Saturday, February 14, 2009

Why Can't I Follow My Trading Plans?

An experienced trader writes to me:

I wondered if at some point you could re-address or provide links to
brief solutions for not staying committed to one's daily plan. Today
was an excellent example. After a breakeven morning with two decent
ideas which didn't pan out, I crunched some numbers which suggested
that the late afternoon, specifically the last hour, could be weak as
much as 1% down by the close and at worst maybe about .5% against me
(lower probability). I went short ES @ 829.50 around 2:45. The mkt
floundered around and by 3:53, I think, it's not going to happen today
and I don't feel like going home with a loss if the big boys try to
squeeze them at the end of day. So I cover with a 1/2 pt loss and
within 2 minutes the market begins to slide, cracking 10 pts by EOD.
Let's just assume the idea was randomly good or bad, I can still
estimate thousands (if not tens of thousands) of dollars in
opportunity cost over time, i.e. selling a winning trade @ 330 pm
instead of at the close per entry time plans for time and/or price.

All of us have experienced the frustration of bailing out of a trade prematurely, only to see it go our way. What makes it so difficult to stick with trade ideas and plans?

I'm going to use more than one post to address this question, because it lies at the heart of trading psychology. Indeed, it was my own experience as a trader--seeing that I was making all of the common mistakes that traders make, despite my background in psychology--that led me to write my first book in the area and examine the role of consciousness in decision-making.

The gist of what I described in the book was that, when psychological impediments to good trading occur, it is because the state of mind and body that we're in when we're executing or managing the trade is different from the state in which we formulated the trade idea.

From this perspective, all of the brief therapy techniques that I discuss in my subsequent books--cognitive, behavioral, dynamic, solution-focused methods--have the same purpose: to create consistency in our conscious awareness, so that we view markets through one, clear set of lenses throughout a trade.

What derails traders is that, at some point, we switch perceptual lenses and view the trade through the lens of profit/loss (P/L), not through the lens of probabilities, risks, and rewards.

That appears to be the case with the trader above. The key to his dilemma is that he had a breakeven morning, with two "decent" ideas that didn't pay him out. That set the stage for frustration. When he contemplates the third idea leaving him in the hole and says, "it's not going to happen today and I don't feel like going home with a loss", now he is P/L focused, not market focused. He is managing his feelings about the day's trade, not the trade he has on.

Performance anxiety occurs whenever our concerns over the outcome of a performance interfere with the process of performing. If our P/L focus exceeds our plan focus, we will tend to act impulsively to allay our P/L concerns, thereby violating trading rules and plans. Under conditions of frustration and anxiety, our perception becomes tunnel-visioned: we act to reduce our distress, rather than to maximize our opportunity.

Below are links that address this issue from different perspectives. In forthcoming posts, I will elaborate on solutions that aid in consistency of thought and action.



Jorge said...

Dr. Steenbarger,

When psychological impediments to good trading occur, it is because the state of mind and body that we're in when we're executing or managing the trade is different from the state in which we formulated the trade idea.

So many lessons in just one sentence.

Incidentally, this is one of the few trading blogs that has posts on weekends and holidays - that should tell us something.

Best trading,


PS: Is Carpatos/McCapital going to publish "The Daily Trading Coach" in Spanish?

Eyal said...

IMHO this trader has a couple of problems:

1. Trusting your edge / trading rules / plan. When a trader has a strong belief in his edge which is based on strong testing and statistical evidence then it makes it a lot easier to just let the edge play out and probabilities do their thing.

2. I would also look at your size, if you're highly anxious about the outcome of each trade then you might be trading too big.

3. Similar to what Dr. Steenbarger said, the trader is focusing on the ultimate goal of making money. That's a good goal to have, but, outside market hours. During market hours the goal should be process oriented, execute your plan to as close to perfection as you can.

I would suggest evaluating your performance daily, in writing, against your process goals independently from whether you made or lost money that day. That's in addition to monitoring and testing how much edge there is in your trading ideas which is the more strategic level.

abel said...

