Thursday, June 12, 2008

From Problem Patterns to Solutions: Brief Therapy for Traders

An experienced trader writes to me:

"I am having a good year trading but today marks the THIRD TIME this year that I've made a critical error which goes against my whole philosophy of trading.

I am a trend trader. That is how I make very consistent gains regardless of what the market is doing...I was buying a stock at levels where I believed it would bounce...of course the stock didn't bounce so I added more at lower levels and more even lower...

I got out of the trade on a rally, but it cost me the next two weeks of average profits...

I knew it was stupid when I was doing it, yet I continued to compound the problem. I didn't necessarily want to be right and make money on the trade, just minimize the losses (by buying more at lower levels)...

What I am not comfortable with is WHY I engaged in such risky behavior...what is the root, how do I find it, eradicate it?...The other two times were similar trades with similar results."

This is a very typical scenario that I help traders with. In this post, I'll walk you through how I view such problems and what I typically recommend.

The framework that I operate from, broadly speaking, is one that is known as brief therapy. These short-term approaches accelerate cognitive, emotional, and behavioral change by emphasizing hands-on skills building and the creation of powerful, new experiences that change how we view things.

Brief therapy is not appropriate for all people and situations, particularly those with chronic (longstanding) emotional problems that significantly interfere with areas of life functioning. Fortunately I know my writer and can vouch for the fact that he does not suffer from any significant emotional disorders.

So what is the key to his problem? What one feature stands out in his presentation? Take a moment and look over his words. What most strikes you about the difficulty?

One such key is that this has happened before in very similar ways. That tells us that it is likely a cyclical problem. Something initiates the pattern (sets it off); something keeps it going (even though he knows it is "stupid"); and something later kicks in to get him out of the pattern.

Most cyclical patterns are there for a reason: they serve a function. The trader's intense desire to find the problem and "eradicate" it is probably part of the problem pattern itself--much as the desire to eradicate insomnia can keep a person awake all night or the desire to eradicate fat can lead a bulimic person to binge eat.

In short, fighting the pattern is a mistake. The challenge is to understand the function of the pattern and then rehearse a different way of satisfying this function. Instead of viewing the problem pattern as maladaptive, the brief therapist views it as a form of problem solving that no longer works for the individual.

Let's take a simple example: Bill grew up with a mother that was anxious and overbearing. Conflicts at home were very unpleasant, so Bill learned to avoid conflict by minimizing communication with his mother whenever she sounded upset. This worked well throughout his childhood. Now Bill is married to Susan, who at times feels overwhelmed at work and reaches out to Bill. Much to Susan's dismay, Bill withdraws at those times and fails to offer support. She feels as though he doesn't care about what she's going through. Bill feels guilty about not being there for Susan and tries to make it up to her, only to fall short the next time she is worried or frustrated.

One might imagine Bill saying the same thing as our trader: "This is the THIRD TIME I've let my wife down...I know it's stupid when I'm pulling away from her, but I continue to compound the problem." It's a cyclical problem that represents a past, overlearned response to a stressful situation.

So how do we help Bill? We don't try to "eradicate" the problem--that hasn't worked. Rather, we get him to *talk* with Susan when he's feeling uncomfortable with her emotions. Step by step, we coach him through such a conversation, opening up about his thoughts and fears instead of pulling away. For example, we teach him to say to himself, "I'm not really uncomfortable with Susan; this is my old fear of my mother cropping up again. How can I tell Susan about that?"

As it turns out, just about anything Bill says to Susan in the situation about his experience will be helpful, because it will disrupt the old pattern and show her that he truly is listening, that he really cares. That sets the stage for the two of them to develop new patterns. Instead of trying to eradicate and bury his feelings, we use them as an opportunity for Bill to connect with Susan.

So back to our trader. He has a cyclical pattern in which he adds to losing trades, eventually taking outsized losers. This is frustrating to him (note the all-caps when he describes the THIRD TIME he's experienced the problem this year), and it is something he wants to get rid of. But what is the function of the pattern? Our trader perceptively notes it himself: "I didn't necessarily want to be right and make money on the trade, just minimize losses." So there it is: our trader is trying to avoid loss by averaging down. This is his way of fighting against failure, falling short.

