Remapping the Mind: Cognitive Therapy for Traders
Brett N. Steenbarger, Ph.D.
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
“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.
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
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.
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
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.
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.