Monday, August 22, 2016

Why Do We Sabotage Our Trading Talents?

The first post in this series examined how successful performance is a joint function of talent and skill.  The second post focused on how traders can identify their core talents.  This third and final post will address the problems that undermine our trading success and what we can do about them.

The central psychological challenge for trading is that frustration and doubts over losses and missed opportunities can lead to self-doubt, and self-doubt can lead us to tinker with trading to the point of veering from our greatest talents. 

A classic example is the intuitive trader who has a keen sense for pattern recognition.  After a period of frustration and loss, he begins to overthink his entries and exits, losing a feel for markets.  This compounds the losses and turns the normal setback into an outright slump.

Yet another example is the trader whose key strength is risk management and prudence of decision-making.  She decides she should be taking more risk and sizes up positions, creating greater volatility of P/L, and destabilizing her emotionally.

In each of these cases, it looks as though the trader is self-sabotaging.  What is actually occurring is that, under conditions of stress and emotional arousal, the trader has a more difficult time accessing and acting on his or her strengths.

How can we know when we're getting away from doing what we do best?

Two tell-tale signs let us know when we're no longer aligned with our talents:

1)  Trading becomes not fun - When we veer from personality strengths, we no longer experience gratification and fulfillment in our work.  That's when we find ourselves stressed and procrastinating.  Recall the key idea from the previous post:  the exercise of talent brings our well-being.  When trading becomes work and drudgery, we know we need to pull back and get back to what we do best.  

2)  Trading becomes confusing - When we lose touch with our cognitive strengths, we no longer experience a sense of understanding and mastery.  We trade best when markets make sense to us, when the factors we look at align in ways we've experienced before.  When we are confused, it could be the case that markets themselves are confusing:  those factors aren't lining up.  Often, however, our confusion reflects a shift in our processing of information.  We're in the dark because we've gotten away from how we best make sense of things.  That's when we know we need to step back and return to our best modes of information processing.

Viewed in this way, our experience becomes a barometer of whether we're aligned with our talents or not.  The single most important thing we can do when in drawdown is reacquaint ourselves with what we were doing when we consistently made money.  Find when you've been most successful and have traded best and you're most likely to find--and return to--your signature talents.

Further Reading:  The Surprising Reason for Trading Failures