Tracking A Shift Across The Style Cube

The style box looks at returns as a function of two intersecting dimensions: large cap/small cap and growth/value. In my own reviews of market performance, I add a third dimension to create a style cube: international vs. U.S. returns.

A click on the chart above will provide a detailed look at a portion of the cube for 2007. We're looking at EAFE value (EFV), EAFE growth (EFG), and U.S. large caps (SPY). Recall that EAFE stands for Europe, Australia, Far East. The iShares EAFE style indexes provide a nice look at returns outside the States.

Notice that we see the same dynamic noted in my previous post: value underperforming growth over the 2007 period.

Since the market peak in July, however, we've seen a different shift than the one noted in my prior post. Here are returns from the peak through 9/14/07:

EFV: -6.97%
EFG: -5.34%
SPY: -3.98%

We're seeing international bourses underperforming the U.S. during this period, with value leading the way down. The weak dollar--which really is a strong Euro--may be responsible for some of this weakness, as goods produced abroad are less competitive (more expensive) in the U.S. market. The surging price of oil may also be taking a toll on countries that are heavy importers, especially those--like Japan--with weak currencies.

RELEVANT POST:

My Previous Look at the Style Cube

A Shift in the Style Box

If you click on the chart above, you'll see a detailed view of 2007 performance for four Vanguard style indexes: small cap growth (VBK), small cap value (VBR), large cap growth (VUG), and large cap value (VTV).

The laggard over the course of the year has been value, with small cap value actually in the red for the year.

Since July, however, we've seen a style shift. Here's how the indexes have fared since their July peak:

VBK: -6.16%
VBR: -8.84%
VUG: -3.08%
VTV: -4.68%

Clearly small caps have underperformed large caps during the recent market turmoil. One possible reason is that a weaker dollar is more likely to benefit multinational companies with a significant proportion of sales overseas. These are more likely to be found in the large cap universe.

In my next post, we'll examine returns across the style cube.

RELEVANT POSTS:

My Last Look at the Style Box

From Style Box to Style Cube

Ayn Rand, Objectivism, and Trading

A New York Times article chronicles the impact of novelist/philosopher Ayn Rand on business leaders. It's quite amazing that her 1200-page book, Atlas Shrugged, is now 50 years old but ranked in the top 500 of all books sold on Amazon.

My experience at various trading firms and with traders across settings confirms the NY Times piece: many market participants are attracted to Ms. Rand's philosophy (which she called Objectivism).

Here are a few Objectivist principles that are especially relevant for trading:

1) The Primacy of Reason - There *is* an objective world out there ("existence exists", as Ms. Rand puts it), and our survival depends upon the exercise of our reasoning mind to grasp reality and base our actions accordingly. Following Aristotle, Rand defines man as "a rational animal": reason distinguishes us from other species. There is no greater moral virtue than the independence exercise of one's reason, for that is what enables us to survive.

2) The Virtue of Self-Interest - This is probably the most misunderstood facet of Rand's philosophy, as what she calls "selfishness" is commonly thought of as hurting others in order to further oneself. Rather, Rand declares that each person has the right to live for him or herself and pursue his or own fulfillment, as long as that does not violate the rights of others. Serving others is not perceived as a moral imperative; rather, the idea is to live a heroic life in which one strives effortfully, using one's reason, to pursue worthwhile goals. Rand defines the "good" as that which furthers life.

3) The Imperative of Freedom - If individuals are to live lives guided by reason and the pursuit of life-furthering goals, they must enjoy the political and economic freedom to do so. The ideal State derives its (limited) power from the consent of individuals who possess fundamental rights; the State does not grant rights to individuals or take them away. Freedom in the political sphere is expressed through democracy, fundamental rights, and rule of law. Freedom in the economic sphere is expressed through the right to own private property and the ability to pursue one's own economic goals (capitalism).

Why do I say these basics of Objectivism are relevant for trading? I believe that the successful trader is, in essence, living out these principles: using independent reason and judgment to pursue self-chosen goals and exercising the prerogatives of economic and political freedom.

Perhaps most important from my own perspective is the way that Rand, as novelist, captures the heroic dimensions of human life and what is possible for each of us. In the characters of Howard Roark in The Fountainhead and John Galt in Atlas Shrugged, we encounter people of principle, who fight for those principles, and make a difference as a result. Her novels, I believe, are as much a spiritual compass for readers as a philosophical one: hence their enduring appeal, particularly to young people.