In a subsequent communication, the trader revealed to me, "Each of these bigger losses occured after a period of very good trading. I didn't feel cocky, but my actions were. I cannot increase my relative risk tolerance after a period of success." This is a very good observation. The problem pattern is NOT triggered by a losing trade. It is triggered by success! After a winning period, our trader becomes emotionally attached to winning: he wants to eradicate losses. This has him resisting taking normal losses at his stop points and instead averaging down to minimize the loss. It's not that he's trying for a home run trade: he doesn't want to stop winning.

So there's the trap. Once the trader hits a winning streak, he wants to keep winning. This makes even normal losses feel threatening. So what can he do? Ironically, the answer is to purposely engage in guided imagery exercises before the trading day starts in which he mentally rehearses honoring his stop levels and taking normal losses. These exercises would be doubled following winning trading days. Just as we had Bill talk with Susan about his discomfort, we encourage our trader to openly confront his need to keep winning. Fighting the pattern hasn't worked; by facing the problem head on, he can keep a level head even when he's in his best winning streak.

I don't know our trader very well, but my guess is that there's more to his drive and desire for success. Perhaps he's *needing* to win instead of passionately *wanting* to win. There's an important difference. Once we're in the "need-to-win" mindset, losses become threatening and we try to avoid them by doing "stupid" things. By rehearsing an "ok to lose" mindset, we interrupt the need pattern and set the stage for initiating new patterns of trading well.

I enjoy trading and I find markets endlessly fascinating. But it's working with people and helping them make changes in their lives that really makes my day. Once we stop viewing patterns as "problems" to "eradicate" and simply discover fresh ways to meet the needs underneath those patterns, we eliminate many of our blocks to success and happiness. And isn't that what coaching is all about?


Therapy for the Mentally Well

Using Brief Therapy to Become Your Own Coach

The First Steps of Brief Therapy

Brief Therapy With a Solution Focus


Fatespilot said...

Wow, this is an extremely useful message. He’s lucky his setback was only two weeks. I just had a similar “Three strikes you’re out!” experience. I thought it was an issue of poor discipline which aggravated avoidance behavior. Thank you for helping me deconstruct what’s going on. I can be more mindful of it now.

CharlesTrader said...

Yes, I have done this more than once.

"I didn't necessarily want to be right and make money on the trade, just minimize the losses (by buying more at lower levels)..."

My internal thoughts during these episodes of insanity were to eliminate my losses, not to minimize them. After a few large losses, I slowly convinced myself that this action was not a good thing to do. I also began to convince myself that small losses, taking early-on when the market turns against my position, can be easily recovered in the next trade or two.

However, just like any adiction, the urge to stay in a losing trade and compound it is always there. I must constantly remind myself during the day to take small losses, and never compound a losing trade.

It is a constant, mental challenge.


Michelle B said...

Your "Dear Abby" type posts (replying to specific trading problems presented to you by real traders)--which I noted about starting several months ago--are EXCELLENT. If I could, I would hug you for them.

Jeff said...

Dr. Steenbarger, thanks for taking the time to respond to this issue. I've read your latest book more than once, and every time you use a "fresh example" in your blog, my understanding of these things grow all the more. Thank you for giving.

itrade4real said...

A trader must somehow view his "problems" differently. You chose an excellent example for this post, as every trader has made the mistake of averaging down, usually with the same results.

SSK said...

Hello Brett, Great article, I have noticed that to also be true upon reflection of those times when you have a winning streak, you absolutly want to keep winning. In my case the losing streaks seem to get me refocused and the best course of action for me is to write about my mistakes publicly, and review the days action with my mind on taking the trade as I watch the replay, even though in the back on my mind I know the outcome. That seems to work. In essance is seems to do what you discuss, finding a new pattern of succsess and replacing it with the failed one. Thanks as always for you great mentoring! Best, Steve

The Financial Philosopher said...

Now I know why I read this blog everyday: Dr. Brett is a philosopher!

