Friday, September 21, 2007

Repressive Coping and Somatic Markers of Experience During Trading

One of the most basic measures of physiological arousal is heart rate. Our heart rate increases with physical exertion, of course, but also rises in response to excitement and stress. In the case of the latter, elevated heart rate is part of the flight-or-fight response pattern that prepares us for action in the face of situations that we experience as threatening.

A very simple way to measure heart rate in real time is with the kind of monitor worn by joggers and runners. The unit I use, manufactured by Polar, has an elastic strap worn below the breastbone that sends signals from sensors to a display worn as a wrist watch. The advantage of such a unit is that, worn regularly, it becomes a natural part of the trader. It does not interfere with trading, and indeed fades from awareness once one is absorbed in the markets.

My base heart rate, when I'm sitting or lying down and reading a book, is in the mid 70s. If I make particular efforts to calm myself, I can get the rate into the upper 60s. My base rate when I'm following the markets during trading hours (but not with a trade on) is in the low to mid 80s. During such a period, I feel very focused and ready for action, but not at all excited or anxious. It is a different subjective experience than simply lying down and reading a book: I feel more alert.

In this post, I will trace my heart rate behavior during an episode of trading from yesterday's market (click on chart above for detail). At the time, the market was slow and range bound; I was looking for a break out of the range between the recent market high (around 9:15 AM) and the market low (around 9:45 AM).

I bought the market around 10:15 AM (see blue arrow). I was noticing a waning of selling in the NYSE TICK and decided to go long the S&P 500 Index with a small position as a feeler. I was skeptical of the long side, however, because of dollar weakness/Yen strength and relative weakness among financial and housing stocks. For that reason, I was prepared to reverse my position if the market could not go higher.

At the time of placing my order, my heart rate was averaging 85. I experienced no particular stress; it was a routine short-term trade. The market very promptly moved my way, and I briefly had a thought of taking a quick one-point profit. That wasn't the plan for the trade, however, so I stayed in the trade. It just as quickly reversed on me, with the negative TICK expanding.

With the expansion of selling, I stopped and reversed my position (SAR on chart), targeting a move below the lows below the 9:45 AM area.

During the market's reversal--and the reversal of my own position--my heart rate did not elevate. This is important: a carefully planned trade--even one that goes against you--does not seem to generate a stress response. Indeed, it felt like a mechanical trade to me. The thoughts at the time were, "OK, we're not going higher; I'll sell here, stop it out if we break 40 and cover when we break below the recent range." I saw the initial (long) trade as information, not as a loss or disappointment.

The market once again quickly moved my way, and I again had a thought of exiting for a quick profit. As before, however, I decided to see the trade through. My heart rate through this time was very consistent, in the low to mid 80s.

Volume really slowed down from there, and the market bounced higher. At one point (marked on the chart as "reaction"), I shifted in my seat and had the distinct thought, "This trade is taking too long to work out." I wondered to myself if I should pull out of the position. I looked at my monitor, and it showed my heart rate in the high 90s.

What was interesting was that I shifted position and my heart rate elevated *before* I was consciously aware of any concern with the trade. Indeed, it would be more accurate to say that my body registered threat first and only then did I interpret that threat explicitly, consciously.

I looked over at the NQ and ER2 futures contracts and saw absolutely no sign of enhanced buying in stocks. I concluded that there was nothing in the slow action or recent bounce that invalidated the basic trade idea. I decided to stick with the position. Shortly afterward, my heart rate returned to the mid 80s, where it stayed for the duration of the trade--including the point at which I covered the position and went flat for a while.

Recent research suggests that repressive coping--the ability to keep physiological arousal from becoming explicit emotional distress--has many adaptive benefits. This research review is particularly informative. During the trade, I experienced heightened physiological arousal, and the marker for this was the shift in my seating position in the chair. I did not, however, experience any unusual anxiety about the position. Indeed, I would describe my state as somewhat bored and a little antsy--a clear response to the slow pace of trading.

In a market with decent volume and volatility, such as we've had recently, the position would have gone my way promptly. My elevated heart rate and shift of position were the first clues that something did not feel right about the trade. It wasn't moving my way as quickly as I expected. That arousal did not manifest itself as distress; rather, it became a cue to examine the trade more closely. When I saw that nothing had really changed in the supply/demand equation, I stuck with the position and my heart rate steadily dropped.

The term "repressive coping" is not quite accurate for my trading episode, though it fits the definition in the research review. In acknowledging and accepting my body's signals, I was able to use them to activate a well-worn behavior pattern of checking price and volume patterns in correlated indexes. Something didn't feel right about the trade, but it turns out that all was OK.

At other times, however, I have taken my flight or fight response to be an action cue to exit the position, with worried thoughts--"Oh no, it's going against me!"--mediating an anxious emotional response. Very, very often those exits turn out to be bad decisions.

What appears to be key, at least in my case, is making myself very aware of somatic markers--shifts in my state--and then using those as information, not as automatic guides to action. Not surprisingly, this is easier to do when trades are planned and when position sizes are reasonable.

Losses need not be stressful if they are preplanned (i.e., if there is a conscious strategy for stopping out of the trade and utilizing the stop-out as market information). Conversely, we can register physiological stress without being consciously aware of any problems with our positions. It's the ability of the mind to register threats subconsciously that provides us with useful alerts--and potential sabotages to decision-making.


Heart Rate Variability and Self Control

Getting Into "The Zone" With Biofeedback