the dojo studying under a sensei before the black belt is conferred.Instruction alternates with practice; rehearsal of techniques alternates with the application of techniques in real-life (tournament) conditions. The online medium has created a variety of promising strategies fortraining traders, such as Linda's chatroom, real-time market commentary via weblog, and services that allow simulated online trading. My sense is that we will see an accelerated shift from services that emphasizetrading techniques to comprehensive trading "dojos" that incorporate real-time instruction, practice, and coaching. Already we are seeing expert instruction modules built into conventional software programs such as
Metastock. This move toward implicit learning environments strikes me as a most promising application for peer-to-peer networks, as traders share research resources and trading experiences and learn from eachother. (See www.limewire.org for more information on Gnutella and P2P networking).


Developing technologies for facilitating learning – This is my primary research interest in trading psychology. A broad array of research suggests that learning is mediated through the brain's prefrontalcortex, which also controls attention, concentration, planning, and other executive functions. We also know that children with learning disabilities are significantly more likely than others to possess neurologicaldeficits associated with the frontal lobes, including attention deficit hyperactivity disorder (ADHD). Elkhonon Goldberg cites considerable research that indicates we can improve the functioning of our frontal cortexthrough structured exercises, much as we can build our muscles in the gym. Such exercises have been used, for example, in delaying the onset and progression of Alzheimer's disease. Is it possible, however, todevelop super-states of concentration and learning in a mental gym the way that bodybuilders can hone their physiques in a weight room? I believe we can. I am currently working with Dr. Jeffrey Carmen onbiofeedback strategies that directly measure regional cerebral blood flow to the prefrontal cortex. Utilizing infrared sensors to detect heat changes in the forehead (reflecting increased frontal blood flow), it ispossible for traders to know exactly how much of their mental processing power is available to them at all times. Moreover, it is possible for them to learn strategies for increasing their frontal activation andmaximizing their optimal learning states. This would allow traders to process each trading day (or lesson) as thoroughly as possible, creating more efficient learning.


My research to date suggests that the state of mind induced by the biofeedback exercises is not unlike the state that people enter during hypnotic induction or meditation. It is a state of relaxed and focusedconcentration. Such a mind frame minimizes the impact of emotional interference at the same time that it quiets the verbal, internal dialogue that permeates much of our cognitive lives. Following Goldberg'shypothesis, I believe that the capacity to enter such states of consciousness may allow us to efficiently process novel information by facilitating right hemispheric activation, even as it dampens emotional arousaland the interference of critical, verbal thinking. This very much fits with psychologist Mihalyi Csikszentmihalyi's observations of "flow" states among highly creative and successful individuals. The learning ofexpertise may depend as much upon the mind state of the learner as the quality of the instructional materials.
Conclusion

I began this article with a straightforward question: How does one gain expertise as a trader? We have seen that expertise is often described as the outcome of an explicit research process or as an explicitacquisition of knowledge about recurrent patterns. Much skill-based learning, however, is acquired implicitly, as the result of processing thousands of examples. Small children learn language, for example, longbefore they can verbalize rules of grammar and syntax; we learn complex motor skills, such as hitting a baseball, without ever being able to capture our expertise in a way that could be duplicated by another person.

While immersion in research and in pattern recognition can indeed produce trading expertise—a finding made clear by Schwager—the key ingredient in trading development may be the immersion, not the researchor the patterns per se. If this is true, efforts to find the best trading system or the most promising chart pattern are off the mark. The what of learning trading may be less important than the how. If you want to become a proficient trader, the most promising strategy is to immerse yourself in the markets under the tutelage of a master trader. You need to process example after example under real trading conditions, withfull concentration, to develop your own "neural network".

I believe the most exciting frontier for trading psychology is the development of tools and techniques for maximizing implicit learning processes. Such techniques would assist in the acquisition and utilization ofexpertise by training individuals to sustain states of consciousness in which they are open to implicit processing. As I hope to demonstrate more thoroughly in my forthcoming book, there are reasons forbelieving that experienced traders possess greater expertise than they are aware of. This tacit knowledge, to use Michael Polanyi's memorable term, reveals itself during "hot streaks" in trading and thosewonderful experiences where we just "know" what the market is doing and place winning trades accordingly. Too many traders look to emulate others. The secret to success, conversely, might well be to gaingreater access to the expertise we have already acquired implicitly and learn to become the traders we already are when we're at our best.

