Wednesday, October 24, 2007

Four Problem Traders; Four Trading Strengths

A while back I posted on the topic of trader strengths, and readers offered worthwhile perspectives on some of the factors that distinguish successful from unsuccessful traders. After much consideration, I decided to approach the topic a bit differently: by outlining four kinds of problem traders I frequently encounter and by identifying the strengths that help people deal with these problems.

Problem Trader #1: The Frustrated Trader - The frustrated trader deals with frequent angry reactions during trading. Sometimes the anger may be vented outward; other times it is turned inward. For example, many rigidly perfectionistic traders are also frustrated traders, because they cannot live up to their impossible standards and thus artificially create failure experiences for themselves. Frustrated traders are often impulsive traders and will make trades to either compensate for prior losing trades or to make up for missed opportunities. Frustrated traders will often ignore position-sizing rules and undergo occasional blowup losses as a result. It's easy to identify the frustrated trader by their physical cues: yelling, cursing, complaining, and gesturing when they should be focused on the screen. The key strength that combats frustration: self-acceptance and being supportive of oneself. Key techniques for combating frustration: setting reasonable goals; using biofeedback for building self-control and calm focus; and mentally rehearsing trading plans/rules to make them more automatic during the trading day.

Problem Trader #2: The Anxious Trader - The anxious trader is consumed with fears of loss, missing out on objective opportunity either by not taking signals or by sizing positions too conservatively. In a sense, the anxious trader is more concerned about not losing than about winning. This risk aversion can lead to analysis paralysis, as the trader waits for the perfect setup that never quite materializes. Sometimes the anxious trader is one who has been traumatized by prior losses. It's too painful to relive memories of those losses, and so the anxious trader exits positions too quickly and is too reluctant to get into positions. A very common feature is cutting profits rapidly out of fear of losing those. Signs of the anxious trader include muscle tension, worry, relief over getting out of positions (or away from the screen), and inability to trade reasonable size. The key strength that combats anxiety is confidence and an ability to accept loss as a natural part of trading. The techniques most helpful in combating anxiety include cognitive methods for replacing worry talk with constructive problem solving; behavioral techniques to calm oneself and reprogram stress responses; setting process rather than outcome goals; and regaining confidence by trading successfully in simulation mode and gradually building one's size.

Problem Trader #3: The Overconfident Trader - Overconfident traders approach trading like a casino--and they're not the house! The overconfident trader typically overtrades, which means trading size too large for their account and trading more often than opportunity dictates. Very often the overconfident trader is attracted to action in markets, rather than consistent profits and sound discipline. As a result, the overconfident trader can be identified by winning periods punctuated by unusually large and damaging losses. Sometimes the overconfident trader is also a desperate trader, hoping to strike it rich. A common feature of overconfident traders is their lack of preparation: they think that anyone can make it with simple methods and a gut feel. The problem is that they never spend enough time reviewing markets and intensively watching screens to develop that feel. The key strength that combats overconfidence is humility, a respect for markets and risk, and conscientiousness in crafting and following trading rules. Techniques that combat overconfidence include mental rehearsal and self-hypnosis to instill trading rules and support rule-governance; mechanical position sizing to avoid risk of ruin; and cognitive techniques to intercept and challenge grandiose thoughts following winning periods.

Problem Trader #4: The Defeated Trader - Defeated traders are ones who, in trader parlance, have "lost their mojo". Their thought patterns are negative and this blinds them to opportunity. Very often they will be filled with shame, remorse, and guilt over past losses and very often they enter new trades expecting the worst. As a result, they don't often enter new trades and will miss out on opportunities that are genuinely present. They often stop working at their trading, as anything trading-related is associated with emotional pain. Defeatism thus becomes a self-fulfilling prophecy. It's easy to recognize defeated traders, not only by their depressed mood, low energy, and lack of enthusiasm, but also by their "yes, but" rejection at helping efforts. Very often the defeated trader will focus on losses and mistakes and gloss over progress that's been made: they see the trading cup as half empty, rather than half full. The key strength that combats defeatism is emotional resilience and the ability to use losses as learning experiences. Techniques that combat defeatism include cognitive methods for reprocessing negative thought patterns; structuring of the learning process to emphasize strengths and solutions rather than mistakes; and a focus on attainable goals and the creation of success experiences.

Most of us can identify elements of these four traders in ourselves. If I had to choose, I'd say that I am most like the Anxious Trader. I am quick to step away from markets when my setups aren't there--sometimes too quick! Many of the traders I work with fit into the Frustrated Trader category: they're aggressive, achievement-oriented, and hard on themselves.

Knowing your patterns does not, in itself, enable you to change them, but it's a necessary step. Indeed, I find that, regardless of the patterns, the first step of progress a trader makes is interrupting old patterns that aren't working and trying something different. The ability to stand outside oneself as an observer of patterns is a core self-coaching skill.


Becoming Your Own Trading Coach

A Framework for Rapid Behavior Change

An Important Step in Self-Coaching


High Probability Trader said...

I'm all of the above. Great!

Ziad said...

I think this is one of your best posts Dr B. We usually hear about strength and psychological techniques in general, but to have them broken down in this kind of detail as to their problem counterparts is just great, and I think it will help traders pinpoint things much better.
Thanks for the great post.

Tyro said...

Thank you for this insightful post! Normally I'm anxious, but over the last month or two I've come the prototypical Defeated Trader to the point I didn't event want to read this post!

I appreciate that you've offered some general strategies to deal with these problem. It's easy to focus on negative behavior, but it's quite another to find a positive means of dealing with them.

Thank you, thank you, I feel like you've thrown my trading a lifeline.

Brett Steenbarger, Ph.D. said...

Thanks much for the comments on the post; glad it was helpful--


calisurfer said...

Thanks Dr. B for the post I am definately #2, but I do think the situation I find myself in (my contracting business has no work and ive had to let go of all 5 of my empleyees) has a lot to do with my psycological problems with getting out of trades early for fear of losing gains. I would have some real big winners if I could fix that part of my trading. This has become my only way of generating income, so fear is ruling my trading.