Saturday, November 11, 2006

Brief Therapy Techniques: How Traders Can Become Their Own Trading Coaches - Part Two

In my first post, I introduced the idea of rapid change of patterns of thought, emotion, and behavior. This post will focus on three principles to guide traders in becoming their own coaches.

Consider a trader we'll call John. He has been successful in the markets over different market conditions and demonstrated a profitable edge in his trading. He is now at the point at which he wants to grow his size and take fuller advantage of his edge, but he is concerned about the risk and pressure of growing larger. How can he overcome his emotional reluctance?

This is a classic pattern that can be addressed with short-term behavior change techniques. It is not the result of a chronic emotional disorder, and it is not the result of poor trading practices. The best patterns to work on using brief therapy techniques are ones that are situational: ones in which you want to change how you deal with specific scenarios.

Which brings us to our first principle:

1) When you are working on yourself, carefully target the changes you wish to make. Don't try to alter your entire personality or your behavior overall. Rather, focus on a single situation that you would like to approach differently and concretely identify a goal for that situation. If you don't know what you're seeking, you almost certainly won't find it. Many times, it's helpful to conduct a review and examine occasions in which you have dealt effectively with your chosen situation. One of the first questions I'd ask John is whether there have been any times in which he has successfully raised his size, even just a little. If so, we might use that success as a foundation to build upon. Many times, we're so focused on our problems that we fail to recognize the solutions that we've stumbled upon. Start your work on yourself by trying to do just one or two things differently. Set yourself up for success and build upon that.

Our second principle is very important to setting proper goals for change:

2) Problems are something you do, not something you have. We sometimes talk about emotional or behavioral problem patterns as if they are viruses: something we've picked up and have to get rid of. The reality is that problem patterns are usually efforts at solving a problem that simply aren't working--but are the best we know to do at the time. John's reluctance to grow his size is his way of managing risk and the emotions associated with perceived risk. The "problem" serves a function and meets a need ; he won't change that pattern unless he has another way to satisfy the need. If I were working with John, I would help him measure risk in percentage terms rather than absolute dollars. I'd encourage him to grow his size very slowly, but steadily, to manage the psychological aspects of risk. I'd also help him define methods of risk management that he might not have thought of, such as using his edge to diversify across non-correlated positions. You can grow your trading size without growing the size of your individual positions: just trade more than one thing and make sure the trades are independent of each other and preserve your edge!

Our third principle is perhaps most important of all:

3) You cannot rapidly change a pattern unless you face that pattern in real time. Talking about a problem does not, in itself, resolve that problem. People learn from new experience. John will feel comfortable getting larger by actually getting larger, not by discussing his insecurities. Accordingly, I might start John on a simulator and have make some practice trades with larger size. I would teach him some basic cognitive and behavioral skills for staying calm and focused and encourage him to use those skills while placing his simulated trades. Once that goes well, we would raise his size just a small notch and have him trade live--again using the skills he's learned. Only when that's gone well do we ratchet up the size another small notch, and another, and another. John will internalize the repeated experience of success; over time, he'll think of himself as a larger trader.

These principles hold true whether you're working on trading discipline, marital arguments, or a fear of heights. Your work on yourself will be successful when you find a safe context to be the change you want to make. Changing by enacting solutions rather than discussing problems is a powerful way to develop yourself as a trader--and as a person. How to do that will be the topic of the third and final post in this series.