Wednesday, September 30, 2009

Overcoming Frustration in Trading

If I had to name one emotion that causes the greatest losses among active traders, it would be frustration. Overconfidence is certainly high on the list, but the market has a way of smacking sense into the heads of people who start feeling invulnerable. Frustration, on the other hand, leads traders to compound their errors by sticking to wrong opinions and overtrading markets that offer little opportunity. Overconfident traders will generally stop trading once they're humbled; frustrated traders generate more frustration and trade larger, with more risk.

In upcoming posts, I'll be addressing ways of minimizing the impact of frustration on trading. It's inevitable that traders will be frustrated at times. Indeed, the same competitive spirit that leads people into trading can be a part of their frustration. Intense competitors don't like to lose. Sadly, in the frantic effort to recoup losses, frustrated traders can lose everything.

With frustration, as with so many trading problems, prevention is the best cure. Traders are less likely to become frustrated if they prepare well for the market day; frame their trades with clear stop loss points that they can accept; and size their positions so that any series of losing trades won't wipe out weeks' worth of profits.

Good trading practices are also good psychological practices: controlling risk and losses goes a long way toward taming emotional reactivity. If you actively *plan* your losses and think through your plan, you've already gone a long way toward accepting those losses. People aren't likely to be frustrated by events they anticipate.

In my next post in the series, we'll look at cognitive strategies for overcoming frustration.