Tuesday, July 22, 2008

Second-Guessing: The Should-Have Syndrome

As someone who works with traders across a variety of settings, I've learned to be sensitive to their self-talk: how they process markets and especially their own performance. We do not experience the world directly; rather, we actively interpret events and react to those interpretations. Our self-talk--how we reflect on the events of our lives--is the product of this interpretive process.

Our self-talk, like our behavior, tends to be patterned. Patterns of negative self-talk have been associated with depression; worry is common among anxiety problems. Traders, as a group, are a highly achievement-oriented group. They do not take losses easily. Very often, their self-talk reflects their intolerance of shortcomings.

This intolerance takes the form of second-guessing trading decisions; the theme of traders' thinking is "should have": I should have taken profits earlier; I should have entered the trade earlier; I should have traded larger; I should have traded smaller. Each "should have" is an implicit self-criticism. Over time, this second guessing takes its toll on self-confidence.

There are times when we break rules of prudent trading, and then it makes sense to reflect on our mistakes and learn from them. The "should-have syndrome", however, is often not a sober reflection on genuine error. Rather, it is a second-guessing from a perspective of omniscience: only an omniscient trader would have known to buy the low, sell the high, size the winners large, and size the losers small. The second-guessing is not part of a constructive, problem-solving process. Rather, it is an expression of frustration.

As I review the journal entries of many traders, I read one "should have" after another. Ironically, those traders would never want to be second-guessed by someone else: they would view the "should haves" as backseat driving at its worst. Driven by perfectionism, however, we can undercut our own judgment and lose sight of our successes.

How do you interpret your trading results? What is the tone of your self-talk? Is it a tone that builds motivation and confidence, or one that destroys those? Much of success in trading lies in the interpretation of market patterns. All of that is imperiled, however, if we cannot accurately interpret the results of our own decisions.


A Technique for Preventing Frustration


SSK said...

Hello Brett, thanks for the reminder regarding self talk, just yesterday in my journel, I noticed that I stated several times even after the trade was a winner, that "I should have" not trailed my stop so close. The only way that is actually resolved though, is through the use of Breif therapy, and setting that as a specfic goal in the morning for the session, and then grade my efforts. That is much more positive then reading what ifs, with no real hot cognitive process pushing the process. I can absolutly see how over time, that could be harmful. Much more insightful input into the journal would be why am I having those thoughts at the time. Then, secondarly ask myself if it is a good mistake or a bad mistake. In my words, "There are two kinds of mistakes, good ones and bad ones. The good ones have logical reasoning behind them, the bad ones have emotional reasoning behind them." Good mistakes shouldnt be second guessed. For example yesterday I got stopped out to the tick, yet my analysis was correct, and I saw that 15 seconds latter, so I got back in and rode the rotation form the lows back to the mean. My stop was just a tick to close, that was a good mistake. The bad mistake would have been not to realize the opportunity still existed even though i got stopped out, hence afriad to get back in. Thanks for your work as always. Best, SSK

Brandon Wilhite said...

It's very easy to second-guess oneself, especially if you are continually trying to get better. This is probably my #1 negative behavior/coping mechanism (closely followed by getting overconfident after a string of wins). I have to remind myself that knowledge is imperfect and that I always try to make the best decisions I can given what I know. When I remember that, it usually sobers me up pretty well.

Where do you think this second-guessing comes from? It seems endemic to our society.


GS751 said...

Another Great Post, Thanks a lot.

CharlesTrader said...

I'm currently reading a book by Robert A. Burton, M.D. titled: "On Being Certain - Believing You Are Right Even When You're Not".

In the book, Daniel Goleman, a Harvard-trained psychologist, is quoted, which I think is pertinent to this topic:

"These two minds, the emotional and the rational, operate in tight harmony for the most part, intertwining their very different ways of knowing to guide us through the world. Ordinarily there is a balance between emotional and the rational minds, with emotion feeding into and informing the operations of the rational mind, and the rational mind refining and sometimes vetoing the inputs of the emotions. Still, the emotional and rational minds are semi-independent faculties, each reflecting the operation of distinct, but, interconnected circuitry in the brain... When passions surge the balance tips; it is the emotional mind that captures the upper hand, swamping the rational mind."


Globetrader said...

Should have's .... are there for a reason!
- I should have taken a stop, even if the trade turned out to be a winner. Last time it cost me a lot!
- I should have taken that trade, because all signals were there. But last time the same setup did not work!
- I should have held that winner longer, it was obvious, it would do the breakout this time, wasn't it?
Should have's can help you, as they are another way your inner self is corresponding with you. It's a discussion happening in real time in your head, when you are focused on the markets.
Listen to that voice, don't give in on it, but argue. There are times, when it is worth overriding that voice. If you are proven wrong, next time, it will be harder to override that voice!
At other times it's only prudent to follow that advice. Your trading plan is there for a reason and its rules are to be followed, unless there is real good reason to deviate. One rule may be that round numbers are usually Support / Resistance levels and you get out at them. They may break on the first test and leave you with a feeling of missed profits, but usually S/R holds on the first attempt, so getting out and locking in profits is only prudent as a daytrader.
Not taking a trade, you should have taken is a tricky one! But there is a reason for it. You just can't see it, as you are so frustrated with yourself.
It might be that you have personal issues today. Maybe you have no time for the trade as you have to leave in a short while or you have other things occupying your mind interfering with your trading. Be happy you haven’t taken the trade and get your things in order, so you can concentrate on your trading again.
But it might also be that your subconscious mind is seeing some flaw in your setup, you haven't identified yet and therefore have not integrated in your trading rules. Maybe your setup assumes high volatility and is just not working at its best in ranging markets. Your subconscious mind is extremely good at analyzing the markets and is signaling you just that. Of course, if the setup then works, you are frustrated not having taken it, at the same time ignoring the last 5 trades, where the setup worked just so or actually failed, but you still assumed that being do to the normal P/L% ratio of your system, when in reality it was caused by a market sentiment shift, you haven't acknowledged yet.
Try to deal with your Should have’s in a positive way. This will respect the parts of your mind, which are having problems with your current course of action and prevent them with interfering in your trading in the most unexpected way. Eg by flooding you with panic feelings, when a real cool head is actually needed. And it will actually help you in your trading, as it is always a good thing to be able to argue the reasons for your trade at any time.
If Should have’s … pop up in your head while in a trade, look at the position in an objective way, try to see it as a position your best trading buddy just told you about and he/she asked you, what you would do with that position.