Thursday, September 18, 2014

Why Do Traders Go on Tilt?

Here's a good article from a poker site that explains the phenomenon of "going on tilt":  allowing anger and frustration to so dominate one's play that decisions are made reactively and irrationally rather than on the merits of one's hand.  It's not so different from what can happen to traders when losses lead to poor trading and further losses.

So why do people become frustrated?  Frustration typically occurs when there is an outcome we very much desire and we experience obstacles to reaching that outcome.  For example, we can become frustrated when traffic jams prevent us from getting to work on time.  We can become frustrated when a trade sets up well, only to be undone by price action resulting from a random news headline.  We can become frustrated when we want peace and quiet in a theater, but a nearby person continues to make noise. 

It is common for us to identify external factors as sources of  frustration, such as the traffic jam.  Very often, however, the frustration is set up by our outcome expectations.  If our expectations are unreasonable, we unwittingly place ourselves in a situation in which frustration can mount.  I know, for example, that if I try to drive into or out of Manhattan at a rush hour time, I'm likely to encounter traffic.  If I accept that and give myself double the normal travel time to reach my destination, I'm unlikely to be overcome with frustration.  By keeping my expectation realistic, I take away a reason for going on tilt.

Many times the expectations of beginning traders are unrealistic.  I routinely hear from traders who have taken a course on trading or gone through a training program and now experience frustration in their desire to "trade for a living".  They wonder what they can do psychologically to stop going on tilt.  The problem is that they expect an outcome that would be unthinkable in just about any other performance domain.  Would we really expect to make our living on the PGA tour after taking a series of golf lessons?  Would we expect to take courses in acting and then make our living on Broadway or Hollywood?  Would we take piano lessons and then look to make a living as a concert pianist?  

In no field does someone quickly go from being a relative beginner to being a master who makes a living from their craft.  Typically we build competence before we develop expertise--and competence takes significant practice and learning.  Think of how athletes or performing artists develop:  by the time one goes "pro", there has been a learning curve that has lasted years.  Why would the trading of financial markets be any different?  Studies tell us that knowledge and experience are key to trading success, and those can only be achieved over time.

By expecting to always make money; or to have an always-high hit rate on trades; or to make a consistent, comfortable living from a small portfolio--all of these set us up for disappointment, frustration, and the emotional disruption of going on tilt.  They also derail learning, because no one learns best if they aren't enjoying the process and immersing themselves in it.  Framing expectations in terms of progress, rather than as lofty attainments, is a great way to sustain focus and positive emotional involvement in the developmental process.

Further Reading:  What Makes an Expert?