Thursday, January 29, 2009

Two Key Questions to Ask When Emotions Affect Trading

Traders most often contact me when they feel that emotional factors are interfering with their trading performance. Their hope is that resolving these problems will help their bottom lines. But how can they begin to achieve such resolution? A good start is to address two key questions:

1) Do the problems that affect your trading also impact other areas of your life? - Let's say that you find yourself overtrading and taking too much risk relative to your planned exposure. You realize that these lapses of discipline are costing you money and creating significant frustration. The key question to ask is whether these lapses also occur in other spheres of life: in managing personal finances, in failing to follow through on personal responsibilities, or in impulsive decision-making regarding career, relationships, and the future. If so, then you know that this is a general problem that is spilling over into trading. Working with a psychologist or other licensed therapist or counselor could be the best way to go, as this is not uniquely a trading problem. Alternatively, if the problem truly is unique to trading, then it is probably triggered by situational factors related to how you are trading. Relying on a trading coach to review your trading practices and address these factors can be promising.

2) Do the problems primarily result from poor trading, or are the problems a primary cause of poor trading? - This can be tricky to sort out, because the direction of causality often goes both ways. Many times, poor trading practices--such as trading excessive risk--lead to emotional fallout, such as frustration, anxiety, or even depression. Working on changing emotions might be helpful, but the root cause--the faulty money management--needs to be addressed. Conversely, there are times when emotional problems, such as performance anxiety, get in the way of trading plans and trading results. It is very helpful to examine trading problems in a step-by-step fashion, to see where emotions are affecting trading and to see where trading is creating emotional pressures.

The most difficult emotional interference in trading occurs when longstanding emotional patterns and conflicts spill over into handling the risk and uncertainty of trading. A rebellious teen with unresolved control issues with parents can easily grow up into a trader who rebels against rules and plans, undercutting his own trading. A person who has been traumatized by losses of loved ones may find it difficult to handle financial losses. Someone who never learned to regulate anger and frustration as a child may now find these emotions derailing sound decision making in markets. When the past is intruding into the present, affecting emotional well being and trading performance, sound psychological assistance--even the short-term methods of brief therapies--can be very helpful.

When, however, skills haven't been learned and a trader lacks a true edge, then trading may be causing emotional frustration and anxiety. Many traders try to front run their learning curves, putting capital to work before they're ready, creating stress and distress in the process. Psychology is vital to good trading, but you need to trade well to sustain a sound psyche.

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4 comments:

BK Capital said...

Good article, Dr.
Our trading problems actually an extension of our daily life problems.
Example : If i'm not willing to take risk in my daily life, I would have difficulty to take risk in trading.
If I have difficulty admit my mistakes in my daily life, then I would have problems cutting my losses.
Thanks.

IDkit aka Ana said...

Brett

You said:
Psychology is vital to good trading, but you need to trade well to sustain a sound psyche.Unquote

Does it mean you must know how to trade with good techniques first, then use Psychology to sustain, not only to trade well but to maintain it?

todd said...

Dr.,
This post has really got to me since reading it. You brought up the idea of "A person who has been traumatized by losses of loved ones may find it difficult to handle financial losses."
I have always had difficulty "pulling the trigger" on trades and never for a second equated that with the loss of my father at an early age over 20-years ago. Is there any advice you could give to help me overcome this issue? Although, to be perfectly honest, simply the introduction of that suggestion into my psyche may benefit me greatly. Thank you for this post!
-todd

IDkit aka Ana said...

Todd

Have you tried Risk Management?

Risk management provides not only protection from financial loss, but also gives the trader a psychological piece of mind.

Please read difference between Risk and Calculated Risk at

http://awanginvest.com/?p=1010

Hope this is a little helpful.