One of the most disruptive emotional influences in trading occurs when normal, expectable frustrations encountered during the trading day trigger longstanding, habitual patterns of negative thought. At that point, as cognitive therapists emphasize, the negative thoughts follow a well-worn—and automatic—path, adding frustration to frustration. This is particularly damaging to trading for two reasons: 1) it prevents traders from constructively addressing the original, market-related sources of frustration; and 2) it escalates frustration to the point where it impedes future decision-making.
Take the example of Rick, an active intraday trader, who grew up in a family dominated by conflict and fighting. Hit and yelled at frequently as a child, he developed resentments toward authority figures that continued during his schooling. He likes to champion the underdog and often complains that “big guys”—those with power and influence in business and government—take advantage of the “little guy”. When he is trading, Rick can be very focused on his markets and keen in his observations. Every so often, however, his markets will move suddenly on news items, rumors, or large institutional (program) trades. That becomes his trigger: the market event that sets off his negative thought patterns.
When the market moves suddenly and sharply against Rick, his first reaction is anger and frustration. Automatic thoughts rush into his head: “I can’t believe this is happening again” and “I can’t believe how unlucky I am.” Although he voices these thoughts in a frustrated and often sarcastic tone, there is no doubting his sadness. He experiences himself as a victim of the market’s adverse movement. He has become the “little guy” hurt by the “big guys”, just as he was hurt during his childhood.
As the market moves further against him, Rick makes the transition from frustration to outright anger. He raises his voice, exclaiming that he can’t believe how unfair and “rigged” the markets are. He declares that it’s impossible to make money; the markets cheat the “little guy”. Eager to lash out at the big guys who are “taking my money”, Rick fights the trend and doubles down on his now-losing position. He rebels against the “big guys” just as he did against his parents, teachers, and bosses. The market, however, doesn’t listen and doesn’t care. It grinds Rick’s oversized position into a major loss, leaving him feeling saddened, defeated, and shocked at his own lack of “discipline”.
Rick vows to do a better job of keeping his cool and following his risk rules and, for a while, he keeps a lid on his frustrations. Inevitably, however, one of those market moves is likely to once again go against his position, and his thoughts and feelings return. It’s as if his brain is taken over by an alien influence—one deeply rooted in his past.
The important thing for Rick to recognize is that he is not simply reacting to the markets; his emotional reactions are colored—and exaggerated by—his past. In fact, this is a useful psychological principle: there are no emotional overreactions to events, only reactions that mix the past with the present.
At the time Rick is finding his negative, automatic thoughts triggered, he is not aware that this is a function of the past intruding into the present. He doesn’t see that he is transferring his anger and hurt toward his father (the first “big guy” who hurt him when he was a “little guy”) to the markets. Because he isn’t aware of this connection, he winds up repeating it again and again in a destructive fashion.
Many, many times, the “overreactions” of traders are reflections of unresolved issues from the past intruding into the present.
In coming posts, I will explore ways of coming to terms with these patterns and isolating them from trading decisions. The first step, however, is for traders to recognize when their frustrations are boiling over—and to stop trading at that time. Above all else, do no harm is the principle. If you felt your car was not responding properly to your driving maneuvers, you wouldn’t keep driving, and you certainly wouldn’t speed up! So why keep trading when your mind is not responding to your planning and reasoning, and why especially trade more aggressively?
This is very important: developing the ability to stop yourself. By itself, it will not solve the problems from the past, but it will drive a wedge between you and your negative, automatic thoughts. You may not be able to stop the thoughts right away, but you can ensure that they don’t control your behaviors. All you need is a rule that you follow religiously that says: once you start yelling, swearing, pounding the table, clenching up, or talking negatively at the screen, you take a break until you’re calm. That’s it. You can choose to trade or not trade when you’re in or out of the zone.
You’ll be surprised how taking a break will help you still the voices in your head, regain your composure, and build your sense of self control. A few minutes of slow, deep breathing and focused concentration perform miracles in this regard. (I find biofeedback especially useful in this regard, as it tells you precisely when you're re-entered the zone). Many more traders would be successful if they only traded when they were in the right state of mind.
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