Monday, February 27, 2017

Four Triggers for Trading Psychology Problems

One of the topics that came up at yesterday's trading psychology workshop was how many trading problems occur as repetitive cycles.  Very often, a trader does not have ten problems.  Rather, there's one problem, repeated in ten ways, on ten occasions.  When we act as our own trading coach, we learn to recognize these patterns in real time, interrupt them, and give them a different ending.  The initial goal is not to make the pattern go away--that often takes time because the pattern has been overlearned--but rather to become better and better and recognizing and shutting down the pattern before it sabotages our trading.

What that means is that, when a trigger for a pattern occurs, it is more important to focus on ourselves than on our trading.  If one of our patterns is triggered, the trading we're likely to miss is bad trading.  We can't change a pattern unless we can first interrupt it.  Stepping back from trading temporarily to disrupt a pattern gives us greater control over how we think and how we respond to markets.  Every time we interrupt a cycle of bad trading, we build our mindfulness muscles and make it easier to break the patterns the next time.

Here are four patterns that came up during the recent workshop:

*  We make money, become overly excited and optimistic, add to risk at bad levels, and then sustain debilitating losses;

*  We lose money on a trade or experience a drawdown period, become frustrated, and begin placing marginal trades to try to make the money back;

*  We lose money in a drawdown, become negative and pessimistic, and then miss out on subsequent opportunity.

*  We make money, perfectionistically think we should have made more money, and then add to positions at bad levels or take poor trades to make up the difference.

Notice how in each situation, there's an event, a set of thoughts and feelings triggered by the event, and then behavior driven by those thoughts and feelings.  Mindfulness means that we are on the lookout for those thoughts and feelings, so that we can calm and focus ourselves *before* placing our next trade.  When we truly know our patterns, we are in a much better position to anticipate them and take a helpful pause before re-entering the market.

In my next post, I'll outline a few ways of effectively interrupting our worst patterns.

Further Reading:  The Power of the Pause