Thursday, August 31, 2006

Techniques for Dealing With Emotional Disruptions of Trading

Every week I get a handful of emails from blog readers wanting advice on dealing with emotional interference with their trading. Many of these readers feel that they have solid trading methods and plans, but simply cannot follow these with consistency.

In an earlier posting, I explained that there are many reasons for problems of trading discipline. Not all of these reasons are due to primary emotional problems. Many traders suffer emotional disruptions of trading because of how they are trading.

The two main trading reasons for emotional interference are:

1) Improper risk management - Many traders are trying to make a comfortable living from an inadequate capital base. They are undercapitalized relative to their income goals, and this forces them to trade too aggressively. The drawdowns, as a result, are severe and create unnecessary frustrations. As I mentioned recently to one reader's surprise, I have yet to meet a trader who can sustain a good living from an account base of $100,000 or less. Perhaps there are people who can make 50-100% on their money year after year after year, but this is not the norm even among the world's money management elite. Taking large risks in hope of such rewards creates emotional impacts that are difficult to overcome.

2) Trading methods that don't fit a trader's skills or personality - You would not believe how common this is: traders attempt to make money in ways that don't genuinely exploit their strengths. Many times, when traders don't follow their trading plans, it's because those plans don't truly fit who they are. Daytrading might not exploit the analytical skills of a trader; many traders don't have the speed of mental processing to succeed at scalping. Similarly, traders with intuitive skills might be frustrated by trying to trade mechanical rules. Traders not only need methods that possess a reliable edge; they need those methods to fit who they are. A risk-averse person won't follow an aggressive system of scaling into trades; a highly active, distractible individual won't stick with long-term investing.

When emotional disruptions of trading *are* primarily due to emotional factors and not one's trading approach (or lack thereof), there are short-term techniques to change patterns of behavior that are quite effective. A little while ago, I helped write a training guide for helping professionals that summarizes these techniques; my upcoming book for traders has two chapters that are self-help manuals to hands-on change methods. For many people, months and months and years and years of psychotherapy are not necessary to change their patterns of thinking, feeling, and behaving. There are short-term change approaches that have been extensively studied in controlled research and validated for their effectiveness.

Unfortunately, most coaches and mentors of traders have not been trained in these brief methods. They try to help traders by repeating simplistic strategies that can be found in the self-help section of any bookstore. Not surprisingly, these strategies don't dent emotional patterns that seem to have a will of their own.

For 19 years at a medical school in Upstate New York, I not only applied brief therapy methods to medical students, physicians, and other professionals; I also taught these methods to the helpers training to be psychologists and psychiatrists. So it's natural that I try to teach some of these psychological skills to professional traders.

Here are some free resources from my personal site that might help you better understand the common emotional disruptions of trading:

Behavioral Patterns That Sabotage Traders - Part One

Behavioral Patterns That Sabotage Traders - Part Two

Changing How We Cope

Expose Yourself

Finding Solutions: How Traders Can Become Their Own Therapists

Remapping the Mind: Cognitive Therapy for Traders

Turning Your Trading Around - Part One

Turning Your Trading Around - Part Two

Turning Your Trading Around - Part Three

After you read those, feel free to email me with any questions about application. (My email address is included in the "About Me" section to the right). I'll post questions and responses to this blog over the holiday weekend. As I so often say to traders I work with, my goal isn't to become your psychologist. My goal is to enable you to be your own shrink.

2 comments:

John Cook said...

Brett if you have a definable edge. What techniques are there to determine if the strategy fits a trader's skills or personality?

Brett Steenbarger, Ph.D. said...

Hi JTC,

It's a great question, and it's one I deal with quite a bit in the new book. In a nutshell, I don't think it's so much a matter of techniques as gaining experience. The important thing is to practice simulated trading with the trading approach you're contemplating and see in your own experience if it fits you well. See my blog entry from earlier in August entitled "The Best Psychological Test of All". You'll know if the strategy is right for you because it will capture you; it won't be something you have to *work* at implementing.

Brett