The following is a direct quote (with the trader's permission) from an email I received just a little while ago. It illustrates a dilemma that many traders face at some point in their career:
"I was doing ok for a few days, then I went back to my old trading ways and just suffered a big loss of my account today. I committed all the the trading sins, etc double my position size, go against the trend, being stubborn and hold onto a losing position. I think I know the correct way (maybe I am fooling myself), but I don't seem to be able to control the demon inside of me and just can't break the old bad habits."
So let's imagine this is happening at one of the trading firms where I serve as psychologist/coach? How would we tackle the situation?
First off, we would tackle it quickly. Times of crisis are also times of opportunity, when it comes to psychological change. That's when people are most motivated--and most open--to making changes. "Strike while the iron hot" is an apt principle when situations feel desperate.
Second, I would immediately institute a three-way meeting with the trader, myself, and the firm's risk manager. We would greatly cut back the trader's risk (i.e., trading size), so that no further harm could be done to the account. "Above all else, do no harm," is a principle that works for physicians and traders alike. The idea is that, with profit/loss (P/L) pressures removed from the equation temporarily, it is easier to focus on problem patterns, their causes, and possible solutions.
Third, I would interview the trader extensively (and observe him trading, if possible) in order to identify the specific situations that are associated with the loss of discipline. In other words, I would ask in detail about what is happening in markets when the trader's discipline is good and what is happening when "the demon inside of me" comes out. What we're looking for are *patterns* that we could then address with specific change techniques.
Here are the patterns that I find to be most common:
1) The trading problem is the result of a broader emotional disorder - This is more common than is commonly recognized. About 5-7% of the population suffers from a diagnosable emotional disorder during any given year, with a similar incidence of substance use disorders. As a result, at least one in ten traders can be expected to experience emotional disruptions that interfere with trading, but are not specific to trading. These disruptions include anxiety disorders (such as panic disorder and generalized anxiety), mood disorders (depression), and disorders related to attention deficits and hyperactivity. Many of these problems can be addressed effectively--and without debilitating side effects or addictive potential--through the use of medications. Many of them also benefit from counseling/therapy assistance from a qualified professional. If the problem affecting trading is also occurring in other spheres of life (relationships, work) or has predated trading experience, the odds are high that it could benefit from professional assistance. The proper course of action is to get a high-quality referral to a licensed professional, not a self-proclaimed trading coach.
2) The trading problem is the result of trading-specific performance pressures - Many times traders experience performance anxiety regarding the uncertainty and risk of markets and the pressures to make money. This anxiety leads them to trade in fearful ways, and it sometimes leads them to overtrade in the desire to make things work out. Many times the disruptions of trading occur during periods of drawdown and slump, when performance pressures become most acute. Common to these performance problems are difficulties with negative self-talk, including self-imposed, perfectionistic pressures. The key to this set of problems is that they are trading-specific. Other areas of life don't exhibit the same patterns of pressure and disruption. Many of these concerns can benefit from self-help methods, including the cognitive and behavioral methods that I outline in my book on trader performance.
3) The trading problem is literally a trading problem - This is most common when traders put their money at risk before they've gone through a proper learning curve. They have read a little, observed a little, and now try their hand at trading. Because they don't understand how markets move--and what makes them move--they rely on simple patterns for entry and exit that provide them with no statistical edge whatsoever. The result is increasing frustration and loss of capital. Although the problem may look psychological, the emotional distress is really the result of the more fundamental absence of skills and experience. I would guess that easily half of all people who seek my advice and assistance fall into that category. When I ask trading and market-related questions, it's clear that they don't understand even basic fundamentals. The proper solution for this situation is to go through the learning curve the right way, starting with observation and practice (simulated) trading, and then gradually moving toward real-time risk as skills build.
A major shortcoming of seeking help from trading coaches is that they are usually only experienced and knowledgeable in area #2 above. They are not trained as professional psychologists to help with #1, and they lack the trading experience to be of assistance in identifying #3. Additionally, it is in their financial self-interest to lump as many traders into category #2 as possible, since the first and third categories are unlikely to build their book of business.
Because I don't work with individual, independent traders myself--either as a coach, psychologist, or trading mentor--I don't feel wedded to any of the scenarios above. The key is for traders to accurately diagnose the problem, so that they can follow a promising, structured plan of action. There are many reasons why the trading demons can get out of control: understanding the why of the demons is half the battle of figuring out what to do about them.
Coaching the Professional Trader
When Coaching Doesn't Work, Part One
When Coaching Doesn't Work, Part Two
A Referral List of Mentors and Coaches