This is Adam Halpern with Indicator Warehouse.

And I want to thank you all for joining us today.

I have the pleasure of having Richard Friesen and Erich

Senft, both with two of the most difficult last names you

could imagine.

So for those of you who don't know Rich, I met him,

actually, when I was trying to build a

trading assessment test.

Because of our diversified trading system, I really

wanted people to be able to get a sense of where their

strengths resided.

Do they tend to lead towards scalping,

swing trading, whatever.

And Rich will give you a little bit about his

background, but he is the perfect match.

He used to be a pit trader.

Now he has a background in psychology and many, many

other interesting things.

He's definitely earned his gray hair.

For those of you that don't know Erich, he owns and

manages supportresistance.com, and he's

also our lead educator.

So I thought it would be perfect to get these two guys

together and have a conversation.

So with that, I will hand it off to Rich and Erich.

I'm happy to be here.

And my background started on the floor of the Chicago

Mercantile Exchange, trading options on the S&P futures.

And then I built a trading desk at the Pacific Stock

Exchange on the options floor, trading options on equities.

I ended up through some perverse things trading on the

Chicago Board of Trade, trading options on wheat.

And then I built an electronic exchange during the dot-com

boom called ePIT systems.

I have been working with professional traders, money

managers, and active traders for the last decade, working

with them to build their emotional, mental, and

psychological strengths.

And from this, I have developed a number of

processes and found where people get stuck, where

traders do those things, those behaviors that no

longer serve them.

And so I've been working, building a series of processes

to overcome the major issues that traders have.

So that's where I have been.

That's what's exciting me today.

And I'm just excited to talk about whatever

Erich brings up.

I know that he sometimes can be a little creative in his

questions, so I'm ready.

All right.

Well, I'll try not to throw you too many curveballs.

All right, so the first question--

fear.

I think this is probably the biggest psychological obstacle

that plagues traders.

You're afraid to take a trade.

You're afraid to pull the trigger.

You're afraid of being wrong, and everything

that goes with that.

How does a trader deal with fear?

Well, first we have to realize that fear is there for a very

positive reason.

We're still operating with our 50,000-year old brains.

In other words, our basic neurology hasn't

changed that much.

And on the savannas and in the tribe, fear was a very

positive contributor to our survival.

And as a result, it's really deep into our brains.

Now, the problem is that we're no longer on the savanna.

There's no longer tigers.

And we're no longer in a clan environment.

But our brains haven't shifted.

And as a result, because trading puts us as close as we

can get to the edge of risk, of survival, of making that

hunt and making that big kill, it triggers all the same

things that our brain is used to from the

savannas, early on.

So as a result, we drop into fear.

We drop into stress cycles.

And we act the same kind of ways that we did

50,000 years ago.

The problem is that those ways 50,000 years ago really helped

us survive.

But in a training environment, it almost brings us to the

opposite behaviors of what we need to do.

That's an excellent answer.

It kind of reminds me a little bit of road rage too, that

would explain what's going on on the highways.

Yeah, the exact same thing.

The whole survival thing.

Yeah, we trigger that fight or flight.

And there are some things you can do, and a couple of break

state exercises.

And I think that Adam can maybe drop those into the chat

box for people who want links to the Flight to Freedom.

There's an exercise there.

And that exercise is basically a breathing exercise.

What happens is, when we're threatened, our brains are

great pattern matchers.

And they see the pattern of the threat.

We drop into our limbic system, and that's our more

primitive animal survival brain.

And it immediately gives us adrenalin cocktail.

It immediately gives us what we need to move our large

muscle groups.

But it shifts our thinking also.

And to get out of that fear state, we need to then

interrupt that cycle.

And what we can do is do a breathing exercise.

And for those of you who are interested, you can go to that

link, and there's the exercises there.

And that breaks that state.

Because what happens is, our limbic system puts in the

adrenalin cocktail, gets us ready for fight or flight, and

then it says, OK, is there a real threat?

It does that first and then checks.

So it checks with our more thinking brain, our neocortex.

And if, in fact, the neocortex says, hey,

there is a threat here--

because the neocortex is somewhat slower--

but if it evaluates and says it is a threat, then it goes

back to the limbic system and says, OK, let's pump up that

adrenalin again.

