"The Daily Trading Coach" by Brett Steenbarger and reviewed by Richard Friesen

I am giving this book to all of my clients

“The Daily Trading Coach” by Brett N. Steenbarger is the best step-by-step guide for traders who want to make steady improvements to their trading game I have read.

The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist (Wiley Trading)


I do have one complaint about the book however. Normally, when I read such a book I will mark everything I read that is of value with notes in the margin and then bookmark them with a sticky note. Then, after I finish the book, I will do a quick review of the parts that are relevant to me and create a “to do” list for action items.

This book has over 150 sticky notes and almost every page has a handwritten note in the margins that stimulated or confirmed my thinking. There is so much of value here that I will have to re-read almost the entire book to review the valuable lessons! Because this book is so practical, I am afraid I can’t summarize it and do it justice.

Seriously, Dr. Steenbarger covers every aspect of the transformational process that traders will need to deal with. Reading the book is like walking on a field of diamonds and hearing them crunch under your boots. The issues that my clients are working on are all addressed clearly along with suggested solutions.

Our mutual experience in trading and trading trainers has forged a common psychological foundation that my clients will recognize as they read this book. My process of building new satisfying behaviors (I call Mind Muscles™) sync right up with his self-coaching guide.

If you are a trader who wants to become more consistently profitable by improving your own mental abilities with self-coaching, there is no better resource. If you want to accelerate your process with professional coaching, I will send you a copy of this book for free.

Richard Friesen
[email protected]
415.259.0652

NOBODY EXPECTS THE SPANISH INQUISITION!!!

My home page is the Yahoo! Finance page. There are two reasons I chose it: 1) If I want to check a stock price, or market action, I can do so with just one click; 2) The pre-market headlines crack me up.

Go ahead, check them out yourself one day. You will find that they are generally rendered moot/outdated/incorrect within the first hour of trading.

Look, I'm trained as a psychologist. I look at things differently. It probably makes me a "bit of an odd duck", to borrow a phrase from my father. (It's true. Ask any of my remaining friends.)

But you don't need to be the quirky type to see why this (lead) sentence from the pre-market headline article is just silly.

"The number of newly laid off workers filing claims for unemployment benefits unexpectedly rose last week as the recovery of the nation's battered labor market proceeds in fits and starts."

What's wrong with this sentence? Well for starters it notes that unemployment claims rose "unexpectedly" last week. Later on in the same sentence, it notes that the labor market "proceeds in fits and starts."

First of all, all economic forecasting is incredibly complex. Why a rise of 1% rather than a decline of 1% for one lousy week's worth of data rates as a "surprise" is beyond me. It's like standing in a rain shower and saying you got hit by a particularly unexpected raindrop. (Really? Didn't see that one coming??)

But the second clause of the sentence says the market proceeds in "fits and starts". Yes, it does. Truly. It is a point that is universally acknowledged. So how can you be suprised by a slight decrease while simultaneously noting the market proceeds in a herky jerky fashion?

For crying out loud, pick a side and stick with it!

Behavioral finance research has taught us how rarely data conform to our pre-supposed parameters. We know a coin will come up heads 50% of the time. Yet somehow we find ourselves wanting results to alternate heads/tails when we flip it. We see a run of 3 or more heads in a row, our pattern-seeking brains screams, "anomaly!"

It's not an anomaly. It is the essence of randomness.

Back to the article; if you read it in its entirety, you will see just how complex the jobs data are. You will find yourself wondering if the first paragraph still makes sense by the end of it.

The skinny: When it comes to a week's worth of economic data, market movements... the weather, don't "expect" anything.

It is sillyness that calls to mind this famous bit of sillyness .

I'm going to have my coffee now.

(Entirely too much sillyness.)

-Frank Murtha

The Golden Thread Across the Canyon

You know what you need to do to execute your trading strategy, but somehow circumstances seem to dictate different responses in the moment. With hindsight you know that had you been more "disciplined" you would have been more profitable.

Why is it so hard to be "disciplined?" Why are New Year's resolutions hardly every kept? Why does it feel like you are acting from a different brain when trading than when researching? Why does learning a new more satisfying behavior feel so hard to do?

The brain has an incredible ability to automate our repetitive behaviors so we can focus on more critical or creative activities. These repeated behaviors "emerge as a result of experience-dependent plasticity in basal ganglia-based circuits that can influence not only overt behaviors but also cognitive activity." * What this means is that repeated behaviors, thoughts, stories and activities create neural pathways and complex network connections that can become a working unit. The entire complex of neural activity can be fired by a single trigger.