Well, if you've followed me thus far through a lengthy article you no doubt have much of capacity for attention and concentration needed to become a master trader! In the coming months, I hope to elaborate manyof the ideas and techniques alluded to in this article, and I encourage you to stay in touch regarding new directions and developments.

With that, I will part with a last research finding from Reber. Remember those artificial grammars that people had to learn, such as MQTXG? Letters were displayed to subjects that either followed the grammar (i.e.,Q could only follow M; T could only follow Q, etc.) or that did not. The subjects did not know the rules of the grammar, but over many trials could figure out which combinations of letters were right and which werewrong. Suppose, however, that the grammar is changed in the middle of the experiment, so that the new constructions follow the rules of NRSYF instead of MQTXG. Will subjects continue to display implicit learning?

The answer is enlightening. After many trials with the initial grammar, without knowing the rules, subjects will choose "MQ", "TX", and "QT as grammatical constructions while rejecting "QM", "XT", and "TQ". Oncethe grammar is switched, the subjects' learning goes out the window and their guesses retreat to chance levels. But with enough new trials, subjects pick up the new grammar and are able to recognize "NR", "SY",and "RS" as grammatical and reject "RN", "YS", and "SR". In other words, people not only learn complex patterns implicitly; they continue their implicit learning when the patterns shift. This has major implicationsfor the development of market expertise. The markets are always changing, but as long as we stay in our optimal learning modes, we can adapt with them.

Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University. Dr. Steenbarger is an active trader and author of The Psychology of Trading (Wiley, 2002). He writes feature columns for the MSN Money website (www.moneycentral.com) and several trading publications, including Stocks Futures and Options Magazine (www.sfomag.com). These articles and a daily trading weblog are linked at www.Greatspeculations.com.

[TayOO]

O Trade Psicológico é um factor interessante e que me fascina sempre um pouco, no mundo real as coisas são sempre diferentes!


Expose Yourself! A Powerful Technique for Breaking Emotional Patterns in Trading
Written by Brett N. Steenbarger, Ph.D

Traders love patterns. We trade chart patterns, oscillator patterns, historical patterns, cyclical patterns—you name the pattern, chances are there's someone trading it. Much of trading boils down to patternrecognition and the ability to quickly identify and act upon profitable patterns as they occur. This is particularly challenging for active futures and options traders, who must read the patterns, make their decisions,and place their orders within a matter of seconds. Processing market patterns in the midst of our own emotional patterns—our tendencies toward impulsivity, hesitation, frustration, and regret—is one of the greatest challenges of active trading.

It is always sobering for traders to realize that they are every bit as patterned as the markets they're trading—and sometimes far more so. In this article, I will draw upon two decades of experience as a clinical psychologist to illustrate a powerful technique for interrupting and changing repetitive emotional and behavioral patterns that disrupt trading. The technique is a cognitive-behavioral method known as exposure, and—in the Ranger tradition described by Brace Barber, Linda Rashcke, and me in September's issue—it is a powerful tool for challenging oneself for exemplary performance.

Becoming Your Own Therapist

Extensive studies by Axel Cleeremans and Arthur Reber suggest that, with sufficient experience, people can learn to read patterns in data and anticipate future data sequences. Interestingly, this pattern recognition is intuitive and implicit rather than verbalized: we know things long before we know we know them. Such findings contradict the common belief that successful trading requires an elimination of emotions. Our feelings, like market data, consist of relatively weak—but vitally important—signals in the midst of considerable noise. Our sensitivity to market patterns often remains hidden amidst the pushes and pulls associated with trading fears and ambitions. Traders can learn to become their own therapists by using techniques such as exposure methods, not to dull or eradicate emotion, but to gain control of their cognitive worlds and better extract signal from noise.

The problem, you see, is not simply our patterns of anxiety, guilt, anger, or discouragement. The problem is that we cannot control these patterns. No one consciously plans to fail to pull the trigger on a promisingtrade; nor does anyone want to impulsively leap into a non-trending but volatile market before evidence of a breakout is at hand. As I emphasize in The Psychology of Trading (Wiley; January, 2003), such emotionaland behavioral patterns play themselves out against the will of the trader, in spite of our best-laid trading strategies and sophisticated market research.

For most of us, the scenario is embarrassingly familiar: We make plans to get into shape, to diet, or to treat others better—and what happens? All too easily, we lapse into our ruts. At the time we make ourresolutions we are sincere. But under the influence of old patterns, the resolutions lose their force. The plans that we had carefully crafted fall by the wayside, like so many good dieting intentions.

