Remapping the Mind - Remapping the Mind Cognitive Therapy...

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Remapping the Mind: Cognitive Therapy for Traders Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com Active traders of futures and options make frequent rapid decisions, requiring a high degree of mental clarity. Reviewing their losing trades, they often find that they have deviated from their established strategies and plans, talking themselves into decisions that they would never make in paper trading rehearsals. It is acutely frustrating to replay the day’s session and see the “obvious” signals missed and the impulsive decisions made. “What was I thinking?” is the common refrain. At times, it seems as though we are not in our right minds. According to cognitive therapists, that is exactly what happens. In the heat of trading, we shift our mind states, activating automatic thought patterns that can sabotage the best-laid trading plans. The goal of cognitive therapy is to identify these thinking patterns, intercept them, and replace them with more constructive alternatives. In this article, I will review the basics of this approach and explain how traders can become their own cognitive therapists. Schemas: The Mind’s Maps Cognitive therapy begins with the notion that people have a basic need to make sense of their world. Our need to explain life events is so strong that sometimes we will prefer superstitious and mystical explanations to none at all. A classic example comes from people who suffer from a problem known as panic disorder. In the midst of completely non-threatening situations, such individuals can suddenly experience overwhelming fear. Because the reaction seems to literally come out of nowhere, patients with panic disorder invent their own explanations for their attacks. If their panic occurred in a mall or in a car, they will assume that malls and cars are the problem and avoid these settings. Eventually, the list of offending situations multiplies to the point where panicky patients refuse to leave their houses. The webs of ideas that organize our perceptions are known as schemas. We can think of schemas as mental maps. In a sense, they are the filing cabinets in which our experiences are stored. The Swiss developmental researcher Jean Piaget described intellectual growth as a function of the development of our schemas. When we first encounter new information and experiences, we try to assimilate these to existing schemas. For example, if we are expecting a market to decline, we may interpret a short- term rise to a new high as a potential head in a head-and-shoulders formation. If, however, it is no longer possible to fit the new information with our expectations, we eventually accommodate—or alter—our schemas to explain our experience. Thus if the market breaks sharply higher rather than turns down following the suspected “head”, we might abandon our bearish position and trade the upside in a breakout mode.
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Ultimately, all of us are heirs to our experience. As we grow older, we develop increasingly rich and complex schemas, helping us understand more of life’s experiences. The categories in our mental filing cabinets reflect the life events we have encountered.
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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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Remapping the Mind - Remapping the Mind Cognitive Therapy...

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