ExposeYourself - Expose Yourself! A Powerful Technique for...

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Expose Yourself! A Powerful Technique for Breaking Emotional Patterns in Trading Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com The following is a draft of an article that appears in the October, 2002 issue of SFO Magazine ( www.sfomag.com ). Traders love patterns. We trade chart patterns, oscillator patterns, historical patterns, cyclical patterns—you name the pattern, chances are there’s someone trading it. Much of trading boils down to pattern recognition and the ability to quickly identify and act upon profitable patterns as they occur. This is particularly challenging for active futures and options traders, who must read the patterns, make their decisions, and place their orders within a matter of seconds. Processing market patterns in the midst of our own emotional patterns—our tendencies toward impulsivity, hesitation, frustration, and regret—is one of the greatest challenges of active trading. It is always sobering for traders to realize that they are every bit as patterned as the markets they’re trading—and sometimes far more so. In this article, I will draw upon two decades of experience as a clinical psychologist to illustrate a powerful technique for interrupting and changing repetitive emotional and behavioral patterns that disrupt trading. The technique is a cognitive-behavioral method known as exposure, and—in the Ranger tradition described by Brace Barber, Linda Raschke, and me in September’s issue —it is a powerful tool for challenging oneself for exemplary performance. Becoming Your Own Therapist Extensive studies by Axel Cleeremans and Arthur Reber suggest that, with sufficient experience, people can learn to read patterns in data and anticipate future data sequences. Interestingly, this pattern recognition is intuitive and implicit rather than verbalized: we know things long before we know we know them . Such findings contradict the common belief that successful trading requires an elimination of emotions. Our feelings, like market data, consist of relatively weak—but vitally important—signals in the midst of considerable noise. Our sensitivity to market patterns often remains hidden amidst the pushes and pulls associated with trading fears and ambitions. Traders can learn to become their own therapists by using techniques such as exposure methods, not to dull or eradicate emotion, but to gain control of their cognitive worlds and better extract signal from noise . The problem, you see, is not simply our patterns of anxiety, guilt, anger, or discouragement. The problem is that we cannot control these patterns. No one consciously plans to fail to pull the trigger on a promising trade; nor does anyone want to impulsively leap into a non-trending but volatile market before evidence of a breakout is at hand. As I emphasize in The Psychology of Trading (Wiley; January, 2003), such
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emotional and behavioral patterns play themselves out against the will of the trader, in spite of our best-laid trading strategies and sophisticated market research. For most of us, the scenario is embarrassingly familiar: We make plans to get into
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This note was uploaded on 08/11/2009 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.

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ExposeYourself - Expose Yourself! A Powerful Technique for...

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