Traders love patterns. We trade chart patterns, oscillator patterns, historic patterns, cyclical patterns--you name the pattern, odds are there is somebody trading it. Much of trading boils down to pattern recognition and also the ability to recognize and act upon profitable patterns as they happen. This is especially challenging for futures and options traders, who must examine the patterns, make their conclusions, and place their orders within a matter of seconds. Processing market patterns in the middle of our own patterns--our trends toward impulsivity, hesitation, fruion, and regret--is among the challenges of trading.

It's always sobering for traders to understand they are every bit as patterned as the markets they're trading--and occasionally far more so. I will draw upon two years of experience to illue a technique for changing and preventing repetitive emotional and behavioral patterns that disrupt trading. The method is really a method and--from the Ranger tradition described by Brace Barber, Linda Rashcke, and me in September's issue--it is a powerful tool for hard oneself.

Getting Your Own Therapist

comprehensive studies by Axel Cleeremans and Arthur Reber imply that, with sufficient experience, people can learn to read patterns in data and expect future information sequences. Interestingly, this pattern recognition is implicit and instinctive rather than verbalized: we understand things long before we know they are known by us. Such findings contradict the common belief that trading requires an elimination of emotions. Our feelings, like market information, consist of weak--but vitally important--signals in the middle of sound. Our sensitivity to market patterns frequently remains amidst the pushes and pulls associated with aspirations and trading fears. Traders can learn to become their very own therapists by using techniques such as exposure methods, not to emotion, but to gain control of their worlds and also better extract signal from noise.

The issue, you see, isn't only our patterns of anxiety, guilt, anger, or discouragement. The problem is that we can't command these patterns. Nobody consciously aims to neglect to pull the trigger on a commerce; nor does anybody want to jump into a market before evidence of a breakout is in hand. As I emphasize in The Plogy of Trading (Wiley; January, 2003), such emotional and behavioral patterns play out themselves against the will of the trader, in spite of our best-laid trading egies and sophistied market research.

For most of us, the scenario is embarrassingly familiar: We make plans to get fit, to diet, or to treat others better--and what happens? We lapse into our ruts. At that time we make our resolutions we're sincere. But under the effect of older patterns, their pressure is lost by the resolutions. The progr we had carefully crafted fall like so many good dieting goals.

Why?

Our trading (or dieting or exercise) egies are anchored to a specific state of mindassociated with a particular set of thoughts, feelings, and bodily sensations. If something intervenes to shift us to a different nation, we shed our anchoring. We no more have vivid and immediate access to the motivating adventures that spurred our intentions. The trick isn't to spend months and years panalyzing why we're”self-defeating” or otherwise lack”self-esteem”. Instead, we need to become our therapists and learn to remain anchored, even in the face of market and emotional forces which can interrupt our trading egies. That is the aim of exposure-based practices.


Overcoming Problem Patterns Through Exposure

Let us take a classic example of how exposure can break seemingly intractable mental patterns. Ellen is currently suffering from a condition called panic disorder. Episodes of anxiety, sudden hit apparently random moments interfering with normal activities. These episodes are so frightening that she is afraid she is losing control and might die. Because of this, Ellen develops a fear of her panic episodes--something called”secondary anxiety”. Sure enough, her dread of the panic attacks leads her to become anxious and triggers attacks. By the time Ellen makes it to therapy, she has been caught in a constant cycle of nervousness, stress, and anxiety.

When I were using exposure methods with Ellen, I'd first teach her a skill, such as a deep-breathing, progressive muscle relaxation method. This involves studying how to slow oneself down by reducing the rate of respiration and deepening the breathing while eliminating bodily tension by gradually tensing and relaxing muscle groups from one end of the body to another (See Figure One).


Lt;table border=1 bordercolor=#006699 cellpadding=10 cellspacing=0 width=480gt; lt;tbodygt;lt;trgt; lt;td valign=topgt;Figure One Relaxation Training: A Useful Eduional Technique

Measure One: Deep Breathing -- Close your eyes and Start breathing deeply, slowly, and rhythmically. Your breathing should be in the diaphragm, and shouldn't be pressured or exaggerated in any way. You keep your body as still as possible, performing the workout in a calm atmosphere.

Measure Two: Emotional Focus -- Fix your attention on a calm, relaxing stimulation while you are performing the breathing. You're able to play music through headphones when that is focus or helpful your attention on soothing plogical scenes or images. As an example, you could picture yourself in vivid detail walking across an ocean beach, smelling the salt spray, feeling the warmth of the sun, hearing the crashing waves, etc.. The crucial thing is to make the music or imagery all absorbing, tuning out chatter.

Measure Three: Muscle Relaxation -- When you are feeling more relaxed, start at one end of your body (for instance, your feet ) and stressed and relax one muscle group at a time, working your way to the opposite end of the body. Ten repetitions for each muscle group, with simple relaxing and heavy duty tensing, works well. This can be carried out while you are breathing deeply and slowly to the accompaniment of the audio or imagery. From feet and instep to calves, thighs, thighs, buttocks, back, shoulders, arms, wrists, fingers, neck, and forehead, your body's tension is progressively undone by you.