Often, these complex neural patterns are copies of earlier patterns that eventually connect to our more primal needs. Even if our current response is dysfunctional, we still repeat it time after time.

But now we want to build a new trading behavior. As we do this in real time if feels so very "hard." It feels like swimming in molasses. Why is this? Because the old patterns are so well developed, so easily connected to multiple neural circuits and complexes that executing the old behaviors feels both easy and good at the same time.

Creating new behaviors means that you are building new neural circuits where none have been before. Imagine driving down an interstate highway with its overpasses, bridges, fuel stops and connecting highways. Now imagine a broad canyon with jungle, boulders and sheer cliffs. Your job is to build a new foot path to a new destination on the other side. To make it even worse, as you hack your way through the jungle, you don't know where you will end up or if there is anything of value on the other side. It is tough to be motivated to keep hacking, when you can hear the cars on the freeway zipping right along the eight lane bridge above you to their familiar destination, even if it isn't where you want to go.

Building new trading behaviors (we call them Mind Muscles™) when you have never experienced the satisfaction of the results of that new behavior is like hacking your way through the jungle. It is a big job that requires a lot of determination. That is why we recommend a different process of creating new positive rewarding and more functional trading behaviors.

This process can be visualized by imagining the broad canyon. Your destination connects to a different point on the other side than the bridge. What if, rather than hacking your way through the jungle and building a new foot path, you could have an experience of zipping to the other side, even if just for a millisecond. It's like you can taste the satisfaction of experiencing the results of the new thinking pattern or behavior? Think of this a thread across the canyon. With the thread, you can pull a cord across. With the cord you can pull a rope. With a rope you can pull a cable and eventually build a bridge.

It is the same way your brain works. As we parse out the behaviors we need to in order to trade successfully, we can then create a simulation, visualization, or experience that is rewarding for each of these parts. We have created the thread across the canyon without hacking through the jungle. Now, having that experience once, we can expand it. If we can do it for a millisecond, we can expand that experience to a second...a minute...an hour and then for all of our lives

The hard part is getting the thread across the canyon in the first place. That is why a guide who can create a scenario that allows you to experience that positive new behavior for a moment can be very helpful. When we work with active traders building new Mind Muscles™, we play out scenes that allow new behaviors to be fully appreciated and savored, even if for just a moment. This gives the client the golden thread they need to build that bridge across the canyon.

* Annual Review of Neuroscience Vol 31

[See other articles from the MarketPsych blog]

Richard Friesen
[email protected]
415.488.6505

Emotional Trading Alarms

How do you know you have downshifted to your limbic brain?

Everyone knows that emotional decisions can create havoc with trading profits. We understand this when we are calm and working from our neo-cortex (our rational brain). The problem is, as the emotions increase we go to our flight/fight response, receive a cocktail of hormones (adrenal dump) and we downshift from our neo-cortex to our emotional limbic brain. Our problem is that we don’t have a way to measure this change because our neo-cortex has been hijacked by our limbic brain and we lose calibration.

Until now?

Phillips and ABN AMBRO are testing a concept device. The implications are staggering. The major political disasters have been caused by emotional reaction coupled with unbounded power. What if we couldn’t drive, vote, legislate or trade while under extreme stress?

Until this device arrives, you can still manage your own emotional state by building a new Mind Muscle™. This exercise could change your life.

By managing breathing, you can change your physiology during times of extreme stress. How you breathe paces the rest of your physiological response. Change your breathing and you change your physiological pattern. If truly mastered, you will be able to lower your blood pressure and counter most of the negative arousal effects and stress levels from the adrenal dump during a downshift to fight/flight.

Practice can be done on your own and works more effectively as it becomes automated. Ideally this exercise I call Upshift Breathing is most effective when practiced under actual stress. To begin, practice the mechanics of this breathing exercise through several cycles by yourself. Pace yourself so that each part takes the same amount of time as you slowly count to four during each part.

1. First inhale through your nose slowly to the count of four.
2. Hold your breath to the count of four.
3. Exhale through your mouth slowly to the count of four.
4. Let your lungs relax and stay empty to the count of four.

Start the cycle again.

Additionally, this visualization may help. When you inhale through your nose, do so with steady deliberation and imagine that you are drawing in the room around you. On the next inhale, take in your trading desk. On the next breath breathe in your computer screen, then the markets, then the whole economy. Hold the economy effortlessly in your lungs for the four second count. Then with a complete and relaxed exhale, experience the joy of returning the markets to their former state.

