© Ed Seykota, 2003 ... Write for permission to reprint.

Ed Seykota's

Frequently Asked Questions

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Tribe Directory - How to Join ... TTP - The Trading Tribe Process

Risk Management ...  Fractals & Borderlines


April 27-30, 2003




Wed, 30 Apr 2003

Going with the Flow

Dear Ed,

Thank you so much for your patience of my repetitive tribe postings. Now I have come to realize after “examining” my feelings/postings.


I am aware of it now and accepting and celebrating its positive intentions. I feel joyful to “go with the flow” and “following the trend.” I have no reason to fight it now.

Thank you so much,

Yes !

Wed, 30 Apr 2003


Portfolio Diversification and Position-Sizing

Dear Ed,

How is position-sizing affected by portfolio
allocation percentages?

For example, if I have allocated equal amounts to 5 markets, instead of 1% of the portfolio might I reasonably choose to risk only 1/5 of 1%?


I've never heard of anyone risking such small amounts but that minimizes the risk if positions are established in all 5 at the same time.

Also, do you think fixed % allocations are OK? I learned to trade the strongest signals, and if
necessary, replace one position with another.
However, this seems to increase the risk of selecting the wrong markets.


Also, if each trade risks 1%, then their combined risk is greater. I have found that, trading odd lots of equities (no futures/option contracts) in a margin account, I can pyramid up to the maximum in only 2 or 3 markets at a time, but I would like to be able to trade more markets (at least 6) with minimal risk.


So, I'm leaning towards fixed percentage allocations and risking 1% of each allocation, not total portfolio size, but wondering if there is not a better way(?). What about "slots" of 25% each, and just pick 4 of the strongest to trade?

Also, is the combined risk of all open positions the same as "portfolio heat," and is it affected by the degree of correlation of the markets traded?

FAQ does not suggest specific system parameters. See Ground Rules.

You can answer such questions for yourself through simulations. As you get results, be sure to check them with you stomach for follow-ability. See System Testing.


Personal Computer


Great tool for performing simulations, designing strategies and optimizing specific parameters.






Wed, 30 Apr 2003


Cure for Wanting to Predict

Mr. Seykota,

First, let me thank you for your willingness to facilitate a forum such as this. I have always found the interview of you in Market Wizards to be the most interesting and thought provoking, and was very happy to stumble across www.seykota.com  a few days ago.

Sometimes seeing many different variations on the same theme seems to have an impact. In my case, the AHA factor hit me after reading several pages of the FAQ's here. I've had a fascination with economics since I took my first course in the subject, and had always carried the belief that my understanding of Macro Economics gave me some sort of an edge in predicting where the markets would head.


As you can probably imagine, this desire to predict the future, and be right about it with my timing, has led to a lot of frustration with the markets. Seeing it emphasized again and again here, I've finally discovered that prediction is completely unnecessary, and even undesirable when using a trend-following system.


Previously I had discounted technical analysis in general, and trend following specifically as something that could not work in "today's computer oriented market". This view has changed, I'm now in the process of learning about system development and testing, I hope that I will discover some profitable methods.

Do you have any suggestions on how I can keep my notions of how the market SHOULD act based economic fundamentals separate from my trading?


I know the obvious answer is "follow your system", but I don't think it's possible, or desirable for me to just suppress my ideas completely.


For example, if I believe the fundamentals say that a certain currency is almost guaranteed to fall over the next several months, I would be very hesitant to put on a significant trade long that currency if my system gave me the signal to do so. The problem here is again, I'm trying to predict the future.

Your thoughts would be greatly appreciated,

Locate your feelings about how the markets should act, and fully experience and celebrate them. This is the work of the Trading Tribe.


When you reach AHA your thoughts, feelings and trading all fall nicely into place.




Salt Lake City Seasonal Ritual

at Liberty Park


With a blower and tractor, a Recreation Department employee blows leaves up; they all fall nicely into into a big pile.






Wed, 30 Apr 2003


Other Applications

Once feelings flow freely, they reach the conscious mind and create wisdom.

Would you say the above quote applies in other facets of life?

Water flows better than ice, free markets work better than rationing, and it's easier to pick your banjo without a lot of duct tape all over your body.

