Sunday, January 18, 2009

Anxiety in Trading: Limiting Profitability by Micromanaging Trades

One of the most common trading problems I see is what I call micromanaging trades: managing positions on a time frame that is shorter than the one utilized to conceptualize the trade. Here are a few examples:

* A trader enters a position because of a pattern on a five-minute Market Delta chart, but exits the position prematurely (prior to hitting a profit target) because of a pattern briefly observed in the order book (depth of market);

* A trader is profitable in a trade designed to revert to the prior day's pivot level, but exits in a panic when the market moves a couple of points against him;

* A trader watching the market tick by tick on a swing position jumps the gun on a stop loss level, only to see the trade become profitable.

As I noted a couple of years ago, micromanaging trades generally occurs when the trader enters a state that is different from the one in which the trade was initially placed. Once the trade has become profitable, anxiety over losing the profits kicks in and leads the trader to falsely seek control by following the market's every wiggle. The anxiety mounts as even normal counter movements to the trade become amplified in the trader's mind, leading to decisions to abort the trade. At that point, we're really stopping out our anxiety level, not just the trade.

The post on fear of missing profitable trades is relevant here, as the fear of missing potential profits is similar to the fear of losing paper ones. What we're often afraid of is not merely the loss of potential gain. We're afraid of our own self-talk should we lose what we had. The traders who are most likely to micromanage their trades are those that are hardest on themselves when their trades do not work out. Instead of accepting that this is a game of probabilities and that losses and frustrations are part of the game, they personalize every loss and lost opportunity and turn their frustration on themselves.

Only an altered self-talk and an acceptance of adverse movement can give traders the peace of mind to stay patient and let their idea hit its target or its stop out point. That peace of mind is also necessary to sustaining an aggressive mindset in which traders add to ideas that are working out, devoting their maximum size/risk to their best trades. Micromanaging not only stops out winning trades; it prevents us from making the most of them.

Much anxiety can be quelled through proper risk management and by structured efforts to alter self talk. More on changing how we talk to ourselves and how that affects trading performance can be found in this post and its links. So often, the best way to manage a trade is to stay out of its way.