The best Objectivist advice I can give traders is to not be afraid to dream and dream big, but to always have the determination to act on reality, not fantasy. There is much to be said for having your eyes on the stars and your feet on the ground. If your life is a canvas or ball of clay, your mission is to fashion a work of art. Your life belongs to you: not to other people, not to a sovereign State, and not to religions and cults. Make it count.

RELEVANT POSTS:

Trading and Heroism

Blueprint for an Uncompromised Life
.

Dr. Brett Coming to New Zealand and Australia

This is a reminder that I will be presenting to the Society for Technical Analysis in New Zealand (STANZ) on Monday, October 1st in Auckland. The program will begin at 7:15 PM, and the topic will be "Using Psychology to Improve Trader Performance". I'm particularly happy to report that material from the book I'm currently writing will be included in that presentation.

From there, it will be a trip to Brisbane, Australia and the 2007 National Conference of the Australian Technical Analysts Association (ATAA). I will be delivering two presentations on Friday, October 5th: "Psychology and Trading Performance" and "Becoming Your Own Trading Coach". These sessions also will draw upon my latest material, which will be included in the new book.

I look forward to meeting colleagues in New Zealand and Australia and am currently pursuing the possibility of presenting in the U.K. What better way to get a global picture of markets and trading than to travel the globe?!

How Hot Heads Make Cool Decisions

An alert reader passed along this article regarding a study of emotions among investors. Unfortunately, the headline of the article--written, no doubt, to attract readers--indicates that "hot-headed investors make better decisions". Only by reading the article text do we find out that this is a four-week simulation (more like trading than investing) and that the actual finding is that, "those who experienced their feelings with greater intensity during decision-making achieved higher decision-making performance."

According to the article, "The conventional wisdom that emotions can make you irrational has less to do with how intense your feelings are than with how much you understand them...those investors who listened to their emotions were better able to regulate them."

In other words, the better decision-makers were not less emotional; they were better equipped to experience, acknowledge, and understand their feelings. Note how this very much fits with the theme of my post yesterday.

The takeaway, I believe, is that all of us have two information processing channels working simultaneously. We process the world explicitly, in an analytical mode, even as we process events implicitly via feeling. Our explicit, analytical channel tells us about the qualities of events and entities that we encounter; our implicit, emotional channel informs us about the self-relevance of those events and entities--whether they pose opportunity, threat, etc.

It's as if we have two antennae: One reaches out and asks, "What is this?" and the other feels around for, "What does this mean for me?"

Both provide information.

Much of our daily life is a delicate interweaving of these modes; our antennae work in concert. Thus, when we're in a conversation, we're processing the logical content of what our partner is saying, but we're also feeling its relevance for us.

When traders shut off emotion--or use action or avoidance to keep feelings out of awareness--it's as if they disable one of their antennae. The result is a loss of information. The study cited by the reader finds that awareness of emotion--utilizing the information from that feeling antenna--aids decision making.

Of course, if one becomes so submerged in the emotional state that it overwhelms the other, rational information-processing mode, the results are also disabling.

Feelings are data: the key is what we do with that information. Many times, we will know what to do if we just allow ourselves to fully acknowledge and experience what we're feeling. A trader I recently worked with was quite frightened when volatility exploded in his market. He didn't like the anxiety, but it told him that things weren't right. He used that information to cut his size and wait for his opportunities. While others at his firm lost significant money, he actually added a bit to his year's results.

The general rule is: When we violate our trading rules and good trading practice, it's often because we're avoiding an emotional experience. We're not honoring our stop loss points because we want to avoid feelings of loss, inadequacy, and failure. We're overtrading because we want to avoid feelings of boredom or confusion about what the market is doing. If we can make friends with the emotions we're avoiding, all those bad practices go out the window. They no longer serve a defensive function.

RELEVANT POSTS:

Bridging the Gap Between Hot and Cold Emotional States

Why Traders Self-Sabotage

Psychological Risk Management
.

A Review of Challenges Facing the Markets

* No Relief for Housing - The market is anticipating a Fed rate cut, but housing stocks are not anticipating relief. The housing index, shown above in a weekly chart, is barely hovering above bear market lows, down nearly 50% from its bull peak.

* Also Hovering Near Its Lows - Is Citigroup stock (C). We've seen a little bounce in banking stocks this week, but C has barely participated. The stock is only about 1% off multi-year lows. Credit exposure remains a concern.

* Bailing Out the Homeowner - Bill Gross of PIMCO offers his prescription for the housing mess.