Duct Tape

One Way to Prevent Day-Trading


Clip: http://mail.bcpl.net/~jthorsse/duct.html

Wed, 30 Apr 2003


Manhattan Tribe is Full

Hello Ed,

I am pleased to report that the Manhattan Tribe is now full. We have five people on the waiting list.

Could you kindly update your web directory to reflect that we are full and looking for others to start another group in NYC. I am also hoping that perhaps one or two members of our current tribe would go on to start their own group.

Based on the amount of interest and the number of emails received in the past four weeks I believe Manhattan could probably support 3-4 groups by year end.

It's that mystique of the great Seykota name. I believe for most of us, our first introduction was the Market Wizards book interview where we learned about this quirky trader living by the banks of Lake Tahoe; that image of a very successful trader with no quote machine on his desk stayed with us all these years.

Thanks for opening up a portal into your mind via the FAQ.

To keep your Tribe full, make it easy to leave, hard to get it.



Overflow at Hoover Dam

Sometimes a portal is worth wading for.


Clip: www.adamandlyn.co.uk/country/



Wed, 30 Apr 2003


Longs Only System

see: Long Only

Hello Mr. Seykota,

Thank you very much for the forum that you provide, and the time and effort you give to the rest of us.

Thank you also to the people that ask the questions. I relate to a number of the questions asked. I expect some benefit to my trading, and I am already feeling challenged to grow in ways that will help my life as a whole.

I am responding to the person who mentioned that his or her system provided positive results only on the long side, and not on the short side.

I see two possible reasons why a mechanical system would work to profit from long positions and not from shorts:


Market behavior causes different types of signals when it is moving up than when it is moving down

Error in the calculations.

I spend time looking at the calculations when I am in similar situations. I am very suspicious of a math error because the person said that he/she had tested several different indicators and always did bad on the shorts.

One way to test for an error would be to modify the data and see what happens. Try taking all of the prices, and subtracting them from 100, or what ever number seems appropriate for your values. If you replace all the prices with 100-price, the system should do well on the short side and badly on the long side.

Do not let the fact that the system has been profitable prevent you from accepting the possibility of calculation errors. I did make profits over a short time period with a system before I discovered I had coded it improperly.

Thank you very much for your time,

If it's just as likely for a stock to double as fall to half, then the signal to noise ratio is initially 100% better for the long side.

Long and short both have their advantages and disadvantages.

Some prefer one, some another and some both. Ultimately, you do best by finding your own niche.







Clips: http://beauty.about.com

Wed, 30 Apr 2003

Hot Seat Experience at our Tribe Meeting

Dear Mr. Seykota,

From the moment I volunteered to the time the meeting was over, I felt anxiety. I was truly experiencing feelings that I had repressed inside my subconscious.

I found it very surprising that since I have shared the experience with a few selected people, I still had repressed feelings of the trauma. I just wanted to forget about the experience and move on. (Clue#1 about my trading practices)

I had not expected the hot seat experience to be as profound as it was. The physical and emotional experiences were clear to myself, as well as the other tribe members. During the hot seat process, the feelings seemed to be exorcised from my subconscious, as I watched and listened to the other tribe member's mirror my feelings.


The mirroring amplified the feelings I was experiencing. I felt very uncomfortable, and started to worry about what kind of chain reactions would take place. Would I be able to have control of this situation, do I have to give up control? (Clue#2 about my trading practices)

I've always wanted to have control over all situations and aspects of my life. I never felt comfortable with "Going with the Flow" (Clue#3 about my trading practices)

I've always felt that I controlled my own destiny (which I now realize is an illusion) and would not accept anything else. Whenever I don't have control of a situation, or I feel that my illusionary sense of control is lost, I fall into a state of panic. I have been living with this illusion of control and panic all my life. (Clue#4 about my trading practices).

One of the tribe members spoke about water when describing his feeling during the mirroring process. Then my subconscious emotional dam cracked. I no longer had control over this situation.

The subconscious feelings started pouring out

When I was a young child, my parents sent me off to summer camp for part of the summer. This was the first time I was ever away from my parents for an extended period of time (approximately one month). I met other children and enjoyed my time with them. However, there was one event that had changed my life and stuck with me to
this day.

Before going to camp, I never learned to swim. The camp had it's own private swimming pool. I felt it was important to be accepted within the group. The group went swimming one day; many of my friends were jumping into the deep end (12 feet deep).


