Trading as Mental Warfare By Brett N. Steenbarger, Ph.D.

Trading as Mental Warfare By Brett N. Steenbarger, Ph.D.

Writings on the psychology of trading commonly view emotional conflicts and reaction patterns as impediments to successful trading. Accordingly, they advocate various therapeutic and self-improvement exercises to remove these obstacles. In this article, I propose a very different perspective: trading as a military activity, rather than a psychological one.

Writings on the psychology of trading commonly view emotional conflicts and reaction patterns as impediments to successful trading. Accordingly, they advocate various therapeutic and self-improvement exercises to remove these obstacles. In this article, I propose a very different perspective: trading as a military activity, rather than a psychological one. Specifically, I will draw upon the military writings of Col. John R. Boyd to demonstrate that successful trading requires superior strategic prowess. As we shall see, this implies that one’s growth as a trader may be more fruitfully pursued through systematic “combat” training than through traditional self-help exercises. This military framework forms the conceptual foundation for a research project already under way, in which researchers from the Massachusetts Institute of Technology (Andrew Lo and Dmitry Repin) are working with a successful trader (Linda Bradford Raschke) and a clinical psychologist (Brett Steenbarger) to explore the effects of emotions and training on the real-time trading results of over 100 traders.

Epistemology: How We Know What We Know

While Col. Boyd is most identified with his OODA (observe, orient, decide, act) framework for decision making in combat, the breadth of his work extended well into philosophy. Boyd was interested in epistemology: the study of knowledge and its acquisition. In this respect, his interests—and his thinking—parallel those of Swiss researcher Jean Piaget. An understanding of Boyd and Piaget’s work will prove helpful in grasping the mind of the trader.

Boyd described the generation of knowledge and understanding as a process of creation and destruction. As David S. Fadok explains in his excellent thesis entitled John Boyd and John Warden: Air Power’s Quest for Strategic Paralysis, Boyd equated creation with synthesis and destruction with analysis. In the face of changing realities and new information, people create fresh “mental images” of the world. They analyze new events and information and synthesize these into updated perspectives. In conditions of war, this facilitates adaptation to the uncertainties of battle. Quoting Boyd, Fadok explains that adaptation in wartime requires mental agility: “a process of reaching across many perspectives; pulling each and every one apart (analysis), all the while intuitively looking for those parts of the disassembled perspectives which naturally interconnect with one another to form a higher order, more general elaboration (synthesis) of what is taking place.”

Students of psychology will find echoes of Jean Piaget’s writings in Boyd’s theory of knowledge. Both men are constructivists: they emphasize the processes by which we assemble our understandings of self and others. In place of creation (synthesis) and destruction (analysis), Piaget referred to assimilation and accommodation. These he viewed as twin forces that allow individuals to maintain a dynamic equilibrium of knowledge. What Boyd refers to as mental images, Piaget calls schemas. These are mental maps that we construct that aid us in navigating reality. When we encounter events that do not neatly fit within our schemas, we try to reinterpret those events and assimilate them to our current mental maps. If such efforts at assimilation fail, we are forced to accommodate to the new reality and revise our schemas.

In his comprehensive book The Developmental Psychology of Jean Piaget, John Flavell summarizes a perspective that could be equally applied to Boyd: “The subject is construed to be an ever organized entity which accommodates its schemas (the basic units of this organization) to external reality as it assimilates the reality to the schemas.” This ensures that knowledge becomes increasingly organized and complex, as it must account for an increasing body of life experience.

Boyd emphasized that this complexity is a precondition of survival, in life and in war. In his well known presentation, Patterns of Conflict, Boyd explained, “It is advantageous to possess a variety of responses that can be applied rapidly to gain sustenance, avoid danger, and diminish [the] adversary’s capacity for independent action…To shape and adapt to change one cannot be passive; instead one must take the initiative.” In other words, the accuracy and the speed with which individuals can revise their mental maps in the face of new realities will facilitate their survival. This simple principle forms the basis for a new perspective on the psychology of trading.

