Sunday, March 04, 2007

Biofeedback for Performance: A Best Practice in Trading

From Brett: This best practice describes biofeedback as a tool for performance enhancement among traders. It emphasizes that the role of biofeedback is to keep us in touch with our (implicit) knowledge, not to eliminate emotion from the decision-making process.

In my recent post, I described how implicit knowledge is a key ingredient of trading performance, with emotion as a necessary part of the decision-making process. An important implication of this view is that we know more than we know we know. Once we have immersed ourselves in market patterns (and that's an important qualification), much of our knowledge about trading is implicit: not precisely verbalizable, but present nonetheless. I recently talked with a very successful trader who made over a million dollars actively trading the stock index market on Tuesday, the day of the large market decline. He placed well over 100 trades that day based on his reading of short-term patterns. To make that kind of money--he has made millions of dollars each year trading the same style--he needs to have an incredible feel for market patterns.

That trader's feel manifests itself quite physically: when he is "in the zone", his sense for market turns is felt and visceral. This is what Damasio refers to as somatic markers: it is how knowing is conveyed via emotion. This is why the notion that eliminating emotion in trading is far off track. Rather, we want to control the level of cognitive and physical arousal so that we retain access to expertise that is already present.

Biofeedback is a powerful tool for achieving such cognitive and physical control. In previous posts, I have written about my use of hemoencephalography and heart rate variability as forms of biofeedback that I have used personally and found to be helpful. While these biofeedback variants differ in terms of what they are measuring, I find quite an overlap in results. Basically, they both require users to remain calm and focused. This requires both physical and mental self-control, not unlike meditation. Through structured practice, people can learn to systematically improve their ability to enter and remain in states of calm focus. Such ability is important to trading (and many other performance activities), not because it eliminates emotion, but because it preserves our access to the somatic markers that represent our market feel.

Research suggests that various forms of biofeedback can improve cognitive performance vis a vis information processing, visuo-spatial processing, musical performance, working memory enhancement, decision-making in performance situations, and attention. The heart rate variability feedback is particularly user friendly, because it is computer based and can track progress both in practice sessions and in real time performance. For instance, it is not difficult for a trader to go about his or her trading while connected to the equipment. This enables the trader to detect shifts in emotional processing during the trading session. This feedback has also been found to enhance cognitive performance across a variety of settings by facilitating a regulation of emotion.

Using the Freeze-Framer program, audible signals tell the user when he or she is experiencing high, medium, or low "coherence", which is a measure of emotional regulation. On-screen games require the user to keep a floating balloon in the air, for instance, based upon sustained medium and high readings. I recently had an interesting experience during one feedback session: I sustained a high level of the balloon, but then clicked a wrong button on the screen and erased my data accidentally! After that frustration, it was *much* harder for me to keep the balloon in the air. It was a nice illustration of the impact of frustration even several minutes after an event.

One particularly promising application of feedback is to purposely encounter challenging situations in real time (perhaps during simulated trading) and then work on maintaining the calm focus. The goal would be to improve one's % of time in the medium or high state during actual or simulated trading conditions. The Freeze Framer program collects the data for you (as long as you don't erase it through a boneheaded error!), charts it, and saves it for you in an archive. This enables traders to work on themselves as they work on their trading. For that reason, I consider biofeedback a trading best practice.


AnaTrader said...

Hi Brett

Feb 27 ,2007 will go down in my memory box as D Day for those who
who have the X factor ie incredible feel for market patterns, especially short term, to take advantage of the market, which does not come to us every day.

Yes, all these expert traders could have made enough to take the whole year off.

As I trade mini lots, although I had my best trade, I did not make millions.

On your point: biofeedback keeps us in touch with our implicit knowledge, not to eliminate emotion from the decision-making process , is valid and played out on Feb 27 07, with many traders laughing all the way to the bank!

Brett Steenbarger, Ph.D. said...

Hi Anatrader,

I do think these volatile markets really test traders to maintain their objectivity. The speed of market moves is very hard for short-term traders to adapt to. Glad to hear you've had success in this challenging environment!


Krasimir said...

Hi Brett,

Thank you for the great post.
Somatic markers, as referred by Damasio (today just by coincidence I watched a BBC movie called Brain Story part II, where those somatic markers were introduced by Damasio) is knowledge conveyed by emotions. This knowledge is brought up when normal decision making is hard to manage with a giving situations.

If I got it right, somatic markers could be explained as a specific neuroconnections in the brain that are caused by our experiences. So, if we have "helpful" experience (positive trading experience) that would mean that we would have "helpful" somatic markers, and vice versa. Which means that implicit learning (somatic markers) are something relative and it doesn't mean that when dicision making is hard to do, that implicit learning would help (it is just a way of coping). In other words, trader has to have the "right" implicit knowledge in order to survive in the market. But, to get the "right" implicit knowledge a trader has to spare a lot of screet time doing replays, be trained by trading mentrors, etc.

Any comment and correction are apprecitated.


Brett Steenbarger, Ph.D. said...

Hi Krasimir,

I think you make a very important point. Those somatic markers are the result of (implicit) learning that only occurs when a person is immersed in a field. It does require considerable screen time and it can be accelerated by proper mentorship. Because of those factors, it is very difficult for part-time traders with no mentorship to develop a good feel for markets.

Thanks for the excellent comment.


ellenweber said...

Great reminder of the power of biofeedback - which could be far more widely used to strengthen any workplace. Thanks Brett! Nice find!

Brett Steenbarger, Ph.D. said...

Hi Ellen,

I agree: biofeedback is underutilized. It can be used as a stress management tool, but has very worthwhile applications as a technology for enhancing concentration and facilitating decision making.


Mike Logan said...

Hi Brett,

I have been using the Freeze Framer with Anger Management and Domestic violence clients for about 8 years, and I have practiced it for myself for about that long to enter into a quiet place in my counseling sessions, where I want to be like you are on the floor of the market. I am following you on twitter now, and hope you will follow me, michaelslogan. I am very curious about your strategies personally and professionally. Thanks for the inspiring work. Mike Logan