My childhood companions were carrying flutter boards (floating devices) to protect them and support them. I dropped my flutter board into the water, as I stood on the end of the diving board. I stepped off the end of the diving board, as I landed in the water, the waves from the splash pushed away my flutter board. That summer, I almost drowned.

The panic and lack of control I felt while being submerged under the water was something I never wanted to experience again. (Clue#5 about my trading practices) This deep-rooted subconscious feeling of panic was resurrected into my consciousness during the hot seat process.

I have a trading system in place, but the sense of panic (subconscious) always took precedent over my rules of trading (conscious). (Clue#6 about my
trading practices)

While sharing my feelings with the tribe, several issues were brought to my
conscious. I want to follow my system, but it means I need to give up the illusionary feeling I have about control over my own life and all the things within it which includes the Markets (The "AHA" starts) Issues that dealt with lack of trust in others, following the crowd, believing I controlled my own destiny, seemed to be catapulted into my conscious.

I had a near death experience, which had traumatized me as a child. I never dealt with the feelings associated with this experience.

The hot seat process didn't stop; the tribe members did not let go, they continued to mirror the feelings. (How much more of this do I need to endure, I thought?)

What could I have done to avoid this potential catastrophe? The tribe members started taking about taking precautions, (wearing a life jacket) to protect myself, to keep my head above water, A contrast to trading. Always wear your life jacket when going into deep water. Sounds like a metaphor to trading? ("Another AHA") It's still a cool idea to wear a life jacket. ("Another AHA")

I feel that my feelings about destiny and having CONTROL were clouding my past experience with death. This was manifesting itself within all areas of my life, especially trading! ("Another AHA")

Some closing thoughts. I feel I have experienced a tremendous purge. I felt pain, but I also felt relief, once I acknowledged my subconscious feelings. There has to be balance. ("Another AHA")

I see that this is a work in progress issue. However, I feel that I am aware of the clues to look for.

A huge paradigm shift has occurred. I can't control the universe and now I realize I don't want to, it takes too much work. Being prepared with my life-jacket is a simpler and easier approach.

One final important note, I feel it was crucial that I decided to deal with the issue and I made the effort to explore my feelings. The desire must come from within the person.

I want acknowledge my appreciation to our Tribal Chief for organizing our group along with our tribe members for helping me deal with this major issue.


Finally, I would like to thank you (Mr. Seykota), for creating a medium that fosters personal development.

Yes !

Wed, 30 Apr 2003

The Zone

Hi Ed,

How would you describe the feeling of being in “the zone”? Does this feeling become noticeable to those around you?

Kind Regards

When you are in the zone, feelings flow easily and naturally, like notes rolling out of a banjo. There's really no one feeling or one note to describe it.




Taking a Banjo Apart

to find out how it sounds.




What's the difference

between a Banjo and a ...


Chain Saw:

The chain saw has a dynamic range.


South American Macaw:

One is loud, obnoxious, and noisy ... and the other is a bird.


Harley Davidson Motorcycle:

You can tune a Harley.



You take your shoes off to jump on a trampoline.


Clip: http://members.tripod.com/


Tue, 29 Apr 2003

Cutting Losses

Chief Ed:

In your Market Wizards interview you said that the the most important rules in trading are: (1) cutting losses, (2) cutting losses and (3) cutting losses.

When you put on a trade, do you know, to any degree, what the outcome will be like?

The outcomes:




Break Even


I know the outcome when it occurs.

Tue, 29 Apr 2003


Using the Trading Tribe Process

Dear Ed,

First of all, deep thanks for your encouragement. I am sincerely grateful to you. Yesterday, for the first time, I did what I always wanted: I bought breakout at its formation, and sold it at the end of the move. Thank you.


The most interesting is that I even didn't feel the excitement from the gain (as before), but just a (much better) feeling of satisfaction. I just did the right thing - for the first time. If not you, I probably would not have guts to do that.

Today, also, for the first time, I had the right attitude, and I sold the position at small profit when market broke at some news before it became a large loss ... Once again, feeling of satisfaction, and not a feeling of regret about lost gains as before ... Thanks...

Now I think I understand better what is the problem with daily trading. First of all, I disconnected all the news. They just distract. Now, the natural unit of time for me is just a day. Probably, it is the same for all people. So, you have to wait days to get breakout in the equities index. But - when breakout is formed, it is necessary to act during seconds ( minutes at the very most).

