Trading With A Laser-Sharp Focus — Here’s My Latest Research

• August 19, 2005
• Brett Steenbarger

In the first
article in this series, I suggested that profitability results as much from
knowing when not to trade as when to initiate positions.  That article
explored the relationship between volume and volatility, concluding that
successful trading might require traders to stand aside when markets offer
insufficient movement and opportunity.  The second
article examined reasons to stop trading that are internal to the trader,
emphasizing the need for warning and drop dead levels to limit daily losses and
preserve overall profitability.  Even when opportunity is present,
sometimes traders are not in a mindset where they can exploit their edge. 
This is often due to emotional arousal–fear, frustration, or excitement–that
interferes with concentration and judgment.  In this final installment, I
will summarize a few of the practical steps traders can take to profitably
re-enter the game after they have stopped trading for emotional reasons.

Emotional Arousal and the Brain

Cognitive neuroscientist Elkhonon Goldberg, in his excellent book “The
Executive Brain”, details the role of the frontal lobes in such executive functions as planning, judging, analyzing, and
reasoning.  To no small degree, our frontal lobes are the instruments of
our rationality.  Patients who suffer from damage to their frontal lobes,
either through accidents or the effects of dementias, invariably suffer from a
loss of self-control, deficiencies in reasoning, and/or difficulties in planning
and executing sequences of action.  When we are engaged in those executive
functions, our frontal lobes stand out in functional magnetic resonance imaging
(fMRI) due to enhanced regional cerebral blood flow.  Conversely, when we
are stressed, blood flow shifts to other, more evolutionarily primitive cerebral regions, such as the amygdala. 
If it feels as though we are not in our right minds when we are stressed out,
that may be because we are no longer activating the brain regions responsible
for our executive functions.  Little wonder that we say or do things that
we regret when we are unusually angry!

That, of course, poses particular challenges for traders.  Initiating
and monitoring trades, scaling in and out of them, and eventually exiting
positions require concentration and keen judgment.  Under emotional
conditions of boredom, fear, or frustration, we find ourselves activating
precisely those “flight or fight” sequences that might facilitate
rapid action, but surely not calm reflection.  Traders I work with
intuitively recognize this when they tell me that they need to take a break
from trading and “calm down”.  They realize that, under
conditions of emotional and physiological arousal, they are unlikely to sustain
the concentration and clear-headed judgment needed for superior
decision-making. 

Conversely, most traders have experienced that sense of being “in the
zone” where they feel as though they are at one with the markets, making
decisions accurately and effortlessly.  This state of “flow”,
described in detail by psychological researcher Mihalyi Csikszentmihalyi,
results from prolonged activation of the frontal lobes.  Because such
activation requires sustained cognitive effort, most of us enter the zone only
occasionally, cycling in and out of states of greater and lesser arousal and
frontal activation.

When traders take a break from trading after a particularly frustrating
market sequence, they generally attempt to relax and take their mind away from
trading.  Some close their eyes and listen to quiet music, others talk with
friends, and still others go to the gym and work out.  All of these can be useful
courses of action in that they interrupt mind states that are not conducive to
trading.  Decreasing arousal, however, is not the same thing as activating
executive functions.  Simply relaxing or diverting attention will not bring
traders closer to “the zone”.  For this, a different kind of
activity is needed when taking trading breaks.

Activating the Executive Brain

Several years ago, realizing that I could neither afford nor regularly access
an fMRI unit, I obtained a biofeedback unit that several innovative
psychologists were using to treat attention deficit disorder.  Unlike most
biofeedback devices, which measure the body’s level of arousal, this unit
measured forehead skin temperature.  The idea was that, under conditions of
frontal activation, the enhanced regional cerebral blood flow would be reflected
in higher skin forehead temperatures.  When the brain’s executive functions
were not under recruitment, the blood flow would withdraw from the frontal
cortex and result in lower temperatures.  Several hours of trials, in which
I engaged in a variety of intellectual, social, and emotional activities,
convinced me that the device’s rationale was sound.  It also convinced me
that I could enter the zone at will if I were willing to sustain the cognitive
effort needed to maintain my forehead temperature above a threshold level.