Measure Four: Self-Awareness -- When you've completed the muscle comfort, slowly open your eyes and notice how you are feeling. By now you've been breathing slowly and deeply, for quite a couple of minutes, with comfort and an attention. Very often you will find particular sensations that accompany your focused mode that traders call the zone. I find that I encounter a quiet feeling in my head, as if I am somewhat taken out of the entire world. Flaws can become your cue and are ready to deprogram aged patterns via exposure.

Notice -- Initially it can take a while to get to the zone. You also enter the zone in a couple of minutes or even seconds and can become rather good in the breathing and muscular relaxation. The key is frequent rehearsal under conditions that are ordinary under conditions of slowly increasing stress.

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When Ellen has discovered that this method, the exposure can start. I'd ask her to take a few quick and shallow breaths, simulating hyperventilation. This exposes Ellen to the some of the bodily sensations she experiences during the first stages of her panic attacks. It summons feelings and those thoughts which have come to be associated with the bodily sensations of anxiety. I instruct her to perform the deep breathing and muscle relaxation, when Ellen begins to re-experience a little bit of her nervousness. Until the anxiety senses are removed, she continues with the comfort work.

After Ellen learns to extinguish the anxiety that comes out of a few quick, shallow breaths and then from more prolonged hyperventilation, then I have her perform more intensive exposure exercises. I might have her spin around in the area, recreating the feeling of dizziness that comes with her panic attacks. Later, I could encourage her to provoke panicky senses by entering scenarios (for instance, a crowded shopping mall) which are associated with anxiety. She would introduce herself to the difficulty pattern although she has been trying to prevent, but would always restrict the exposure and immediately follow it. With daily practice between sessions problems such as anxiety disorder can be handled within a matter of weeks.


Why is this egy work?

Most of our issue patterns are painful; nobody likes feeling anxious or depressed. It is human nature to want to avoid emotional pain. However , we never understand the control required for their elimination in preventing our problems. We build a sense of mastery -- all the while practicing ways of coping and keeping up control -- by exposing ourselves to situations. This is the way folks learn to overcome debilitating traumas and phobias. No quantity of talk replacements for your very first hand experience of straight facing fears again and again and staying in control. Repeated success affects the self-image, and it changes our self-talk. Unexpectedly, we really begin to feel and think,”that I can do this!”


Applying Exposure Methods to Trading

If you will function as your own therapist at the exposure-based manner, the cardinal rule is: You constantly have to activate a problem pattern in order to overcome it. It isn't sufficient to think about your problems or talk about them. You need to experience your problem patterns in real time, slowly and progressively, and make conscious attempts to counteract those patterns. You'll have to trade bigger by boosting your size if your trading problem is triggered. If your trading pattern happens during trendless, low volatility markets or at the opening minutes of trading, that's when you will have to work on your own.

Fortunately, we can accelerate plogical change through a procedure called imaginal exposure. Exposure is thought of as the plogical equivalent of newspaper trading. Instead of starting out with real-time problem situations (called in vivo exposure), we can vividly imagine scenarios connected with our negative patterns--triggering a few of the feelings of greed, fear, uncertainty, and regret--and mentally rehearse egies for dealing with those situations. Imaginal exposure isn't as successful as confronting problems in vivo (much as paper trading lacks the immediacy of true trading), but it's a useful starting point in building the feeling of success and mastery. As athletes have found rehearsal to help Olympic performance, the handling of trading struggles can prepare for the actual thing.

Let's think about an example:

Lou is an active futures trader, using a little over a year of experience under his belt. He's made most of beginner's mistakes and has learned carefully planning his transactions, restricting his losses, and climbing in and out of places with sizes that are corrected for market volatility. He mostly trades the NQ and ES eminis at a short-term breakout manner, attempting to ch 1-4 swings per day based upon volatility and fashion conditions. His entries are based on dual RSI oscillator readings, using short-term (intraday) and longer-term (swing) parameters. While he's been generally successful, he finds he has performed poorly on upside down and downside fad days. He discovers he hesitates too long in entering the market and then is fast to exit the transactions as soon as they are profitable. He takes bites from the moves that need to be providing him with much of his profit.

A examination of debatable trend days reveals that these begin with a gap in the open in which price moves sharply up or down relative to the last transaction of the previous moment. This gap triggers negative thinking on Lou's role, much of that reflects feelings of having missed the high or low on the market. In this period of sorrow, he is not actively following price action or planning an entry. Instead, he finds himself hoping for a pullback so he might get a better entry point (and a reprieve from his self-recriminations). Price, of course, doesn't adapt to his appetite and moves much further by the open, currently registering an”overbought” or”oversold” signal on the short-term oscillator. Lou uses this justifiion to hold off on entering a position, allowing him to overlook a sector of the morning fad.

