Tuesday, April 08, 2008

Three Steps for Breaking Patterns of Frustration in Trading

In my recent post, I recounted the example of Rick and the frustrated thoughts that were interfering with his trading decisions. A major idea from that post was that Rick's thought and behavior patterns were not really overreactions (as he thought they were); nor were they signs that he was "crazy" or "immature" (also things he called himself). Rather, Rick's patterns represented conflicts from his past that were triggered by events in the present, setting off old (and out of date) ways of thinking and behaving.

Research that I recently cited finds that "willpower" is much like physical energy: it can be depleted with effort. When we expend effort on following markets and containing emotions, our reserves of self-control dwindle. This, in turn, leaves us ever more vulnerable to those situations in which present events trigger automatic thoughts and actions from the past.

It is for this reason that "controlling" or fighting emotions is not helpful for the trader. Even if we succeed in keeping a lid on feelings, we take ourselves out of that performance "zone" in which we'll make our best decisions. Only by removing ourselves from the trigger situation and putting ourselves in a different physical and emotional state can we short-circuit the negative patterns (make them less automatic) and enable ourselves to re-enter that decision-making "zone".

So let's break this down: the first steps in changing negative, automatic patterns are threefold:

1) Recognizing the triggers for our patterns - Typically, there are a limited number of situations that set us off. For Rick, for example, a trigger situation was one in which the market moved suddenly against him. This set off feelings of frustration, which then triggered self-talk about markets were "rigged" by the "big guys". Those thoughts, in turn, triggered efforts to fight the big guys, leading Rick to double down on his now-losing trades. This sequence can occur relatively quickly, but notice how there are many points at which Rick could interrupt the cycle. One technique I've found consistently useful is having traders keep a journal in which they look back on periods of frustration and identify the triggers. Reviewing this journal helps us become more aware of--and sensitive to--our triggers. This brings us to our second step.

2) Recognizing that the patterns are occurring - This means monitoring your state of mind and your physical state at regular intervals during the trading day. One tool I've used with traders is a simple picture of a thermometer, in which traders can fill in the time of day and their "stress temperature". The idea is to recognize frustration *before* it triggers ongoing, negative, automatic patterns of thought and behavior. (One trader I worked with stayed hooked up to a biofeedback unit while trading for this very purpose. He stopped trading temporarily when he exited the "zone" to a significant degree). The idea is to generate a mental red flag when we recognize that frustration has been triggered. A journal can be helpful here, as well. In this case, the entries would be in real time: How am I feeling right now? What am I thinking? What is the state of my body? Such a journal strengthens our ability to act as an observer of our patterns, reducing the likelihood that we will become lost in them. This, in turn, brings us to our third step.

3) Taking the break from trading and entering a new state - Once you exit the situation that is triggering frustration, you can engage in an activity that greatly shifts your physical state. The odds are good that this will also move you to a different cognitive and emotional state. A quick round of active exercise (such as jogging on a treadmill, calisthenics, or push-ups and sit-ups) can work very well. Conversely, you may find it more effective to listen to very quieting music and then perform a meditation exercise: vividly imagining yourself in a peaceful location while you rhythmically breathe very deeply and slowly for a few minutes. If you use biofeedback, this would be the time to engage in one of the biofeedback routines. One unit I use, for example, (em-Wave) includes on-screen "games" in which you keep a balloon aloft by staying "in the zone". The idea would be to only return to the trading station once you've kept the balloon aloft for a few minutes. That completely short-circuits the negative behavior pattern. It will take some creative experimentation to find the specific activities that work best for you in shifting your state. In many cases, just taking a break, putting on some music, getting a bite to eat, and walking around are enough for me to clear my head and start fresh.

