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.
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11 comments:

Abid Ashraf said...

I really enjoyed reading the post and it reminds me of the days when I started trading. Excellent post.

Time said...

I like the last comment, stay of out it. But that is the most sane advice. You enter the trade on a plan and just stay out of it until action is required according to the plan. Very rarely should it be intervened.

I like your blog. Thanks for your posts.

Chris said...

This describes my trading experience perfectly. I have been working on improving my approach and am almost there. This article will certainly help me get over the last few hurdles. Thanks for the post!

Charts and Coffee said...

Good post. Interested in your thoughts on my recent post -

Using the Confidence Index as a case for going long HYG and short LQD (or perhaps just looking at HYG long) - www.chartsandcoffee.com

Thomas said...

Another possible reason for micromanaging trades could be trading an account that is too small. A trader might exit earlier than planned on a small profit desperate to accept any win to grow the account and exit on the slightest move against a position fearing the account getting even smaller.

John said...

Hi Brett
love your work.

If I may add as a supplement to your thoughts that the reason people exit too early are;

fear of loss and hence bringing up personal issues of loss of Self and related to this is a loss of structure. what happens here in these trading moments of fusion to the object is that Chaos has been threatening when it is felt a loss is about to occur or has occured ....we move to the head to not feel these states. Often the heads acts as a somewhat automatic reaction in order to avoid any pain and says get me outta here.. I dont want to feel this anymore...its too threatening to Self the situation I am in...

These states are difficult to navigate without conscious effort to at first catch them and secondly integrate them into a conscious change of behaviour, a change hopefully aimed at a better self acceptance/self knowledge of oneself and of course these types of situations...

Consciousness I believe is like gaining distance between our thinking/feeling states with that of the object/situation. The more distance we can gain in those moments the better chance we have of not identifying with the situation we are in. The less identifcation the more rational and accepting we will become of it.


All the Best

John

SSK said...

Hello Brett, thank you for this post. It hit the nail on the head regarding issues that I am having sometimes. It is a hard thing to find the balance between patience,a particular timeframe trading style, and not being perfectionistic! Thanks for your inspiration! Best, SSK

Brett Steenbarger, Ph.D. said...

Thanks for the comments and support and the wise observations--

Brett

Alexander Grant said...

Sorry to be the chink in the chain, but it would be nice to hear what traders ARE doing right.

Dr. Brett, you of all people know that if people's focus is on what they are doing wrong they continue to repeat that behavior.

My 'success' (whatever that means - trading and otherwise) never came from reading/emulating what other successful traders were not doing correctly.

I would love to hear/read more stories focused on what traders are doing correctly.

peaktrade said...

I couldn't agree more with Alexander Grant's comment...I for one am getting sick of psychobabble on this blog and many, many others...WE KNOW THIS ALREADY...we, or me are interested in what works in battling randomness, algorithms, black boxes etc...I get invitations daily for webinars and when I listen to them, they know less about the real price mechanism then the newest runner on the CME floor...Whomever is trading well and successfully is keeping the real goods private...most of this stuff on "setups", certain indicators is out of the horse and buggy era (the 1970's)...does anybody know ANYTHING about Fibonnacci tick counts (not levels), numerology, and other advanced recognition vehicles...I Think Not.

dom said...

Brett,

I love your books & blog ... You put me on the right path in "Enhancing Trader Performance" by highlighting that emotional issues in trading often arise from lack of proper training and preparation.

As for sources of anxiety, I strongly believe that NOT having a written trading plan with a definitive edge (thoroughly backtested) is anxiety problem #1 for new traders, whether they realize it or not.

Trading is an exercise in odds & probabilities, and until a trader fully accepts that the outcome of any particular trade is meaningless to long-term success, he/she is doomed to mis-manage trade after trade.

Cheers