Tuesday, July 22, 2008

Second-Guessing: The Should-Have Syndrome

As someone who works with traders across a variety of settings, I've learned to be sensitive to their self-talk: how they process markets and especially their own performance. We do not experience the world directly; rather, we actively interpret events and react to those interpretations. Our self-talk--how we reflect on the events of our lives--is the product of this interpretive process.

Our self-talk, like our behavior, tends to be patterned. Patterns of negative self-talk have been associated with depression; worry is common among anxiety problems. Traders, as a group, are a highly achievement-oriented group. They do not take losses easily. Very often, their self-talk reflects their intolerance of shortcomings.

This intolerance takes the form of second-guessing trading decisions; the theme of traders' thinking is "should have": I should have taken profits earlier; I should have entered the trade earlier; I should have traded larger; I should have traded smaller. Each "should have" is an implicit self-criticism. Over time, this second guessing takes its toll on self-confidence.

There are times when we break rules of prudent trading, and then it makes sense to reflect on our mistakes and learn from them. The "should-have syndrome", however, is often not a sober reflection on genuine error. Rather, it is a second-guessing from a perspective of omniscience: only an omniscient trader would have known to buy the low, sell the high, size the winners large, and size the losers small. The second-guessing is not part of a constructive, problem-solving process. Rather, it is an expression of frustration.

As I review the journal entries of many traders, I read one "should have" after another. Ironically, those traders would never want to be second-guessed by someone else: they would view the "should haves" as backseat driving at its worst. Driven by perfectionism, however, we can undercut our own judgment and lose sight of our successes.

How do you interpret your trading results? What is the tone of your self-talk? Is it a tone that builds motivation and confidence, or one that destroys those? Much of success in trading lies in the interpretation of market patterns. All of that is imperiled, however, if we cannot accurately interpret the results of our own decisions.


A Technique for Preventing Frustration