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