Conditioning optimal trader behaviour

Steven Berkoff (torturer): What is this?

John Rambo: Okay, okay, it’s the3500 road map.

Steven Berkoff: You haven’t followed it. You are pathetic, a weak soldier! You lack discipline. You must be punished!

A recent post by Globetrader on ’emotions in trading’ got me thinking about the trader’s journey of self-discovery, and the meaning of my road map. Personally, a large part of my journey is about using will power to condition myself to be a better trader, about killing off those behavioural gremlins that pop up every now and then and send me in to a vicious circle, where perspective is lost and losses mount. Actions I have taken include taking more breaks, eating and drinking correctly, and regular exercise. These activities have helped my discipline and general emotional balance. My road map also includes reminders of the the ugly side of trading (addictive trading, seeking instant gratification, challenging fate), as well as reminders of the positive characteristics to continue to develop (patience, discipline, being humble). The general aim is to nourish the positives and starve the negatives. What it boils down to is will power and an openness to change.

Recently, I’ve been thinking about whether I can speed up this development process. Some of the negative behavioural responses in my trading can be thought of as Pavlovian, in that they sometimes feel like predetermined natural reflexes to certain external stimuli that have been transposed on to my market behaviour. Whether these responses are hard wired or not, the point is that I should be pro-active in trying to modify my conditioning by promoting positive behaviours and punishing my negative behaviours. Previously, I wanted to use will power alone, reasoning that this would have represented the ultimate journey. However, what comes to mind is a comment that Brett Steenbarger made a while back, that trading should not be about seeking ‘validation’ as individuals. This is very important. Trading is about finding the best way of making money. Using the market as a testing ground for one’s will power is dangerous and reckless.

So, how can I condition myself using a carrot and stick approach?

A few days ago I was thinking of some pretty extreme solutions. These included self-harm such as cutting myself when I committed a behavioural foul; keeping a knife next to my PC would be a good reminder of the forthcoming pain. Instead of this extreme measure, I thought about ‘paper-cutting’ my finger (less blood, but more annoying, lingering pain). This could work a treat. At the very extreme, I envisioned myself hooked up to an electrode that sensed my brain pattern and electrocuted me with jolts of varying strength. The great thing about the last method is that I could be electrocuted before I even placed a trade. This ‘Minority Report’ style pre-crime punishment is not actually as far fetched as I thought – a few days ago, it was reported that:

A team of world-leading neuroscientists has developed a powerful technique that allows them to look deep inside a person’s brain and read their intentions before they act.

The team used high-resolution brain scans to identify patterns of activity before translating them into meaningful thoughts, revealing what a person planned to do in the near future. It is the first time scientists have succeeded in reading intentions in this way.

Professor Colin Blakemore, a neuroscientist and director of the Medical Research Council, said: “We shouldn’t go overboard about the power of these techniques at the moment, but what you can be absolutely sure of is that these will continue to roll out and we will have more and more ability to probe people’s intentions, minds, background thoughts, hopes and emotions.

Pretty cool, but back to reality. I have decided that if I continue to trade in the months ahead, I will ring fence a small portion of my profits for ‘treats’. On the punishments side of the equation, I am still not sure what is best. Actual self-harm is too extreme, but I need to have some kind of consistent punishment that sticks in my mind long after the event.


14 responses to “Conditioning optimal trader behaviour

  1. What are your opinions on the G7? Seems trends (weak yen and positive carry trades) should not be dismayed by what was said.

  2. There was no direct mention of the yen, as expected, but the G7 officials have all come out warning against the market taking one-way bets in the foreign exchange market, clearly referring to the carry trade (again, not specifically in reference to the yen). With so many officials talking of ‘one-way bets’ it is clear they have discussed this issue in some depth and mean every word they say. Unfortunately, I don’t think that adds up to very much at all. One the one hand, at least there is some consensus as to what the official wording of the statement means; previously, different interpretations of the G7 communique sent major ripples through the fx market. But on the other hand, I question whether the G7 ministers have any place in trying to steer the market away from what they perceive to be an excess. Have they lost some of their faith in the functioning of the free market? Perhaps they think fx participants are unaware of the risk of the carry trade unwinding? I don’t believe this at all. Just look at the official statement language on Japan: “Japan’s recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risks”. They are still confident in the market. I don’t think they needed to make any such warning on one-way bets and think it is a little condescending (to market speculators), but it was probably a language compromise as some folk were clearly gunning at the yen before the meeting, whereas others (i.e. US) clearly didn’t want to play any role in yen bashing.