* Dollar Fakeout? - Trader's Narrative finds an analogy to the 1992 market and its reversal.

* Coming Clean - Jon Markman makes the case for banks to tell us what they know about the magnitude of credit problems.

* At the Abyss - Mish finds problems across the country in commercial real estate.

* Do Oil Price Hikes Affect Stocks? - CXO Advisory blog examines the surprising evidence on this and other relationships between the economy and the stock market.

Using Emotion to Change Emotion

In my recent post, I suggested that many of us avoid emotional upset by substituting action for feeling. This is a pattern that lies at the heart of many impulsive trading decisions, including many lapses in trader discipline.

Let's take a common example: a trader is working a bid a bit below the market and suddenly a ferocious sell program takes the market five ticks lower. The trader's order is filled and, in an instant, the market is several ticks against him. He reacts first with shock, then with anger at people who "manipulate the market". In a flash, he buys more contracts, even though this sizes his position much larger than his plan allows. It's a classic revenge trade: he's going to get even. The market moves a few ticks lower, and he is forced out at the worst possible price with a much larger loss than his initial trade planned for. In remorse, he makes a note in his journal that he needs to be more disciplined in his trades.

As long as the trader views "discipline" as his problem, he is sunk psychologically. He sets up a condition in which he is split: part of him is impelled to do something under particular conditions, another part attempts to exercise control by dictating what *should* be done. This is how anorexic and bulimic patients fight with food intake; how addicts fight with drug abuse; how many of us fight with sticking to diets and exercise regimens.
We cannot substitute thought for emotion: shoulds cannot overcome emotional impulses.

The key to moving past an emotional reaction is to experience it fully and then substitute a different emotional experience. Psychologists such as Leslie Greenberg and Robert Elliott have developed emotion-focused techniques to accomplish just that. The basic principles and techniques are straightforward, well-supported by research, and described in detail in a growing professional literature.

What is happening with the trader in the example above is that he first experiences hurt and disappointment. He might also experience a fleeting sense of failure and loss. These are too painful to feel, so he has learned to respond to hurt with anger. He transforms sad to mad and then acts on the angry feeling. What appears to be the problem--loss of discipline--is his way of coping with the *real* problem, which is vulnerability.

Suppose, however, I ask our trader to go more deeply into the experience of having his order taken against him. As he talks, I notice an unhappy look on his face and a slight slumping of his shoulders. I point that out and ask him to give voice to what he's feeling. He talks about how it seems as though nothing is working in his trading, how he and his wife just bought a new house, and how they're concerned about making the payments.

When I ask what that's like, feeling as though he can't support his family, he acknowledges, "I feel like such a loser". Then, however, he speaks with a different voice: "But I know I can trade. If I would just stop trying to catch exact tops and bottoms with these orders, I can ride moves once they happen."

"So when you're working orders in the book...", I begin.

"I'm being an idiot," our trader interrupts. "I know I shouldn't be working orders that close to the market. It's too thin."

"But you're trying to catch a top or bottom to feel good and help your family," I offer.

"Yeah," he acknowledges. "But I'm f*****g it up."

"So it all starts with you feeling concerned about your family. You have to get something going in the market to make some money, so you throw an order in the book to catch a turning point," I suggest. He nods.

"Could you pretend your wife is in the room right here, right now and talk to her about that concern and what you want to do about it in the market?"

We set up an exercise where our trader talks aloud his concern for his family finances. He has no problem telling his wife that he needs to be patient and trade well in order to regain his success. By the end of the exercise, there's no hint of the angry revenge trader. In its place is the direct experience of facing his worst fear--his feelings of inadequacy--and emerging with a different emotional experience: empathy for his wife (and for himself).

Greenberg notes:

"People can recognize that a feeling is not helpful to them once it has been accepted fully. The paradox is that, if the feeling is judged as not acceptable--as "not me"--it cannot be changed, because it hasn't been accepted. Only when a feeling has been accepted can it be evaluated and changed if necessary" (Emotion-Focused Therapy, p. 93).

Doing can be a way of avoiding feeling, and that keeps people stuck in problem patterns. Ironically, the solution is to deepen the feeling that is being avoided. At the other end is a very different--and usually quite constructive--emotional experience.

RELEVANT POSTS:

Brief Therapy Techniques for Traders

What Works in Trader Coaching
.

