Lance Armstrong and my Cognitive Dissonance.

A sideways look at how correctly resolving your 'Cognitive Dissonance' matters for future success as a trader.

I was extremely disappointed last week when I heard that Lance Armstrong was not going to fight the recent charges brought against him by the US anti-doping agency. Armstrong has long been one of my personal heroes, a man who has fought and overcome a prolonged, and at times near futile, battle with cancer. Against all the odds not only did he survive, but then went on to become the greatest touring cyclist of all time, winning the ‘Tour De France’ an amazing seven times, and becoming a champion of the fight against cancer. – Allegations of using performance enhancing drugs have however dodged Armstrong throughout his career, something which was rife in his sport, yet something which he has always strenuously denied – that is until now. For someone who has spent his life fighting any adversity or opponent, be it death, cancer, the best cyclists in the world, the incredibly tough and demanding cycling events and terrain, and numerous allegations, is quite a statement, and would suggest to me - ‘hands-up, you got me’.

Personally this leaves me in a bit of a bind. Armstrong, as I mentioned, was one of my all-time sporting heroes. I bought into the whole Lance Armstrong thing, perhaps not in a huge way, but nonetheless he was someone I hugely admired and revered. I read his two autobiographical books; ‘It's not about the bike: my journey back to life’ and ‘Every second counts’, I have watched documentaries about the man, read countless articles and followed him on Twitter. For me Armstrong is someone who overcame the most incredible adversity to achieve the near impossible. And yet, there in ‘Black and White’, he is someone who can now be associated a word which I almost have trouble typing in relationto him - ‘Che-t’ (could not quite bring myself to type it). – This is a circle I can not quite square at the moment. – Two weeks ago I was at the Olympic Games for the finals of the men’s 4x100 metres. When the announcer read out the names of the various team members, each name was greeted by the crowd with a roar of appreciation, that was until the name Justin Gaitlin was announced, his name was followed by a mixture of boos and muffled silence. Gaitlin is man who is a ‘Cheat’, he has been found guilty of using performance enhancing drugs; is this the fate that awaits Armstrong?

How and why am I writing this on a blog about trading, and what lessons can this possibly have for traders?

Firstly, I want to explain what is happening for me ‘in my mind’ around this Lance Armstrong issue:- I am suffering from a clash in my belief system, my mind firmly believes one thing, and yet I have an opposing and contrary belief in my mind too.

• Belief 1) Lance Armstrong is one of the all-time great sporting heroes and a living legend, despite the fact that he has now almost certainly been found guilty of using performance enhancing drugs. 

• Belief 2) I despise cheating in sport, including the use of performance enhancing substances.

These two opposing beliefs occurring together in my mind are what are termed a ‘Cognitive Dissonance’. Our minds loathe possession of two opposing and contradictory beliefs running at the same time; it is a very uncomfortable and at times almost painful and unsettling experience. As a consequence we seek resolution of the cognitive dissonance. We achieve this by finding excuses, justifications or narratives which allow us to square the opposing beliefs, even if this means sometimes we have to fool ourselves. In terms of Armstrong, this may take shape of: - ‘I really admire Armstrong for his battle with cancer and for his incredible charity work he has done to help, the battle against cancer, and cancer sufferers’. I could possibly add that ‘Cycling is a sport where cheating through the use of performance enhancing drugs has been rife in the past, and there is a fine-line between what is acceptable and what is not, and perhaps Armstrong inadvertently crossed that line’. – Naïve? Maybe: - Yet that is how I could resolve my ‘cognitive dissonances’ with regard to Armstrong. – And thus Armstrong, in my mind, would still be the legend, who perhaps erred inadvertently in a situation where that is always that risk, as opposed to being someone who consciously cheated.

In trading, there are many occasions where trader’s experience ‘cognitive dissonance’, often the effects are minor and largely immaterial, however there are times where the consequences could have far-reaching affects which can seriously undermine trading performance. - Traders are particularly vulnerable to experiencing ‘cognitive dissonance’ when markets or trends turn, or there is a marked change in the trading environment, or when they adopt a contra-trend approach. At times such as these traders may hold on to their firm beliefs developed in a previous trend or as a trend matures, they then exasperate the situation by deepening their commitment to this belief and may alter their conduct as they try to justify this. This is when a trader can become vulnerable to behaviours such as seeking out people with similar views, favouring news articles, web-pages and blogs which they know support their arguments and beliefs, and avoiding or dismissing opinions and views that disagree with their beliefs; - a behaviour termed ‘confirmation bias’. The result of this is often to entrench their beliefs further and deepen their commitment and resolve. – However, this sort of behaviour, often in the face of overwhelmingly unfavourable price action, can lead to a serious depletion of one’s trading account. Eventually the trader will have to throw ‘the towel in’, however at this point they face two new but related threats:

