Thursday, February 11, 2010

Emotional Trauma, Risk, and the Dark Side of Trading

In this post in the series, we'll take a look at what happens when traders find that emotions from past, traumatic events intrude into their trading. Previous posts in this series covered trading, trauma, and the brain and a checklist for self-evaluation regarding issues related to trauma.

An important framework for thinking about this issue is that psychological trauma is not an all or none thing. Emotionally painful events can impact us with varying degrees of trauma, with resulting disruption of thought and mood and periodic flashbacks.

For example, I have worked with people who have experienced infidelity in a relationship as traumatic. The threat to emotional safety and security left the individual with painful memories, intrusive thoughts and feelings of anger and betrayal, and subsequent difficulties in trusting others.

In order for an event to have a traumatic impact, it has to threaten a person's basic sense of safety and security. Getting stopped out from a trade that was planned well, with favorable reward relative to risk, will not traumatize anyone. Losing more than half your capital on an "all-in" set of market bets may or may not have a traumatizing impact. If the capital is what you're counting on for your vocational and financial future, it's hard to believe that the loss of half your future could be taken in stride.

Poor risk management is a major reasons traders experience traumatic impacts. Placing large bets relative to one's account size exposes us to risk of psychological as well as financial ruin. We also court trauma when we trade with capital that we cannot afford to lose. It's not just the absolute magnitude of real or threatened losses that impact us emotionally; it's the psychological significance of those losses. Many traders react strongly to losses, not because of the dollar amounts, but because the losses signify the potential death of a dream.

It's easy and romantic to glorify traders who take huge risks in search of grand payoffs. We all like to see the player who has the balls to go "all in". To those who are tempted to play out this fantasy, allow me to share my perspective:

I'm the psychologist. When those bets go sour--as bets inevitably do at times--I'm the one who sees what happens to those ballsy traders. I see their affliction with anxiety and depression; I help them pick up the pieces of lost careers and try to find jobs with resumes that suddenly appear razor thin in a desperate economy. I also see the family members who have to pay the price for Ballsy Trader's testosterone-fueled dreams when bills can't be paid and basic needs can't be met.

No one puts those traders in how-to trading books, breathless magazine articles, or "find your next big opportunity" websites and newsletters. We read a lot about "trading for a living"; not much about how living can be impaired by trading. So I'm the one who occasionally writes these posts and afflicts traders' comfort, even as I try to comfort traumatic afflictions.

The next and last post in this series will focus on techniques for overcoming traumatic emotional reactions. The posts below and their links address this issue from a variety of angles.



RoachApproach said...

Great post!

Appreciate it.


william said...

im one of "those" traders you speak of. I took irrational risk in late 2008 early 2009 and sustained heavy losses from being long into the final leg down into march. the fall out was enormous - bills, school tuition, relationships. im trading again - that's all in know. im using the information you post during this time of reconstruction. my question - are there success stories that you know of that have come back from this form of self implosion? many thanks.

Sean McLaughlin said...

"It's easy and romantic to glorify traders who take huge risks in search of grand payoffs. We all like to see the player who has the balls to go "all in"."

For every one of these trades, or Traders, there are hundreds on the other side of this who completely blew out.

Sadly, it seems that most Traders (myself included) need to have had this experience (or been close) before they "see the light" and take corrective action.

Mr. Mom said...

This week's series of posts have really struck close to home. Sure the last year has been my toughest in a very good 10 year career. The last 4 months have all but completely drained me. I totally agree with the idea that some of us have some degree of PTSD. You should see how I flinch and even tear up at loud noises. What to do though?

Tahoe said...

Thanks Brett. your work is always so meaningful and insightful. It isn't what happens to you, but how you react. The recent deaths in UK fashion world are stark realizations that these situations can be untenable for those experiencing them.

Radek Dobias, H.B.Sc., M.W.S., B.Ed. said...

Initial trading trauma that nearly everyone experiences can act either as a devastating defeat..... or a springboard to improvement, growth, and right livelihood.

It's not things themselves that dictate our experience; it's how we hold them and what we do with them.

nqtraderjay said...

Dr. Brett has some of the most no-nonsense posts I ever read.

"...psychological significance of those losses...losses signify the potential death of a dream."

Exactly!!! This stuff is gold.

And then the paragraph, "I'm the psychologist...who sees what happens to those ballsy traders...."

What bunch of macho guys in a room will dare to venture into the touchy feely psychological areas?
And be sensitive to their inner stuff? As far as I've seen, most guys try to stay as far away from that as possible, going as far as to medicate in order to distract themselves from any of the painful or less than invincible facade they so love to erect. Reminds me of the movie Unforgiven. Trading is often sport by sport fan types. But not in the books I read and not the long-term successful traders I know.

Lucky for me, I've always been out of that group and been working on my psychological stuff for as long as I can remember. Not being the "hero child" does that. It gets you to look in and question. Great stuff, keep it coming.