Support, Resistance, and Market Views for Mid-Week

* Support Becomes Resistance: As the daily chart of the ES futures notes, the 1500 level, which had been market support is now serving as resistance. With an important Fed meeting looming, the big market question is whether an interest rate cut would be sufficient to vault us above this level. It seems to me that a cut is baked into market expectations, perhaps leaving us more open to disappointment than surprise and euphoria. Note how equity prices have changed very little since early August despite significant volatility.

* Joining the Gold Rush: The Raw Greed blog outlines the precious metals stocks that they are following closely as gold rallies.

* Recession in the Works?: The Kirk Report links several worthwhile perspectives on possible economic weakness ahead.

* 20/20 Hindsight: Excellent post from A Dash of Insight on outcome bias and its effect on traders and investors.

* Promising ETFs: Tom Lydon and Seeking Alpha note opportunities in water and high yields.

* Who We Need for the Current Crisis: Financial Ninja makes the case for a Paul Volker in today's markets and examines the evidence.

* Interpreting Spikes in Options Volume: Lots of call volume might not mean what you'd think. Here's an excellent perspective from Daily Options Report.

* Congratulations on 1001! - Abnormal Returns does such a fine job of finding relevant and worthwhile posts on markets and the economy, including their 1001st post, which includes a look at how much recession is already priced into markets.

* Know Your Symbols? - InvestorGuide offers its Ticker Game as a challenge to traders.

When Traders Prefer Action to Emotion

Think of how many trading problems take the form, "I know I should do X, but I wind up doing Y instead."

For example:

"I know I should trade small, but I end up putting on large positions."

"I know I should get out of the trade, but I wind up riding the loser all the way down."

"I know I should wait for a setup confirmation, but I front run my signals."

In each case, the trader tends to focus on Y--what they did wrong--as the problem. They approach me, their trading psychologist, in the vein of, "How can I stop doing Y?"

So often, the behavior pattern they tell themselves they should be engaging in is one of restraint: keeping trades small, honoring stop levels, waiting for signals, etc. The behavior they want to stop is one of impulse: acting without fully thinking through the consequences.

But what if the impulsive act is not the problem, but a way of coping with a more fundamental problem: the fear of what might happen under conditions of restraint? Instead of openly acknowledging and dealing with that fear, action becomes a defense--a way of making the fear (temporarily) go away.

If so, simply trying to motivate oneself to do less of the impulsive behavior--or even reinforcing the proper, restrained behavior--is not enough. When traders take action to avoid unpleasant emotional experience, the answer is to learn how to transform those emotions.

In an upcoming post, I will be posting on a set of techniques from the therapy literature that accomplish just such a transformation. Not by replacing emotion with reason, but by learning how to replace emotion with other emotions.

The key to these emotion-focused methods is to figure out what it is that the trader is running from: what emotional experience is so scary that it is preferable to act on impulse, with all the consequences that entails?

Asking that question opens us up to novel and highly promising modes of self-change.

RELEVANT POSTS:

Mood, Emotion, and Trading

One of Trading's Greatest Emotional Pitfalls

Making Sound Financial Decisions Under Conditions of Fear

I recently received a call from a Wall St Journal reporter asking good questions regarding the role of fear in trading and investment decisions. This topic is particularly relevant, given recent market volatility.

As this excellent summary indicates, a wealth of research finds that people make suboptimal decisions under conditions of high emotional arousal. Different regions of the brain are responsible for decision-making under high vs. low risk conditions. Excessive activity in these centers for processing emotions leads to either excessive risk-taking or excessive risk aversion.

Similarly, distortion of information due to how decisions are framed is mediated by activity in the amgydala, which is implicated in our processing of emotional stresses.

Quite simply, our brains function differently under conditions of fear (and greed!) than under cooler emotional conditions. As a result, we can make decisions with our money that later (in our more calm modes) seem puzzling to us.

How can we minimize such distortions in our decision-making? One simple way is to clearly articulate the rationale behind each of our investment or trading decisions. Specifically, we want to map out:

1) Why we are making this decision; what we expect to happen; why we think that current prices are away from true value;

2) What would lead us to take profits; what would be fair value that would lead us to exit the position;

3) What would lead us to exit the position if it goes against us; what would tell us that we are wrong in our initial assumptions.

In many performance fields, such as Special Forces military training, people are taught to follow decision-making routines under highly stressful conditions. By making these routines explicit and repeating them to the point of internalization, we make it easier to access them even when the blood flows in our brain are activating our flight or fight responses.

