Do we trade with Free Will?

Bad Assed Trader:  My latest fascination relating to trading is whether I am fully using my "free will" to trade.

One would like to think so.

But all is not what it seems in respect to human behaviour.

Wikipedia defines free will as:

"Free will is the ability of agents to make choices free from certain kinds of constraints."

I recently read that scientists had carried out research which allowed them to predict a decision people were going to make 6-7 seconds before the person had actually made the decision....or should I say was aware of the decision they had made.  The conclusion was that the subconscious (or unconscious mind as many prefer to define it) makes our decisions before we are aware of them and then informs the conscious part of our brain which thinks it has made the decision all by itself.

I then forgot where I had read the article so did a bit of googling and found this fascinating short Youtube video on Free Will  which demonstrates exactly what the article was saying.

In my research on the topic I also came across this really absorbing article  in the New York Times which has stimulated my thought no end.  As a psychology graduate and soon-to-be qualified coach I have a more than passing interest in this anyway, let alone how it relates to trading.

I have an emerging hypothesis which I'd like to start to relate here.

Evidence points to decisions being made first in the subconscious mind.  Logic would suggest that if decisions originate there then thoughts also originate there as you would expect thoughts to precede decisions.  Otherwise, what would be the point of thoughts if not to guide decisions?

Maslow's Hierarchy of Needs

Psychological study has long understood that people are primarily driven and motivated by deep seated needs (or urges).  These needs come before the thoughts and before the decisions - they are the first step in the process of any action we take.

At their most basic they are clearly physical - the need for air, water, food and warmth.  Maslow set out a hierarchy of needs in a pyramid (see left) and the basic needs are at the bottom.

So our need for air generates our action to breathe.  The thoughts and decisions concerning breathing are generally taken subconsciously.  Conscious thought does not come into it unless we wish to veto the decision to breathe and hold our breath.  We cannot consciously override this deep seated need though because in the end our subconscious takes over and forces us to breathe.

As we work up the pyramid we believe we have more choice over whether, how and when we meet these needs. We are also more influenced by our environment and upbringing in these choices - ways of acknowledging respect differs across cultures for example.

So we start with the need which drives or motivates us to find a way to meet it.  Latest research in neuroscience (watch that Youtube video and read that NYT article) is now showing us that our subconscious mind starts that process of meeting a need with something that could be described as a "perception of motion". This means the subconscious mind has an idea as to how to meet that need and perceives the answer.

Whilst needs are always real and valid (because they are simply needed - no choice or interpretation is involved), the ideas generated as to how to meet them are sometimes inefficient.  For example, someone who needs respect might hit another person thinking that will gain respect.  This might not be the most efficient and effective way to gain that person's respect.  These ideas from the subconscious are the result of learning, mainly as a child when we form our understanding of the world around us and how it works.

So the subconscious generates this idea and the conscious mind becomes aware just before execution, perceiving the decision as made and then witnesses the execution of the act as though it was controlling it.  According to the NYT article and information on Wiki, our conscious has the power of veto.  This means it can receive the proposal to act from the subconscious and then reflect on it, consider it more fully and then decide against it. This is considered to be where "free will" is applied, through conscious thought, where people believe they have resisted their urges or some predetermined destiny that's written into their DNA or fate or whatever.

But I'm not so sure.

I do believe we have free will but I don't believe it is generated by the conscious mind.  If decisions originate in the subconscious then all thoughts could be expected to originate there and so it is in the subconscious mind that free will resides.  Our conscious mind is simply overhearing, if you like, the thoughts and decisions the subconscious is considering and making.  Consciousness is just awareness: awareness of thinking, deciding, doing and perceiving.  I don't think I'm out of kilter here considering the definition I found on Wiki:

"Consciousness is a term that refers to the relationship between the mind and the world with which it interacts."

This reflects well my own line of thought which is that consciousness is just awareness of the world, including what we are perceiving, thinking and doing in our subconscious.  We (the bit of us that feels, wants, thinks, aspires, plans, decides, regrets, loves and hates) are our subconscious really.

The Oxford English dictionary defines conscious as "aware and responding to one's surroundings".

The conscious mind is the aware mind.

Experienced traders stress the need to be self aware, to recognise when feelings like greed and fear are starting to influence your trading and to refrain from trading until you are aware that you are back in control, ready to trade without emotion - trading what you see not what you think or feel or want.  Trading with free will.

So if we want to trade using free will and our free will resides in our subconscious/unconscious mind then it is our subconscious mind that must be trained to trade and to wish to use its free will (free from the influence of deep rooted emotions) when doing so.