Once you have the mechanics down, take a private moment, become comfortable, and create an imaginary threatening situation. This situation can range anywhere from mildly stressful, such as an argument with a spouse, to a truly terrorizing fear you have carried for years. We recommend that you start with a visualization of an event that is mildly stressful and work your way up to your core fears.

Set an alarm for five minutes (you can adjust the time with experience) and start the fantasy. Imagine the peace you feel before you see signs of danger or stress. See, smell and hear the argument, stressful situation or danger. Visualize it in all its details with all of your senses as if it were a surround sound, 3D movie playing in your mind. Notice the effects on your body as the experience intensifies. Allow yourself to feel the full impact of the stress, anger or danger. Allow your body or voice to respond out loud.

When the five minute alarm goes off, notice what is going on in your body. Notice everything you can. Inventory your entire body: breathing rate, vision, hearing, muscle tension, stomach etc.

Now, start Upshift Breathing. Breathe slowly. Focus on your body. Notice the changes as you slow you breathing. Practice this breathing several times until you feel you have the cycle of fear and relaxation automated.

Then the next time you are staring at disbelief at your trading screen as you are stopped out of you sixth trade in a row, your boss yells at you or your spouse makes an accusation, start your Upshift Breathing cycle. Pay attention to your body at the start of the Upshift Breathing cycle. Then notice your state as you cycle through the breathing exercise. This real-time awareness is an important part of the experience. As this breathing becomes part of your life, it will happen automatically in the very real high stress trading situations where you really need it. Law enforcement officers who use this technique report that it has become automated when they feel threatened, helping them asses danger and save lives.

If you can automate this breathing response during trading, it will eliminate the majority of emotional trading mistakes. The challenge is that most of us have a resistance to deep breathing because we have contracted our bodies to protect ourselves over the course of a day, week, year and lifetime. Slow breathing not only takes you out of the fight/flight downshift to your limbic brain, but has the potential to open other life pains. So, be gentle with yourself. Notice if you intend to do this exercise but don’t. Your resistance is there to protect yourself, even if that protection is no longer necessary.

To learn more about building Mind Muscles™ and a free consultation please call.

Richard Friesen (415) 259-0652 [email protected]

Turning Your Uniqueness into Market Edge and a Trading Strategy

We are all wired differently. We all bring different skills to trading. We all have distinct dispositions. We also have our own unique mental baggage that we deal with day in and day out.

This is good news.

Because you are unique, you can build a trading process that works for you. The ultimate goal is to accept who you are, know your skills and limitations and find a way to turn you internal trading machine into a statistical trading “edge.” Once you know your own “edge,” you can then create a trading strategy that emphasizes your edge and ameliorates your mental baggage.

Some traders need control. Others love excitement. Some traders want a clear system to execute. Others feel imprisoned by mechanical systems. We all have trading weakness that can be triggered in certain market conditions with certain positions.

A system that is built on who you are, your trading needs and ameliorates your emotional triggers can turn a volatile P&L into more consistent profits.

The first step is to determine what you really need. Not just what you say you need, but what is the underlying need. And don’t be shy here. It is ok to know that you need an adrenaline rush. There is no shame in this. It is fine to recognize a need to avoid being terrified.

Try this exercise to see if it reveals any deeper needs. Make a list of what you need out of trading. This will probably include money, but be sure to look for other needs as well…perhaps recognition, proof of your intelligence or escape.

Once you have written down all the benefits of trading, take the one that seems the most important. Then ask yourself, what you get out of this benefit. Write that down. Then ask again, what do you get out of that benefit? Write it down. Keep drilling down until there are no more underlying benefits. Then, go to the next most important trading benefit and drill down again.

For example, if you start with money as an important benefit, ask yourself, what benefit to I get out of money? The answer may be security. Then ask, what benefit do I get out of security? And keep drilling. The answers may surprise you.

You can also learn more about yourself by taking the MarketPsych Trader Personality Test gratis. It returns scoring on personality factors and biases.

The next step is to find out what your “edge” is. Edge is anything that gives you a statistical advantage for a trade. It might be pattern recognition, fearlessness in the face of market panic, discipline to follow a system, or an algorithm. What is your edge? How does it work? Why does the market not discount this edge? Why is the market going to give you profits? Make sure this edge is in sync with your skills, temperament and emotional baggage.

Once you have defined your “edge,” you can then create a system. The more clearly defined it is, the more it can be followed, tested and improved.

Understand who you are, use the best of yourself to create a statistical edge and build a system based on this foundation. The MarketPsych trader training coaching programs are built on this process. Please call if we can be of help.