Reducing trading and investment decisions to a few criteria and then mentally rehearsing those--keeping them explicit--is a great way to stay grounded during periods of uncertainty and volatility. The goal is to make the same decisions under conditions of pressure that you would make in calm conditions. Mentally rehearsing various pressured ("what if") scenarios and walking yourself through the steps you'd take in each situation is excellent preparation for real-time risk.

RELEVANT POSTS:

Handling Volatile Markets: Lessons From Neuroeconomics

Inside the Trader's Brain
.

The Effect of Dollar Weakness on Stock Market Performance

The pink line in the chart above (click for greater detail) shows the cash S&P 500 Index from 2000 to the present. The blue line is also the cash S&P 500 Index, but adjusted for the value of the U.S. Dollar Index. The dollar has been weakening as stocks have risen. As a result, the bull market in large caps since 2003 has been far more anemic in world currency terms than in dollar terms. With growing calls for interest rate cuts, that doesn't bode well for the dollar, and that invites questions about who would want to own dollar-denominated assets when the dollar is shrinking.

The Flight to Quality Accelerates

If you click on the chart, you'll see the breathtaking decline in 10-year yields in the past several months. That decline has accelerated in the past two days, on the heels of the weak jobs report.

As investors flee to the quality of Treasuries, yields fall. But the same fear that fuels the desire for bills and bonds also pressures stock prices. The weakness in yields has thus provided a great sentiment indicator for trading those market ranges.

UsingTrading Range Information to Frame Trades

If you click on the chart above, you'll see a portion of my premarket preparation for trading. My goal with this perspective is to identify and understand relevant trading ranges that are likely to affect the coming day's trade.

Note that, after Friday's weak jobs report came out, we made an initial decline just below the 1465 level in the ES futures. This is what I view as the market's efficient response to the data: it is the market's estimate of how equity prices should be revalued in light of the new information.

After an initial, weak attempt to move higher than this 1465 level, we moved lower still, all the way down to below 1455. This I view as the market's emotional response to the data; it represents the "giving up" of the bulls once it becomes clear that the market will not reverse its initial decline.

For fundamental reasons we cannot sustain a move above 1465; the market no longer views such pricing as value. As long as that's the case, I view us as being in a short-term downtrend. The market is repricing value lower over time.

But for sentiment reasons--inability to find sellers to sustain a move below 1455--we've essentially moved nowhere since midday Friday.

That is the relevant trading range that I work with. Some of the best day trades occur at the edges of those ranges, as we either fail to sustain moves out of the range (and return to at least the range midpoint) or we see that moves out of the range attract additional volume and encourage a repricing of value (trending move).

It's when the moves to or slightly beyond the range extremes fail to attract volume and are not accompanied by meaningful repricings in other, related markets (dollar, rates, equity sector indices) that I am most likely to fade these moves. Conversely, large moves in rates and the dollar are most likely to encourage repricing of value among stocks.

By focusing on longer-term ranges and trends in rates and currencies and then following short-term volume flows (such as Market Delta), sector movements, and sentiment (NYSE TICK), I'm handicapping the odds of moving out of or back into these ranges. One or two such trades per day can catch worthwhile swings in a market with decent volatility. Much of the rest of the market's movement I treat as noise. By requiring myself to frame trades in this manner, I gain clarity about what would make the trades wrong (stop levels) and where to place targets to take profits. I also avoid those impulsive trades based on market noise.

RELEVANT POSTS:

How to Identify and Trade Breakout Moves

The Importance of the Overnight Range

Anatomy of a Market Breakout
*

Finding Your Calling and More Ideas to Start the Week

* The Importance of Dreams - Here's an interesting post from Fast Company's site, relevant to the topic of finding one's calling. Here's a unique exercise for finding one's interests.

* Assessing Trader Sentiment - Thanks for Barry Ritholtz for pointing out Yahoo!'s effort to quantify investor/trader sentiment via board postings. See also Barry's weekend linkfest, including a worthwhile post on whether China is dumping U.S. bonds.

* Economic Perspectives - Are among the Sunday links offered by Abnormal Returns, including a consideration of solvency vs. liquidity crises.

* Rise in NASDAQ Volatility - Adam Warner tracks VXN and finds it outperforming VIX. See also this volatility index comparison from VIX And More.

* Picking Winners - Winners in the Kirk Report's stock picking contest will be sharing their methods with members.

* Weak Dollar Makes for Strong Commodities - Here's an eye-opening rundown from Larry Nusbaum and a look at gold strength from Musings of a Trader.