"The resistance to the unpleasant situation is the root of suffering." ~ Ram Dass

"Freedom from the desire for an answer is essential to the understanding of a problem." ~ Jiddu Krishnamurti

"Without accepting the fact that everything changes, we cannot find perfect composure. But unfortunately, although it is true, it is difficult for us to accept it. Because we cannot accept the truth of transience, we suffer." ~ D.T. Suzuki

Thanks for the "philosophy" lesson Dr. Brett...

Kent (The Financial Philosopher)

Marc said...

Hi Brett,

Great article!

I want to thank you for your past insights which proved quite useful today. Around midday I saw the averages sitting near their highs yet the tick was trending lower and lower. In that moment it was clear the market would have to drop. A nice little short trade followed.

Thank you,

alwaysLearning said...

This post is great because you don't have to think of it in the context of just trading.

I have some annoying habits I want to get rid of. Thinking about the underlying need that causes the desire for the habit to arise and addressing that 'need' makes a lot of sense.

Indifferent said...


An implication of the trader's problem, which I'm sure we all go through, is: the fact that winning 'feels good' in the first place is a problem in itself! When we make money, our internal chemistry changes, dopamine is released, etc. Note that this can be totally irrational. A trader who's lost money for months and cut his account in half will still get that same rush when he manages to take money out of the market.

Then, when that feeling is gone, addictive behaviors are invoked. I would like to see a future post address how a trader is able to divorce 'making money' from 'feeling good.' That could short- circuit the addictive behavior, since there would be no perceived emotional void to fill!

Globetrader said...

If you trade oil futures try one experiment. It will cost you maybe one or two ticks in commissions, but emotionally you will learn a lot about yourself:

Take a quiet period and go long 1 contract CL N8 (which is the current front month contract) and if possible at the same price Short 2 contracts QM N8.

Make sure you have no stop or target orders in the market.

This position will cost you 150USD in margin as in fact you are flat, you have no market exposure at all, as every tick down in CL will be made up by a tick up in QM and vice versa. The only slight difference comes from the fact, that QM trades in 0.025 increments while CL trades in 0.01 increments. Asx the tickvalue in QM is half that of CL you will need 2 QM contracts to offset the CL position.

Now take the time and follow your position during the day. Monitor how you react to the losing side and how different you react to the winning side of that combined position. Notice how you have that urge to take profits in the green position, while you are somehow reluctant to let go of the losing side, instead having the feeling that that loosing position will come back.

At the end of the day, when everything is quiet again, close your position.

I don't suggest taking advantage of extremes, as the purpose of that experiment is to learn how you react different to a losing and a winning trade, even when objectively there is no market risk at all. You are at no time exposed to any market risk, you may have to pay one or two ticks plus commissions, but that is well worth the experience.


costar said...

Thanks for the excellent post. It seems like most big losses come after winning streaks and it's important to pay attention to your attitudes after you've been winning.

MikeH said...

Thanks for another idea: I have been practicing via simulation on situations where I know the outcome of the trade setup is positive. My intention is to ingrain the trade setup and increase my extraction. From this post, I realize I also need to practice the opposite - trade setups that break down and work on reducing loses.

Brett Steenbarger, Ph.D. said...

Thanks for the comments and the interest in the post. My hope is that it takes readers a bit closer to becoming their own psychologists--


Kevin H said...


Ahhhh! As always, great post. I just made the same mental error the trade in your post did. Good to know the solution to this problem.

weirdo said...

Great post! I have (hopefully, now had) EXACTLY the same problem. I was winning consistently, felling like I finaly do it for a living, and then BANG in only one trading day burned everything. Pain and dissapointment, then slowly croling back to life, struggling to understand, to improve, to learn. Then, again, won every single day for entire month when, after thinking again that I can do it for a living ... BANG. I tried all kind of things (relaxation, mental training, intensive simulations) but this stupid behaviour came back. In milder forms but still a source of pain and shame for doing such stupid things.

Now, thanks to you, I understand better the mechanism and the reason for this behaviour. I can target train for it.

Immense gratitude!