Speed of Processing: The Crucial Variable

Col. Boyd was a fighter pilot and chose aerial combat as the “point of departure” for his military theory. He was renowned for his challenge that he could place his plane in a position of disadvantage relative to any pursuer and outmaneuver the pursuer for strategic advantage within 40 seconds. Boyd never had to eat those words, and thus earned the nickname “Forty second Boyd.” He attributed his success to his ability to outthink his adversary. By making unexpected maneuvers at opportune moments, he left his pursuer temporarily confused, opening a window of vulnerability—and opportunity.

Boyd referred to these maneuvers as “fast transients”—rapid, unexpected actions that violate the mental images (schemas) of the enemy. In Patterns of Conflict, he notes that the “idea of fast transients suggests that, in order to win, we should operate at a faster tempo or rhythm than our adversaries.” Echoing Sun Tzu, he further explains, “Such activity will make us appear ambiguous (unpredictable) [and] thereby generate confusion and disorder among our adversaries—since our adversaries will be unable to generate mental images or pictures that agree with the menacing as well as faster transient rhythm or patterns they are competing against.”

Victory in war, Boyd believed, was primarily a mental victory. By confusing and surprising the enemy, we wear down his ability to comprehend, adapt, and resist. Fadok explains, “The aim of Boyd’s maneuver warfare is to render the enemy powerless by denying him the time to mentally cope with the rapidly unfolding, and naturally uncertain, circumstances of war. One’s military operations aim to 1) create and perpetuate a highly fluid and menacing state of affairs for the enemy, and 2) disrupt or incapacitate his ability to adapt to such an environment.”

The winner in conflict is the one who is able to operate within the mental images (schemas) of the adversary. Once you know your enemy’s mental maps, you can select opportunities to operate outside the rules and expectations of those maps, creating temporary disorientation. While the enemy is struggling to assimilate your new actions and accommodate to them, a window of vulnerability opens. This is a lightning process, requiring rapid judgment and action, as in the case of a 40 second dogfight.

The goal of such fast transient maneuvers, Boyd wrote, is to “enmesh [the] adversary in an amorphous, menacing, and unpredictable world of uncertainty, doubt, mistrust, confusion, disorder, fear, panic, chaos,…and/or fold [the] adversary back inside himself.” This latter point is crucial. When the enemy is disoriented, he must “fold back inside himself” to adjust his thinking and redraw his maps. While he is so engrossed, he is unlikely to be able to keep up with the rapidly shifting realities of battle. Fadok quotes the essence of Boyd’s thinking: “You must get into the mind of humans. That’s where the battles are won.”

One can find many examples of Boyd’s principles in competitive sports and games. The successful chess player stays one or more moves ahead of his adversary, using surprise moves to break the opponent’s strategy and create demoralization. The champion heavyweight Muhammad Ali repeatedly used psychological warfare to surprise and disorient his opponents. When he found out Sonny Liston had a fear of insane criminals during his incarceration, Ali (then fighting as Cassius Clay) purposely acted crazy in the pre-fight weigh-in, yelling and banging a walking stick. Liston declined to continue the fight after the seventh round, as much demoralized as battered.

Later, Ali accomplished a similar outcome against George Foreman in Zaire, during the famous “Rumble in the Jungle”. Refusing to dance around the ring, Ali allowed the larger Foreman to pummel him and wear himself out. All the while, Ali taunted him: “Is that all you got? You hit like a sissy!” Worn out and discouraged, Foreman fell prey to an Ali right hand and couldn’t respond to the ten count.

“Diminish [the] adversary’s capacity while improving our capacity to adapt as an organic whole,” Boyd advised, “so that our adversary cannot cope while we can cope with events/efforts as they unfold.” By seizing the initiative and operating outside the schemas of the adversary, we create strategic advantage.

The OODA Loop

Suppose we, as traders, wish to duplicate the fast transient maneuverability of Col. Boyd and become “forty second traders”. How might we operate?

First we would go to our trade stations and observe what the market is doing. Is it rising, falling, or consolidating? Is volatility increasing or waning?

Second, we would orient ourselves by placing the market’s present action into context. Is the current day’s activity occurring within a larger trend or within a broader trading range? Are various market sectors moving in concert, or are there discrepancies? What is the movement of interest rates, overseas markets, and commodities?

