Winning Psychology Revisited
In June last year, I wrote the article "Winning Psychology". I wrote it after reading Mark Douglas' book, "Trading In the Zone". I felt that Mark's main ideas were near the bull's eye but were not dead on. The article was an attempt to articulate and pinpoint the reasons for my feelings. In hindsight, the attempt was a good one that failed. Nevertheless, it did provide the basis for this article.
Mark's thesis in his books and workshops is:
"Successful traders have a unique mindset that allows them to remain disciplined, focussed and confident in the face of constant uncertainty. They do this because they accept risk. The main barriers to acceptance are Fear and Euphoria. These emotions motivate losing market participants to look for certainty in an inevitable uncertain environment".
In "Trading in the Zone", Mark also went on to day that it was this unique mindset and not market knowledge that was critical to success. By adopting the mindset, we would be open to the opportunities the market is offering at any given moment.
Mark's approach is a good starting point but it is only a starting point.
A healthy fear of the market is necessary. Without an awareness of what the market can do, we can ourselves serious damage; we need to learn that without the appropriate skills, the market is like a fire; it will burn us if indiscriminately stick our hands into it. Euphoria is also the emotional reward to a job well done - like elation and happiness felt by a gold medical winning Olympian.
So, the questions that resonated in my mind were:
At what point do traders/investors cross the line so that "fear and euphoria" become the enemy and not the ally?
What is the source of our fear and euphoria?
To recognize opportunities, we must have knowledge. For example, until you know the characteristics of a head and shoulders pattern you won't be able to "see" it. So, in trading, what is the relationship between emotion and reason?
I found a part of the answer in my sessions with Dr George Lianos. Dr Lianos is a practicing psychiatrist in Sydney, Australia. With his assistance, I learnt that my trading results depended on the "management of anxiety". He gave me real life experience to Mark's ideas. At this points I had two keys to the puzzle:
the blocks of success were at some point fear and euphoria and
the solution to the blocks lay in their management.
The next steps in the story were taken when I read:
(a) Magnificent Addiction by Philip Kavanaugh, M.D.
(b) The Growth of the Mind by Stanley Greenspan, M.D.
(c) Fear Itself by Rush W. Dozier, Jr.
(d) The Feeling of What Happened by Antonio Damasio
My philosophical and intellectual roots come from Ayn Rand (in my view an emotional cripple but an intellectual giant) and Aristotle. Both subscribed to the view that…
"Historically, psychologists and philosophers have tended to separate emotions and cognition….. (They) have elevated the rational side of the mind above the emotional and seen the two as separate. Intelligence… is necessary to govern and restrain the base passions."
(Greenspan pp 1 - 2)
You see this influence in many, if not, most of the investment books on the psychology of trading.
e.g.
In "What I Learnt Losing a Million Dollars", Jim Paul's underlying message is:
"Our emotions must be controlled by our reason using a written plan".
Greenspan and the others tell me that this view is scientifically incorrect".
Kavanagh shows that fear is soft wired. The moment a child's consciousness realizes that his wellbeing is dependent on a caretaker, fear for his survival immediately arises. This in turn leads to a fear of aloneness and a compulsion to control. This explains why human beings have such a great fear of change - change is associated with the danger of abandonment and/or loss of control.
Dozier shows that fear is hard wired into the human psyche. By that, I mean fear is part of our humanity - fear is nature's way of protecting us from unknown forces that threaten our safety. At some point, however, too much fear creates a flight or fight response. When that occurs, our limbic brain generates only fearful scenarios. This results in panic or paralysis.
Dozier says there are three fear systems, the primitive, rational and conscious. Each plays a different role in the creation, control and experience of fear. The primitive system serves to warn us of danger. The rational system determines causes-and-effects. It uses the result of this analysis to plan and generate scenarios for the past, present and future. The conscious directs the rational fear system as it selectively inhibits or releases the primitive fear system. If the primitive generates an emotional response beyond a certain threshold, then a flight or fight response is generated. The result is either a paralysis (a driving out of knowledge) or a fear-fight-anger response.
Here then is the source of fear, our own humanity. Fear has beneficial effects - it gives early warning of danger - provided our flight or fight response is not triggered.
Euphoria is the mirror image of fear -- the pleasure to fear's pain. We cross the line when our euphoric response becomes more than a celebration; when it becomes an internalization of success - when we experience invincibility; when it blots out the danger signals of our limbic brain.
For me, Greenspan made the most telling contribution. According to Greenspan:
".. ..the emotions are in fact the architects of a vast array of cognitive operations throughout (our) life span, Indeed, they make possible all creative thought."
Finally in a series of books, (Stephen Wolinski) states that the trauma created by a " flight or fight" response leads to a trance state. In it, we respond not to the current situation but to the original events that created the trauma. Moreover, this is an unconscious response unless we make an effort to acknowledge and become aware of it.
Let's summarise the new learning:
"Emotions are an essential factor to new learning. Fear and euphoria are emotions, which, as part of our humanity, will be present whenever we face uncertainty. They do play a beneficial role in our learning provided a "flight or fight" response is not triggered. What triggers a " flight or fight" response is peculiar to each individual. This " flight or fight" response leads to an unconscious reaction not to current events but to the original happenings. In other words we see the old events and not the current ones. Consequently, our actions may inappropriate".
This idea has an immense impact on our trading/investing. Not only is emotionless trading not possible, it is not even desirable. For, it is only through a combination of our emotions and our reasons that new distinctions are made. If we accept Greenspan's ideas, our learning without emotion is difficult if not impossible.
What we need to avoid is that level of stress that generates within us the "flight/fight/euphoric" response. Be aware of the stimulus that creates this level; then use tools to push its boundaries. In this way, the worst excesses described by Mark in "Trading in the Zone" will be avoided.
Let's be very clear on what I am saying. Like Mark, I do believe that "fear" and "euphoria" as a response to the inherent uncertainty of the markets lead long term non-profitability. However, I would add the word "inordinate":
Our inordinate "fear" and "euphoria" prevent us from achieving our investment goals.
The impact of these excessive emotions can be seen across the spectrum of traders.
The beginner who won't put on a trade until he is certain the next trade will be a winner
The trader who "knows" what the market will do and as a result refuses to exit a losing position.
The same trader who ignores market information that is contradictory to his position.
The same trader who becomes paralysed with fear - "Dear God, just let me break even! I promise I won't do it again!"
The student who refuse to send in work because he doesn't want to be told that his hours of work are "wrong"
The trader who after series of wins feels "he's made it!" ...and becomes reckless.
Etc etc……….
In the next article I shall look at a number of ways we can gain "emotional fitness".
Tuesday, May 16, 2000
Ray Barros
tradingsuccess.com |
