To Simulation Trade or Not to Simulation Trade

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To Simulation Trade or Not to Simulation Trade

Susan felt a gasp come out of her as she looked at the plunging price action. It was the NQ E-mini and the line of red looked like blood running down the wall of a slaughter house. But she would not be moved. You see, her trading plan, which she had created from her analysis, indicated that rather than sell in this situation, she must wait, patiently...to buy. She had identified a significant demand level that had formed on the hourly chart and that coincided with a daily chart level; and the price action happened to be screaming down toward that demand level as the buyers were waiting because the price action had not revisited this level since that last consolidation. This was Susan's setup and her protocol was to wait for the price action to revisit this out-of-balance condition, indicating a high-probability buying opportunity. The challenge was to allow her buy limit order to be hit – even though part of her was yelling, "Noooo, I'm going to lose" - and of course, she had her stop in place just below her lower demand level support line.

Then it happened, she heard the audio alert say "order filled." And, it continued to drop, for a few moments, as her stomach knotted. Then just before hitting her stop, it moved sideways, then up, and up, and up. Where before she felt a nervous anxiety, she now felt elation and a sense of confidence; a) for sitting with her emotional discomfort, which meant that she had developed a little more strength to do this again the next time and b) that the trade had worked in her favor. But, the interesting thing is that Susan felt all this even though she was not making a dime from the trade. You see, Susan was in a simulation trade!

Let me begin sharing a few names and facts. The names are Tiger Woods, Kobe Bryant and the L.A. Lakers, and Derek Jeter and the N.Y. Yankees; the fact is that they all practice, practice, practice. In one story about Tiger - even through his latest slump, he is still the best golfer today - after winning a particularly difficult match on a rainy day, someone in the clubhouse looked out over the course and noticed a body out there ... alone. It was Tiger ... practicing. That is how the good get great. Kobe is the first one to get to practice and the last one to leave; his work ethic is legendary. And, it's the same with Jeter and Alex Rodriguez and all the other great athletes, dancers, actors, astronauts, surgeons and special agents. They train and train and train and then train some more. And when they practice/train, it is not under game/reality conditions; but they do it relentlessly. They are creating consistency to build skill capacity. Now how? Let's look at why that happens.

There is a growing field that merges the medical arts, neurobiology and psychology, which is called psychoneuroimmunology. It essentially is the study of how what you think affects brain function and health. It demonstrates the connection between the mind and body. In his book, "Evolve Your Brain," Dr. Joe Dispenza explains it this way. Your every thought produces a bio-chemical reaction in the brain. The brain then releases chemical signals that are transmitted to the body, where they act as the messengers of the thought. The thoughts that produce the chemicals in the brain allow your body to feel exactly the way you were just thinking. So every thought produces a chemical that is matched by a feeling in your body.

Essentially, when you think happy, inspiring, or positive thoughts, your brain manufactures chemicals that make you feel joyful, inspired, or uplifted. For instance, when you anticipate an experience that is pleasurable, the brain immediately makes a chemical neurotransmitter called dopamine, which turns the brain and body on in anticipation of that experience and causes you to begin to feel focused and energetic. If you have fearful, greedy, or self-doubting thoughts, the brain also produces chemicals called neuropeptides that the body responds to in a comparable way. You feel fearful, greedy, or unworthy. In this way, thoughts are becoming matter.

When the body responds to a thought by having a feeling, this initiates a response in the brain. The brain, which constantly monitors and evaluates the status of the body, notices that the body is feeling a certain way. In response to that bodily feeling, the brain generates thoughts that produce corresponding chemical messengers; you begin to think the way you are feeling. Thinking creates feeling, and then feeling creates thinking. Going further, thoughts and feelings drive behavior in a continuous cycle. When you do this over and over, you are creating brain pathways that make it easier to feel and do in the way that you have "trained."

What also happens is that as you think about the charts that you are analyzing and executing, even though there is no real money at stake, you are going through what is called "mental rehearsal." Studies have shown that all the areas of the brain that are involved when you are trading real money and executing live trades are activated when you are simulation trading. Of course, the key is to trade in simulation "exactly" as you would with live money. Actually, there is another filtering system at play in your brain as well. It is called the reticular formation. This part of your brain facilitates arousal and focus of attention. Here is an illustration: I was attending a seminar and the presenter told us to take a moment and look around the room and to identify "everything" that was red. He gave us just a few seconds to do this, he then told us to stop and to take a pen and write everything that we saw that was BROWN. How many things do you think that we identified...if you said 0 then you are correct.



The point of this exercise was to demonstrate how our brains filter information. We see what we think. The reticular formation is responsible for a large portion of this. When you simulation trade - again, it must be just as if you had live money on the line – you are firing not only neurotransmitters in your brain and creating memorable states (like relaxation and confidence in the face of anxiety producing stimuli); and you are not only increasing your ability to see a particular type of setup and through repetition and training, develop tolerance and desensitize yourself to it because of the repetition; you are also, establishing expanded mental filters that allow you to "see" beyond the internal biases and limiting beliefs about the market (I wrote about some of these in last week's article, Biases: They Can Be Bad for Your Trading), which drive emotions that can and do distract you while in the trade.

So you see, there is a strong biological basis for the importance of simulation trading. It can be a boon to getting you closer to your A Game. That's what Tiger, Derek, A-Rod, Kobe and Susan are doing. They are training their minds, their brains and their bodies to work in alignment in order to get the results that they want. This is what we teach in Mastering the Mental Game. It's all about learning how to attain, maintain and sustain your A Game.

Have a great day.
- Woody Johnson


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