Richard Friesen
[email protected]
(415) 259-0652

Profit When Market Patterns Shift

All trading systems work. All trading systems fail. It is difficult to find a trading system that DOESN’T work in some market at some time. It is also difficult to find a system that DOES make consistent returns in all market conditions.

Here is the really good news.

Independent traders have the luxury of picking and choosing their trades. They don’t have to trade all of the time. This is their edge. They can wait until the market patterns are working for them.

It is in the evolution and transition of trading patterns that a lot of money can be made and lost. Because trading patterns are driven by humans who trade repeatedly with the same behavioral responses the destruction and emergence of new patterns create profit opportunities.

The problem we have as traders is that if we have a system that is making money in one market pattern, we get attached to that system. We build our ego on the fact that 15 of our last 18 trades were winners. This rewards our dream that we have found the secret to trading.

It’s like one of those Zen puzzles…any belief you are attached to, the market will destroy. As a trader, it is your ability to see new trading patterns emerge that create the most profit potential. To do this, the mind needs to see the markets as they are without the prejudicial filters we all carry around. If our ego is attached to a trading system and its success, the ability to see new patterns emerging is difficult.

When I was an option floor trader, I would get a “sense” that a market pattern was about to change. This “sense” was built on years of experience. Even though I might not be able to articulate what was happening, I could feel it.

At these times I would go to the market to reduce my risk. It was expensive because I would have to trade with other market makers to change my positions quickly. More often than not, nothing had changed. I would have paid $10,000 or more for the insurance. However, a few times a new pattern would emerge and I could see it because I didn’t have positions based on the previous pattern. Other market makers, with large complex positions based on the previous pattern would need to believe that the current change was an aberration and that the markets would come back to their previous patterns. As the market continued the shift, it would get more and more expensive to realize the losses, and the more stubborn these market makers would get.

Here is the cool thing. Since I no longer had a risk position, a few times I was able to visualize the new patterns very early in the shift, reset my option volatility tables and start building a new position. I would often be trading with other market makers whose values were based on the previous patterns. Slowly, one by one, the other market makers would see what was happening and the options would come in line with the new pattern. With the new option values, I made a lot of money.

As a market maker, I had to be trading and make markets for incoming orders at all times and it was expensive to shift positions. But as an independent trader, you can pick and choose the times to trade. This is a powerful advantage. You can get out of a position with a click of the mouse when you sense a market pattern is changing.

Here are some potential indicators of changing market patterns:

Psychological:


-Unusual Emotions in yourself such as exuberance, fear or cockiness
-Emotions in other traders you talk to such as exuberance, fear or cockiness
-Overwhelming consensus of where the market is going
-Physiological changes in yourself such as stomach pain, tenseness, funny taste in your mouth, back ache etc.
-Emotions in the news and headlines

Market Indicators:


-Volume
-Daily Range
-Volatility and implied volatility in options
-Momentum
-Size of trades or unusual large orders
-New chart patterns
-Unexpected price moves
-Time of day pattern shfits
-Opening market patterns changes
-Closing market pattern changes
-Changes in your ability to execute trades
-Changes in your P&L patterns
-Unusual price gaps
-Sudden quiet
-Shifts in how the market reacts to news
-Changing margin requirements

Remember, all trading systems work during certain market periods. All trading systems eventually fail. It’s the law. If you can free yourself from the belief in your system as the holy grail, you can see new patterns as they emerge and profit.

Easy to say, but how do you see new patterns? In my coaching practice we create a series of Mind Muscles™. These are neurological circuits that help us create new responses to market conditions. Creating concrete visualizations is one way of building new Mind Muscles™ and behavioral responses. If you want to create a Mind Muscle™ for new pattern recognition try this exercise.

First, get comfortable in a place that you won’t be interrupted. Take a moment do some deep breathing exercises. One exercise that works well is to slow count to three on your inhale through your nose. Hold the inhale for another count of three. Exhale through your mouth to a slow count of three and rest at full exhalation for another count of three. Repeat 10 times or until you feel your body settling in.

Then close your eyes and imagine a dog, a well trained bloodhound. He is sniffing the air, the ground and various objects. Imagine this hound dog in detail, his colors, movements and sounds. He is looking for some scent that is out of the ordinary. Spend some time with him as he sniffs his world. Now give him a name. Sniffer works great if nothing else comes to mind. Call the dog to your side. Pet him and give him some love. Then tell him to go and sniff out new patterns and to bay at the top of his voice when he finds one. Call him back, reward him with love, and send him out again.

