Monday, August 27, 2007

Assessing Your Coping Style as a Trader

How do you handle adversity in the markets? My recent post suggested that the effectiveness of your coping methods is important both in moderating the flight or fight effects of stress, but also in helping us retain access to our implicit knowledge of market patterns. Here is a short self-assessment that I've put together to help you identify your coping styles.

Imagine the following situation: You are in a trade and it is gradually moving in your favor. You have a mental stop set and a target price. A program trade hits the market and your position blows through your stop, putting you further in the red that you wanted to be. Rate each of the following reactions to the situation on a 1-5 scale, with 1 indicating that you're not at all likely to respond that way; 3 indicating that you sometimes respond that way; and 5 indicating that you usually or almost always respond that way:

1) I vent my feelings out loud and take immediate action to rectify the situation.

2) I step back from the situation mentally and make sure I'm calm and collected.

3) I tell myself it's not a big deal and that I can get the money back in a later trade.

4) After the trade, I seek support from other traders and from people I'm close to.

5) I hold myself responsible for what happened and take the blame.

6) After the trade, I try to not dwell on what happened and turn my attention elsewhere.

7) I go into problem solving mode and figure out how I can manage the position.

8) After the trade, I review what happened and try to figure out what good might come from the trading experience.

If, like many traders, you respond to this kind of situation in more than one way, write down which response you're most likely to have first, which second, etc.

Think back to a trade situation that you did *not* respond to effectively. Go back to the list and identify which response came first, which came second, etc.

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Let's take a look at the results. The eight responses represent the coping strategies assessed by the Ways of Coping Scale developed by Folkman and Lazarus:

1) Confrontive Coping - Responding immediately to challenging situations with action.

2) Distancing - Gaining emotional distance from a situation.

3) Self Controlling - Making efforts to keep oneself in control in the situation.

4) Seeking Support - Looking to others for emotional support in the situation.

5) Taking Responsibility - Putting the responsibility for the situation on oneself.

6) Escape/Avoidance - Making efforts to get away from the situation.

7) Planful Problem Solving - Making plans to deal with the situation.

8) Positive Reappraisal - Trying to look at the situation in a positive light.

Remember, none of these coping methods are all good or all bad. All can have their place and all can be overused and misused. The key question is: How do *your* coping efforts work for you?

One easy way to determine that is to examine what I call your "conditional trading outcomes". Take a look at your trading results immediately after you have a meaningful losing trade, a meaningful losing day, or a losing week. Take a look at how well you trade after a position has gone against you. Do you trade better after a drawdown or worse?

How about after you have a few winning trades, days, or weeks in a row? Do you trade better or worse? Breaking down your performance as a function of recent performance will tell you a great deal about how effective you are in coping with risk and reward.

The other excellent indicator of whether your coping is working for you is your emotional experience during trading. If you find that anxiety, overconfidence, frustration, and stress are pushing you into poor decisions, you know that you're not coping well with the uncertainties of markets.

Finally, it is helpful to identify the sequences of coping behaviors that you utilize when you're making good decisions and the sequences when you're trading poorly. Knowing how your individual coping responses come together to form coping strategies can help you cultivate your coping strengths. How to develop those strengths will be the topic for the last post in this series.

RELEVANT POSTS:

Overview of Coping and Trading

Coping and Appraisal

Trading, Coping, and Intuition
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