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.