Friday, May 30, 2008

Psychological Change and the Power of Discrepancy

In my post on constructivism, I described change as a revision of the mental maps we construct to make sense of the world. We provide coherence to our experience by shaping it into narratives; when we tell the story of our lives, we literally tell a story. We include and emphasize certain events, exclude others. The story line is our personal drama, one in which we play leading roles. (See my earlier post on the roles we play and the importance of shifting roles).

Discrepancy--encountering new experiences that don't fit our mental maps--is the source of all change. We change by thinking new things, behaving in new ways, and feeling differently. If we stay in the same roles, engaging in the same activities, thinking the same things, nothing in our mental maps will require revision. We do not change.

When we enter new roles, we are forced to think and behave in new ways. This is how we adapt to new careers, new relationships, and new responsibilities such as parenthood. As we play the new role, it increasingly becomes a part of us, integrated into our mental maps.

But that is not easy. When we encounter discrepant events and situations, we will naturally feel uncomfortable. We are outside the familiar realm of our maps. A certain anxiety and discomfort precedes all change; without it, we are too stuck in existing roles and maps to shift the ways we think and act. It is only human nature to avoid such discomfort, so we tend to stay with the known, the existing set of maps. We resist change.

My earlier post emphasized that we bring our life dramas--the scripts from our accumulated roles--to our trading. If you find yourself making the same mistakes in trading repeatedly, the odds are good that you are reprising a role in the markets. Maybe you're caught in a success fantasy or a story line of high expectations that are never met. Perhaps your drama is one of fighting larger forces or encountering risky thrills.

It is impossible to adapt to changing markets when we are rigidly bound to scripts from the past.

There are so many ways of changing how you trade and thereby revising your mental maps. You can trade in a more structured, rule-based way. You can trade larger; you can trade different markets or time frames. Each change shifts our experience of markets and our experience of ourselves in markets, and that alters the viewing, making it easier to continue altering the doing.

At one time a trader I work with thought of himself as a promising beginner. With success under his belt and a network of successful peers, he now experiences himself as an established professional. Another trader I've seen for a while used to view himself as undisciplined. He took on roles in his physical fitness and development, carried those over to his trading, and now sees himself as a trader with excellent risk-adjusted returns. When I first met him, I'm not even sure he had thoughts about risk-adjusted returns. Now it's how he keeps score.

You can't talk yourself into change. Only encountering new situations and placing yourself in new roles will provide the discrepancies that prod you to revise those maps and change your ways of viewing and doing.

If you get that, then you can see that the changes you most want to make as a trader are those that will enable you to experience yourself as the trader you want to become. The links below might just help you get started on that adventure.


Becoming Your Own Coach

How to Change Yourself


Raphael said...

Thanks for the clarification. I really love your point how people use the market as a stage to play out the unconscious dramas of their life. Clearly, this approach can be the source of many trading errors and frustrations. It truly is amazing how preexisting mental maps can play a major role in trading decisions, and the trader is none the wiser.

Globetrader said...

Hi Brett,
talking about change. I tried something new for me today. I had discussed it in my blog a year ago or so, but it was only theoretical then.
I was long oil (CL at 127) on a possible spike up. It was a fake and CL broke down fast 40 ticks. Remembering yesterdays sell-off, I did not add to the position, but I hesitated to get out.
A familiar problem, as I was up for the day and did not want to close the week on a losing trade, especially one which wiped 40% of my daily profits.
I had the Brent oil contract (COIL) available for trading as well on my tradedesk and instead of covering the losing CL trade I shorted COIL.
I was now Short COIL, Long CL, which froze my exposure to the 40 ticks or more accurately to the spread between COIL and CL, which actually widened in the breakdown to about 60 ticks max. as COIL was stronger than CL today.
When CL could not take out the 125.10 mark and then held above 125.40 I covered COIL for 100 ticks profits and stayed in CL.
(I hoped I had timed it right and we would not break further)

It was the right decision and when we came back to 126.10 I closed CL for a 90 tick loss (we had spiked above 126 and I had moved a trailing stop to 126.10 as I did not want to sit through another test of the lows)
(A look at the chart confirms that I should have had conviction and stayed with the trade, but you never know, and I was happy to have successfully traded something I had thought about a year before, but never got around to really trade it.)