Now, when you are trading and have a moment, visualize your new bloodhound. He represents a new behavior you have created in your brain. Call him by name. Give him some love. Tell him to go sniff out pattern changes. Watch him as he sniffs both psychological indicators and market metrics. And wait for the baying to begin.

For more on the how and why of creating Mind Muscles™ please call.

Richard Friesen
[email protected]
415.259.0652

Coaching Clients that Stay Stuck

When I am talking to a prospective coaching client, one of the questions that frequently comes up is about my success rate, or clients that don’t progress. A professional trader and potential client asked me this question today.

This is a great question because it has stimulated my own thinking.

As a trader, I am all about pattern recognition (by the way, neuroscience is finding out more about how pattern recognition works in the brain…my next blog?). What is the pattern of traders that never make it?

We all have deep core needs, some of which have never been met. Most of us compensate (I know I have) and live great lives. However, sometimes that deep unmet need is connected to a belief about ourselves, our world or the markets. This belief becomes a story and this story becomes our lifeline and hope for the future. We will protect our belief in this story like life itself.

As a result, we are unable to see the market for what it is when it doesn’t fit our story.

If we felt ignored in our early years, we might create a story that successful trading will bring us acclaim. If we were told we were stupid, successful trading might prove that we are smart. If we felt powerless, sucessful trading will give us the power we deserve. If we were abused as children, successful trading will release the anger we feel. If we feel unworthy, we may sabotage our results.

For example, a former exchange floor trader who worked for my trading firm was adopted and had always felt unworthy. He had overcome a number of problems in his life (like stuttering) but his lack of self-acceptance was a deep unacknowledged wound. Before I hired him, he had made a lot of money trading then blew out (He lost all his trading capital). After training, he followed our option trading system but had mediocre results.

I brought in a hypno-therapist to work with him. She gave him the tools to visualize and build a new relationship to himself, as someone who was worthy. After a few sessions, he became a tiger in the pit. In fact, he became so aggressive that he got into a fight on the floor. My firm was fined, and I was very happy to pay. He went on to become both profitable and consistent.

But what if he had kept the story that he was unworthy? Would new trading systems, new gurus, new algorithms make a difference? Probably not.

We all have unacknowledged stories. Most of them are benign. But occasionally, one story can be so attached to a core wound that at this time, we can’t let go, even with all the help in the world.

The first step to discovering our own story, is awareness. Here is an exercise that may be helpful in expanding your own self-awareness. When trading isn’t going well, set an alarm to ring in ten minutes or more. When it goes off, freeze! Now take an inventory of your thoughts. Are you telling yourself a story? If you are feeling badly, what drives that feeling? What story creates that feeling? If you find a story, write it down in a journal.

The story is your way of protecting yourself, so give it respect like a wise elder. If you want to take this experience further, see what the story is protecting. You might find a door to a new insight.

Richard Friesen
www.MarketPsych.com
(415) 259-0652
[email protected]

You have Gone Favre Enough!: Leading a Portfolio Comeback

The NFL is back and for the 18th consecutive year and so is Brett Favre.

I was watching the Jets in New York when the network went to a game update - Vikings vs. 49ers. Favres Vikings were down 24-20 at home to the upstart Niners. With time for one play remaining on the clock, Favre dropped back but was quickly flushed from the pocket. Scrambling desperately, with the final seconds ticking away, Farve stepped up and threw a pass about fifty yards on a line to the back to the back of the endzone. Miraculously, with two defenders all over him, Gregg Lewis plucked the ball out of the air and got two feet in bounds and - Pow! Lighting strike! - the Vikings had won the game.

The crowd at the Metrodome went nuts. His teammates mobbed him at midfield. And the sports cliches came poring in -- Brett Farve, the river-boat gambler! Farve, the old gunslinger! Hes done it again! It was truly an amazing comeback.

And because I am a geek, it made me think of investing.

If you’ve been in the game the last few years, chances are you have been losing too; your net worth that is. Yes, the major indices have rallied considerably in the last 6 months, but all in all those indices are still down approximately 40% from their highs.

Investors want a comeback. But how do you lead a comeback in these circumstances? What does it take to get your portfolio back on track?

The choice comes down to two major sports cliches that any NFL fan (sports fan in general, really) will recognize. Do you try to make make something happen? Or do you take what the defense gives you? The choice for investors is clear.

It can be very tempting to go for the latter and try to make a play. You know, like Brett Favre did. Youre down big. You feel restless, like time is running out, you have to make a play. In football these plays are often called Hail Marys. In investing they are called, well, Hail Marys.