Why?

Our trading (or dieting or exercise) plans are anchored to a particular state of mind—associated with a particular set of thoughts, feelings, and physical sensations. When something intervenes to shift us to anotherstate, we lose our anchoring. We no longer have vivid and immediate access to the motivating experiences that spurred our initial intentions. The key is not to spend months and years psychoanalyzing why we are"self-defeating" or otherwise lack "self-esteem". Rather, we need to become our own therapists and learn to remain anchored, even in the face of market and emotional forces that could disrupt our trading plans.That is the purpose of exposure-based techniques.

Overcoming Problem Patterns Through Exposure

Let's take a classic example of how exposure can break seemingly intractable emotional patterns. Ellen is suffering from a condition known as panic disorder. Sudden, episodes of anxiety hit at seemingly randommoments, greatly interfering with normal activities. These episodes are so scary that she is afraid she is losing control and might even die. As a result, Ellen develops a fear of her panic episodes—somethingknown as "secondary anxiety". Sure enough, her fear of the panic attacks leads her to become increasingly anxious and actually triggers further attacks. By the time Ellen makes it to therapy, she has been caughtin a continuous cycle of worry, anxiety, and panic.

If I were using exposure methods with Ellen, I would first teach her a skill, such as a deep-breathing, progressive muscle relaxation method. This involves learning how to slow oneself down by reducing the rate of respiration and deepening the breathing while eliminating physical tension by gradually tensing and relaxing muscle groups from one end of the body to the other.

Figure One Relaxation Training: A Useful Behavioral Technique

Step One: Deep Breathing – Close your eyes and begin breathing deeply, slowly, and rhythmically. Your breathing should be from the diaphragm, and should not be forced or exaggerated in any way. During the deep breathing, you keep your body as still as possible, performing the exercise in a quiet, distraction-free environment.

Step Two: Mental Focus – Fix your attention on a peaceful, relaxing stimulus while you are performing the deep breathing. You can play instrumental music through headphones if this is helpful and/or focus your attention on soothing mental images or scenes. For instance, you could imagine yourself in vivid detail walking along an ocean beach, smelling the salt spray, feeling the warmth of the sun, hearing the crashing waves, etc. The key is to make the music and/or imagery all absorbing, tuning out internal chatter.

Step Three: Muscle Relaxation – Once you are feeling more relaxed, begin at one end of your body (such as your toes) and tense and relax one musclegroup at a time, working your way to the other end of your body. Tenrepetitions for each muscle group, with hearty tensing and slow, easy relaxing,works well. This can be performed while you are breathing slowly and deeply tothe accompaniment of the music and/or imagery. >From toes and instep tocalves, knees, thighs, buttocks, back, shoulders, arms, wrists, fingers, neck,and forehead, you progressively undo your body's tension.

Step Four: Self-Awareness – When you have finished the muscle relaxation,slowly open your eyes and notice how you are feeling. By now you have beenbreathing deeply and slowly, with an altered focus and physical relaxation, forquite a few minutes. Very often there are particular physical sensations thataccompany your relaxed, focused mode that traders call the zone. I find that Iexperience a quiet feeling in my head, as if I am somewhat removed from theworld. Such sensations can become your cue, alerting you that you haveentered the zone and are ready to deprogram old patterns via exposure.

Note – At first it can take a while to get to the zone. With practice, you canbecome very good at the breathing and muscle relaxation and enter the zonein a matter of minutes or even seconds. The key is frequent rehearsal, firstunder normal conditions, then under conditions of gradually increasing stress.

Once Ellen has learned this method, the exposure can begin. I would ask her to take a few rapid and shallow breaths, simulating hyperventilation. This exposes Ellen to the some of the same physical sensations that she experiences during the early phases of her panic attacks. It also summons those panicky thoughts and feelings that have become deeply associated with the physical sensations of anxiety. When Ellen begins to re-experience a bit of her anxiety, I instruct her to perform the deep breathing and muscle relaxation. She continues with the relaxation work until the initial anxiety sensations are eliminated.

