Sunday, August 26, 2007

Trading, Coping, and Intuition

In my recent posts, I've emphasized that effective coping strategies are essential to those who operate within the financial markets. These strategies are mediated by the appraisals we make of situations and of our own resources. The effectiveness of coping methods is not measured by their ability to eliminate stress; stress is inherent in any activity in which we must make decisions under conditions of risk and uncertainty. Rather, coping is effective if it enables us to make the same sound decisions in the heat of fire that we would make under cool, calm, leisurely conditions.

Improving our coping is important, not just to moderate the impact of stress, but to help us retain access to those subtle cognitive, emotional, and physiological cues that are markers for our implicit knowledge. As I've noted in past posts, we know more than we know we know. What we call intuition is actually an internalization of repeated experience that makes us exquisitely sensitive to patterns in events.

We draw upon such cues continuously when we engage in conversation; those subtle markers tell us when we should respond, when we should acknowledge the speaker, etc. There is no way that any of us could possibly write out all of the rules of social intercourse that we draw upon in any normal conversation; those rules are implicit, rather than explicit. The advantage of implicit processing is that it enables us to respond effectively to rapidly shifting events.

When we do not cope well and are overwhelmed by the mind and body's flight or fight responses, we lose access to those implicit cues. We are more apt to engage in social behavior (interactions with spouses or colleagues) that we will later regret. We become less sensitive to others, distracted by our own turmoil.

Similarly, the trader who is enmeshed in panic, worry, and frustration loses access to subtle market patterns--and especially to the internal cues that are alerts to those patterns. This is how we can make decisions in the heat of market action that we later look back upon and wonder, "How could I have done that? How could I have missed that?"

Coping is crucial, because it keeps us in a zone in which we can reason well explicitly, but can also act swiftly upon our implicit knowing. In my next post, I'll outline specific coping strategies and their strengths and weaknesses, so that you can assess your own ability to handle the challenges of risk and uncertainty and develop ways of strengthening your access to sound coping when those challenges arise.


The Role of Somatic Markers in Trading Decisions

Biofeedback for Trading Performance