    In terms of the actual wording, the FX portion of the statement doesn’t deviate from the Singapore meeting, with an emphasis on exchange rates reflecting fundamentals. Personally, I think you could make the case that there are real fundamentals of the economy and the monetary fundamentals, and the weak yen is fairly reflective of the latter.

  3. In order to become successful you have to get rid of your human behaviour (called emotions of fear and greed) You must have a plan and trade your plan.
    Your plan should tell you when to get in and when to get out not your emotions.
    Ask yourself when do I get in and when do I get out and do it.
    Trying to time the exact entry and exit point is very difficult,but if you have a plan you will be in control of how much you win or how much you loose.
    If you risk too much on a trade your account will we wiped out.

  4. Until you can excise the idea of “punishment” for failing to adhere
    to your market rules, you will continue to make the same mistakes.
    I know, because I continually punish myself and I never get better.
    Englishmen have a built-in masochism–the result of our outrageously
    critical and self-critical society–and we enjoy being abused. Only
    when we can surmount that desire with a desire of equal weight (but
    healthy), can we succeed.

  5. Forexharry – I have always had a plan, but since starting this blog, I have supplemented it with a road map (the plan is a sub-set of this). My road map can be found at

    Chris G – Surely the carrot and stick approach can help to condition improved behavioural responses over time? It works with animals, and with children. I just think I need a big enough stick and a tasty carrot, to really make the incentives work properly. What kind of punishment do you use?

  6. Don’t go head’s on against your mistakes. You make them for a reason. Punishment won’t rid you of your problems in trading, it will make you only stronger, so you will continue to make the errors despite the punishment.
    Take a different approach. Brett Steenbarger suggest introducing an external observer. Think of you split in 2 persons and now you as external observer would look over your shoulder while you were trading.
    Take this concept a step further.
    After you made a mistake.
    Take the time and try to analyze in a discussion between yourself and your external observer what you were thinking in the trade. What the real reasons were, why you made the trading error.
    Maybe you will find, that something totally irrelevant to trading caused the trading error. (eg. You had a pressing chore to do, but you could not stop trading) Maybe you will find, that you are taking to big risks in trading, because the size traded is too big for your account, or you were frustrated missing a clear opportunity and you wanted to get the “missed” money back.
    I found that I can not trade against myself, I will just make the same mistakes again and again. With some problems I have to live, but knowing them I can try to avoid the situations, when these demons pop up, some others I have integrated in my trading as money management rules or strict trading rules. EG. If I have to leave the trading desk in 20 minutes, I take no trade. If my family is around I don’t trade. If I have to finish a paper I do that first, then I trade.

  7. As an intuitive person, I scribble notes on my trade worksheet, and I am my own best diagnostician – one recent error was preceded by this comment: “too dangerous, keep out” noted beside the stock symbol…gues what this newby did. It is followed by six points of observed weaknesses on this trade, noted immediately..but for future review. I think you should be even-handed in your response to errors because you also need to keep your ‘animal spirits’ alive. I concluded to avoid a certain trading set-up that is death for me. Of course, I am just learning.

  8. I have the similar situation, I believe yours is not unique. I have been struggling with it for 5 years full time and had my account wiped out many times, but these negative behaviors persisted. I know what they are, I have commited to correct them, including trying various forms of self punishment, but to no avail.

    I stopped trading since January 2006 and went to work for others, while continue to work on these issues, one of the things I do is to listen to Mark Douglas’s “Trading In The Zone” several hours a day, it was not easy but I on it, the “broken record” graduately sank deeply in my subconscious. It took me over 6 months of daily listening to the “broken record” until I started change, I still made mistakes, but I am improving bit by bit, one day at a time.

    Just thought that I share this with you and your readers. I have not find the solutions yet and “Trading In The Zone” didn’t cure my problem, it helped.

  9. Caravaggio, this post had me in stitches, sorry as I know you are serious about speeding up the demise of your trading gremlins. If the gremlins are particularily deeply entrenched, and if they are numerous, it will take time to tame them. Focusing on the damage that they do is pretty potent as is identifying them and their popping out to run the trading turret. In addition, developing the internal observer is very effective–you divert the mental/emotional energy from the gremlin realm to the internal oberver’s–that’s is what is called self-empowerment. You do not need to punish yourself to achieve any of this. And regarding your wanting to speed up the process, despite the fact that you have done very well with your roadmap and tripling your account in about a half of year, you want to speed it up even more? Sounds like a gremlin is popping its pesky little head here! The reality that you may need to earn income another way is just that, reality. That possibility does not warrant derailing your progress by wanting to speed it up in time so you can keep trading.

