Tuesday, April 29, 2008

The Perils of Achievement Motivation: When Traders Press Too Hard to Win

A deadly pattern among some of the best traders is to channel achievement motivation into trading *more*.

The best traders do have a strong achievement motivation and work quite hard at their craft. That achievement drive makes them hate losing. Their impulse is to go for the jugular; they want to not only achieve, but achieve *more*.

This drive can be a trader's greatest weakness, however. It can lead to stubborness in taking losses, leading to outsized losses. It can also lead to overtrading, as the driven trader attempts to *make* things happen. That is a particular recipe for disaster on slow, narrow days such as yesterday, when it's easy to get chopped up jumping aboard seeming trending moves.

The net result is that *pressing* to achieve can take the trader out of his or her game. It subverts risk management by leading the trader to trade too large, without careful attention to stop loss points. It also interferes with decision-making by leading the trader to take trades without an objective edge.

A good analogy is the fighter who goes for the knockout on every punch, leaving himself wide open to jabs and punches from the opponent. When the boxer is *too* aggressive, defensive skills go out the window. So it is with the trader.

Another analogy is the soldier in the battlefield. Too hyped up and too aggressive, he may charge out of his foxhole and make himself an easy target for the enemy. Sometimes the best strategy is to maintain control and pick off the enemy sniper-style.

How can you know if this is a problem for you? If you keep metrics of your trading results, you'll see that the average size of your losing trades exceeds the average size of the winners. You'll see that your biggest losing days are ones in which you trade most often and with largest size, particularly when the market was showing no special opportunity. You'll also know by your state of mind: traders who *press* to win typically experience high degrees of frustration when the profits don't come quickly.

If these are concerns for you, self-control strategies such as meditation and biofeedback can be tremendously helpful. How to use such strategies will be the focus of my next post.

RELATED POSTS:

The Most Important Skill Traders Need

Biofeedback for Performance
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2 comments:

SSK said...

excellent points. I found myself in that situation last week, so I took 4 days and went back to studying fundementals and took a break. Yesterday was the first day back, and I was able to sit on my hands for the most part. I did see the late sell in the last hour, but didnt take it. It felt nice to take a break. What do traders do that work for firms? Are they allowed to take time off if they need to get their heads back in line?

Brett Steenbarger, Ph.D. said...

Hi SSK,

Yes, traders at firms do indeed take breaks, both during the day and across days. It can be a very constructive step to reorient and start fresh.

Brett