Thursday, September 13, 2007

Using Emotion to Change Emotion

In my recent post, I suggested that many of us avoid emotional upset by substituting action for feeling. This is a pattern that lies at the heart of many impulsive trading decisions, including many lapses in trader discipline.

Let's take a common example: a trader is working a bid a bit below the market and suddenly a ferocious sell program takes the market five ticks lower. The trader's order is filled and, in an instant, the market is several ticks against him. He reacts first with shock, then with anger at people who "manipulate the market". In a flash, he buys more contracts, even though this sizes his position much larger than his plan allows. It's a classic revenge trade: he's going to get even. The market moves a few ticks lower, and he is forced out at the worst possible price with a much larger loss than his initial trade planned for. In remorse, he makes a note in his journal that he needs to be more disciplined in his trades.

As long as the trader views "discipline" as his problem, he is sunk psychologically. He sets up a condition in which he is split: part of him is impelled to do something under particular conditions, another part attempts to exercise control by dictating what *should* be done. This is how anorexic and bulimic patients fight with food intake; how addicts fight with drug abuse; how many of us fight with sticking to diets and exercise regimens.
We cannot substitute thought for emotion: shoulds cannot overcome emotional impulses.

The key to moving past an emotional reaction is to experience it fully and then substitute a different emotional experience. Psychologists such as Leslie Greenberg and Robert Elliott have developed emotion-focused techniques to accomplish just that. The basic principles and techniques are straightforward, well-supported by research, and described in detail in a growing professional literature.

What is happening with the trader in the example above is that he first experiences hurt and disappointment. He might also experience a fleeting sense of failure and loss. These are too painful to feel, so he has learned to respond to hurt with anger. He transforms sad to mad and then acts on the angry feeling. What appears to be the problem--loss of discipline--is his way of coping with the *real* problem, which is vulnerability.

Suppose, however, I ask our trader to go more deeply into the experience of having his order taken against him. As he talks, I notice an unhappy look on his face and a slight slumping of his shoulders. I point that out and ask him to give voice to what he's feeling. He talks about how it seems as though nothing is working in his trading, how he and his wife just bought a new house, and how they're concerned about making the payments.

When I ask what that's like, feeling as though he can't support his family, he acknowledges, "I feel like such a loser". Then, however, he speaks with a different voice: "But I know I can trade. If I would just stop trying to catch exact tops and bottoms with these orders, I can ride moves once they happen."

"So when you're working orders in the book...", I begin.

"I'm being an idiot," our trader interrupts. "I know I shouldn't be working orders that close to the market. It's too thin."

"But you're trying to catch a top or bottom to feel good and help your family," I offer.

"Yeah," he acknowledges. "But I'm f*****g it up."

"So it all starts with you feeling concerned about your family. You have to get something going in the market to make some money, so you throw an order in the book to catch a turning point," I suggest. He nods.

"Could you pretend your wife is in the room right here, right now and talk to her about that concern and what you want to do about it in the market?"

We set up an exercise where our trader talks aloud his concern for his family finances. He has no problem telling his wife that he needs to be patient and trade well in order to regain his success. By the end of the exercise, there's no hint of the angry revenge trader. In its place is the direct experience of facing his worst fear--his feelings of inadequacy--and emerging with a different emotional experience: empathy for his wife (and for himself).

Greenberg notes:

"People can recognize that a feeling is not helpful to them once it has been accepted fully. The paradox is that, if the feeling is judged as not acceptable--as "not me"--it cannot be changed, because it hasn't been accepted. Only when a feeling has been accepted can it be evaluated and changed if necessary" (Emotion-Focused Therapy, p. 93).

Doing can be a way of avoiding feeling, and that keeps people stuck in problem patterns. Ironically, the solution is to deepen the feeling that is being avoided. At the other end is a very different--and usually quite constructive--emotional experience.


Brief Therapy Techniques for Traders

What Works in Trader Coaching


robin said...

My trading has greatly improved since I found this river of knowledge. Thank you for that. Although for some reason, yesterday I entered an order and exited several contracts but left 2 on the table for a possible run. I normally exit a 3 tick stop but I will use a finger stop due to market usually bounces around on my stop and heads my way (bonds), I dont want to exit and watch market go my way. So this bit me yesterday as I watched market go 8 ticks against me before I finally exited. I remember telling myself the market will come back, but it never did.
What should I be thinking at this moment? "That anything could happen and I should exit at my stop" or "who knows where the market will go so lets get out"?
What was I thinking?

