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When I examine myself and my methods of thought, I come to the conclusion that the gift of fantasy has meant more to me than my talent for absorbing positive knowledge.

-- Albert Einstein

What is the single most unappreciated fact of mental life?

If you answered, "The power of the unconscious mind to determine behavior," I would say "good guess." But, as much as I honor it, for the garden-variety investor, the existence of the unconscious still relies upon help from

Tinker Bell: Either you

believe

in it or you don't.

However, there's a psychological reality that is even more unappreciated than the unconscious. It can't be disputed, nor is it a matter of belief. And yet I challenge you to find a single reference to it in trading books, including those that focus on the psychology of trading.

What I'm referring to is the considerable amount of time we spend in waking fantasy -- often only scarcely aware of it, or unaware of it at all. These daydreams are fictional stories made up of fleeting pictures. They often contain a partial or complete story line and sometimes evoke associated feelings.

There isn't a single person reading this who hasn't at some time found himself or herself lost in the reverie of both deliciously wishful fantasies and catastrophically negative ones.

The mind is exceedingly skillful at weaving elaborate fantasies out of the barest of mental threads. Here's an example: I'm watching

Goldman Sachs

on my monitor begin to gain momentum. I notice I'm thinking about how much money I'll make if it goes up another few points.

Perhaps I could use my imagined gain to swoosh my wife off to Europe? Maybe we could finally take that trip we were planning to begin on Sept. 18 of last year -- the one I abruptly cancelled five minutes after seeing the second plane hit the World Trade Center.

My mind gently floats away to the charming town of Bellagio, on Lake Como in Italy, one of our destinations. I recall the beauty of the lake, and the view from our room at the

Grand Hotel Villa Serbelloni out onto the water and the gentle hills beyond. The hotel sits on the tip of a point with an unparalleled view, which is considered one of the most outstanding panoramas in the world. I imagine strolling among the many well-cared-for Italian gardens in the vicinity and the mist coming in over the lake in the late afternoon.

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My fantasy is very clear, and I begin to smile. All of this happens in the span of two minutes as the stock climbs higher.

Sometimes, fantasies are brief mental images that seem disconnected. And others are well-developed sequences of very clear images that tell elaborate stories and pull us away for minutes of time from our external reality.

When You Wish Upon a Star

Fantasies come at a moment's notice. A flash of thought, a fleeting memory, a passing incident -- that's all it takes for us to buy a ticket to fantasyland. Significantly, much of how we interpret our personal world is based on fantasy -- not the actual events. Our imaginations concoct everything from the hopeful and uplifting to the dismal and degrading. Because they seem so real, we forget that we have simply made up one storyline interpretation from the numerous possibilities.

For active traders, those who spend time watching quotes, it is common to find the mind floating away to fantasyland for brief periods as a way to distract oneself from the monotony of flashing numbers. Enjoy your fantasies -- they are the lifeblood of creative imagination. But keep in mind the following:

Don't take the process of a daydream for a final outcome; just because in your fantasy the story ends a certain way doesn't mean this is what will actually happen. (Yes, this ought to be pretty obvious to everyone over the age of 10. But this is violated countless times by intelligent traders -- not to mention by multitudes of otherwise savvy people -- in the everyday world, causing undue pain and suffering for themselves through their unfulfilled fantasies.)

Be aware of how your fantasies may affect your trading decisions. Are they oriented toward seeing the market in an overly positive or negative way? Are they wishful, catastrophic or neutral? Are they filled with hope or despair? What needs might they be pointing out that are presently going unfulfilled?

The closest the trading world has come to recognizing the role of fantasy is to have created the dictum: "Don't trade on hope." But, ahh, there is so much more than just hope that our dreams would have us trade on! The more inclusive instruction ought to be: "Don't trade on fantasy."

If you think you don't fantasize, pay closer attention to where your mind goes when you drift away. It takes mindfulness to catch brief fantasies when they appear. One way to work with enhancing your awareness of your fantasies is to notice how they come up in activities or idle moments outside of trading.

Our capacity to fantasize various outcomes and to tell ourselves elaborate stories is one of our most useful and potentially enjoyable mental abilities. It adds mental spice to our lives. It demonstrates the power of our minds to shape our world.

But be careful how your floating away to fantasyland may intrude upon your trading. Make sure you clearly distinguish the boundary

where the float meets the quote

-- that is, where your daydreams end and the reality of the numbers begins.

Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is the author of

The Disciplined Online Investor

, recently translated into Spanish. At the time of publication, Hendlin held a position in Goldman Sachs but positions may change at any time. He is pleased to receive your comments and questions for publication in his public forum columns at

steven.hendlin@thestreet.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.

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