Third, we would decide upon a course of action once we had integrated the market’s current action with the broader context of trading and economic forces. Our decision would be based upon the mental image of the situation we had created, such as a topping market gaining downside momentum in a rising interest rate environment.

Finally, once we had arrived at a trading decision, we would need to act and place orders based upon our mental maps. Our actions would reflect our judgments as to relative value in the market—where the market is properly valued for a purchase or sale—as well as our assessment of the proportion of assets to be devoted to the trade.

This four-part sequence of OODA—observe, orient, decide, and act—lies at the heart of Col. Boyd’s theory of military strategy. Our continuous process of mental map building allows us to make sense of our observations, orient ourselves in conditions of danger, and take action based upon decisions that reflect updated realities. The tactical goal of war, Boyd emphasized, is to “observe-orient-decide-act more inconspicuously, more quickly, and with more irregularity…to repeatedly and unexpectedly penetrate vulnerabilities and weaknesses exposed by that effort.”

Boyd describes OODA as a loop, not as a linear sequence. Our decisions and actions generate new observations that require renewed orientation and fresh decisions. The advantage in battle goes to the side that operates with the most rapid loops, adapting to changing conditions before the enemy, thereby opening windows of confusion and chaos that can be exploited.

The grand tactic of war, Boyd stressed, is to “operate inside adversary’s observation-orientation-decision-action loops or get inside his mind-time-space.” The most fundamental attack strategy, from this perspective, is the attack on the enemy’s mind: an assault on his ability to process information and know reality. When we operate within the enemy’s OODA loops, we can “penetrate [the] adversary’s moral-mental-physical being to dissolve his moral fiber, disorient his mental images, disrupt his operations, and overload his system.”

The key to operating within the enemy’s cognitive loops is the use of surprise and unpredictability. Remember that it was the sudden, unexpected, extreme maneuver that allowed Boyd to evade his pursuer in aerial combat and plant himself on the pursuer’s tail. “War is the province of uncertainty;” German military theorist Karl von Clausewitz observed, “three-fourths of the things on which action in war is based lie hidden in the fog of uncertainty.” Strategy, for Boyd, is the art of increasing and exploiting this uncertainty. In this, he is preceded by Napoleon—“The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemy’s.”—and by Sun Tzu: “What is of supreme importance in war is to attack the enemy’s strategy.”

All warfare, for Boyd, is psychological warfare. From this premise, we can characterize the victor in battle: active, confident, planful, and orderly. We can also characterize the loser in any battle: reactive, demoralized, confused, and disorganized. The goal of combat is not merely to defeat the enemy through sheer force, but to defeat his will to resist. This is a marked departure from the school of thought derived from Henri Joumini, which declared the mass deployment of forces as the central tactic of warfare. Leading a battle, Boyd would be more likely to follow Rommel’s Blitzkriek than the frontal attacks of General Lee.

Trading as Mental Warfare

The preceding exposition of Boyd’s ideas, from epistemology to strategy, provides a foundation from which we can understand the challenge of trading the financial markets. Like the battlefield, trading offers an environment typified by risk, danger, and uncertainty. Trading also occurs in an environment that rewards the efficiency of mental processing. The successful trader is one who can rapidly observe market conditions, orient himself, integrate information into effective decisions, and quickly act upon those decisions. Indeed, a floor trader may need to operate with OODA loops that are tighter than even those of forty second Boyd!

Who, however, is the enemy in trading? To a certain degree, the adversary consists of other traders operating in the same markets. The futures markets are a zero sum game and, if one is to experience consistent success, it must be at the expense of other participants. The trader who watches volume pick up at a false breakout or late in a rise or decline is using that information to enter the OODA loops of other traders and can craft strategies that exploit that information. Knowing where the average trader is likely to place stops, for example, permits the experienced trader to enter the market just before these are hit, capitalizing upon the miniature panic of liquidation. Larger traders may even issue their own disinformation, masking their intentions to buy or sell or leaking misleading information to draw in the bulls or bears. Trading, in this context, is a chess game, with each player pitted against others in an ongoing series of moves and countermoves.