Ziad said...

Hi Dr. Brett,

It's interesting that you should post a series on this topic as I had recently discovered the role of underlying emotions in my trading and was wondering how I could address the issue. I had recently been analyzing my trading and myself and I noticed a certain theme. I'm quite a disciplined trader, however one area where I can't seem to control my actions consistently is that of scratching or cutting positions before they hit the full stop when such an outcome seems inevitable.

After thinking about it for quite a while I noticed that there was an underlying fear that was controlling me. That fear was the fear of missing large moves that I had "called" and was positioned for. For me that seems to be the worst feeling. In fact it's worse than taking a loss, which is why I will willingly sit there and take a loss that looked very likely from early on, than to exit the position and potentially watch it do what I had originally thought it would without me on board. The same theme applies to entering prematurely in fear of missing that big move that seems so likely.

I've tried to think why this fear overshadows the other fears I have, and I can't say I have an answer yet. I'm assuming there is an even deeper underlying issue of what missing big moves that I had anticipated means to me on a subconscious level. I'm assuming that because I've tried to reason my way to behavior change, but that has proved quite tough. So i'm going to take a look at the emotion focused techniques for a possible solution. But I would also appreciate any thoughts about what my fears could be grounded in.

Thanks as always.

Brett Steenbarger, Ph.D. said...

Hi Robin,

It's a great question, but hard to answer specifically because I don't know your trading style. The general answer is that your stop should reflect: a) a favorable risk:reward ratio for the trade; and b) a reasonable point of exit where you conclude that the basic rationale of the trade is disconfirmed. Once the stop is set based on those two factors, its execution should be automatic. It very much helps to eliminate discretion from stops, so that they become a kind of habit pattern.


Brett Steenbarger, Ph.D. said...

Hi Ziad,

Many traders get their ego connected to making market calls or anticipating certain moves, and that makes it difficult to be flexible. The fear of missing a move is often connected to a lack of trust in one's own entry criteria. Ultimately, the answer lies in normalizing mistakes, both making bad trades and missing good ones. Perfectionism is the great enemy in that regard for many traders.


radicimo said...

This is extremely useful information for all traders. Thank you for sharing, Dr. S.

I mostly swing trade days to months, and like to find multi-bagger diamonds in the rough.
I went through a phase of being vindictive towards longer term holdings that I sold too soon. I would turn around and short them, and may have been successful the first time or two. I told myself that it was a method of developing skill at trading both sides of an issue, and about not trying to have a bias up or down on a stock. To some degree that is true, but I was fighting the trend in some cases. This year I had a couple of dramatic blow-ups that would have been so much better managed had I just stayed long and held. It caused me to explore some of the emotions that led to my decision-making. I believe that I've put an end to that behavior.

Similarly, I've long had a problem with transferring annoyance at myself for selling too soon into annoyance with the stock ticker itself. Instead of getting back in, I either wait for a better entry and have it nag at me as I watch it go higher, or I completely give it up, remove the ticker from my screens, and move on looking for other fish to fry. What I'd like to do is be able to get back on the horse a bit quicker, to mix metaphors here. I'm going to think about how to apply this technique to good effect. I'm not annoyed if I exit and the price continues in the direction that caused such a decision. So I guess somehow I need to be annoyed at NOT being in. Is that how the exercise might work? A potential collateral problem would seem to be over-compensating and making a bad re-entry, right? Geeze, fine-tuning emotional response ... lol

novicetrader said...

Would be interested in your thoughts on this article:;_ylt=ApI.S6Ie.OGgZpG18SO29fiyBhIF

AnaTrader said...


If it takes emotion to change emotion, then as Jim Cramer quoted his wife's 4th commandment: If there is a position that is dogging you, take some of it off, throw the maiden in the volcano and please the gods.

You will probably breathe easier and make a better decision according to him.

Some kind of EFT, emotion -focused therapy, pioneered by Prof Leslie Greenberg.

Brett Steenbarger, Ph.D. said...

Hi Radicimo,

The key is figuring out which emotional reaction is being avoided by the flight into annoyance. Once you deal with that underlying emotion, there's no need to cover it with annoyance.


Brett Steenbarger, Ph.D. said...

Hi NoviceTrader,

Thanks for passing along the article; see my post on it.