I have some ideas that I am experimenting with on myself to train my subconscious to direct my trading more effectively and will let you know of positive outcomes as they unfold...

Unleashing the power within...

Fear of Missing Out

Bad Assed Trader:  As part of my continual search for the holy grail of trading improvement I am homing in on detailed aspects of my psyche by paying great attention to what I am feeling and thinking just before I take those of my trades that do not work out well.

The Euro Yen (EUR JPY) seems to be my nemesis at the moment, or should I say my tutor.  It recently gave me another learning opportunity.  I had thought I had identified my fears and recognised them but I was still operating with a blind spot in relation to the fear of missing out.

A couple of weeks ago I had been watching many of the currency pairs retracing back against their trends.   They were mainly in down trends due to dollar strength increasing, but they had all stretched themselves and were being pulled back to the 50 day moving average in the manner of an elastic band pinging back or, as my coach Emmanuel puts it, a lung breathing in and out.

So, as a trader, you watch the price going back up and you wait for a sign that it will turn and head back down.  My rule is that I need cyclicity to be on my side, with price bouncing off a strong level of support or resistance and price action indicating that price is turning by showing a high or low test bar, a doji, train tracks or equivalent - all shown by the nature and shape of the bars on the chart.

So Euro Yen was retracing and I was watching and waiting.  Patiently, or so I thought.  I subsequently realised that the more time passed and the more price retraced the more I felt a building up of pressure.  It was the same with many other currency pairs, they were retracing and then they were retracing more.

In fact, they started to look as though they might have actually turned and formed an uptrend as price was making a considerably higher high.

As I later realised, the pressure building up turned into a feeling that I had missed noticing the turn in the trend.  Then I started to feel - in a deep down sort of way rather than a blatantly apparent way - a similar feeling to that which you get as a child at school when someone's come into the classroom with sweets to share and everyone else has spotted the goodies and got up and helped themselves and because you were concentrating so hard on your work you didn't notice until it was too late and all the sweets had gone.  Awww.

With the benefit of hindsight I can see that this feeling influenced my actions.  I took a long trade with EUR JPY just one step too soon because the pressure had been mounting.  As a result price dropped to a dozen points below my stop loss taking me out and then chuntered its way up through my target.

Well I'm not gnashing my teeth over it as it provided me with a really helpful lesson.  As it was I was having a day's training in coaching that day as part of the diploma in executive coaching I'm doing.  So after losing my trade I had the benefit of some free coaching from another trainee coach and took this issue into the coaching arena.

It was fascinating to explore in detail the emotions that were involved in the run up to me taking that trade.  The other trainee coach and I put a magnifying glass onto my feelings about missing out and this has helped me to recognise those feelings of pressure which are so dangerous to traders.

No-one likes to feel they are missing out on something everyone else is benefiting from.  It feels painful and lonely.  We all have that small child inside still pressing us to join the crowd. You can see the advantages to children to follow the herd because they haven't developed sufficient judgement to know for themselves when something beneficial or harmful has appeared so they just tag along.  We are undoubtedly hard wired to do this for our whole lives.

As a trader I have to conquer that emotional pressure.  I have to anticipate that it will come, spot it coming and find a way to counteract it because successful traders absolutely do not follow the herd.  It's no good me denying I have that inclination to some degree: we all have it.  Good traders have found ways to prevent it from influencing their trading behaviour.

Youtube has an amusing video from Candid Camera showing how powerful herd behaviour can be on unsuspecting victims:
http://www.youtube.com/watch?v=fQI8pZJiMe0

Resisting the urge for sheep like behaviour

Bad Assed Trader gets off to a flying start...finally

Bad Assed Trader:  Readers who tuned in last weekend will have read the final farewell from Faceless Bureaucrat.  I'm on my own now, a Bad Assed Trader alone in a mad market, watching as the Euro soars over 100 pips against the Pound one day and tanks by the same the next, as it did on Thursday and Friday this week. Typical action in the frenzy that is the Forex...frenzy and huge potential.

I've been preparing myself for this adventure (Faceless Bureaucrat would have called it a "challenge" but I cast away such jargon and just head for the fun) and recently this has taken the form of training my subconscious to play a more active role in supporting my trading.  Now I can't prove that it is this tactic which has turned my performance around this week or the fact that FB has gone once and for all (P45 arrived in the post this morning - YES!) or maybe I was already turning the corner (hey, it was a very long corner, let's be honest) but something has happened, something amazing.