It’s the same play. High risk, big reward, chuck the ball down field into heavy coverage and pray your guy is the one who catches the ball. That is essentially what Favre did. And in his case it was the right play.

When Favre threw his last second pass into heavy coverage, he had no alternative. Could his pass have been intercepted? Absolutely. (And knowing Brett Favre, there’s a good chance it would have been). But the clock was about to run out. He needed a touchdown to win. Not only was it an acceptable risk in this case - it was really no risk at all.

But for investors, even though the temptation can be overwhelming, trying to make something happen is the wrong call.

Football games have binary outcomes. You either win or you lose. (Yes, technically you can tie. But that is an extreme outlier). The object in any one game is to win, so sometimes you have to take risks you ordinarily wouldnt like to.

But investing success is not measured this way (e.g., 2 million dollars or die trying!) Framing one’s investments as all or nothing/win or lose is one of the absolutely worst traps an investor can fall into. It causes us to take foolish, reckless chances - the equivalent of throwing into triple coverage. In a football game with a minute left in the 4th quarter there can be nothing to lose on a play. In investing, it just feels that way. You can always lose 100% of what you have.

In addition to a win/lose framework a second difference is that the clock doesn’t run out on your investing - not like it does in a football game anyway. It is ticking, and thats part of the problem. Sometimes the clock seems to be ticking so loud that it’s all we can hear. But the bottom line is we do have more time left. We don’t know how much. In some cases decades, in other cases much less. But barring the most extreme and unusual circumstances, we are not in a position with our investing to say, I need to make 50% on my money by the end of the year or its game over.”

And even when our biological clock expires, our investments do not. They get, in most cases, passed on to the people we love, spouses, children, grandchildren.

The right way to lead a portfolio comeback is to take what the defense (read: Market) gives you. That is not a code for be ultra conservative. By all means take advantage of cheap valuations. Adjust your asset allocation. But let your choices be dictated by opportunities, not a desperate desire to make it all back on one play. You may find that the supposed long, slow climb back can happen more quickly than we expected - and without advanced warning. Those with broad equities exposure have seen just that in the last 6 months.

Maybe your comeback has begun. I hope it has. Or maybe you have been on the proverbial sideline. If the latter is the case, you may feel an even greater temptation to make something happen. Resist this temptation. Evaluate your goals. Evaluate your holdings. Evaluate your opportunities. And start making sound, measured decisions. Do it. Take what the defense gives you and you will come back.

There is only one Brett Favre.

And as any Jets fan will tell you, he led the league in interceptions last year.

-Dr. Frank Murtha

Anger - How an emotion can sabotage profits

One of my overseas coaching clients had become frustrated with the complex trading system he was using. He had recently received a stinging set of losses.

We had just completing our third phone coaching session and I suggested that he stop trading. There was a long pause on the line.

“You want me to stop trading?”

I responded positively suggesting that since he wasn’t making money anyway it wouldn’t hurt to just stop as a way to find out what was going on.

He agreed.

Three days later he gave me an unscheduled call. He was very frustrated with not trading. So I had him do some relaxation breathing exercises with me on the phone. Then I asked him if he was willing to experience a guided imagery. He agreed.

We did some exploration of his frustration until it was located and had a voice of its own. The voice was anger. Anger at not being perfect. Anger at losing money. Anger that if he couldn’t trade, his dreams of the future were threatened.

This session was very productive. While he was trading, this anger was still there, but unrecognized. By stopping trading, we were able to see the emotional state that he brought to the market. This same emotional state was sabotaging his efforts.

This trader was smart, and had made a lot of money in past and had a workable trading system. We are now working with the anger with a new awareness. It has some important message for the client.

We all have voices and emotions that we have walled off. If not recognized, they can undermine even the best traders and systems. One of the processes we use in coaching is to create an environmental shift that gives the client new powerful awareness. Even a simple awareness can produce significant breakthroughs and return trading to profitability.

Richard Friesen
Director of Trader Training
MarketPsych LLC
415.259.0652
[email protected]

Real Estate Optimism at Decade Highs

It's been a loooooong time (and a 20% S&P500 rally!) since we last blogged.

We've been investing and training financial advisors - among whom, as you might imagine, there is a huge (and long overlooked) need for psychological tools to use for the benefit of emotional clients in volatile markets.

We thought you'd find the below graph interesting. Optimistic discussions of real estate are rising to decade-long highs in the mainstream financial media (in this case: WSJ, NYTimes, Financial Times, and Barrons). IYR is the iShares Dow Jones Real Estate Index. The chart demonstrates the time period from January 1, 2001 until today.



