By Richard L. Muehlberg*
Posted: June 27, 2008

(Recap: In part one of this series, I explored induced tunnel vision and reactive tunnel vision among traders. Induced tunnel vision is the phenomenon of a trader making wrong decisions based on too little information or the wrong information. Reactive tunnel vision is the phenomenon of a trader fixating on a fraction of his / her available information. I cross-referenced these conditions with physiological and psychological studies from law enforcement. I concluded by briefly presenting solutions. I will now detail solutions.)

Tunnel Vision: Why Should You Care about It?

Tunnel vision among active traders is bad. Here is a brutal example. Let's make you the star in the following drama. You are watching a carefully chosen array of symbols, watch lists, charts, news feeds, alerts, and so forth. It is February 22, 2008, a Friday. You are day trading S&P 500 futures and SPY, the S&P 500 exchange-traded fund, or ETF.

Equities in general are bearish today. You went short at today's NYSE opening bell. Right now, things look good. You are making money. The S&P 500 is going down. Your concentration narrows. You fixate on your S&P 500 position. You don't notice 30-year U.S. Treasury bonds. Bonds begin to break.

You are an experienced trader. You know that equities and bonds have been moving in opposite directions today, but you ignore the break in bonds. You also ignore the regional banking sector, which can drive the S&P 500. You fail to appreciate that the banking sector ETF, RKH is testing support that held on February 15 and February 20, just a few days ago. The time is coming up to 3:30 p.m. Eastern. You start thinking about the weekend. Your short-side profits on the S&P 500 are solid. BAM!!! Equities surge. Large traders flood the market with bids.

On February 22, 2008, equity bulls ambushed equity bears. The bulls were waiting for the right set of circumstances and the right time. When RKH tested half-dollar support at $124.50 after bond futures floor trading closed, the moment was right.

If you did not personally experience this day, look up an intraday chart of the S&P 500 that covers February 22, 2008. Equity bears who saw their profit flip to a loss were victims of tunnel vision. They did not know what to look at, or they fixated on the inputs that reinforced what they wanted to see.

Tunnel Vision: Let's Try That Again

Let's rewind February 22, 2008. I will continue to use you as the star in this drama. Let's say you know about tunnel vision. You know to guard against it. Once again, you are an active trader. You are short the S&P 500. You are watching the markets that can affect your position, especially interest rates and the financials.

This time, you are trading differently. Last night, you had studied your latest trading diary entries (yes, you keep a disciplined trading diary now). This morning, after you sat down at your trading desk and as the day developed, you practiced open-eye, deep-breathing mediation.

Right now, even as you focus on your short S&P 500 position, you are maintaining situational awareness. This time, you see bonds breaking. You appreciate that weakening bonds may be supportive for equities. You see RKH test support that held on February 15 and February 20. You take your short-side profit on the S&P 500. You are in cash now.

Your meditation has helped lower your heart rate. You are alert. BAM!!! You see RKH rally. You step to the long side of the S&P 500. Your long S&P 500 profit surges. Minutes before the NYSE closes, you go to cash again.

Body / Mind Muscle Memory

What the heck is open-eye, deep-breathing meditation and what's with the diary? Let's start with the diary. A trading diary improves a trader's "body / mind muscle memory". Muscle memory is a familiar concept to people in high-stress occupations, especially cops. If you train to respond positively to stress, you will respond positively automatically. Your subconscious body / mind will take over if your conscious body / mind fails under stress.

Tunnel vision narrows peripheral vision. Positive body / mind muscle memory maintains peripheral vision. Bruce Lee, the legendary martial artist (see part one of this two-part article) said it this way, "Learn it until you forget." In other words, study your diary so that making good decisions under stress becomes second nature. (See my January 25, 2008 article "Is the Advice to Keep a Trading Diary Good or Bad".)

Open-Eye, Deep-Breathing Meditation

In part one of this two-part article, I discussed the concept of "tactical breathing" in a law enforcement context. In this concept, before a cop goes into a high-stress situation, he / she is trained to breath in for a count of two, hold for a count of two and exhale for a count of two. This sequence is repeated several times to keep the heart rate within 115 - 145 beats per minute.

I have developed a variation through independent experimentation as an online trader. Online traders, unlike patrol cops, sit most of the day. The high-stress situations we face as traders are derivatives of a physical world. Stress is still a factor but our environment is different.

Here's how my trader's deep-breathing variation works. Take a length of nylon cord of approximately 26 inches long. Tie a knot every 2 inches: 10 knots in total. The purpose of the knots will be apparent in a moment.

Place the cord in your lap. Keep your eyes open and on your trading screen(s). Relax. With one hand, gently press the first knot between your index finger and thumb. Hold the near end of the cord with your other hand. Inhale deeply through your nose as you mentally count to seven. (At first, counting to just five may be difficult. Practice. Breathe by flexing your belly; breathe from your belly. You might yawn and your eyes might water; this is OK.)

Pause. Now exhale through your mouth as you mentally count to seven. Pause. Approximately 15 seconds will have passed. Pull the cord until you feel the second knot. Repeat the inhale / exhale sequence. By the time you reach the tenth knot, approximately two-and-a-half minutes will have passed. Repeat this exercise during the trading day.

Initially, I thought I needed to keep my eyes closed. I eventually realized a trader is more inclined to keep his / her eyes open! What you will find is that you will lower your heart rate. You will be less vulnerable to tunnel vision.

Get Control

Successful trading has at least two components: (1) Waiting for a high-reward / low-risk trade and (2) Using the words of police psychologist Alexis Artwohl, PhD., controlling "your physiological and emotional arousal levels" when you consider, enter and exit a trade. You need to practice (visualize) how you will trade under different conditions by studying your past trades.

In the words of Bruce Lee, "Learn it (your trading approach) until you forget it." If it helps, print out a checklist of your trading rules. Tape the list to the side of your trading screen. If you feel sluggish, do open-eye deep breathing: Pump up your oxygen level, so you keep alert. If you feel the urge to trade anxiously or impatiently, do open-eye deep breathing: Get your heart rate down; get the impatience out of your mind.

When you want to make a good trade but start feeling afraid, do open-eye deep breathing: Get your heart rate down, get the fear out of your mind. Stay alert. Stay disciplined. Act when the moment is right.

Tunnel vision is an affliction that can take you by surprise. You need to recognize tunnel vision and prepare yourself. You need to fight tunnel vision by getting control of yourself. You will feel and trade better.

*Reprinted (and modified) with permission from Richard L. Muehlberg (richardmue@yahoo.com). Richard is a contributor to Futures magazine and actively day trades his own account using linear regression channels and intermarket analysis. His daily trading diary entries are available on www.DayTradingWithLinesInTheSky.com.