Boyd’s ideas, however, raise a more intriguing possibility, in which the adversary in trading is the market itself. When you are trading the S&Ps, you are not merely trying to enter the OODA loop of rookie trader Joe Blow; you want to enter the market’s loop as well. Like an enemy in wartime, the market masks its intentions with false moves, quick thrusts, and lengthy periods of inaction. In executing its function of efficiently allocating resources to enterprise and rewarding the prudent assumption of risk, the market must adapt to the trading patterns of the majority and, indeed, must frustrate these patterns. Capital markets would cease to function if, over the long haul, they failed to reward the assumption of risk. Once the herd identifies a pattern within the market, following this pattern becomes the safest course of action—the path with least risk. This must, over time, be punished.

It is this tension between the risk aversion of the majority and the need for rewards to disproportionately accrue to risk takers that makes an adversary of the market. We see this in numerous studies of mean reversion in the markets: high volume stocks that have outperformed the market tend to underperform the market over a period of years; low volume winning stocks tend to outperform. Losing stocks tend to rebound and offer superior returns compared to winning stocks. The market is prone to rise when a weak open follows two or more days of decline and is prone to decline when huge buying interest, measured by the NYSE TICK, fails to move price significantly higher. “If it is obvious,” market guru Joseph Granville used to say, “it is obviously wrong.” The successful trader cannot merely follow the market, but must outwit it. He must figure out what the market is doing and act before the market has completed its move. This is what it means to operate within the market’s OODA loop. Once the trader figures out how the market will punish risk aversion and reward risk assumption, he has tightened his own loop and now can outmaneuver the market.

Conversely, when the trader falls for the market’s feints and parries, he enters a realm where the market now operates within his OODA loop. The market is shifting tactics faster than the trader can observe, orient, decide, and act, creating chaos and eventual demoralization. An important market corollary of Boyd’s work is that fear and greed are not primary emotions in trading. Rather, the psychologically minded trader should look for the appearance of certainty versus confusion. Before a trader will fall prey to anxiety or depression, he will be confused. He will fail to update his mental images to account for shifting market realities. By the time he has reoriented and formulated a new course of action, the market has made its move, leaving him in the red. Only then will the emotions of fear and recrimination enter the picture. Left with demoralization, the trader may conclude that his emotions are his enemies. Nothing, however, could be further from the truth.

In reality, the trader’s emotions have given useful and meaningful signals. The calm feeling of certainty known to every experienced trader and sometimes referred to as “the zone” suggests that the trader is operating within the market’s OODA loop. Conversely, confusion and disorientation are sure indications that the market has invaded the trader’s loop. Von Clausewitz stressed that defense was the essence of every war. Similarly, the decision to avoid trading during periods of confusion may be the trader’s greatest weapon. Knowing when to fight is every bit as much a tactical advantage as knowing how to fight.

From the perspective of Boyd’s military strategy, the primary objective of trading psychology is not to overcome emotion, but to create conditions conducive to “the zone” of certainty and antithetical to confusion. No therapy or self-help psychology can accomplish this; not in trading and not in war. Certainty can only be achieved through experience and superior training. No amount of positive thinking, visualizations, or any of a myriad of self-help methods can substitute for the experience of having observed and oriented oneself under a variety of market conditions. “Untutored courage is useless in the face of educated bullets,” General Patton observed. The market fires far too many educated bullets to allow untutored traders to survive on the financial battlefield.

Training for Trading

Speed, speed, speed is of the essence in war and in trading. “Don’t delay,” Patton advised, “The best is the enemy of the good. By this I mean that a good plan violently executed now is better than a perfect plan next week.” Greatness in war has always required boldness and the ability to strike quickly. “L’audace, l’audace, toujours l’audace,” Napoleon exclaimed. While impulsivity may have its costs, indecision is a greater threat. “It is better to act quickly and err,” von Clausewitz explains, “than to hesitate until the time of action is past.”

Speed is one element that distinguishes the trader from the investor. The investor has time to weigh alternate courses of action, research these, and implement them; portfolios may be adjusted a few times per year if even that. Traders, however, may place many trades within a day, or even an hour. The floor trader has no time to conduct historical research, consult multiple charts, or read research reports. His OODA loop has been so tightened that it now operates at speeds beyond that of explicit thought.