What I have found using the device is that relaxation alone does not result
in higher forehead temperatures, because relaxation does not actively engage
such cognitive functions as attention, concentration, and reasoning. 
Indeed, we generally soften our cognitive focus in order to relax.  The
state that most reliably produced the high biofeedback readings and feeling of
the zone was one of relaxed but intent concentration.  I tried many
different exercises at home to consistently produce this state, and the one that
worked best (and has since worked well for others) was as follows:

You sit in front of the television, tuned to CNBC, with the volume
off.  Your sitting position is very still, and you’re breathing deeply,
slowly, and rhythmically.  While doing that, you intently watch the ticker
on the CNBC screen and the numbers that accompany each stock symbol.  Your
task is to keep a running sum of the last digit of these numbers.  This is
easily done when the numbers are small, but as the cumulative sum increases and
natural fatigue and boredom set in, it takes ever-greater mental effort to keep
the sum running.  While initiating and sustaining that effort, your skin
forehead temperature steadily rises and then plateaus.  After 15-30 minutes
of this, you find yourself in a different “zone”, much more
clear-headed and calm than when you started.  Another variation that has
worked for me involves counting backward by sevens from a very large starting
number.

This technique works for several reasons:

• The physical stillness and rhythmical breathing facilitate a state that is
  incompatible with emotional arousal;
• The cognitive focus on emotionally neutral stimuli (such as number
  sequences) interrupts the flow of frustrating events;
• The sustained concentration allows access to new cognitive and emotional
  states.

My experience is that thinking is clearer and more intuitive after this
exercise than it is normally–and much better than when we are emotionally
charged.  It is possible that this is merely a placebo effect: we expect to
become calmer and more focused, so that is how we experience ourselves. 
Thus far, however, my trading results–and those of traders I’ve worked
with–also support my experience.  The key is sustaining concentration
beyond the normal threshold of boredom.  If you keep counting the
numbers even after antsiness has set in, eventually you get to a quiet, focused
point where the counting becomes near effortless and your perception is very
clear.  And, if you perform the exercise routinely, you can access that
zone with increasing ease.

My Latest Experiments

Most recently, I’ve been using sensory isolation tanks (see the website
of a leading manufacturer; also look here
for tank locations) to push the limits of sustaining concentration in an
emotionally neutral environment.  For this exercise, you float in water
that is filled with epsom salts and heated to exact body temperature. 
During the float, you are enclosed in a soundproof and lightproof tank. 
You hear and see nothing, and you feel very little, because your body’s
surroundings match the condition of your body.  The task is to sustain
concentration in the absence of all external stimuli.  This requires a
complete stilling of our normal internal dialogue–a task very reminiscent of
Zen meditation.  

What happens after an hour or more of isolation is that the mind and body
adapt to the changed environment.  Once again, this requires a willingness
to stay in the tank, focused, beyond the normal boredom threshold.  My
experience is that you know you have adapted to the environment once you no
longer feel a need to move or leave the tank.  Although I am not hooked up
to the biofeedback machine during my time in the tank, I strongly suspect that
my skin forehead temperatures are quite high, as I sustain active, directed
awareness during my time of isolation.  By the time you leave the tank, the
world looks and sounds different, as you are now no longer adjusted to the
world’s colors and volumes.  The clarity of perception and thought that are
characteristic of the biofeedback work are even stronger following 
immersion in the tank.  

Although work with meditation, isolation tanks, and biofeedback is often
couched in esoteric terms, there is nothing mystical about them at all.  By
controlling our environment and cognitive activities, we can access states of
mind that are associated with executive functioning and deactivate brain regions
that are associated with impulsivity.  Elkhonon Goldberg foresees the day
when all of us will participate in gymnasiums of the brain, just as we join
health clubs to attend to our bodies’ health.  Traders might be the first
in line to benefit from his vision.

Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003).
As
Director of Trader Development for Kingstree Trading, LLC in Chicago, he has
mentored numerous professional traders and coordinated a training program for
traders. An active trader of the stock indexes, Brett utilizes
statistically-based pattern recognition for intraday trading. Brett does not
offer commercial services to traders, but maintains an archive of articles and a
trading blog at www.brettsteenbarger.com.