So, daily trader should have two almost contradicting traits: patience (as for commodities), but to be very alert, and to be able to act decisively in matter of seconds.


I think about myself: if I am patient, it develops predisposition to quiet thinking, and analysis. At that time, I am not always able to act fast. But, if I am alert, there is a tendency to do something - means, to trade randomly (usually, with loss).

I suspect it is a combination of two spider traits - patience, and alertness, makes the daily trading so difficult. What I did with myself - I am training myself to take decision in just seconds (most of them - do nothing), and I allow for the free stream of emotions.

I am registering the feelings I have before I come to the screen - it makes me much more
concentrated. Feeling brought from outside disappear somehow
... Ed, thank you.

Yes !

Tue, 29 Apr 2003

Intentional Community

Hi Ed

Saw your new references to 'intentional community'. Did some Google searches on
the phrase, but was curious if you would offer more specifics on what an intentional community actually is from your perspective?

Intentional communities provide benefits of association.

In The Different Drum Dr. Scott Peck shares examples of getting to self awareness through community.

The Trading Tribe and this FAQ are examples of intentional community, in which traders interact and help each other.

Scott Peck

Clip: www.mscottpeck.com

Date: Tue, 29 Apr 2003

Test for Randomness

Hi Ed,

Could you explain further as to what you mean by : "Markets can pass tests for randomness and also provide profits for good traders" (a comment you made in response to an email sent on the 5th Feb). I didn't think it was possible to test for randomness in price data. Are there such tests?

Lookup Random Walk Theory. It claims markets are efficient and chart methods therefore cannot work.


So the trader takes an Efficient Market Scholar to lunch. On the way the trader sees a 100 dollar bill on the sidewalk and points it out to the Scholar. The Scholar tells the trader he must be mistaken, since if there were one there, someone would have already picked it up.


Notice that if you force the joke into SVO-p syntax, the joke and the Random Walk Theory both fail:


The Scholar tells the trader he is mistaken, since if there is one there, someone is now picking it up.



One Thousand Dollar Bill


Random Walk Theorists still won't stop

to pick one up since it can't be there.


Clip: www2.travlang.com/money/USD.html

Tue, 29 Apr 2003 09:55:48 EDT


System Testing and The Process

I've made a thorough review of my actual historical trades ..with data arranged in 3-D pattern...and I've gained quite interesting insights.


However, where does historical simulation and testing fit in the process of including the organic part in ones system design?

Historical simulation gives you an idea of the ride you might expect at various bet size levels. Ultimately your gut sets the amount of volatility you can stomach.





A good design for a volatility sensor.


Clip: www.rapidnet.com/~rernster/



Tue, 29 Apr 2003


Long Only


I have been trading LONG only for a while now with respectable results as a beginner (less than 15 % max drawdown) since Dec ’02.

My problem is that my system does not work for SHORT trading. I have back tested the Donchian, the Turtles, MACD, Moving av. Etc. based systems and my results are a steady decline in profits. I find that I am consistent in following my trading plan, which has worked so far for LONG trades only, however I am struggling to come up with a system for short trading that has at least a statistical chance of positive return. Can you assist?


Since your system works on the long side, and not on the short side, I suggest you examine your feelings of wanting to trade the short side.



Sentenced to an eternity of doing things the hard way.




Tue, 29 Apr 2003

Drawdown Vamoose!

My problem of having draw downs is because I am a nice guy who would not hurt a flower … having this psychology in my head … when I am making money in the market, I feel like I am hurting someone else by taking “their” money away … therefore I feel “bad”… which causes me to have draw downs; because of this feeling, I want to give the money back because I don’t want to hurt people!!!

But I am not hurting people, in fact they want to give me their money as a gift for executing a proper trade. But why do I feel bad when I take their money - à because I feel bad WHEN I give it away when they deserve it (ie when I lose)!!!

I am a scrooge with money (materialistic) so every time a cash flow comes out … I feel & associate it like I have been hit by Mack truck … painful …

SOLUTION: Quit connecting money with pain!

You may think at times that money determines your feelings (getting it feels 'good', spending it hurts), but that's not true: You have the ability to choose the way you feel.


Your life and your income will change dramatically to the better if you decide to feel exceptionally great about every dollar that you are going to spend from now on.