This creates an interesting psychological dilemma. The rapid trader is like the baseball hitter facing a 95 mile per hour fast ball. While he may enter the situation with a strategic aim—to bunt, hit to the opposite field, protect the plate—he has no time to consciously observe, orient, decide, and act as each pitch arrives. His OODA loop is implicit, rather than explicit, drawing upon years of experience watching the release of the pitcher, the rotation of the ball, the location of the pitch, etc. Indeed, any attempt to formulate an explicit strategy is apt to interfere with the batter’s normal swing. Like a Zen archer, the batter must perform his actions naturally, without the interference of the conscious mind.

The pitcher, on the other hand, does not want the batter in “the zone”. He wants to disrupt the batter’s rhythm, create uncertainty, and—in Boyd’s words—fold the adversary into himself. A pitch thrown too closely inside will create disruption, encouraging the batter to think of his safety instead of the next pitch. A fastball down the pike on an 0 and 2 pitch similarly attacks the hitter’s expectations by violating the normal expectation of attempting to get the batter to swing at a pitch outside the strike zone to avoid a strikeout. The duel between pitcher and batter is an effort to outthink the opponent and enter his loops. The pitcher wins if he can make the batter think—if his disruptions and fast transient maneuvers force the batter out of the implicit processing of “the zone”.

Similarly, the market wins most battles in which the short-term trader no longer functions automatically. Traders frequently ask me how they can sustain more positive thinking during their trades. My response is that they shouldn’t be thinking during the trade at all. If they are thinking, the market is almost surely inside their loops. Consider the example of driving. Under ideal conditions, you are not thinking about your driving. You may be listening to music, carrying on conversations, or daydreaming while performing the driving automatically. If you have to be thinking about the driving, it is because some hazardous road, vehicle, or weather conditions have arisen, or because you have become lost. At those points, you are adapting to an abnormal reality. Your exiting the loop of the automatic and entering into explicit thought suggests that you are no longer fully in control.

The trader should no more be performing positive thinking exercises than the batter or driver. The goal is to make trading automatic: to so tighten the OODA loop that it is no longer consciously driven. Clearly this can only be accomplished through training. Repetition and exposure—constant drilling—are needed to make learning automatic. In wartime, soldiers perform heroic actions not so much because they lack fear but because they are trained to do the right things under pressure. “Men are seldom born brave but they acquire courage through training and discipline,” the Roman military strategist Vegetius observed. “A handful of men inured to war proceed to certain victory; while on the contrary numerous armies of raw and undisciplined troops are but multitudes of men dragged to the slaughter.”

A careful inspection of training methods in sports, law enforcement, and the military suggests that superior performance is cultivated through intensive drilling under simulated conditions that mirror the risk and danger of real-world challenges. Soldiers, astronauts, and chess players are pushed by their mentors to face what-if scenarios that violate normal expectations. Only then can they develop the proper mental pictures that will orient them and guide their actions under threat. Facing these scenarios repeatedly tightens the loops and allows for rapid execution of decisions. Socrates was right when he said, “We are what we repeatedly do. Excellence, then, is a habit.”

The goal of trading psychology is not to create favorable states of mind. Rather, the goal is to create winning habits: to so prepare the trader for any scenario that he will remain inside the market’s loops even during periods of abnormal trending and volatility.

How Can We Train Superior Traders?

“There is nothing so practical as a good theory,” psychologist Kurt Lewin pointed out, and here is where we can observe the practical implications of Boyd’s work. To cultivate decision making within a 40 second loop, traders must train like fighter pilots. They must learn to think and react rapidly in the face of enemy maneuvers. The adversary is attempting to enter their mind-time-space; only superior information and processing of that information can prevent this from happening.
Below are several practical directions for the training of traders:

The creation of multiple what-if scenarios during the trading day – Napoleon advised, “A general-in-chief should ask himself several times in the day, ‘What if the enemy were to appear now in my front, or on my right, or my left?’” By expecting the unexpected, we can create proper schemas for guiding our decisions and actions, taking the advantage of surprise away from the adversary.

