Saturday, March 20, 2010

How to Get Off the Performance Roller Coaster

Do you find yourself on a performance roller coaster? This is a situation in which you make money for a while, begin to think you have it all figured out, only to fall back, lose money, and feel like a rookie all over again.

A while back, I wrote about the performance roller coaster and some of the emotional factors that sustain it. The gist of that important post was that how we process wins and losses affects our subsequent trading--and sometimes contributes to winning and losing streaks.

I just finished an enjoyable interview with Mark Wolfinger of the Options for Rookies site. One topic that came up was the way in which traders identify with their P/L. Once a trader's sense of identity and esteem becomes caught up in profits and losses, the trader begins an emotional roller coaster simply due to the natural ups and downs of markets.

There's an important difference between *wanting* to make profits and *needing* to make them. When the trader *needs* to win, performance pressures are magnified many-fold. Even normal losses can make the trader feel like a loser--and then trade like one!

Conversely, when our self worth becomes too wrapped up in trading results, periods of profitability can easily lead to overconfidence and even grandiosity. It's not at all unusual for traders to stop doing what was making them money once they've had a series of winning days or weeks. And that leads to the downhill portion of the roller coaster.

The advice I shared with Mark in the interview and that I've mentioned elsewhere is that it's vitally important to be psychologically diversified. If you're counting on trading to provide your sense of accomplishment and value, losses will become unduly threatening. If you don't have aspects of life to draw upon when trading goes bad--relationships, career, personal interests--it's going to be difficult to rise from the slump.

It is possible to care very much about trading and work hard at it without riding a performance roller coaster. You can feel very good about your evolving process as a trader, even as you struggle on a given day, week, or month with making money. Once you take yourself out of the equation, it becomes far more easy to focus on markets and the patterns we trade.