* Near-Term Risk-Reward Ratio - Doesn't look favorable for Henry Carstens' systems.

* Where to Find Worthwhile Blogs? - Check out Value Blog Review for reviews of financial blogs. Some great nuggets there.

* Housing Market Woes - Are not evenly distributed. Here's an interesting perspective from Goldman Sachs passed along by The Kingsland Report.

* What LIBOR is Telling Us - WSJ Online blog reviews the significance of rates that are out of whack.

Self-Coaching: Lessons From Basketball

Yesterday I hit the basketball court for the first time in years. I used to be quite the gym rat, but long ago replaced hoops with more practical exercise: jogging, weight-lifting, etc.

I was surprised how quickly my shot came back to me. Very shortly after coming onto the court, I was launching and hitting jumpers from beyond the three-point range. My legs had lost some spring, and my stamina was reduced. I wasn't yet ready for prime time.

Most surprising to me, however, was how the self-coaching kicked in. After years of being in a team environment, that coach's voice had become more a part of me than I realized.

My first free throws were off the mark: I was only hitting 50-60% of them--and that's *really* bad for me.

So, as if I had never missed a beat from college, I shot free throws. One after another. Again and again.

Each time, I made subtle adjustments. In my head, I talked with the coach's voice: square your body and distribute your weight, extend the follow-through, keep your eye on the front of the rim as you shoot.

When I'm at the foul line, every shot follows a routine: I center my body in front of the rim, with my feet just behind the line; I bounce the ball three times, look up at the rim and take a very deep breath; I bounce the ball one more time and place my hand on the ball with the middle finger touching the same part of the ball (part of the ball's labeling) each time; I fix my eyes on the rim, launch the shot, and follow through.

Bounce, bounce, bounce. Deep breath, look at rim. Bounce. Center the hand on the ball. Eyes on the rim. Follow through.

Every shot the same.

But it's the subtle factors that take a shooter from 50% accuracy to 80%. As I stood out there in the heat, I quietly coached myself in those subtleties. In the end, it turned out I had two problems:

1) My fingers were not sufficiently widely spaced on the ball. With my fingers close together, I was getting a bit less arc on the shot and putting a little too much launch into the shot. With the fingers spread just a little more widely, the ball hit nothing but net.

2) I needed to take just a little more time--just an extra moment--in that initial look at the rim after the deep breath. By slowing myself down and fixing my eyes more carefully on the rim, I made the rest of the shot more automatic.

Little differences, repeated and made routine, yield major results. But they have to be the *right* differences.

On the court next to mine, a group of teens was playing a three-on-three game. It was almost more like three one-on-one matches going on simultaneously. Each player first looked to shoot the ball, only later to pass. Many opportunities to drive the lane, draw defenders, and dish off to open teammates were lost. They couldn't really see the whole court or the high percentage plays. They wanted to shoot the ball, not play basketball.

Every so often they looked my way. They probably wondered what in the world I was doing at the foul line all that time, bouncing and shooting.

I had to keep missing my shots--in practice, not in a game--to get things right. The focus had to be on the process of shooting, not making points.

I left the court thinking how very much like the trading world it all was.

RELEVANT POSTS:

Becoming an Agent of Continuous Learning

What Works--and Doesn't--in Coaching Traders
.

When the Trading Dream Dies

This post, like the one previous, was inspired by a reader comment. Responding to my column on creating change through powerful emotional experiences, the reader indicated that his dreams of trading riches had died and that he had to "just be happy with the person I am". He then referred to this perspective as "depressive".

I have so many responses to this comment that it's hard for me to know where to begin.

So let me start by saying that I have felt much the same feeling. There's a part of me that would love to be a super-successful trader, even as I know deep within myself that this is neither where my greatest talents nor passions lie. In recent years, I've been what I consider to be a competent trader--I've made money after costs--but I haven't traded the size or achieved the returns that would assure me (and my family) of the lifestyle we now enjoy.

It must be how many decent college basketball and football players feel. They've excelled in high school and made it to their university teams, but they never quite make it to the pros. They're good--but they're not among the elite. Those dreams of success in the "big leagues" can be difficult to put aside.

Some of those competent college players--Bob Knight, Dean Smith, and Jim Boeheim in the basketball ranks come to mind--end up becoming superlative at coaching. Others find their success in another life arena, apart from sports. They've made the transition from mourning the loss of a dream to crafting a new one. Most important, they've brought something from their first, sports endeavors (discipline, competitive drive, self-development) to their new pursuits.