In the future I will actually use the WTI contract to offset a CL position, as this is also a Light Sweet Crude contract, which trades 1:1 with CL, just the spread is a bit higher. But using this one to offset CL freezes the Loss effectively, even in a very fast market and that would have allowed me, to squeeze some more ticks out of the Short position.

In one article you wrote, that being in a position focuses a lot better than when you sit on the sidelines. I know, that had I taken the loss of 40 ticks, which most readers will recommend and gone short, I would have made a lot more. But you don't know that in advance and actually I need time to refocus after a big loss, I don't reverse a 40 tick loss. I go flat, and I would have remained patiently on the sidelines through the breakdown and the recovery without taking a trade unsure when CL would reverse on me again.
Taking the Short put me on the sidelines, while still exposing me to the market, while still forcing me to focus and make decisions. It was difficult to see that deep red CL position and it's true that the offsetting profits in COIL did not seem so big. Only the look at the total confirmed, that my exposure was not changing, even if CL showed me a -190 ticks at one time.
I won't trade that way every day, but in a fast market it's a good tool to have available I think.
Best regards,


Btw: I did not worry that I couldn't make back the initial 40 tick loss, because CL swings usually 60 to 100 ticks even if you are in a countertrend trade. The only thing is, that you need to get within the current swing range with your open position to be able to close the trade at a profit. Adding to a trade is one way, being long and short at the same time another and that way actually brings down your entry price a lot faster, if you are on the wrong side of a trend move.

Bryan said...

What is the reader of this blog to do when confronted with such challenging and coherent ideas?

Read on complacently?

Stop reading?

Or Lay down new tracks in an attempt to break old habits?

You've boxed me into a corner!

Thank you for starting the new blog. I'm looking forward to it greatly.

HSC_ said...

Why would you short WTI instead of simply covering the CL contract? WTI is the exact same contract traded on the ICE, except it is cash settled to the NYMEX contract. You are simply adding an extra level of complexity and commissions without reason. You can always re-enter the trade when you think the move is finished.

Globetrader said...

if it were that simple, I would do it. Actually in 90%, maybe 95% of my trades I do exactly as you suggest. But the remainder is the problem.
There are trades where I'm convinced I'm right,
there are trades where I just don't want to lose,
there are trades, where for any other reason I don't close the trade.
And I need a strategy for these trades.
Something which on the one hand respects the -you can say overwhelming- urge not to close the trade, because it will ultimatly be a winner and on the other hand protects my account from my own folly. It's not, that I don't know, that I should stop out of the trade. My inner voice tells me loud and clear: Chris get out now, it will only get worse.
I still don't do it.
I managed through a lot of discipline to bring the numbers down, when such a situation occurs. But I seem to be not able to bring it down to zero.

I know it's an emotional response to certain trigger factors, which when present cause this self damaging behavior. I managed to take care of certain trigger factors, but as I don't know and actually can't control all external factors triggering this response, I know, I fear it will occur in the future again.

And I need a plan for this. I need a response, which respects this emotional feeling, as I can't go against it when it is present. I tried and failed, some of my biggest losses and set-backs where caused by it.

Paying double commissions is a very small price to pay, if I finally found a way to counter this self damaging behavior, without going head-strong against it.

Actually maybe it will disappear in the future, when I see myself sitting through more than 1 trade at -190 ticks, which was caused by that emotion. I then might be able to override myself and exit such a trade at a loss, even if every fiber in me tells me not to do it.

Don't get me wrong, I have losses, I take stops, it's a rare combination of events which causes me not to take a stop even if I know I should. And these few trades do the most damage of all to my account.

Until I can trust myself 100%, I now have a plan how to react in case my inner voice tells me "Chris: Get out. This trade is not working" and I find myself overriding that inner voice despite the market telling me clearly my inner voice is right.

Brett Steenbarger, Ph.D. said...

Thanks for the comments and insights; they're much appreciated!