1. It is extremely hard to abandon a deeply held belief; it takes time for the belief to dissipate and during this time the trader will be prone to placing further trades which reflect the belief. – This can lead to ‘death by a thousand cuts’.
2. A new ‘Cognitive Dissonance’ may form regarding the trader’s ability. This represents a future threat if not effectively dealt with and takes the following form:

• Belief 1) I am a good trader, who has a tried and tested method and approach which over the long-term will bring me success. (Self-belief is a fragile commodity in trading, and it is essential the trader retains their self-belief).
• Belief 2) I screwed up and lost money, - a significant amount of money, which has depleted my account. Perhaps I am not a good trader. (Self-belief is under threat).

As I previously mentioned, cognitive dissonance is uncomfortable for our minds, a kind of mental disharmony. In our heads we feel internal conflict; confused, muddled, anxious and angry, as a consequence we seek to resolve this ‘cognitive dissonance’. We could do this in any number of ways, perhaps seeking self-justification, excuses, or creating a favourable narrative.

Looking at the situation faced by the trader, the question of how they resolve their cognitive dissonance, may affect how they perform moving forward:

• Let’s assume the trader goes down the self-justification and excuses route as they attempt to smooth over the battering and bruising their ego suffered. – This may take the form of refusing to accept that they were wrong, instead claiming that the market was wrong, crazy and totally irrational. I am sure most traders have been at this stage at some time in their life, I know I certainly have. – This self-justification does the job of resolving the dissonance; however it leaves the trader vulnerable. They do not learn from their mistakes, and may continue to hold beliefs in the market which are incompatible with current trading conditions. 

• If the trader however attempts to resolve the dissonance by trying to be honest with themself, which is not always easy, and creating a favourable narrative, then they could emerge from their bruising actually stronger for it. This more constructive approach requires using a little introspection and reflection, setting aside one’s ego, and putting one's actions into perspective. In this case it may take the form of the trader admitting they were wrong, and accepting that trading is a game of risk and probability and there will be times where the market moves contra to one’s views. Further to this the trader could accept that mistakes were made, and that in future they will have to look at applying greater discipline and be willing to seek out and accept opposing views. So long as they stick to their trading approach, which has worked well in the past, and avoid the sort of mistakes recently made, then there is every reason to believe that they will continue to be a successful trader. Thus they will have resolved the dissonance and retained their self-belief, whilst accepting that they made errors, and that losses and being wrong are part of trading.

Where does this leave me with regard to my thoughts on Lance Armstrong? Well that is something for me to deal with? Of course I have the luxury of not having this affect me in any material way, and thus I can continue to believe in my earlier attempt at dissonance resolution. Judging by the numerous articles I have read since Armstrong announced he would not be fighting the claims, I do not think I am alone; he still seems to be held in great esteem, if just a little tarnished.

" 'Confused mind' image courtesy of FreeDigitalPhotos.net"

Food for thought on the great Euro sell-off

I have been slightly absent from comments lately. I do apologise. – Lazy Summer days, vacations, commitments, Olympics etc. – Normal service will hopefully soon be resumed. 

Today I would like to draw your attention to two stunningly similar charts. – The top one is the Bund Continuation Future (German 10 Year Government Bond) from 2006/07, the second one is the EURSEK FX cross over the past 18 months. – As you can see the similarity is striking. – I have been incredibly bearish EURSEK in recent weeks, however it has hit some key fibonacci projection targets, which were always like to cause a pause in the downtrend. – However I would suggest watching out over the next few weeks to see if this pause unfolds. – There are of course no guarantees that this will correct in a similar way to the Bund correction higher of the second half of 2007, which completely retraced the Q2 2007 drop, but I think this is worth noting.

By the way for those of you with a curiosity for Technical Analysis, the pattern in both cases is a rare inverted ‘Cup & Handle’ Pattern. Whenever I mention this pattern to people it is usually met with howls of laughter and accusation that I made it up. Well it does exist and is not made-up, here is a link to a detailed description of this pattern.   

Revisiting - Sell in May and go away – Except in year with an Election day!