If spending (i.e. utility bills, taxes, mortgage payments, groceries, purchases, gifts for grand kids, etc.) is a 'bad' and painful experience to you, you are generating a dangerous belief - association - anchoring with every dollar you're giving to someone else:

You'll believe (and it doesn't matter whether you're aware of it or not) that you are causing pain to other people each and every time you're accepting money from them. You'll believe that your desire for money is damaging to someone else. Your income will be limited to the level of pain that you are willing to inflict on others. How much would you let others suffer, for the sake of your personal financial gain?

Giving Money To Other People Is Fun!

If you can understand--and more important feel--the truth of it, you'll make more money than ever. You'll feel great about yourself taking more money from more people, and the people who pay you will love you for accepting their money!

For more along these lines, see:

Egbert Sukop www.rumpelstilz.com

If you can choose how you feel, a bereaved person can choose to feel cheerful and happy.

The Trading Tribe does not attempt to change, manage or fix feelings.

Our Process is to experience feelings, exactly as they are, until they inform the conscious mind.

Forcing feelings sets a mission for the subconscious to inform the conscious mind, through repeating dramas. 

To unwind all this, you might begin examining your own feelings of wanting to control your feelings.

The Process is about experiencing feelings, not judging them.


The Honorable Paul Freitag - Sparks, NV


Experience your feelings just the way they are and leave the judging to Paul.





Mon, 28 Apr 2003

Cause vs. Effect

Hi Ed,

One consideration that keeps coming back to me when reading through your site about " Going with the Flow" is that I think you should adapt the environment to yourself and not have the environment adapt you to it.


One is cause and one is being effect. One is being responsible and one is being irresponsible.


The markets are a good place for this theory as you need to figure out how to be Cause over something which you have no control over.


The only way I see doing that is to focus on the things you have control over such as: Entry Method, Position Size, Expectancy, Stop Losses, Exit Strategies etc...


Otherwise to me when you say "Go with the Flow" you are saying "O.K. what just happened to me I am not responsible for but I am not going to get mis-emotional because of it." I do agree with being able to experience your emotions and being able to confront the situation but can you explain to me how you locate the positive intentions of your destructive emotions? I am very interested in that process.

Anyway I am still trading and just wanted to write and say Hi and ask you a question that I think about a lot.

The Trading Tribe goes with the flow, not against it; trade with the trend. 

The Trading Tribe knows no destructive feelings. Traders who view their feelings as destructive, may have trouble experiencing them.

The process of unlocking feelings is the work of the Trading Tribe.

Once feelings flow freely, they reach the conscious mind and create wisdom.

Wrecking Ball


The wrecking ball is destructive; it takes a chunk out of a building and destroys it. Feelings are not destructive. Acting out dramas instead of experiencing feelings can be destructive.




Sun, 27 Apr 2003


Rough Draft

Dear Ed:

I want to apologize for sending you an earlier email that was the rough draft. I nearly jumped out of my skin when I saw the rough draft had been sent.

You work hard enough without having to tolerate this type of inconvenience.

If you have time, please post this email instead:


Thanks for your excellent site, hard work and creativity. FAQ has been a pleasure to read. The traders that write in are to be congratulated for their honesty and effort also.

My email relates to three widely held beliefs in the trading community:

1). Not strictly following a mechanical trading system is an amateur mistake.

2). Strictly following my system will eventually lead to excellent performance.

3). Trading blowouts are usually the result of psychological phenomenon. Or as you put it Ed, that trading disasters are the result of dramas being played out.

My take is that:

1). There are plenty of level headed experienced traders that change or don't follow their systems at times for the betterment of performance.

2). Severe drawdowns or poor performance are frequently not the result of psychological baggage. To the contrary, I believe emotions are often used as an excuse for poor performance.

Just recently I read that [xxx], who where highly successful and have had success over many years, introduced discretion into their approach for the first time in their trading careers and are quite happy with the method.

A second example of this is [yyy]. He's had several severe drawdowns.

After this episode, I read [yyy] began using a counter trend approach along with his trend following system. He is a trader recognized as calm, cool and collected and an excellent system designer with two decades of tremendous success and yet he did exactly what's implied as amateur trading behavior -- not sticking to his system, or, changing the system just when the system "doesn't work."

