Friday, April 11, 2008

An Effective Technique for Preventing Frustration and Its Effects on Trading

The first post in this series dealt with stilling the negative thoughts that are triggered by trading-related frustrations. The second post outlined three steps for breaking patterns of frustration as they're occurring. In this final post in the series, I will describe my personal favorite among the strategies for dealing with frustration, one that I use extensively myself as well as with traders I coach. The appeal of this methodology is that it is preventive: it is designed to head off frustration before it occurs.

To understand the method, let's take a simple, practical example. Suppose you find traffic jams to be especially frustrating. You often lose your cool during periods of traffic delay, ruining your mood for the remaining morning or afternoon. How could you prevent this from occurring?

Telling yourself to not overreact doesn't work: emotions are amazingly refractory to such willpower efforts. Interestingly, the best approach is to actively *plan* for the very frustration you hate. If, say, you *knew* you were going to be delayed in your commute due to a snowstorm, you could prepare in advance. You might bring extra music, snacks for the car, or an audiobook for listening. You might plan out conference calls you can make from the road while you're stuck in traffic. Once you are actually sitting in the traffic, you find that it's not so frustrating: you are prepared--and that takes the emotion out of the event.

Let's take a step back and examine the causes of frustration. We become frustrated when we have a goal or purpose in mind and when this objective is hindered by forces beyond our control. Thus, we might be frustrated by an airline delay when we're in a hurry to a business meeting, or we might be frustrated when we're looking forward to a good night's sleep, but are kept awake by noise outside our window.

Frustration hits us when we experience these impediments as *threats*. The airline delay might be a mere annoyance if we're not in a rush to an important event. If, say, that event were a crucial job interview, we could be frustrated indeed.

When a trader emotionally accepts losing as part of the business, loss is not so threatening. With proper money management, it can be contained and need not pose more than an annoyance. But if a trader *needs* to make money--perhaps because of perfectionism, or perhaps because of dire financial circumstance--then normal loss might be experienced as unusual frustration. It's the overriding *need* to make money that sets the trader up for acute frustration.

As in the above example of anticipating the traffic delay, we can anticipate losses and prepare accordingly. For example, let's say I'm preparing myself for a potential reversion to a mean trading price as we're trading near the bottom of a multi-day range. I know that, as we approach the lower end of that range, that we'll either get the anticipated reversion, or we'll see a downside breakout. Either way, there will be a good trade in the offing.

Before the market opens, I seat myself comfortably and breathe deeply, slowly, and rhythmically, focusing my attention on relaxing music playing through headphones. Once I'm calm and focused, I walk myself through the anticipated trade, imagining in detail how the market trades near the bottom of its range and bounces higher, how I wait for the first pullback from that bounce, and then how I enter with my long position to capitalize on the return to the average trading price within that range. It's as if I'm watching a movie, visualizing vividly myself executing the trade idea.

Then, however, I include the frustrating event in the visualization: I vividly image the market reversing and trading weaker, with volume now hitting the market bid. I imagine myself feeling frustrated that my trade hasn't followed through, and I visualize myself stopping the trade out once we trade below the point at which the above-mentioned bounce began. Then, I further visualize waiting for a fresh downthrust (confirming the weakness) and immediately entering the market on the short side on the first bounce, flipping my position to capitalize on the downside breakout. That is my preparation for the frustration, just like the preparation of the driver who knows he'll be stuck in traffic in a snowstorm. Instead of viewing it as threat, I'm mentally rehearsing it as opportunity. The stopped out "reversion" trade tells me that we're not going to stay rangebound. Instead of focusing on the loss, I stress the information gathered from the loss and prepare in advance to flip my position.

As with the earlier exercises, this exercise requires repetition and the willingness to take time each morning to prepare for frustrations with vivid scenarios. Readers of my book on trader performance will recognize this approach as a variation of the exposure methods I described in the chapter on behavioral techniques for change. My experience is that traders can learn these methods for themselves as part of becoming their own trading coaches. My upcoming book will describe this in considerable detail. The key is embracing frustration by anticipating it and turning it into opportunity. That removes the threat from emotional triggers, enhancing a trader's self-control.


Overcoming Anxiety

Consumer's Guide to Coaching Traders