So, hopefully, it can be with trading. For me, trading has been life-in-miniature: a crucible in which I've learned to deal with risk, reward, uncertainty, fear, greed, overconfidence--just about all the emotions that affect what we do and how we do it. I'm a better psychologist for having had trading experiences, and I'm certainly better equipped to understand the challenges specific to traders.

When the trading dream dies, it is a loss and that can feel depressing. The challenge is to figure out how that trading experience is going to equip you for the next dream, the next pursuit that may be better suited to you and your talents and interests.

Now a separate response, apart from the reader's comment:

My experience, particularly with young traders, is that trading often doesn't express a dream. A dream is what motivates an entrepreneur: someone who founds their own business, develops their own products, and spends long hours refining those, marketing them, and finding financing for growth. For many young traders, however, trading is a fantasy. It is not connected to a concrete business plan, and it certainly is not accompanied by long hours of dedicated effort. What makes it a fantasy is that it is an effort to achieve success without such effort.

When that fantasy dies, it opens the door to reality. That is sobering, to be sure. But it is also the first step in finding oneself: discovering a career and calling that are so meaningful and stimulating that the real work necessary for success won't feel like work at all.

RELEVANT POSTS:

Four Overlooked Qualities of Successful Traders

Resilience and the Courage of Your Convictions
.

Finding Solutions to Trading Problems

My readers have outdone me! I like my post on creating powerful emotional experiences, but the reader comments to that post are even better. Please read the comment by Glen Bowman, Ph.D.; it is unusually insightful.

There are several lessons to be learned from his experience:

1) Psychological change does not come all at once - His valuable point is that change occurs a little bit at a time, day after day, as we create new experiences for ourselves. Over time, we internalize the feedback from those new experiences and they become parts of our identity. Making one big effort is not nearly as powerful as making focused, consistent efforts over time. In that sense, psychological development is like physical development: you have to work out with regularity to see lasting results.

2) The solutions to trading problems are within you - If you have a trading problem, a powerful way to address it is to figure out how you've dealt with a similar problem in a different area of your life. If, for example, you're in a trading slump and doubting yourself, it's worthwhile figuring out how you've gotten past dips in self-confidence at other times in your life (at work, in relationships, etc.). Whatever you've done to aid your confidence and trust in yourself at those times may well hold the key to what will work for you in the trading situation. Dr. Bowman drew upon his experience with social anxiety to address trading anxiety. Brilliant.

3) When implementing new solutions, start small - Dr. Bowman uses the example of trading 100 SPY rather than 50 ES contracts. That is exactly the right approach. Why? It removes the pressure of profit/loss from the trading and allows you to simply focus on making changes to your trading processes. Once you get the processes down with consistency, then you gradually raise your trading size. But you have to earn the right to trade 500 SPY if you've been trading 100 and 200; you have to earn the right to trade multiple ES contracts if you've been trading a single one. So often, the difference between success and failure among developing traders is that the successful traders make just as many mistakes as the unsuccessful ones; they just make them smaller and thus survive their learning curves.

My thanks to Dr. Bowman and the many readers who take the time to comment on the blog posts. I hope readers take advantage of these fine insights.

RELEVANT POSTS:

A Solution-Focused Linkfest

Solution-Focused Trading
.

More Good Reading to Start the Weekend

* When Trading Gets Out of Control - Too many traders rationalize addictive patterns of trading as a "passion" for markets. Well, I guess that's what an addiction is: having a passion for something that brings numerous unwanted consequences. It's nice when traders face the problem squarely and get their lives back. See this very insightful post from the CXO Advisory Blog re: how the internet has changed the emotional experience of trading.

* Cognitive Neuroscience Interviews - The SharpBrains blog offers a set of 11 interesting interviews on different facets of brain function and performance. I'm pleased to see that cognitive therapy pioneer Judy Beck will be next on the interview list. I'll be appearing with her at the Annual Meeting of the American Psychiatric Association in May. I recommend her work highly.

* How Do Americans Rate Various Industries? - Here are some insights from the Gallup organization. See also how Americans feel about public education and especially how they feel about the economy.

* Disaster - That's how Mish describes the recent jobs report. See also his insightful post on gold as a holding during times of inflation and deflation.