As the SP500 knocks on the door of 1400, its hard to believe that it is only 2 months since the SP500 made a loss of 1266, that is a quite awesome 10%+ gain since that low as of last night's close. In light of this it is interesting to re-visit a post from the 20th June. - The post was entitled ' Sell in May and go away – Except in year with an Election day!' which can be seen here. At the time I alluded to a comment from Bank of America Merrill Lynch analyst Stephen Suttmeier, who pointed out that 'On average, the April-May period is the weakest two-month period for the Presidential election year and this is followed by the strongest three-month period in June-August. I also include a couple of charts from Barry Ritholz's Big Picture blog which can be seen below, and which highlighted how this has played out on average in the past.


The next chart is an update of the monthly performance for this year to date into last nights close. It certainly seems to be playing out true to form for an election year thus far, though this does not bode too well for the stock market next month.

Signs of deeper correction for EURUSD.

The last couple of weeks have seen some significant price volatility on the EURUSD just above the key 1.2000 psychological support, which have produced some technical signals suggesting the possibility of a deeper correction over the next few weeks at least. 

The weekly chart below highlight's the significant downtrend of the EURUSD since March of last year. However it is noteworthy that the decline during 2012 has taken the shape of a declining wedge formation, declining wedges are not the strongest of patterns, however a breakout above the upper line of a declining wedge can trigger corrective price action. The declining wedge suggests a loss of downside momentum, which is echoed in the bullish divergence in the momentum studies (MACD and RSI) below. 

Further evidence supporting a correction is the ‘Bullish Engulfing’ Candle from last week which was confirmed this week, with a rejection of the low and a higher close.  

I am not looking for a change in direction in the EURUSD, rather a pause in the downtrend for now with a correction possibly back to the 1.26/1.27 area where the upper downtrend channel line coincides with some Fibonacci retracements and projections, and some old lows from January and highs from June. The idea of a correction would be challenged if the EURUSD were to decline back through last week’s low at  1.2135.

Elite Performance – Olympians and Traders.

As the world sporting world descends on London, it is interesting to look into sporting performance and compare and contrast this with similarities in trading. Having watched some fantastic spectacles and feats so far in the pool, at the archery, in the equestrian, the gymnastics and the weightlifting, it is amazing how much comes down to mindset on the day. Our own greatest Olympian Sir Steve Redgrave says ‘The bodies are roughly equal, the training is similar, the techniques can be copied, what separates the achievers is nothing as tangible as split times or kilograms. It is the iron in the mind, not the supplements, that wins medals.’ I’d like to compare this to a comment from Jack Schwager in one of the early Market Wizards books - ‘What sets successful traders apart...Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach’. Iron in the mind and attitude, it’s the same thing. – It is about mindset, the ‘appropriate mindset’, this is what separates the winners from the rest of the field.

Of course there are other aspects beyond mindset, mindset matters on the day and in the moment, but it also about the hard work, the training, pushing oneself to the limit, where every muscle and sinew is aching day after day. Trading is also about putting the hours and effort in, taking risks, feeling the pain on a mental and emotional basis when markets go against you, when your mind cannot  make out what is happening, when your ego is taking a pummelling; regretting not taking a bigger position

or cutting out a potential winner, seeing you hard earned potential winnings being left on the table. The pain is not physical, but it is every bit as real and possibly more tortuous.






Ultimate Performance is the result to two main factors: Potential and Interference. The father of modern day coaching Tim Gallwey, whose work has influenced coaches across the world, came up with a simple formula for performance.

Potential is what everyone has inside them, it is the education, learning, development, support and time put in that enables one to continually develop their capabilities. This can increase, at least until either physical or mental limitations constrain further growth.

Interference is what detracts from potential to reduce performance. This can be down to any number of reasons, perhaps environmental or external factors, physical or mental hurdles or limitations, poor execution of process, inadequate self-management. Many of these can be deatlt with in some way; however, the greatest threat in most cases is from attitude and mindset. Perhaps it could be something as simple as seeing yourself failing and recalling the look of an angry parent, a doubting physical education teacher or a school bully from your younger years who always told you that you did not have what it takes. – This creates that painful memory which instils that moment of hesitation or self-doubt just when you least need it. – Who hasn’t at some time during their trading had that pang of self-doubt, or lacked the self-belief or confidence just at a crucial moment, and then looked back with regret and heartache, in some cases leading to a whole cycle of self-doubt and poor decisions, execution and position sizing.

I will elaborate on this theme of performance in tomorrow’s post, with a look at the role of coaching in elite performance, and how this works in trading.