After Ellen learns to extinguish the anxiety that comes from a few rapid, shallow breaths and then from more prolonged hyperventilation, I then have her perform more intensive exposure exercises. I may have her spin around in the room, recreating the feeling of dizziness that comes with her panic attacks. Later, I might encourage her to provoke panicky sensations by entering situations (such as a crowded shopping mall) that are associated with anxiety. In each case, she would expose herself to the very problem pattern that she has been trying to avoid, but would always limit the exposure and immediately follow it with the rehearsal of a coping skill. With daily practice between sessions, severe problems such as panic disorder can be successfully treated within a matter of weeks.

What makes this technique work?

Most of our problem patterns are painful; no one likes feeling anxious or depressed. It is only human nature to want to avoid emotional pain. In avoiding our problems, however, we never learn the control necessaryfor their elimination. By gradually and progressively exposing ourselves to stressful circumstances—all the while practicing ways of coping and maintaining control—we build a sense of mastery. This is how peoplelearn to overcome crippling phobias and debilitating traumas. No amount of talk substitutes for the first hand experience of directly facing fears time and time again and staying in control. Repeated successchanges the self-image, and it alters our self-talk. Suddenly, we really begin to feel and believe, "I can do this!"

Applying Exposure Methods to Trading

If you are going to serve as your own therapist in the exposure-based mode, the cardinal rule is: You always must activate a problem pattern in order to overcome it. It isn't enough to think about your problems ortalk about them. You must actually experience your problem patterns in real time, gradually and progressively, and make conscious efforts to counteract those patterns. If your trading problem is triggered byincreasing your size, you will need to gradually and steadily trade larger. If your impulsive trading pattern occurs during trendless, low volatility markets or in the opening minutes of trading, that is when you willneed to work on yourself.

Fortunately, we can speed emotional change through a process known as imaginal exposure . Imaginal exposure can be thought of as the psychological equivalent of paper trading. Instead of starting out withreal-time problem situations (known as in vivo exposure), we can vividly imagine scenarios associated with our negative patterns—triggering some of the feelings of greed, fear, doubt, and regret—and mentallyrehearse strategies for dealing with those scenarios. Imaginal exposure is not as powerful as facing problems in vivo (much as paper trading lacks the immediacy of actual trading), but it is a useful starting point inbuilding the sense of success and mastery. Just as athletes have found mental rehearsal to aid Olympic performance, the mental tackling of trading challenges can prepare us for the real thing.

Let's consider an example:

Lou is an active futures trader, with a little over a year of experience under his belt. He has made most of beginner's mistakes and has learned from them, carefully planning his trades, limiting his losses, andscaling in and out of positions with initial sizes that are adjusted for market volatility. He largely trades the ES and NQ eminis in a short-term breakout mode, attempting to catch 1-4 swings per day depending upontrend and volatility conditions. His entries are based on dual RSI oscillator readings, using short-term (intraday) and longer-term (swing) parameters. While he has been generally successful, he notices that he hasperformed relatively poorly on upside and downside trend days. He finds that he hesitates too long in entering the market and then is too quick to exit the trades once they are profitable. As a result, he takes smallbites out of the moves that should be providing him with much of his profit.

An examination of problematic trend days reveals that these begin with a gap at the open in which price moves sharply up or down relative to the last trade of the previous day. This gap immediately triggers negativethinking on Lou's part, much of which reflects feelings about having missed the apparent high or low in the market. During this period of regret, he is not actively following price action or planning an entry. Instead,he finds himself hoping for a pullback so that he might have a better entry point (and a reprieve from his self-recriminations). Price, of course, does not accommodate to his desire and moves even further from theopen, now registering an "overbought" or "oversold" signal on the short-term oscillator. Lou uses this as further justification to hold off on entering a position, allowing him to miss a good segment of the morningtrend.

This problem seems unusually rookie-like for an experienced trader, so we examine Lou's overall trading performance. Sure enough, we find that his worst losses have occurred when opening gaps in the markethave been reversed. These false breakouts have left him buying at the early highs and selling at the lows, starting his day with solid losses and shaking his confidence. This allows us to see that what appears to bethe problem—the failure to enter the market early during trend days—is actually a coping mechanism designed to minimize the possibility of losses. Unfortunately, it also minimizes opportunities!