This problem looks unusually rookie-like for a seasoned trader, therefore we examine Lou's entire trading performance. Sure enough, we discover that his declines have happened when gaps in the market have been reversed. These false breakouts have abandoned him buying in the highs and selling in the lows, beginning his day with strong losses and shaking his confidence. This allows us to see what seems to be the problem--the failure to enter the market early during tendency days--is a working mechanism designed to decrease the chance of losses. It also reduces chances!

Our exposure therapy for Lou begins with ability teaching, as in the case of Ellen. We teach a method for that entails slow, vision and rhythmic deep breathing to Lou and invite him to practice this till he becomes skilled in keeping his composure. In addition we also need Lou to find out some trading. He needs a set of rules for distinguishing potential fashion days as soon as they happen, for identifying reversals from the ones that may rules or reverse. For example, his own research and a tiny mentoring from experienced traders might teach him that openings that happen on breakout highs or lows from the NYSE TICK are far more inclined to reveal continuation than openings that happen without such breakouts. Alternately, he may discover that moves are more inclined to continue than those that partially fill throughout the day.

Once Lou has recognized his trading rules for the problem situation and learned a way of cultivating self control, the exposure work is about to begin. We can start inviting Lou to enter his relaxed manner with slow, diaphragmatic breathing and eyes shut. Within this manner, he vividly imagines an preopening news report that sends the market gapping reduced outside its Globex range. As he moves his breathing and mentally rehearses the trading egies he maintains the visualization of this scenario. For example, he could image the TICK diving into some multi-day low on also the SP failing to fulfill its gap on the first TICK bounce toward zero and the opening movement. This would be his cause for a short entry, and he would clearly envision every step he would take in tracking the market, putting his order, setting his quits, etc.. A similar set of visualizations can also facilitate the rehearsal of depart egies.

Once all discomfort is extinguished from the plogical rehearsals, another step in exposure work will be applying the skills in newspaper trading. Using historic market data, we'd have Lou advance charts bar by bar in trading simulations of fad days while rehearsing trading egies and his self-control. Only when these simulations proceed successfully (i.e., eliminating stress ) will Lou undertake real time, in-vivo exposure, beginning with little positions and construction to bigger ones. (The rate with which Lou advances from imaginal exposure to newspaper trading to in vivo function would depend upon the intensity of the problems and the intensity with which he rehearses the techniques. Research suggests that fewer but more, more intensive exposure sessions are more effective in removing negative plogical patterns compared to a larger amount of brief exposures.)

The idea is that, before Lou faces another possible
trending day on the market again, he'll have experienced multiple successes in tackling such times in creativity and on paper.

It's the repeated experience of mastery and achievement that offers the power behind exposure-based intervention. Nothing builds confidence as overcoming and repeatedly facing the fears. (See Figure 2 for keys to success in the exposure method).


Lt;table border=1 bordercolor=#006699 cellpadding=10 cellspacing=0 width=480gt; lt;tbodygt;lt;trgt; lt;td valign=topgt;Figure 2 Keys to Success With Exposure Methods

-- Taking the time to become fully relaxed before beginning the exposure is Vital. Give yourself sufficient time to achieve the zone (see Figure One).

Persistence -- A secret to jelqing negative patterns is repetition. Applying coping skills to problem situations again and again, in vision and in vivo makes stressful situations safe and familiar.

Gradualism -- Set yourself up for success by beginning with manageable variations of your problem patterns and imaginal exposure before handling your greatest struggles in vivo.

Consistency -- These are short-term techniques, but applying them intensively and consistently on a daily basis offers superior outcomes.

Realism -- Exposure can break old problem patterns, but by itself won't instill new patterns of success. Nothing substitutes for experience and research in the markets!


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A Final Note

there are lots of plogical approaches that can enable us to obtain control of our problem patterns. Methods are especially helpful for futures and options traders because they are sometimes self-administered and often produce results that are rapid. Such methods can't overcome all problem patterns; occasionally people with chronic difficulties need types such as mediion. But when plogical reactions are situational rather than chronic--and particularly when you can isolate the trading situations that trigger the problem patternsegies are excellent mechanisms for gaining control and remaining anchored to trading egies.
Notice, however, I have emphasized the need for proper, researched trading egies to accompany the exposure procedures. As an experienced plogist and trader, I will assure you that techniques alone will never allow you to master the markets. If you would like to understand how to trade a candidate fashion day, an intraday range breakout, or even a day consolidation of a morning fad, you have researched those market conditions and generated any rules and techniques to guide your entries and exits. Otherwise, you will be teaching to concentrate and relax while you lose your hard-earned capital.

What plogical approaches can do is supply You with the self-control to implement your trading egies. That is important. Consistency not the house run trades we all like to talk about, best positions us .


Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University. Dr. Steenbarger is an active trader and author of The Plogy of Trading (Wiley, 2002). He writes feature columns to the MSN Money website (http://www.moneycentral.com/) and many trading publiions, including Stocks Futures and Options Magazine (http://www.sfomag.com)/. These articles along with a daily trading weblog are connected in Greatspeculations.com.