Saw it, Liked it, Reprinted it here...

Dr. Brett is as astute an observer of markets and behavior as anyone you will find. His swan song at http://www.traderfeed.blogspot.com/ has included some reprints and references to real gems of wisdom from years passed and today had a link to May 2nd, last Sunday. I have highlighted in red a couple things which caught my eye, then explained why in the parenthesis which follow. I am sure going to miss this guy as he winds down his blog for good.


Sunday, May 02, 2010
Core Ideas in Trading Psychology: Implicit Learning and Somatic Markers
Previous Posts in This Series:

Mirrors and Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns Briefly

Trading as a Performance Activity

Introduction to Trading Psychology



Perhaps the most common psychological change that traders need to make is the ability to quiet their minds and focus their concentration. Many of the problems described by traders, from emotional frustration to negative self-talk, distract traders from their best trading practices and plans.

One of my earliest observations as a psychologist working with traders was how common it was for experienced traders to go through periods in which they traded like rookies. How could that be?

The literature review that I conducted to write the Trading Performance book led me to an interesting conclusion: the skills that are central to trading involve frequent exposure to subtle patterns in the shift of supply and demand. Over time, these patterns are internalized, so that experienced traders develop a "feel" for markets. This is known as implicit learning (see the Performance book for a full description): the trader recognizes the pattern, but cannot necessarily verbalize it.

*(bluecollartrader commentary: Scott Farnham has referred to his "gut feel" as tacit knowledge. See the comment section of his July 28th, 2009 post entitled, "The Enemy Within" as well as this follow-up essay entitled, "The Spark" from August 3rd, 2009. When I see things repeated over and over, I take note.)

There are many patterns in life that we sense, but cannot fully place into words. My favorite example is the young child who creates grammatical sentences when she talks, but cannot tell you the rules of grammar she is using. Similarly, I can sense clearly when a person is talking in a very sincere or insincere manner, but cannot necessarily tell you all the subtle cues--the changes in vocal inflection, the nuances of facial expression--that lead me to that conclusion. As for the experienced trader, for the seasoned psychologist, it's a gut thing: the result of thousands of exposures to patterns that recur, but rarely the same way twice.

Once the concentration of the psychologist or trader is broken, the access to those subtle gut hunches is lost. In that situation, the experienced professional loses contact with years of experience and, indeed, becomes a rookie. Caught in frustration, worries about profitability, or distracted by family turmoil, the trader is no longer attentive to somatic markers, the felt cues that tell us that a pattern is present.

This is why, in the Trading Coach book, I highlighted exposure methods as particularly promising for traders. Those methods train us to stay calm and focused, even as we are mentally rehearsing (or actually undergoing) stressful situations that typically trigger our problem patterns. It isn't that we need to remove emotion from trading--our feelings provide our best somatic markers. Rather, we need to ensure that self-relevant emotional turmoil does not overwhelm the intuitions that are present when we are focused on markets.

All this having been said, I would estimate that 80+% of traders fail because they have never developed implicit learning in the first place--not because their gut hunches are swamped by distracting thoughts and feelings. Trading is indeed a performance activity and it takes many concentrated months of exposure to patterns to make them our own. Placing money at risk before cultivating that implicit learning is no different from entering a battlefield without military training. You'll be so busy looking for setups that you'll never realize that you're the one being set up.

*(bluecollartrader commentary: I have posted the Mark Douglas interview on a number of occasions over the months of blogging, including recently. This is a long interview video but he makes a point of mentioning the importance of paper-trading/practice trading prior to putting real money at risk. This is something which Scott Farnham of FNG Day Trader, someone who has had a strong influence on the direction I want to go, did when he first started. I believe he went roughly 1.5 to 2 years without trading real money during his learning process. If someone is telling you that you must have real money at risk as you learn to day-trade, your bullshit detector should be going off like mad. Not that they all are charlatans, but seriously, are they trying to sell you something? A subscription? A chatroom? A course of study? Wouldn't your losing money add perceived value to their... (fill in the blank) ...that they are trying to sell you?
When one of the best traders in the blogoshpere who doesn't try to sell anything to you, as well as the two top trading psychologists who have penned the best, most respected books on the topic tell you the importance of practice-trading before putting real money at risk, shouldn't you take heed?)


For more on the topic of implicit learning, check out the posts on Implicit Learning and the Unattached Mind, Implicit Learning and Single-Trial Learning, Building Market Intuition, Intuition and Trading Decisions, and Somatic Markers and Trading. Cognitive and behavioral exercises to aid trading performance can be found in the Trader Performance book, along with a detailed account of implicit learning.