Another example is a veteran successful trader who prides himself on robust systems and has stated in the past that "the system must be followed religiously" and that "probabilities must be allowed to play themselves out over many trades" and "work over different markets and time periods." Last year this trader had some tough drawdowns and wrote a letter to his investors implying the game has changed and that he was quitting trading commodity futures and was now dedicating himself to developing stock trading systems.

I bring these points up because I think trading can be a difficult long-term endeavor regardless of one's hard work in system development and discipline.

Trading excellence and superior performance is not guaranteed regardless of one's mental makeup or whether there is or isn't emotional baggage.

My key point: one's emotions are often made the scapegoat for poor performance. It's that old question: Which came first, the chicken or the egg?

Often the emotional baggage is the result of poor performance and not the other way around.

Thanks Ed,

The tribe uses SVO-p syntax. S-ubject, V-erb, O-bject, present tense.

Your "are to be congratulated" puts the congratulations out in the non-existing future and also hides the identity of the congratulator.

You might consider, "I congratulate the traders." 

You might make a point of using SVO-p for a whole day, and notice any feelings that come up in doing so, and use that as an entry point for The Process.

Same comment for "emotions are often used as an excuse."  SVO-p requires you to identify the user.



If you have trouble using SVO-p,

you might have something to hide.



Clip: http://www.crystal-fox.com


Sun, 27 Apr 2003

Adding to the position & time Stop

Hello Ed,

I am forever grateful to the knowledge and wisdom (Not just trading, about life too) you have passed along to all of us and continue to do so through this web site. I have sent email to [xxx] and am very interested to join the [yyy] Tribe and one day I wish to meet with you. I am writing it to you very first time with a trading question.

What do think of having a time period on initial position to determine the exit of a trade in addition to just a Stop Order? For example in my EOD trading, if my trade does not double (2%) to the level of initial risk (1%) by fourth trading day after entry, but still has a little profit I close the position.


On the other hand, if trade is already double of the initial risk I add to the position with lighter position and move first stop to the breakeven. So in this situation I’ll have an open risk (<1%) of the only 2nd position and if market continues to trend my reward could be higher.

Currently, I do have a rule in my trading of moving stops to breakeven on 4th day if trade is in profit, however, I do not add to the position. In case if trend continues to go in my direction after I closed out I re-enter on a little higher level with 1% risk. Please advise


FAQ does not recommend parameters. See Ground Rules.


You might examine your feelings of trusting your own research versus relying on an external expert to verify your reality.



At some point

the child may learn to trust himself.






Sun, 27 Apr 2003

Time Stop

Mr. Seykota,

After I buy a breakout, the stock does not advance nor hit my protective stop for some time. Is time stop a good strategy in this situation for trend followers?

The scenario is similar to the checkout lines in grocery stores. I am anxious and frustrated seeing other longer lines moving faster. But I am reluctant to switch because I am afraid to lose my current position.


By employing a stopwatch, I don’t know whether I would be getting out the store faster or just hopping repetitively to different lines all day long. Appreciate your comments.


FAQ does not recommend parameters. See Ground Rules.

You might examine your feeling of frustration about being in one line and seeing another move faster, or being in one instrument and watching another move faster.


Hunger Line

6th Ave & 42nd St - NYC 1932



Five Cent Meal Line


Clips: newdeal.feri.org/library/d_3d_e1.htm

Sun, 27 Apr 2003


The Neuro-psychology of Trading


I want to thank you for the excellent Tribe site. I've forwarded a posting that I recently sent to a different community of traders that might be relevant to Tribe members interested in The Process.

Recent research supports the idea that emotional patterns can be reprocessed
efficiently under conditions of high attention - concentration
. I believe that is
what is happening during experiential exercises when individuals become conscious of their emotional experience and verbalize it through S-V-O statements.

The biofeedback that my posting refers to may be a way of operationalizing the
degree to which a person is operating under full conscious awareness. I would expect that processing troublesome emotional experience during such full awareness would be particularly effective. I would also expect that introducing new thought - feeling - behavior patterns under such awareness would accelerate learning.

I realize there's a fair amount of verbiage in what I'm forwarding. Feel free to edit as you see fit if you'd like to share with Tribe members.

Again, thanks for the thought-provoking site.


