Friday, July 04, 2008

Cross-Talk: The Role of Emotion in Trading

SFO Magazine has another trading psychology issue available, and there are several articles worthy of a look. Here is the link to my article in that issue.

The theme of the issue, as titled on the magazine cover, is "Contain Your Emotions". Here is a sampling of quotes from articles included in the feature:

"It is a generally agreed upon industry fact that traders spend a disproportionate amount of time focusing on external market analysis and significantly less time on understanding themselves as traders."

"...while it's difficult to contain emotion 100 percent of the time, the more you can keep it at bay, the better off you will be."

" is be able to sustain calm without having to mask roiling emotion. One key to success is to be calm and methodical in general and at every point in the trading journey..."

"Markets are full of endless opportunities, and the only obstacles preventing us from consistently capitalizing on them are our own mental models..."

Well, you get the idea. Emotion is bad and if you control emotion you'll succeed.

Contrast that view with this quote from my article:

"Just ask yourself: Would you want to be operated on by a physician who put as much time into keeping on top of his profession as you put into your preparation for trading? Would you want to be represented in court by an attorney who put as much preparation time into your case as you put into your trading days?"

If you don't understand markets, if you don't systematically prepare for trading, and if you haven't sufficiently rehearsed trading-related skills, you'll perform miserably and you'll become emotional. Plenty of emotional traders contact me seeking help; the vast majority trade simple patterns that have no demonstrable edge whatsoever, do not understand intermarket relationships, and do not know how to read intraday market sentiment. They're emotional because they haven't a clue.

Because emotionality enters into much bad trading does not mean that controlling emotion will, in and of itself, lead to successful trading. That's like saying that infidelity is common in bad marriages, so if you contain your urges for people other than your spouse, you'll enjoy a blissful union.

The question that should be addressed is *why* emotion is playing a destructive role for some traders and what, specifically, can be done about that (just as the question for any competent marriage counselor would be *why* the desires for infidelity are there to begin with). The idea that emotion is bad and should be minimized in decision-making is flat out wrong; cognitive neuroscience research is clear on the role of emotion in normal, sound thought and decision-making. When people's capacities to feel are genuinely minimized--through brain damage--*that* is when they behave in irrational, maladaptive ways.

Of course, emotions of fear, greed, overconfidence, and anger can skew our decisions and actions. But there are two major reasons these emotions can intrude into trading:

1) The trader is biologically predisposed to a high degree of negative emotional experience (i.e., the trait of neuroticism) and probably shouldn't be operating in a field with high degrees of risk and uncertainty;

2) The trader has not sufficiently studied and learned markets, is not succeeding at his/her decision-making, and is becoming frustrated and emotional as the result--not the cause--of trading problems.

It's unlikely that trading coaches offering commercial services will emphasize either of those perspectives. Many traders, as well, want to hear the message that if you just "contain your emotions", you can participate in "endless opportunities"; that traders don't need to spend as much time on "external market analysis" as long as they work at "understanding themselves as traders."

The truth of the matter, in trading as in other performance fields, proper training is the best source of discipline and the most effective safeguard against intrusive anxiety and impulsivity. Learn how to trade well and you'll master most emotional difficulties associated with performance. Learning to "contain emotions" without proper cultivation of trading skills will only help you more comfortably part with your capital.


Somatic Markers and Trading

Trading and Intuition

Trading Psychology Myths


Ana said...


Just as there is dual aspects of Independence (and it is July 4), there is cross posting here between us :

I now refer to your say at SFO:
The time that a trader spends on his or her craft outside of actual trading represents preparation.That is a trader’s self-coaching time. Unquote

It is refreshing to look at the Law of Preparation as you described it, and certainly a prerequisite to success.

The Lonely Trader said...

"1) The trader is biologically predisposed to a high degree of negative emotional experience (i.e., the trait of neuroticism) and probably shouldn't be operating in a field with high degrees of risk and uncertainty;"

This is an interesting statement. So, neuroticism is biologically determined, then? Could you point me in the direction of the research that supports this? What about the "nurture" side of that same coin? (False dichotomy? Is a "coin" a bad metaphor?) I'm troubled by determinism in all of its forms...recently I have heard a lot of people in my social circles talk about "selecting out" undesirable traits, through genetic research, in the military and in the corporate world. Gives me the shivers. Are we talking here of selecting out traders from our consideration based on undesirable "predispositions", then? Seems to me this has important implications for those traders who self-identify as "neurotic" (actually a defined clinical term), and attribute that to some permanent biological basis, i.e., they are doomed and should quit from the get-go.

And on the other hand, could not a neurotic person circumvent the pitfalls of their neuroticism with specific mitigation strategies? These might involve direct circumvention of the behavioral trait itself, via automatic trading systems or other creative contrivances. Or, these might involve targeted mitigation strategies designed to "rewire" the behavioral context of the trading day or otherwise employ some mechanism that prevents triggers from causing the behavior.

Just wondering....

Brett Steenbarger, Ph.D. said...

Hi Lonely Trader,

Good questions! The temperament literature suggests that the "big five" personality traits are relatively stable across the lifespan and first appear at a very young age. And, of course, we know from twin studies that such problems as anxiety disorders and depression have genetic linkages.

There's no question that people high in neuroticism can utilize psychological methods to cope more effectively and that this could help them in trading settings. I think it's an uphill battle, however, to ask people highly prone to anxiety, depression, and impulsivity to operate in environments in which risk and uncertainty are particularly high. It's like asking a temperamentally introverted, shy person to excel in sales.


The Lonely Trader said...

I think I understand what you're saying. I tried sales during a summer break in high school and, since, I've had few moments that compared to the existential horror of that experience.

I hate to be such a relentless knocker, but I think the verdict is far from supportive that the big five are biologically predisposed -- although I can't deny biology has a role to play, I think the development process holds more complexity than biology alone can summon.

On a personal note, I am uncomfortable with all the talk of biological determinism of late. This invokes my unpleasant memories of having Notes from the Underground forced upon me by my Russian Literature prof. Not sure why.


CoachAshwin said...

"This invokes my unpleasant memories of having Notes from the Underground forced upon me by my Russian Literature prof. Not sure why."

Here's the WHY.

"It's like asking a temperamentally introverted, shy person to excel in sales."

My point is that the desire to be a successful trader or salesperson has to be coming from the person, not FORCED from outside.

What I have found is that most temperamentally introverted, shy people do NOT want to excel in sales.

And most people with degree of negative emotional experience do not want to be traders.

Traders are primarily super-optimistic people, many of whom have achieved better than average success in some other field prior to entering the business of trading.

The negativity only shows up when achieveing their 'super-wealthy-trader' dreams seem to be much farther than they intended to be.