Our exposure therapy for Lou begins with skill teaching, as in the case of Ellen. We teach Lou a method for behavioral self-control that involves slow, rhythmic deep breathing and soothing imagery and encouragehim to practice this until he becomes skilled at maintaining his composure. In addition, however, we also want Lou to learn some vital trading coping skills. He needs a set of rules for distinguishing potential trenddays from those that may reverse and/or rules for quickly identifying reversals once they occur. For example, his own research and a little mentoring from experienced traders might teach him that gaps that occuron X-period breakout highs or lows in the NYSE TICK are more likely to show continuation than gaps that occur without such breakouts. Alternately, he may find that moves from opening gaps that remain intact byY o'clock are more likely to continue through the day than those that partially fill.

Once Lou has identified his trading rules for the problem situation and learned a method for cultivating self-control, the exposure work is ready to begin. First we can start with imaginal exposure, encouraging Lou toenter his relaxed mode with slow, diaphragmatic breathing and eyes closed. In this mode, he vividly imagines an preopening news report that sends the market gapping lower, well outside its prior Globex range. Hemaintains the visualization of the scenario as he practices his slow breathing and mentally rehearses the appropriate trading strategies. Thus, for instance, he might image the TICK plunging to a multi-day low onthe opening move and the SP failing to fill its gap on the first TICK bounce toward zero. This would be his trigger for a short entry, and he would clearly visualize each step he would take in monitoring the market,placing his order, setting his stops, etc. A similar set of visualizations could also facilitate the rehearsal of exit strategies.

Once all discomfort is extinguished in the mental rehearsals, the next step in exposure work would be applying the skills in paper trading. Using historical market data, we would have Lou advance charts bar by barin trading simulations of trend days while rehearsing his self-control and trading strategies. Only when these simulations proceed successfully (i.e., eliminating anxiety) would Lou undertake real-time, in-vivoexposure, beginning with small positions and building to larger ones. (The speed with which Lou progresses from imaginal exposure to paper trading to in vivo work would depend upon the severity of the problemsand the intensity with which he rehearses the techniques. Research suggests that fewer but longer, more intensive exposure sessions are more effective in eliminating negative emotional patterns than a greaternumber of brief exposures.)

The idea is that, before Lou confronts another potential trending day in the market again, he will have experienced multiple successes in handling such days in imagination and then on paper. It is therepeated experience of mastery and success that provides the power behind exposure-based intervention. Nothing so builds confidence as repeatedly facing and overcoming one's fears. (See Figure 2 for keys tosuccess in the exposure method).


Figure Two Keys to Success With Exposure Methods
Patience – Taking the time to become fully relaxed before starting the exposure is crucial. Give yourself enough time to reach the zone (see Figure
One).

Persistence – A key to extinguishing negative patterns is repetition. Applying coping skills to problem scenarios again and again, in imagery and in vivo
makes stressful situations safe and familiar.

Gradualism – Set yourself up for success by starting with manageable versions of your problem patterns and imaginal exposure before tackling your
greatest challenges in vivo.

Consistency – These are short-term techniques, but applying them intensively and consistently on a daily basis provides superior results.

Realism – Exposure can break old problem patterns, but by itself won't instill new patterns of success. Nothing substitutes for experience and research in
the markets!

A Final Note
There are many psychological approaches that can enable us to gain control of our problem patterns. Exposure-based methods are particularly useful for futures and options traders because they can beself-administered and often produce rapid results. Such methods cannot overcome all problem patterns; sometimes people with chronic difficulties need additional forms of treatment, including medication.Nevertheless, when emotional reactions are situational rather than chronic—and especially when you can isolate the trading situations that trigger the problem patterns—exposure-based techniques are excellent
mechanisms for gaining control and staying anchored to trading plans.

Notice, however, that I have emphasized the need for proper, researched trading strategies to accompany the exposure methods. As an experienced clinical psychologist and trader, I can assure you that self-helptechniques alone will never enable you to master the markets. If you want to know how to trade a candidate trend day, an intraday range breakout, or an afternoon consolidation of a morning trend, you damned well better have researched those market conditions and generated some rules and techniques to guide your entries and exits. Otherwise, you will be teaching yourself to focus and relax while you lose your hard-earned capital.

What psychological methods can do is provide you with the self-control to implement your well-researched trading strategies. That is important. Consistency of effort, not the home run trades we all like to talk about, best positions us for trading success.

Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University. Dr. Steenbarger is an active trader and author of The Psychology of Trading (Wiley, 2002). He writes feature columns for the MSN Money website (www.moneycentral.com) and several trading publications, including Stocks Futures and Options Magazine (www.sfomag.com). These articles and a daily trading weblog are linked at www.GreatSpeculations.com.