Forwarded Message

Abstract: This is a lengthy posting on brain activity as it relates to trading. While recent advances in functional magnetic resonance imaging are revealing important brain-behavior relationships, such research is difficult to conduct with traders. Use of thermal biofeedback holds particular promise in objectively quantifying the degree to which individuals are engaging in executive cognitive functions. Preliminary data suggest that such biofeedback accurately discriminates between haphazard - discretionary and rule-governed - mechanical trading methods.

One of the traditional challenges research psychologists have faced is the reliance upon the self-report of experimental subjects for data on such variables as moods, intentions, etc.


With the advent of functional magnetic resonance imaging (fMRI), it has become possible to track cerebral blood flow patterns among subjects as they perform various tasks. This allows researchers to see which areas of the brain are activated during standardized tasks that draw upon particular cognitive functions.

Such standardization is necessary when assessing the functioning of particular patients. For instance, a task called the PASAT (Paced Auditory Serial Addition Test) presents subjects with a series of numbers. Each number in the series is followed by n seconds of silence before the next number is presented. The task is for subjects to add the series of numbers mentally. This tests auditory processing speed, attention, and calculating ability. By obtaining fMRI pictures of normal subjects engaging in the PASAT, we have a sense for the brain regions that are activated when engaged in these functions. When a brain damaged patient is asked to perform the PASAT, the fMRI reveals those relevant brain regions that are not receiving adequate blood flow.


Interestingly, when efforts at cognitive rehabilitation are undertaken, the brain damaged patients can regain some of their skill at tasks such as the PASAT. This is corroborated by fMRI pictures that show new regions of blood flow to those brain areas associated with auditory processing and attention.

The implications of this work are profound, suggesting that the brain is much more plastic than has been assumed in the past. With imaging, we can now see the brain develop new blood flow patterns.


Obsessive-compulsive patients, for example, who have undergone successful behavioral psychotherapy reveal structural brain changes before and after their treatment. In the future, such changes might even constitute an objective measure of whether a pharmacotherapy or psychotherapy has been successful.

One of my longstanding passions has been to identify the brain regions that are activated during trading, and particularly the patterns of brain activation that distinguish successful traders from their less successful counterparts.


It is reasonable to believe that traders who experience emotional interference with their trading, for example, would display different blood flow patterns under fMRI than traders who maintain a reasoned discipline in their work. It is also reasonable to believe that neophyte traders might show different blood flow patterns than their more experienced peers. (Research, for example, finds that novel tasks tend to be processed in the right cerebral hemisphere, while routine tasks are processed dominantly in the left. Intriguingly, negative emotional experience also tends to be lateralized to the right).

There are significant logistical difficulties in studying trading with fMRI. Imaging is very expensive, and getting on the magnet at busy medical centers is not easy. Perhaps even more daunting is the challenge of placing an entire trading station inside an MRI tube and creating realistic trading conditions. Finally, there is the challenge of creating standardized trading tasks, so that different individuals can be assessed on the same metrics.

I've mentioned on the List (and in my book) that one way I've tried to begin exploring the brain/trading relationship is through a novel form of biofeedback. Most biofeedback measures physiological arousal, and is used to track patterns of anxiety for the purpose of relaxation. Forehead skin temperature biofeedback, however, evaluates minute shifts in skin temperature on a real time basis. This reflects increases or decreases of cerebral blood flow to the frontal regions of the brain, which are the mind's "executive center". The logic behind the biofeedback unit is that skin temperatures should increase when subjects are engaged in such processes as concentration, judgment, planning, and verbal reasoning. Conversely, forehead skin temperatures should decrease when subjects are frustrated or otherwise emotionally aroused and when they are physically active.

I commissioned an engineer to build such a machine (since none are commercially available) and have been engaged in using it for research purposes. Most recently, I have created standardized tasks for the unit that involve varying degrees of emotionality, activity, attention/concentration, etc. By taking forehead skin temperatures every 10 seconds during task performance and calculating the standard deviation of the readings, I can compare the distribution of temperature scores under one set of task conditions with those derived from other tasks. The readings strongly support the underlying rationale of the device: tasks requiring the greatest mental effort consistently generate the highest temperature readings. The biofeedback unit appears to be an accurate means for quantifying the degree to which subjects are exercising their executive brain functions.

An interesting side note: Very high skin forehead temperature readings that are sustained over a period of minutes are invariably accompanied by major mood shifts, in which subjects report feelings consistent with being "in the zone". They report an unusual degree of clarity, focus, present-centeredness, and ease of thought. I should emphasize that this is not a placebo effect: the digital readings of the machine are hidden from the subjects so that they have no idea of whether their readings are high or low.