The Heart of Trader Coaching: Creating Powerful Emotional Experiences

In my post yesterday, I described the case of Pete and the idea that what we consider to be our problems are often coping efforts that once might have been successful, but now no longer fit our situations. Pete prided himself on being a master analyst of the markets, but in fact was dogged by feelings of inadequacy whenever he couldn't figure out market moves. He looked toward success in trading as a way of vindicating himself for prior failures, particularly in college. The feelings of inadequacy were thus quite threatening to him. He avoided them by backing away from working at his analysis and planning during difficult market times, later blaming his "loss of discipline" as the reason for his drawdowns. In reality, his lack of discipline was his coping: instead of trying and failing--his worst nightmare--he simply went on psychological strike and stopped trying.

When I was in therapy myself as a graduate student at the University of Kansas, the most impactful comment my therapist made was that I should "pursue my anxiety". She explained that everyone is afraid of the unknown. But we can only grow and develop as people by going beyond the known. Our anxiety often points the way toward our greatest growth.

In my case, I had a recurring dream of going down a very large and fast slide. It was very anxiety-provoking: I was afraid of losing control and falling. (Other dreams similarly featured a fear of heights). In guided imagery work during the therapy, I had to place myself on the giant slide and release myself downward. An important therapeutic moment occurred when I transformed the rapid fall down the slide into an image of flying (another recurring, but positive dream). In many aspects of life, I was afraid of falling; by facing that fear directly, I could replace it with the joy of soaring.

The important principle is that we overcome fears by experiencing them directly and finding a new, more positive emotional experience.

Pete was hoping to change his behavior with simple advice or positive thinking. In essence, he was hoping that he could bolster his own (maladaptive) coping so that he could preserve his image of himself. What we had to do to create real change, however, was to actually face times of great market uncertainty and use those to double his efforts at analysis and planning. This was the slide he needed to go down.

Of course, this was greatly anxiety-provoking for Pete, and it triggered many thoughts and feelings such as, "What if I'm wrong?" My stance was, "Of course you'll be wrong at times! What trader isn't? The good traders aren't the ones who are always right. The good ones are the ones who survive the periods of being wrong. If you're wrong, let's see if we can learn from it, so that we can become better."

By requiring Pete to make small trades based on his analysis during a period in which he felt uncertain, I created a win-win for him. If his analysis was correct, it would reinforce the notion that he did, indeed, have skills. If his analysis was faulty, it would provide us with the even more helpful experience that he could survive "failure", learn from it, and use it to improve in those areas where he was not yet expert.

The real heart of the work with Pete was seeing him through this facing of his worst fears, helping him rework the anxiety into opportunity. He needed to learn to face his inadequacies without being swamped with the feeling of being inadequate.

All of us are deeper and far more complex than we realize. It's human nature to seek the easy path, the short cut. We look for solutions to our problems that keep us comfortable, that keep us coping in the same ways that haven't been working. What I learned from my own experience in Kansas was that, if you haven't had a powerful emotional experience, you haven't changed.

In facing our demons, we become their master.

RELEVANT POSTS:

Controlling Emotions Is Not The Goal of Trading Psychology

Five Principles of Growth and Development

Techniques for Dealing With Emotional Disruptions of Trading
.

Self-Help Resources and Other Reading for a Thursday

* Figuring Yourself Out - I received a few emails following my post on problems as coping efforts. For those interested in further resources, here's a link to a series of articles on the topic and here's a link to a related article series.

* Keeping It Real - With the exception of selected posts reprinted on the Seeking Alpha site, I have not authorized any other website to be reprinting posts from this blog. If you're reading this on a site other than TraderFeed, I invite you to visit the TraderFeed blog and make use of the Twitter comments on the site as well. The lack of integrity of someone who would post other people's work as their own (or as a tool to further their own traffic) just astounds me.

* Keeping a Trading Journal - StockTickr has been adding features to their electronic journal, including impressive performance reports. Excellent resource.

* What Will the Fed Do? - The market is already pricing in its answer, according to this Seeking Alpha post.

* How Would a Rate Cut Affect Markets? - The market may be anticipating inflation already, Charles Kirk notes, with a rundown on recent strength in gold and gold stocks. See also Kirk's recent links, including a look at what happens after multiple days of 9:1 up:down volume.

* What's the *Real* Unemployment Rate? - The Big Picture offers an eye-opening estimate of real-world unemployment.

* Stock Screening Ideas - Chris Perruna offers some of what's on his radar and also posts his CANSLIM screening candidates.

* More Stock Picks - Here's what the MSN StockScouter is identifying as worthy of consideration. Here's a portfolio of stocks owned by Warren Buffett that have implemented stock buyback programs, as reported by the excellent StockPickr site.