    Your emphasizing that your doing the best that you can do is the way you want to either continue trading and/or leave it to do something else is excellent.

    Without emotions, we would not get up in the morning. We do not live by logic and reason alone. Reason and logic can filter the emotions, so the best are used to motivate us. It is often misunderstood, that all emotions need to be absent from trading activities.

  10. In addition, your gremlins are punishing you. You want more than what they are dishing out? Focus on the bad that they do to your account and mental capital which will reveal so much punishment you will wonder why you are still alive!

  11. Chris G – It looks like many readers agree with your idea that self-punishment is not the way forward. I thought it was perfectly logical, but it looks like I may be mistaken. Time for a rethink, me thinks.

    Chris Czirnich (Globetrader) – Many thanks for your advice. You are the second person to say that self-punishment won’t work, and I am starting to think there is something to this. Reading your post, I imagine you are a very rational trader, which is excellent. Personally, I find the ‘external observer’ exercise extremely useful in decision making. I also find a variation of this technique helpful: instead of creating an external observer, I project myself forward in time and look back the decisions I am making. I used this technique when I decided to leave my old job. However, I find that it’s all too easy to get lost in the moment when I am trading, and it is at these times that the gremlins come out to wreak havoc. Because I think I am weaker than you on this front, I believe I need to take more drastic action to modify behaviours and kick compulsive habits and other gremlins.

    Nonadamas – I also believe I am my best diagnostician but I realise I am also vulnerable to moments of weakness, and I need to eliminate and become stronger. Also, your point on keeping the ‘animal spirits’ alive is noted. I think it is important to ‘cultivate’ the right emotions.

    A reader – Many thanks for sharing. Your journey of five years of full-time trading is something to behold. I congratulate you on your efforts, and on your decision to decide to leave trading, at least for the moment. Your daily listening ‘Trading in the Zone’ resonates with my own focus and pre-occupation with this road-map of mine. I use meditation to help the advice and reminders of the road map sink in, but I think I need to dedicate even more to it. All the best, Caravaggio.

    Michelle – Good to hear from you again. Your contributions always give me something to think about. I like your point about diverting energy from the gremlin to the observer within. I do find it difficult to stay removed from the ‘present’ action at times, but I will try harder. It is important – I never thought about it in terms of an emotional energy transfer from the negative to the positive.

    You are the third person to say that I do not need to punish myself. I take this on board, although I must admit I still don’t really understand why this approach won’t work.

    Also, your point about wanting to speed up my account growth is valid. I am content with the returns, but what I am not happy with is the behavioural difficulties I have encountered. Whether I succeed or fail in terms of my account growth, I want to be able to say I gave it my best from a behavioural perspective. That way, I can fail and succeed at the same time. It’s true that the gremlins themselves are punishing, but I do feel that I need to attack them from every possible angle.

    PS – It’s cool that you laughed at the article. It was supposed to be serious but kind of funny at the same time.

  12. Caravaggio,

    Punishing yourself, especially via bodily pain, constitutes behavioral conditioning. I could be wrong but I think that behavioral conditioning and psychology has gotten a bit of a beating from cognitive psychology. Cognitive psychology changes behavior by focusing on changing thought and thought patterns. You change the thought, you change the behavior. Behavioral conditioning to me seems inadequate and ineffective because behavior which has to be conditioned can become unconditioned through time and through lack of conditioning stimulus, while via cognitive changes, the actual neural connections are modified, therefore effecting a permanent change. To me, psychological conditioning is a quick fix, but not lasting. Cognitive changes are more challenging but certainly not impossible to accomplish, and though they may be more slow acting, the changes are lasting.

    Making an analogy with dieting, the best approach is to change your approach to eating/exercise, not adhering or trying to adhere to a restrictive diet or a punishing physical regime, but to learn how to choose the best kind of nourishing food (low calorie, nutrient dense) and the amount of it which you can reasonably eat via greater knowledge of nutrition and energy expenditure via physical exercise. When the pounds come off, they stay off, because you have changed your enviroment surrounding eating. Same thing with the cognitive approach, you change your mental environment via brain changes.

  13. Thanks Michelle. Your explanation makes perfect sense. I can see why behavioural conditioning is unlikely to have a lasting effect: ‘behaviour which has to be (behaviourally) conditioned can become unconditioned through time and through lack of conditioning stimulus’.

    I’m just thankful I followed everybody’s advice and steered away from this approach. So, it’s back to good old, slow-burning will-power.

  14. Pingback: The Real ‘Law Of Attraction’ - It’s Not What You Think

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