And so for some of us, we can get into this cycle whereby

the neocortex says, oh my god, we're in a panic state.

There must be something wrong.

The adrenalin says, the neocortex thinks there's

something wrong.

So we get into this cycle.

So this is a break state that traders can do.

Hm.

That's really interesting.

I had no idea.

So a simple breathing exercise can actually help you refocus

and give you some clarity on the situation and help you

decide whether you should pull the trigger on a trade or

perhaps exit a trade early.

Well, it's not going to give you the decision process on

that, but what it's going to do is break that cycle.

So if your limbic system in the brain notices that you're

breathing slowly and regularly, it will say, oh,

there must be nothing wrong.

So you can actually take a symptom and turn it into a

cause and change the state of your brain.

Then once you're not in the fight or flight mode, you have

less fear, then you can take and say, OK, what do I need to

do here, and make a decision.

Well, that sounds a whole lot better than my method of

dealing with it, which was usually

just to hold my breath.

Well, OK--

you can go another direction on this.

And that is, another way to break that fear is to take

some deep fast breaths until you start to feel lightheaded.

You need to lie down for this--

is to lift your legs, lift your belly, clench your arms,

clench your legs, clench everything as tight as you can

and hold your breath and squeeze hard.

Just hold that breath.

Hold it until you feel like you're going to pass out.

And then let it out.

And what this does is it takes that fear state, builds that

physiology that a normal fear state would do, by using your

big muscle groups.

And then when you release and breathe slowly, it's another

way to break that fear cycle.

I may actually try that one.

That sounds pretty good.

It's a great exercise.

Yeah, no, that sounds fantastic.

All right.

Next question here, we have greed.

I think probably behind fear, greed is probably the next

biggest obstacle that plagues traders.

We're in a position, we have an open position, we're making

profit, we don't want to get out of a trade any earlier

than we need to.

But at the same time, there's probably no worse feeling in

trading than to have a profitable position turn on

you and turn into a loser.

What advice do you have for people when it comes to

dealing with greed?

Well, greed is a word that covers a lot of different

psychological and physiological states.

So let's parse this out and break it down a little bit.

You know, on Wall Street, the Gordon Gekko, "Greed is good."

In one sense for traders, greed is great.

And we can talk about that later.

What you just mentioned, though, is that sense of loss.

Psychologically, and when I'm doing presentations to groups,

I'll say, OK, let's say we bought something at 100, and

it ticks at 99.

Have we really lost money?

And most people say no.

It ticks to 98.

Have we really lost money yet?

No.

97, no, no, no, no.

And then they say, OK, we get out.

And then I say, have you lost money, and the answer is yes.

If, on the other hand, you buy something at 100,

and it goes to 101.

Ooh, that's cool.

102, oh, man.

I called that right.

I'm a giant in the industry.

It goes to 103.

Wow, did I nail that.

104, whoa--

everything I dreamed about is coming true.

And I'm exaggerating here, but what happens is when we're in

a winning trade, what we do is we associate that win with a

lot of psychic and psychological value.

Now, let's say it gets up to 110.

And we're going, man, am I a genius.

And then it ticks to 109--

have we made money from 100 to 109?

Well, really the answer is no.

We've lost money from 110 to 109.

Because psychologically, we've already

banked that 110 number.

And as a result, it ticks 108.

Whoa.

We don't look at it, is the overall strategy, what's the

best way to get out?

Do we have trailing stops?

How do we exit?

What's our goal?

All those things that are statistically valuable, we

lose sight of those because we've already

banked that high watermark.

Right.

I can certainly relate to that.

I can too.

So what's a solution to that?

How do we deal with the market backing up on us?

Do you have any suggestions?

Yeah, that is moving from trade winning to strategies.

When a new trader starts out--

and I've trained lots of traders to trade my money.

And usually on the floors, they spend six months or a

year as clerks, and then they move up, and first, they're

getting your coffee.

Then they're running your sheets.

Then they're helping determine implied volatilities, like I

was on the options floor.

So on the first day, almost every trader that I've

trained, deep down inside, believes that he's a god, he's

a trading genius, and that if somebody would