Such charts are important to consider in context. Many investors are still "shell-shocked" - trapped in negative views of real estate and the markets and waiting for the next "correction." It's important, after a distressing year such as we've had, not to be stuck in the mental habit of pessimism. We're seeing and hearing much more pessimism than optimism among money managers, yet the key is to try to remain flexible and adaptable to new information - which is always the most difficult thing.

Happy Investing!
Richard

Swine Flu: Don't Panic! (Seriously. Don't.)

A few years ago they terrified us with chicken.

In 2009 it's pork, bacon and ham. Once again, the world's tastiest creatures appear bent on revenge.

Yes, we have another potential pandemic on our hands, this one goes by the name of Swine Flu. And like most every medical scare, the response is all out of proportion to the facts as we know them.

Since Swine Flu touched down here in New York City, it's all people seem to want to talk about. And the media reports rather than dowsing fears, have predictably poured gasoline on the fire.

"New virus"... "no known cure"... "quarantines"... "stockpiling Tamiflu"... and now this "money quote"; "I fully expect we will see deaths from this infection." (Richard Besser, acting director of the CDC.)

Scary, right?

A little perspective is called for here.

Yes, there may be deaths resulting from the Swine Flu in the United States. There have been 150 deaths (at last count) in Mexico.

But there are ALWAYS deaths from an outbreak of influenza. (Sad but true) How many? The CDC estimates that complications from influenza kill approximately 36,000 people each year.

Thirty-six. Thousand.

Today I read "Fears of Swine Flu" were the reason the DJIA gave its gains back. If this episode seems like a repeat (perhaps of repeat of Quincy), it is. A few years ago it was Avian (Bird) Flu that captured the imagination of the media. It weighed on the necks of the world markets, like an infected albatross.

Let's check the stats on that "Superbug". In the last 10 years (according to the World Health Organization) it has killed 248 people (as of January of '09).

Look, I am not making light of Swine Flu. It has already inflicted horrible suffering on people. It is truly a killer and all out effort to combat it should be taken with the utmost alacrity.

But if people feared the mundane killers out there a fraction as much as they fear these inflated medical scares, they'd never leave the house.

My wife, (bless her heart) worries when I take a plane. "Let me know when you get you there, honey", "Call me when you get in", she says to me.

What I (wisely) no longer bother to point out is that the most dangerous part of my journey arrives after I get into JFK.

Flying is amazingly safe. So safe, that when something bad happens amidst the millions of flights that take off every year, it makes news. More than that, it IS news. Cars on the other hand...

You know what kind of flying isn't safe? Flying down the Long Island Expressway at night and weaving in and out of traffic on the Triboro bridge at 75 miles an hour, while your Russian taxi driver is screaming epithets at his girlfriend over the phone.

That's legimitately terrifying.

Turbulence? Piece of cake.

So let's not lose sight of the baseline here.

We have enough real economic indicators out there scaring us already.

Do we really need the Pig Flu torpedoing our rallies?

MarketPsych on TV

Been a little remiss in my blogging the past month, but I wanted to update folks.

I will be on CNBC Monday morning (supposedly between 10:30 and 11:00 AM) with Erin Burnett and Mark Haines talking about Fear and Market Bottoms.

So tune if you wish.

And congrats to Richard and the MarketPsy Asset Management crew who have been riding high through these turbulent markets. When it comes to secret formulas for deliciousness, there's Coca Cola, Kentucky Fried Chicken... and MarketPsy.

The Monster in the Closet

It is again rumored that there IS a monster in the closet, and this one is bigger and badder than any previously imagined. The monster is in the form of bad debts on bank balance sheets -- creating an insolvent US banking system with "$2.5 trillion" worth of bad debt. I'd say that's a scary situation to be in.

There are a number of potential remedies to dealing with the monster -- the UK may choose to go the route of nationalization, which is apparently favored by Shelia Bair (currently head of the FDIC). The danger of nationalization is the destruction of shareholder value that would ensue and the further loss of investor confidence.

In anticipation of this worst-case scenario, today we saw the stock market acting as if nationalization were likely to occur - creating a self-fulfilling prophecy of plunging share and asset prices, which itself increases the risk of banking collapse. Such psychological positive feedback loops don't stop unless some signal is given by the government (or a credibly strong authority) that nationalization is not likely to occur. Because we're in the midst of a momentous political transition, such information probably won't come this week. Which sets us up for a very volatile week.

