Are You Backtesting Your Trading Brain?

01/14/2011 1:04 am EST


By Woody Johnson, author, From Pain to Profit: Secrets of the Peak Performance Trader

Linda visualized the trade over and over. She saw herself sitting at her trading platform, cool as a cucumber, back straight, brow smooth, heart beating evenly with dry palms and saying to herself, "...patience...patience...patience." And, what's more important, she allowed her trade to progress according to plan, with stops in place and remaining in place while letting the market prove her plan wrong or right.

She had done this same exercise many times and then had gone through it again in her demo account to create the neural (brain) pathway, and as well, the neural network (everything that she sees, hears, feels, smells, and tastes associated with this trading event) in her brain by mentally rehearsing this behavior. Just like a professional baseball player who practices through mental rehearsal in his mind first, then does everything just has he had visualized it in order to "train" his mind and muscles to do the right thing habitually so that he gets the right results habitually, Linda was training her mind and muscles to follow through as well. When she finished, she celebrated her success with the realization that success was defined as executing her trade in exactly the way it was planned and following all of her rules...overtly.

She also learned and was now demonstrating that neurons that fire together wire together (when you think, feel, or do, brain cells fire/release neurotransmitters; neurochemicals and other messenger molecules that create pathways in your brain, and when it happens habitually, those pathways become hard wired and fire together automatically when in the same situation). She was not only mentally rehearsing and practicing peak performance, she was creating an effective routine.

Mental rehearsal is a powerful tool that is used by all manner of peak performers and high achievers across the board; from elite surgeons, to high-powered trial attorneys, to world-class athletes because they have come to understand the power of imagination. They also understand that it is not enough to simply sit and visualize; you must demonstrate the ability in real time by "practicing" the art and using your muscles in the process. Demonstration is the crucial final step from mental rehearsal to personal evolution.

As you practice the desired behavioral strategy (a high-level, multi-step plan for getting a result), the more that you go through the exact motions associated with the desired result, you are slowly changing "explicit memory" (memory of how to do things that you can think about and declare like stating your name or your address or gender) to "implicit memory" (memory that is unconscious or behavior that you don't have to think about as in typing, brushing your teeth, tying your shoes, riding a bike, and playing a musical instrument). Another way to think of it is to look at how you learned to drive a stick shift. You learned each behavior that was necessary individually and then grasped through instruction or watching a model, the whole "behavioral strategy" associated with the desired result of effortless driving.

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You then practiced—you tested (tried the particular behavior like pushing in the clutch), then through feedback from the car, you knew if it was done correctly. Usually a surge forward followed by an immediate stall meant that you needed to do it again. You operated (looked at the model or reviewed the correct way to push in the clutch), then tested again (engaged that particular behavior again, in this instance practicing on the clutch); and you tested, operated, and tested until at some point, you got it and "exited" this process. All the while you had to think about each and every behavioral point in the strategy and you were using "explicit memory." You did this until you could flawlessly execute the entire stick-shift driving strategy.

Of course, 15 years after you "learned" this strategy, you may have found yourself driving 65 miles an hour down the freeway while negotiating a cup of coffee, with a burger in one hand, a cell phone in the other, and still "feeling" capable of manipulating the clutch and stick if necessary. This behavior had then dropped into "implicit memory;" in other words, you became unconsciously competent with regard to driving a stick-shift car.

Effective routines that are designed around a protocol (a sequentially ordered series of steps toward an aim or goal) or strategy, which then are "tested" using a feedback system that documents and/or verifies that the protocol/strategy is credible, that are then done over and over and over again to form a habit, are the makings of "skill building." If you do this process enough, the explicitly based memories associated with having to consciously think about everything that you are doing will drop into your unconscious and become implicitly based memories of how to get the same successful results; that is, planning your trade and trading your plan while following all of your rules to a T. When you do this, you have "programmed" your system to act and respond in a deliberate fashion; you are then designing the way that you interact with the markets and your general environment.

Your state of mind (a neural network of all that you saw, heard, felt, smelled, and tasted associated with a pleasurable or painful experience, which is most often connected to several/many other similar networks throughout your brain) has everything to do with your outcomes in trading and in life. States of depression, anxiety, fear, self-doubt, anger, and greed, to name a few, all have the power to influence your thoughts in very negative ways, leading almost invariably to self-sabotage. On the other hand, for example, states of confidence, curiosity, awe, satisfaction, happiness, and optimism can activate your internal resources and align your system to move in the same direction and for the same goals.

You can design your states by identifying the behavioral protocols/strategies that will get you the consistent results that you want, visualizing yourself doing those behaviors successfully, and then practicing this process in real time using a demo account in order to test-operate-test-exit the process. At this point, you have established an effective routine that is connected to the protocol/strategy, and by doing that over and over and over, you go from thinking to doing to "being" the trader that you know is inside of you.

The establishment of an "A" game is not an accident. Just like world-class peak-performers in other disciplines, trading requires preparation, training, mental programming, practice, persistence, and perseverance (pardon the overuse of alliteration) in order to trade successfully in the trenches.

By Woody Johnson, author, From Pain to Profit: Secrets of the Peak Performance Trader

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