I refuse to see it as a blip.  I know it's only a week but I can feel that a shift has taken place in my mindset.  It's a combination of things.  I'm paying much more attention to lines of support and resistance and to cyclicity and giving more weight to them.  I'm more discerning in waiting for evidence of support/resistance PLUS cyclicity PLUS price action to be in my favour.  If one of these is missing then I skip the trade and don't care if I miss out.  Bad Assed Trader has become more patient, waiting for the signs to scream before she risks money and she's fussy, she has high standards and knows if she drops them she may as well stick ten pound notes in the fireplace and take a match to them.

And, following the lessons I learnt on the last trade I blogged about on Tuesday (October 4) I have actually managed to pretty much stick to my action plan - I only take a trade if I'm really confident in it and then I just don't mess with it.  I let it run its course.  I had one exception to this where I realised after entering the trade that I wasn't fully confident and so when price very clearly started going against me I took it off for half a percent loss. This turned out to be the right thing but again reinforced to me how important it is that I only go for those trades where I have the confidence to see it through.

So what's this flying start then?  Well, let's look at it this way.  Perhaps Bad Assed Trader was an apprentice until Faceless Bureaucrat was willing to cede control.  Perhaps BAT needed to learn all the lessons whilst it was safe to do so.  Of course she'll carry on learning until she drops but best to learn the most difficult and dangerous lessons when it's safe.

Perhaps BAT feels that only now does she really need to make serious money, now that she's on her own.

Whatever.

The point is I've made over 5% in my first week of post Faceless Bureaucrat trading. I took 11 trades and won 7 of them, often making 2 or more percent on a winning trade.  Now even Bad Assed Trader doesn't like to brag but after well over a year of trading I reckon I'm entitled to say that's my best ever week.  And I'm determined that it marks a turning point. There will inevitably be peaks and troughs but I'm sticking to this new mindset.  Let's see how it goes.

In the meantime I firmly believe we have witnessed the faceless bureaucratic caterpillar metamorphosing into a forex trading butterfly, and what a metamorphosis it's been. Thrills and adventure all the way.

And I promise to be honest if it all goes tits up next week.

From Faceless Caterpillar to Bad Assed Butterfly

Confessions of a Typical Trader

Bad Assed Trader:  I've been reflecting long and hard on a particularly instructive trade I took last week.  It's been another learning opportunity, let's put it that way.

No, it was not a disaster.  I didn't lose any money, in fact a gained a bit.  But not the full 1% I aimed for and could have achieved had I not indulged in the typical trading errors to which I am clearly still vulnerable (but working on it - or rather to be positive: am over it).  The reasons were 100% mine and the errors so typically and classically mine (and so typical of many traders I believe) that I feel I should hold this trade up as a standard "why I should not interfere" trade.

I had only recently gone over a clutch of my trades to compare what would have happened had I not interfered with them whilst they were on and compared the outcome with my actual results (with my interference).  It gave me the evidence to prove that my coach Emmanuel is right when he repeatedly says I should find a great trade, set realistic profit and stop loss targets and then let it run its course.  Do not start changing the target mid trade, for example.

USD JPY 4 hour chart on 30 September 2011

So here's how not to do it.

The Yen (USD JPY) has been buggering about for some time and I'd practically scratched it off my list for daily analysis until, on Friday, I noticed an interesting repetition in price action.  I've picked this out on the chart on the right by drawing the emerging trend line as price started to make higher lows and higher highs. MACD (the indicator showing at the bottom of the chart as an ascending row of peaks) also indicated that price was turning upwards.
I can't pretend this was a conventional trade in any sense.

USD JPY on hourly chart just before 8am 30/09/11

But I'm a girl of principle.  By which I mean I work from principles.  My understanding of trading is that we look for patterns which show a repetition of some behaviour and use that as a basis for assessing the balance of probability for where price might go next.

USD JPY: What happened next...on the hourly chart

When I saw this it looked exactly as the chart above shows.  I checked on the hourly chart (left) and entered the trade on the break of the 7am bar (the last one) at 76.68.  I set my target at 76.93 (initially), below yesterday's high and the whole number (77.00) where price will often fall back.  I was right, price got there (see chart below where I have marked on my entry with a fully shaded blue arrow, my (altered) target with a purple arrow pointing down and my stop loss with a red arrow.