Intensive drilling under practice conditions – Nearest neighbor statistical methods are techniques that allow one to identify past markets that are similar to the current market on one or more dimensions. For instance, if today’s market is up in the morning after having risen yesterday afternoon from a five day low, I can query my database for all such days matching this pattern. By paper trading these similar days, I orient myself to the many market maneuvers that can occur under present conditions. The goal is not to predict what the market will do (the typical use of the nearest neighbor methodology), but to identify what the market has done, so that adaptive plans can be formulated for all contingencies.

Rapid drilling under practice conditions – A soldier trained in survival may be deposited into unfamiliar terrain and then observed to see how well he copes. Rapid observation, orientation, decision, and action is needed so that the soldier will not fall victim to hostile environmental conditions, predators, or enemy action. Similarly, the trader can deposit himself in an unfamiliar market drawn from a historical database and rapidly execute trades. Like Boyd, the trader could issue challenges to the market: put me in a position of disadvantage and I will execute a winning trade within 40 seconds. While beginning traders will no doubt require more than 40 seconds to execute their loops, gradually tightening the time parameters will greatly facilitate the automatization of trading.

Intensive mentoring – While we all admire self-made individuals, the reality is that superior athletes, soldiers, and traders are not created out of thin air. They are the product of years of training and mentoring. Wherever we see superior performance, it is the result of day in and day out teaching, drilling, and practicing. Traders often hope to learn their craft in seminars or through books. They are no more likely to succeed in this hope than concert pianists, chess players, armies, or Olympic athletes. It is the intensity of instruction that facilitates its internalization to the point at which learning is automatic and implicit. Indeed, it would not be inaccurate to say that the entire purpose of training is to allow individuals to acquire the mental maps of their mentors so that they can eventually build upon these.

This three elements, then, form the core of training successful traders:

  1.  Education – Teaching traders what to look for under different market conditions.
  2. Drilling – Performing regular exercises to build specific skills.
  3. Practice – Rehearsing trading under realistic conditions to assemble the skills into superior performance.

Based upon Boyd’s work, I hypothesize that the intensive enactment of these three elements yields expertise by improving both the accuracy and the speed of one’s mental processing, generating a richer array of mental images of the market, and a wider range of response patterns for each image. At a psychological level, I hypothesize that the hallmark of successful trading is the reduction of the amount of time in which traders feel confused, surprised, or otherwise disoriented and an increase of the amount of time in which they feel confident, in control, and otherwise familiar with the market terrain.

These are testable hypotheses, and we may get a first test of them in research recently undertaken by Linda Bradford Raschke and a team of investigators from the Massachusetts Institute of Technology’s Sloan School of Management. Led by Andrew Lo, Ph.D. and Dmitry Repin, Ph.D., this team will assist Linda and myself in evaluating the emotional functioning and trading performance of over 100 frequent traders. Moreover, the study will specifically investigate the emotional and trading impact of one month of intensive education, drilling, and practice led by Ms. Raschke, an accomplished mentor. For the first time, we will be able to put Boyd’s ideas to work in a real time trading framework and see if expertise can be cultivated in the markets, as it is on the battlefield.

While one month is hardly enough time to generate mastery in any complex domain, it should be enough time to permit an internalization of basic skills, a developing sense of mastery, and improvement in trading results. We will report on the outcomes of this study in a future article and hope that it will raise as many fruitful questions as it answers: What training methods work best, and do certain methods work best for particular types of trading or traders? Does the intensity of practice and exposure accelerate the development of expertise? Is real time exposure to trading hazards necessary to the expansion of one’s OODA loops or can realistic simulations accomplish this purpose?
We have just begun to scratch the surface of understanding the elements that contribute to trading excellence. Viewing trading as mental warfare opens the door to the study of all warfare and the moral elements that contribute to successful campaigns. Von Clausewitz once observed that war is filled with frictions: chance episodes that introduce uncertainty and doubt into the best-laid plans. “Is there any lubricant that will reduce this abrasion?” he asked. “Only one,” was his answer. “Combat experience.”

Brett N. Steenbarger, Ph.D. has been actively involved in the financial markets since the late 1970s. He most recently served as Director of Trader Development for Kingstree Trading, LLC in Chicago and is currently Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. A clinical psychologist and active trader, writer, and researcher for the past 20 years, Brett is the author of... More