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


SSK said...

Hello Brett, thank you for the excellent articles in this series!It takes a lot of cogitation for sure. I also noticed in my case that it is a series of losses that allows me to trade better over time. As soon as I feel good about my trading, whamo, I get beat back repeating past errors, hence by refocusing, and reapplying fundamental techniques I eventually break out to new highs. I try to look at losses a alarm clock, time to get back work! At almost all my new highs on the charts I use to track performance, I can say at almost all of them, I revert to some previous state and fail to execute. I mean, fail to execute on a larger picture that I have in my mind. I am going to work on your suggestion of replaying within my minds eye to a greater extent. It is funny, I was so pleased with my trading results during march, I put a picture I took of fire and smoke,(I thought it was a cool shot, but the imagery was the point) put it on the site where my trading preformance is archived, and it has been all downhill from there!(nothing catastrophic) just poor execution, and missed opportunites. Just goes to show you how vunerable you are when they think you got it! It takes so much energy in this business to be succsessfull. Best, Steve ~SSK~

SSK said...

Hello Brett, I just read the other linked article on "My favorite techniques for overcoming anxiety". It was an interesting application of music in the mix. I am going to try and catch you at ioamt's event if it is open to the public. Thanks as always, Steve

Krasimir said...

“The key is embracing frustration by anticipating it and turning it into opportunity”
While it is possible to embrace frustration thru exposure techniques, it could not always be possible to turn it into opportunity, at least the way it is in the above example, I think. In your example you described market conditions that gave you opportunity for immediate consecutive trades on both sides – long and then short. Often, market conditions would not be favorable for taking reverse trades or taking the next trade so soon(if there is a valid signal) and looking for immediate trade (e.g. taking lower probability trades) as a way for turning frustration into an opportunity could be just overtrading, but a coping strategy, that would further deepen the frustration. So, what could be used as an opportunity when there is no tradable pattern after frustration has taken place? One technique could be opportunity to learn something new from the frustrating event. Other suggestion could be to imagine (or having the experience) that the frustrating event is a normal part of well constructed money management.

Thanks for the series.

Brett Steenbarger, Ph.D. said...

Hi Krasimir,

I would suggest that there are constructive actions to follow following *every* losing trade. Some of those actions might be flipping a position (per my example), but others might be reassessing the market (and one's market assumptions), working on one's execution, etc. The key is to visualize *constructive* responses to losing trades that actually lead to self-improvement. Thanks for the opportunity to clarify; excellent point.