It looks straightforward doesn't it?  Did I take the easy road?  Did I buffalo.  So here is my honest appraisal of my performance on this trade:

1.  Fundamentally I lacked confidence in the trade.  Although I had some good justification for it, it was an unconventional trade (going long in a downtrend where indecision about price and a narrow range of price were predominating).  The hourly also showed a lower high and low which I discounted as mini cycles.  I believe this lack of confidence underpinned all my subsequent errors.  It shows me how important it is that I have full confidence in and justification for my trades.

2.  Despite the lack of confidence I took the trade.  I put this in as an additional point to reinforce it really as it is so pivotal.

3.  I watched the trade too much.  This is the addictive side of trading which I need to spot as it happens and overcome.  It went up initially and then plodded for two hours, gradually drifting down (the red bar just before the purple arrow).  I went out for about an hour and when I returned price was having a growth spurt and quickly moving in on my initial target.

4.  At this point I became greedy.  Sigh.  This has happened before.  I realised my target was not the full 1% and so moved my target further away by 4 pips.  Price hit my initial target.  It did actually reach the place I had moved my target to: 76.97 according to my charting software as you can see, but the broker's "spread" kept me in.  It then started to retrace in line with the normal way of things.

5.  From greed to fear.  The typical trader pendulum.  I became sensitised to all price signals for a move down and started to lose my bottle.  Price sat on the pivot point (the black horizontal line at 76.75) for some minutes (felt like hours) and when it threatened to drop below it I took the trade off for 0.25% profit. As you can see, the dip was price simply retesting the 50 Moving Average line (the red upward moving line) before shooting up at some speed to career through my target and beyond.

6.  I was influenced heavily by two other factors.   The overriding one was my strong desire to end September in profit and this trade was making a significant contribution to this.  I did end the month about 1.2% in profit. But this desire encouraged the greed and fear every new trader battles.

7.  I allowed myself to get drawn into managing the trade and then wanted to finish the trading and relax.  I ran out of patience...as well as bottle.

Seven errors...all in one trade.  And yet I have felt no pain.  This at least indicates I have moved on to some degree since my early trading days.  That and the fact that I can now dispassionately deconstruct all my errors, seeing them in clearer, sharper detail and hopefully understanding my weaknesses better.  Deep down I think I didn't feel I deserved that trade because it was unconventional and I lacked full confidence in it.  Apart from my moment of greed I was governed by this lack of confidence and so didn't achieve the 1% target I had seen as possible.

My resolutions going forward are:
1.  Only take trades where I have sufficiently high confidence that I will not be tempted to tinker.
2.  Do not interfere once in a trade - there lies greed, fear and ruin.
3.  Work on spotting the three key issues I have: being drawn into managing the trade (I see that as trading addiction), greed and fear.  I will raise my awareness of when I feel these three sins arising and learn techniques to banish them.  I've now developed a mantra for the early warning signs of all three and how I will talk myself out of them.  If this works it'll be material for a future blog...
4.  Stick to the plan - as the experienced traders have told me repeatedly from the beginning, plan your trade and then trade your plan.  End of story.

Onwards and upwards.  What ho!

Faceless Bureaucrat bids a fond farewell

Faceless Bureaucrat:  It is time I drew the curtain because the end has now come.  Faceless Bureaucrat has left the building.  As of yesterday I am no longer employed by the NHS, my only connection with the institution being that I am obliged to continue to look for suitable alternative NHS employment for a month and then am eligible to claim my redundancy cheque.

I now hand over fully to Bad Assed Trader to continue this blog with the passion for trading she has developed over the year.  I say to her:

"Our financial future rests now with you my girl.  I've done my bit, brought in the income to pay for your training and to support you for the first year.  I've even managed to secure redundancy to support you for longer whilst you steady yourself on your feet.  Hopefully you'll get your balance sufficiently early that you can put some of this redundancy cheque into the trading account and make an income with it.

"The time has come to fully shed the bureaucratic mindset, the institutionalised boundaries limiting your hopes and dreams.  I've tried to dent the universe for the better in my own bureaucrat way but it's been frustrating and limiting to say the least.  So now it's your turn. You are now in full control my girl.  There is no-one to stop you succeeding but yourself.  No-one to stop you failing but yourself.  You wanted complete responsibility for the outcome of your efforts, you wanted the chance to express yourself without inhibition, here it is.  Complete and unabridged, in the form of trading.

"I have faith in you.  So go on, step up to the plate and show us all what you're made of.  Find and exorcise your demons, find and nourish your angels.  I know you're not motivated by money alone.  I know your plan is to use money wisely and contribute to the greater good - so start making it girl!"