In my most recent experimentation, I attach myself to the biofeedback unit while placing a variety of trades in the market. Unlike fMRI, there is no logistical problem with being hooked up to the machine while trading. Specifically, I tried to create two very different trading conditions: 1) uncertain, frustrating trading where I made decisions intuitively on the basis of common technical oscillators and chart patterns, and 2) structured trading where I traded a tested, mechanical system. To keep conditions constant, I traded over identical time frames in similar mid-afternoon markets.


During the seat-of-the-pants trading, I started with relatively high forehead skin temperature readings, which deteriorated over the course of the trade. In the structured trading, however, my readings continued significantly higher throughout the trade. In fact, the average readings were much higher than the highest levels recorded during my standardized concentration tasks. Objectively (and subjectively) I was in the zone--but only when trading was structured.

The reason for this is a bit subtle. In the seat-of-the-pants trading, I didn't really know what to look for to base my decisions and had to flit from screen to screen to pick up (probably random) cues of strength and weakness. My attention was highly divided, and--because the trade duration was short (less than a half hour)--I felt rushed in my decision-making. During the mechanical trading, however, I knew exactly what to follow on a minute to minute basis and stayed glued to a customized screen that contained all the relevant data for decision making. My attention was not divided, and I experienced no sense of time pressure or frustration. (Yes, the mechanical trading has also been more profitable).

Much more experimentation remains to be performed. How are the biofeedback readings (reflecting sustained concentration and mental effort) affected by large increases in market volatility or position size? By holding period? By the nature of the trading system? Do successful traders sustain significantly different readings from unsuccessful ones? How much individual variability in readings occurs during hot and cold trading periods?

Perhaps the most intriguing questions involve training. Can we train people to sustain mental effort and access "the zone"? Would such training improve trading performance by enhancing trader discipline, pattern recognition, and problem-solving? Can dysfunctional trading patterns (blaming self for bad trades, failing to take valid trading signals, impulsively trading when valid signals are absent) be eliminated by reprocessing anxiety during states of high frontal activation?

If there is sufficient interest and if the kind hosts are amenable, I would be happy to conduct a demonstration of the biofeedback during our August Spec gathering. By then, I'm sure to have a variety of data to share.

My understanding of your points:


Scientists don't like to rely on self reporting of symptoms - and prefer objective measurements, such as fMRI and your Forehead Monitor.

Rehabilitation of brain function shows up as physical restructuring of the brain.

Your passion is to use your equipment to measure and enhance trading performance.

Mechanical repetitive tasks tend to result in going into the Zone.

Intuitive and random activity does not result in going into the Zone.

You might consider getting some readings on yourself before, during and after conducting The Process on your feelings of wanting to measure trading performance.



This Self Measurement System

Relies on Self-Reporting,

and Avoids Measuring Equipment.


What size bra should you buy? Where do you start? Don't go near a tape measure! The objective is to wear a properly fitted bra, not a tape measure. We don't use a measure to fit customers in our retail shop and neither should you. If a bra is too big or too small it tells you.



Clip and procedure:




Date: Sun, 27 Apr 2003


Thinking of Linking

Dear Mr. Seykota,

Which method is the most robust for linking historical futures prices (i.e. rollover) for the purpose of system testing? Thanks.

Robust means healthy, strong and vigorous. A trading system is robust if it performs well over a wide range of parameters. Same for a trader.

Some methods for linking historical charts:

Simple Splice - when one delivery expires, just continue with the next one - this leaves a price gap equal to the spread, at the seam.
Panama - like at the canal, you float one delivery up or down to close the gap - these adjustments accumulate, so for long term charts, with many splices, the prices at one end of the chart drift way off, even negative in some cases.
Interpolation - when you have two adjacent deliveries on the board at the same time, you can manufacture an interpolation series, that gradually works its way from one delivery to the other - this method gradually discounts the spread between the deliveries.

I prefer software that imitates real life, closes the expiring position and opens a new position in the next delivery.

This also handles the case in which adjacent deliveries are trending in different directions.

The Stork System


Pretty good method for bringing new deliveries on line.


Clip: www.tssphoto.com/vint_hum/pages/