Tuesday, March 10, 2009

Trading With a Diversified Emotional Portfolio

A little while back, I gave readers a sneak peak of a chapter from my forthcoming book, The Daily Trading Coach. Yesterday, I received an advance copy of the book in the mail, and I see a few copies have snuck their way onto Amazon for sale, so it's just a matter of time before the book ships. Thanks to readers for their interest in the book; as of my writing this, the book is ranked 1,127 among all Amazon texts. No doubt, the challenging market conditions that we're seeing are spurring an interest in self-help for traders. The goal of the book is to help traders learn to coach themselves with 101 concrete lessons and techniques.

One topic that I address in the second chapter is what we might call "emotional diversification": the degree to which the happiness and contentment in your life are coming from multiple sources. When we are emotionally diversified, no one area of setback in life can turn our stress into overwhelming distress. That is absolutely crucial in a field such as trading, where occasional setbacks are the norm even for the most profitable professionals.

Some questions to consider come from page 51 of the new book:

"How psychologically diversified are you? How much stress and distress are you experiencing in your social life, your family life, and in your general emotional state? How much satisfaction are you experiencing in each of these areas? What sustains you when trading goes poorly? What problems from your personal life creep into your trading day? How is your physical fitness? Your quality of sleep and concentration? Your energy level? It's worth evaluating the nontrading aspects of life as well as your market results with monthly reviews. If the other parts of your life are generating distress, it's only a matter of time before that compromises your focus, decision-making, and performance."

A little while back, I used the Twitter feature of the blog to link to a questionnaire that enables you to perform a brief emotional self-assessment. That generated quite a bit of interest, as readers seem to be interested in performing at their peaks. (You can take the short test here; here's where you can interpret the results; and here's where you can learn more about what the test is measuring). The idea of the monthly self-assessment mentioned above is to make sure that you are sustaining a physical and emotional state that will maximize your learning and performance. Happy, satisfied traders with a full complement of energy and a diversified portfolio of sources of well-being are least likely to trade impulsively out of frustration or desperation, and they are most likely to be in a mindset where they can aggressively take advantage of their opportunities.

Becoming your own trading coach starts with becoming your own observer: stepping back and examining whether or not you're doing the right things. And that starts, not with trading, but with doing the right things in all the other parts of life. No one climbs the learning curve of expertise firing on only a few cylinders. Success in markets is an expression of--not a substitute for--success in life.


hcarstens said...

There might be an interesting adaptation of this for trading systems, i.e., that success is proportional to emotional diversification among systems/strategies.


Brett Steenbarger, Ph.D. said...

Hi Henry,

Yes, to the extent that systems capture "emotion" or sentiment, a diversified mix could make great sense, esp if the sentiment diversification spans time frames--


Charles Fallon said...

i diversify not only with sectors but also beta.So if market corrects my low beta stocks remain solid while high beta give me an entry point. Helps me sleep at night. High beta gives the most satisfaction but also greatest pain