Psychologically speaking, there are a few things we can do when we think there's a $2.5 trillion monster in the closet, which roughly parallel the "freeze, fight, or flight" response:

1. FREEZE: We can hide under the covers and hope it goes away (hasn't worked so far).
2. FIGHT: We can grab a baseball bat and run into the closet swinging. (This seems to be the TARP method, but too many blows have missed the monster and hit us on the other arm -- ouch - which makes parents (i.e. taxpayers) angry and reduces our monster-fighting motivation).
3. FLIGHT: We can jump out of the bed, sprint to the light switch with a pounding heart, fumble to find the switch in a panic, turn on the light, and slowly turn to face the monster. (Just shedding light on the monster reduces the uncertainty and fear we feel.) If instead of turning on the light we fled from the house, then we'd be homeless and the monster would get our Serta, which isn't tolerable for most of us.

Right now we're hiding under the covers, and the monster has been growing bigger and more bold.

I'm concerned that in the next rescue - Part 4 - the government may destroy shareholder value via nationalization. To do so would further undermine confidence in the stock market, at a delicate time, and in my opinion it could delay the economic recovery. The lower asset prices go due to nationalization, the more forced liquidations and underfunded pensions we'll see. That may be inevitable in the course of this unwinding, but it's not economically desirable.

If we turned the light on the monster, had a long honest talk with it, gave it it's own bedroom (the "good bank, bad bank" method), and let it find a job on its own time, then we might make it through without being eaten. Seems like the best option so far.

We may have to live with a stinky expensive monster for a while, but that's better than ignoring it and having crippling anxiety attacks and insomnia which ultimately undermine our ability to get on with life.

And don't forget that the banking system was insolvent in the early 1980s as well, and it made it through that storm intact.

Richard

Yeah, But Are You "Sure-Sure"?

Ivory soap is famously 99.44% pure. I like that extra 44/100s. It gives me peace of mind.

If only financial forecasters would follow the Ivory model in their predictions. I've been hearing/reading/seeing a lot of expert predictions these days. New calendar years and volatile markets seem to attract them.

Now, let's be clear, I don't have a crystal ball. (I do have a Magic 8-Ball. But when I asked it if the Jets would make the playoffs it told me "Signs Point to Yes." So I'm thinking it's busted.)

The only predictions I will make with any confidence are these:

1) All consensus predictions will be too narrow in scope.

2) People will overuse artificial parameters in the form of round numbers and calendar years when formulating those overly narrow predictions.

Okay, I cheated.

Those aren't predictions. They're observations of human behavior that are among the most reliable you will ever find.

How reliable? Research into the area that behavioral finance folks call "overconfidence" indicate that when people are asked to predict a range in which they are 99% confident results will fall (i.e., a 99% confidence interval) they are correct 80% of the time.

Now at first blush, that may not seem so awful. 80% vs 90-something%...what's the big deal?

But it is awful.

Truly, horribly, make-you-want-to-toss-your-cookies awful.

Why?

Think of the corresponding behavior in light of such predictions. When we're 99% of something, it's basically as close to saying we're absolutely certain as we're going to get.

You could go Ivory Soap and say 99.44% certain but when we blurt out, "I'm 99% sure that won't happen", we're essentially saying, "No shot in hell."

That's dangerous even when it's TRUE.

Once in a hundred years was the standards to which they built the New Orleans levees. That works fine... right up until your neighborhood has to be airlifted off the rooftops.

But with market predictions, it's 20x worse. Events that people - and this includes experts, mind you -- say would happen every 100 years (1%) - happen EVERY FIVE YEARS (20%).

Let's say you listen to a more conservative expert predictor. He/she is twice as good and are accurate 90% of the time.

That STILL means every 10 years we're going to experience something that "nobody" saw coming.

Nassim Nicholas Taleb wrote a book called The Black Swan. (It's not as good a book as Richard Peterson's Inside the Investor's Brain, but it's certainly worth reading).

Where are we seeing such predictions these days?

Oh... everywhere.

"Where do you believe the S & P will be a year from now?"

"How high do you think unemployment can go?"

"What are the chances you will have to cut your dividend, Mr. CEO?"

Remember, fellow investors, fight the danger of narrow framing and don't be drawn into sharing the outlook of those who look at the horizon through a key hole and tell you wide it is.

We have no reliable way of knowing how bad (or how good) it's going to get.

The key is to expand the scope of expectations and to have plans in place for even the most unlikely-seeming scenarios.

Think "Ivory Soap".

And good luck.

-Frank

(If you are interested in a MarketPsych seminar, please feel free to contact us at [email protected]. I'm 99.44% sure you will find our seminars valuable.)

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