Friday, May 01, 2009

Reflections on Frequency of Trading and Emotional Distress

Suppose the distribution of good and bad trades for any particular trader followed the distribution of returns from financial markets. This leptokurtic distribution would be high-peaked (many average trades) and fat tailed (a larger number of very good and very bad trades than one would expect in a normal distribution).

If this were the case, how would the frequency of trading impact trading psychology? Wouldn't frequent traders sustain larger numbers of unusual positive and negative runs than less frequent traders, suffering overconfidence, frustration, and disappointment as a result?

Does emotional upset create trading problems, or could it be that some forms of trading are incubators of emotional distress?

Why do I find emotional disruptions so much more common among frequent traders than less frequent ones? More drama, more trauma.

1 comment:

Gangineni Dhananjhay said...

Dr Brett,

This site has been an emotional mirror for millions of true seekers of knowledge in trading.Your books are so revered they are instantly recognised and related to by my ten year old daughter Gangineni Hita.
This article on frequency of trading resonates with me as I am mostly a day trader in India trading Equities Intraday.
There seems to be two way feedback between frequency of trading and emotional distress of the trader.With increased frequency, vig starts to catch up with me at the end of the day with the market mistress's all knowing smile.
The articles on VWAP,Structure of the trading day,Interlinkages between markets, reaction of price to important levels,Observing volume at key price points are some of the concepts that are helping me to substitute a bit of randomness with intentionality ( to quote your words Dr Brett which is a tribute to a great teacher). These concepts give me some handles to understand the price discovery process and be in control of how I react to the ever surprising market.