Notice that the most important step in the above is the decision that a trader makes to not buy into the frustration and the resulting negative self-talk. The market is not the problem. Other traders are not the problem. "My terrible luck" is not the problem. The problem is buying into negative thinking and letting it control trading decisions. That is why the most important step of change of all is the decision to actively fight these automatic patterns. They--not you, not trading--are the problem. Once they're triggered, your sole priority is to interrupt them and prevent them from controlling your behavior. With each interruption, you distance yourself from the patterns and make it easier the next time to extricate yourself from them.

If you find that you cannot identify the triggers and recognize them as they're occurring, you may want to try some of the techniques highlighted in the two chapters in the Enhancing Trader Performance book devoted to cognitive and behavioral methods. I wrote these chapters specifically as self-help mini-manuals for traders. If you find that even self-help methods are not working for you, that's the time to consider professional assistance. Here's a reputable website that offers referrals of licensed professionals in various geographic areas.

That having been said, my experience is that the most common reason that self-help methods don't work is that traders don't stick to them. Patterns that have been acquired over a period of years and reinforced by years of repetition will not go away simply by talking with a coach or trying an exercise a few times. If traders faithfully carried out the three steps above every day for a month, I'd expect to see significant progress in the vast majority of situations. What happens, however, is that traders don't see progress after a few days and give up. It's not the time with a coach or counselor that generates change--it's the consistency of hands-on efforts day in and day out to interrupt and change our patterns.

For my last post in this series, I will outline a specific routine that I use to work on myself. It will illustrate a different aspect of working on changing our automatic patterns: preventing them from occurring in the first place.


Brief Therapy Techniques for Traders

A Framework for Rapid Behavior Change

Solution-Focused Change


Markus said...

Perseverance is perhaps the most critical factor for success.
If you start running for example you should set up small goals and should exercice at least two times a week, but not more than 5 times (at least in the beginning). After a while your body will change, new muscles grow, you get more stamina. However, that is just the beginning. You can reach this stage after several months, but it takes years after your skeleton adapts to regular running. You have to be patient, otherwise you will hurt yourself unnessecarily.
The same with trading: Take your time (and therefore think in years not months and be financed for years ;-).


Globetrader said...

I have had always problems leaving my stops in the market when the market was moving against me, especially when it was doing so in a slow fashion always letting you think it will come back just in a minute.
The biggest losses I've had in my trading career occured when I doubled down in such a market.
I know that letting the market take my Stop, if the trade is not working out, is imperative for my future as a trader. Still only after I stopped being calm while in a trade I was able to take a loss without moving the Stop order.
To the outside I was calm in the trade, but inside my emotions where boiling, often resulting in a cancelled Stoporder or a doubled down trade.
Now I'm letting these emotions out, I swear at the market, if it goes against me, I talk to myself during the trade. And while I do that, I noticed I'm calm inside, I'm able to follow the market, letting it hit my stop or take my profits at a logical point. I'm taking less and less impulsive trades, because I found a way to let the emotions out instead of letting them boil inside.


CharlesTrader said...

The "Kaizen Method" of improvement, which is a daily "Continuous Improvement" in small steps. A process involving experimentation using the scientific method, and made famous by W. Edwards Deming and Toyota.

Kaizen involves three principles as stated in Wikipedia:

1. Consider the process and the results (not results-only) so that actions to achieve effects are surfaced;

2. Systemic thinking of the whole process and not just that immediately in view (i.e. big picture, not solely the narrow view) in order to avoid creating problems elsewhere in the process;

3. A learning, non-judgmental, non-blaming (because blaming is wasteful) approach and intent will allow the re-examination of the assumptions that resulted in the current process.


Brett Steenbarger, Ph.D. said...

Hi Markus, Chris, and Charles,

Thanks for the *excellent* comments and additions to the blog post; those are great ideas--


AVP said...

Good article doc.

Revenge trading was hurting me real bad so I wrote down what I was feeling and why I was feeling,took out a print out and posted it right in front of me.

Then went over past instances of trades where same pattern had occured and it always lead to a big drawdown.

Glad to say that there are no pangs for revenge trading anymore and I dont keep the printout anymore.