Wednesday, September 12, 2007

When Traders Prefer Action to Emotion

Think of how many trading problems take the form, "I know I should do X, but I wind up doing Y instead."

For example:

"I know I should trade small, but I end up putting on large positions."

"I know I should get out of the trade, but I wind up riding the loser all the way down."

"I know I should wait for a setup confirmation, but I front run my signals."

In each case, the trader tends to focus on Y--what they did wrong--as the problem. They approach me, their trading psychologist, in the vein of, "How can I stop doing Y?"

So often, the behavior pattern they tell themselves they should be engaging in is one of restraint: keeping trades small, honoring stop levels, waiting for signals, etc. The behavior they want to stop is one of impulse: acting without fully thinking through the consequences.

But what if the impulsive act is not the problem, but a way of coping with a more fundamental problem: the fear of what might happen under conditions of restraint? Instead of openly acknowledging and dealing with that fear, action becomes a defense--a way of making the fear (temporarily) go away.

If so, simply trying to motivate oneself to do less of the impulsive behavior--or even reinforcing the proper, restrained behavior--is not enough. When traders take action to avoid unpleasant emotional experience, the answer is to learn how to transform those emotions.

In an upcoming post, I will be posting on a set of techniques from the therapy literature that accomplish just such a transformation. Not by replacing emotion with reason, but by learning how to replace emotion with other emotions.

The key to these emotion-focused methods is to figure out what it is that the trader is running from: what emotional experience is so scary that it is preferable to act on impulse, with all the consequences that entails?

Asking that question opens us up to novel and highly promising modes of self-change.


Mood, Emotion, and Trading

One of Trading's Greatest Emotional Pitfalls


cpptrader said...

Dr. Brett,
Reading this made a question pop into my head, and forgive me if you've covered it in prior posts and I've missed it.

Can you train impulses? For example, at times I'll see a set-up, or read bid/ask, and know I should take a trade, but I don't. It's the exact opposite situation compared to what your post here addresses. I often then see the price move in my favor, and I can't discriminate between objective analysis and hindsight bias. Keeping a record of missed or avoided trades may be the best solution. Thoughts?


antares said...

Just 1 cent view, The most and recognizable problem faced among the retail traders are to set a buying points and selling points.More experience and exposure to day to day operation are very crucial in every aspect ofprofessionalism "no doubt".

speedtheplow said...

"Freedom means working comfortably in harness." Robert Frost

Brett Steenbarger, Ph.D. said...

Hi Matt,

Performance anxiety is the most common cause of the situation you're mentioning. I find it very helpful to mentally rehearse those setups during biofeedback sessions, so that I learn to stay calm and focused at decision-making time.


Brett Steenbarger, Ph.D. said...

Hi Antares,

Great point; very often traders don't really think through the risk:reward aspects of their trade ideas.


Brett Steenbarger, Ph.D. said...

Hey Speed,

That is a fantastic quote: so true.


Benjamin Boyle said...

thanks Brett,

I was able to relate to this topic quite a lot, and appreciate your work greatly.

I have spent more than two years learning the markets, and I figure it'll take at least another two years to learn myself now. But I am glad that I at least feel as though the only thing left for me to work on is myself.

As humans, we have a special gift to be able to understand how our mind / emotions are working together, and then effect change in our own instincts!

That being true, haha, we have such a LONG way to come :) our self-knowledge is very scratchy, I believe.

What do you think is the best way for a person to begin this journey?

cheers / ben