Wednesday, November 28, 2007

Turning Setbacks Into Goals

One of the most common mental errors I see traders make is that they equate movement with opportunity. If the market moves and they’re not on board, they berate themselves for “missing opportunity”.

Opportunity, however, is not defined solely by the market and its movement. It is also a function of your trading signals and the ability of those signals to detect a positive expectancy in future returns. If movement were opportunity, there could be no random movement.

The perfectionistic trader looks at market moves and expects to participate in each. This creates a perpetual experience of frustration and failure, because those expectations are never fully met--and *can* never be met.

The proper rejoinder to, “I should have been on board for that move,” is “By what standard?” The only standard that demands participation in all market moves is the standard of omniscience. Perfectionism fails because we will always fall short of omniscience. Perfectionism ensures the mindset of a loser.

A more reasonable set of standards would grade us on outcomes that are in our control: whether we size positions properly, whether we maintain a good risk/reward profile on each trade, whether we follow rules about stops and exits, and whether we trade when and only when there is genuine opportunity.

Steady improvement is a realistic goal that can lead to growing feelings of mastery. Perfectionism dictates unreachable goals that undercut our sense of mastery. No one has ever berated themselves into confidence and competence.

The secret to goal-setting is setting yourself up for success and steadily building the sense of mastery and competence. Every market mistake provides a learning experience when we turn setbacks into goals.

RELEVANT POST:

What Works in Goal Setting
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5 comments:

ccdev said...

Hey Brett,

came across your blog recently. i live in the other side of the world (malaysia, near singapore). Just wanted to say thanks for sharing your psychology experience and how we can utilise it in our trading. I can relate to the emotion side of trading (frustration, fear, guilt over missed "chances", anger etc), had a lot of trouble overcoming certain repeating behaviorial traits and your articles have opened up my mind, really given me something to think about and to work on. Thanks again, man. Take care.

SunshineMicha said...

Brett,

that's exactly what I discovered as one of my weaknesses when I started trading. It's an emotion that creeps up. What helps me in fighting this emotion is that before every trade I ask myself consciously: "Is this trade an opportunity? Am I "in front of" the market?" If I can't answer this question with a YES, I don't take the trade.

I try to generate the emotion that I don't buy a bargain anymore.

Thx

Keith Shepard said...

>>"Perfectionism fails because we will always fall short of omniscience."

Totally agree. This is one of my early trading afflictions that I'm still working through. Learning that the road to success is an imperfect one at best. And so is the driver.

Brett Steenbarger, Ph.D. said...

Hi all,

Thanks for the great observations and comments. Getting to the point of seeing losses as challenges and potential sources for growth and development--not simply as threats or indications of incompetence--is a major psychological transition for traders.

Brett

jedi said...

hi brett-

the title of this post says it all and applies to areas outside of trading as well. sometimes i jump in too quick before my systems prove themselves. staying the course in the middle of a correction is hard, but sometimes it's even harder not to increase allocation, size, etc. when the market is doing well. when you turn setbacks into goals though, at least you can build momentum in the right direction right away.