Tuesday, May 05, 2009

Coping Effectively With Trading Stresses

I recently read a book that claimed that the best traders trade completely clear headed, free of emotion. What rubbish. The best traders I've known have been highly competitive individuals who take significant risk and seek significant reward. They are no less emotional than boxers in a ring or basketball players at tournament time.

What enables these traders to perform at high levels is that they are able to prevent the normal stresses of work from becoming distress. Another way of saying this is that they employ effective techniques for coping with the daily stresses of managing money in uncertain and volatile markets.

Here is the post I linked yesterday via Twitter; it will enable you to assess your coping style.

Many times, we employ coping methods that have worked for us at one time in life or in other situations, but do not work in trading situations. We go back and back to the same ineffective coping behaviors, not because we're self-destructive, but because we have overlearned those behaviors through past experience.

Here are a few examples of such good coping gone wrong:

* A person who has learned to confront problems head on cannot back away from markets when trading poorly;

* A person who withdraws in situations of conflict to keep the peace finds themselves unable to stay in good but uncertain trades;

* A person who deals with problems by taking responsibility for them becomes self-blaming and punitive during periods of normal drawdown;

* A person who has learned to put a painful past behind them fails to focus on trading problems and never adequately addresses them.

In all these cases, coping actions that have been effective do not work for the trader.

This is where the solution-focused approach can be quite useful. In the solution mode, we focus on examples of times when we *have* coped effectively and figure out what we did that worked. Once you can identify a positive pattern--a way of dealing with challenging market situations that works for you--the task is then to rehearse it to the point at which it becomes second nature.

As I emphasize in the chapter of the new book devoted to this topic, traders frequently run into problems when they fail to enact their best coping strategies. Tracking how you deal with challenges when you are at your most effective enables you to create a mental model of that coping that you can call upon during periods of high stress. We cannot avoid the stresses of trading, but those do not have to generate distress and biased decisions.