Dr. Brett,

So many outstanding and practical insights, both technically structured, and psychological, (and physical, that makes three aspects!).

This topic touches on a particular aspect that is of keen interest to me. While the trader mentions it in the context of his message, the focus of your response is centered on an aspect that does not specifically dwell on it.

It is of interest to me, because it is an issue that seems to be almost perpetual in its repetition.

The issue is: the anticipation of a market movement / reaction. Quite often, in fact, most often, this takes the form of 'being early'...the very act of anticipation seems to involve foreknowledge, and also most often positioning, mentally and or physically (a trade) in the direction of the anticipated movement. Just as often, it seems, the market takes it sweet time in getting around to the movement I am anticipating. Taking the 'scenic route', I call it.

Usually, by that time, I am played-out, in one form or another, perhaps several ways...physically and or mentally exhausted, possibly in a loss situation, and perhaps most importantly, (in italics for emphasis) when the move (finally) begins to occur and manifest, I have grown so weary of waiting and or of doubting and disbelieving, I am no longer interested in participating. Naturally, missing the move I had anticipated and waited for, sets up the conditions for a 'deficit', and has me once again, anticipating the next move.

This cycle repeats with such phenomenal regularity and frequency, it is truly a marvel, which I personally find fascinating and intriguing. Tiresome, also.

So, my question is: Have you suggestions for those of us whose methods of engagement with the markets customarily involve 'anticipation' as an integral component, and therefore, habitually tend to act early, usually resulting in testing our resolve and patience?

I find your work invaluable.


Woodshedder said...

What Eyal said in #1 is the key.

I would bet this trader was trading a discretionary strategy.

I find that unless one keeps very detailed records of his/her discretionary strategy, that he/she is really not aware of the extent of any edge that may or may not exist.

When one is confident of the edge, and has watched how the edge has played out over many years, hundreds of trades, etc., then I think it is much, much easier

The caveat is that I do not trade discretionary strategies (anymore) and I have a hard time understanding how discretionary traders stay profitable over long time periods without knowing their edge.

adan said...

wow, looks like you've (brett) have hit a mother-lode in regards to concern and interest

lots of over-lapping ideas, much with you've identified (thank goodness) as:

"...we switch perceptual lenses and view the trade through the lens of profit/loss (P/L), not through the lens of probabilities, risks, and rewards." -

ie, as you and several people posting say, "process"

todd, at minyanville, referes to it (if i'm connecting ideas correctly) as "...the mechanics of the swing will trump the results of the at-bat...."

though i've objected (in my internal discussion of ideas) to both his and your emphasis on the process over results (or p/l), mostly because, sitting and planning when not under fire, isn't, by definition, acting under fire, therefore there's a contextual actual difference

but, i am beginning to come around to understanding both the reason, and preference, to giving the "mechanics of the" more priority over the result

but i still keep trying to blend that thought with the notion that, my pre-trading process, includes leeway within the trading for that rarely throw, yet very effective, pitch - the "change up"

ah, the learning process, especially in real time ;-)

Brett Steenbarger, Ph.D. said...

Hi Jorge,

I don't know about a Spanish language translation of the new book, but I would certainly welcome that! Thanks for your excellent comments and for your support--


Brett Steenbarger, Ph.D. said...

*Great* suggestions, Eyal; many thanks--


Brett Steenbarger, Ph.D. said...

Hi Abel,

That is an excellent observation and question. It is the hanging on every tick that creates the mental exhaustion; planning trades out and stepping back from overmanaging those is key. We inevitably react to the market on whatever time frame we're watching, not the time frame we're necessarily trading!


Brett Steenbarger, Ph.D. said...

Hi Woodshedder,

I think you're right; become more systematic in trading can be a very effective way of removing psychological variability from trading performance--


Brett Steenbarger, Ph.D. said...

Hi Adan,

Well said! It's the mechanics of the swing, rather than the outcome that becomes the focus when we're "in the zone".