Thursday, February 11, 2010

Emotional Trauma, Risk, and the Dark Side of Trading

In this post in the series, we'll take a look at what happens when traders find that emotions from past, traumatic events intrude into their trading. Previous posts in this series covered trading, trauma, and the brain and a checklist for self-evaluation regarding issues related to trauma.

An important framework for thinking about this issue is that psychological trauma is not an all or none thing. Emotionally painful events can impact us with varying degrees of trauma, with resulting disruption of thought and mood and periodic flashbacks.

For example, I have worked with people who have experienced infidelity in a relationship as traumatic. The threat to emotional safety and security left the individual with painful memories, intrusive thoughts and feelings of anger and betrayal, and subsequent difficulties in trusting others.

In order for an event to have a traumatic impact, it has to threaten a person's basic sense of safety and security. Getting stopped out from a trade that was planned well, with favorable reward relative to risk, will not traumatize anyone. Losing more than half your capital on an "all-in" set of market bets may or may not have a traumatizing impact. If the capital is what you're counting on for your vocational and financial future, it's hard to believe that the loss of half your future could be taken in stride.

Poor risk management is a major reasons traders experience traumatic impacts. Placing large bets relative to one's account size exposes us to risk of psychological as well as financial ruin. We also court trauma when we trade with capital that we cannot afford to lose. It's not just the absolute magnitude of real or threatened losses that impact us emotionally; it's the psychological significance of those losses. Many traders react strongly to losses, not because of the dollar amounts, but because the losses signify the potential death of a dream.

It's easy and romantic to glorify traders who take huge risks in search of grand payoffs. We all like to see the player who has the balls to go "all in". To those who are tempted to play out this fantasy, allow me to share my perspective:

I'm the psychologist. When those bets go sour--as bets inevitably do at times--I'm the one who sees what happens to those ballsy traders. I see their affliction with anxiety and depression; I help them pick up the pieces of lost careers and try to find jobs with resumes that suddenly appear razor thin in a desperate economy. I also see the family members who have to pay the price for Ballsy Trader's testosterone-fueled dreams when bills can't be paid and basic needs can't be met.

No one puts those traders in how-to trading books, breathless magazine articles, or "find your next big opportunity" websites and newsletters. We read a lot about "trading for a living"; not much about how living can be impaired by trading. So I'm the one who occasionally writes these posts and afflicts traders' comfort, even as I try to comfort traumatic afflictions.

The next and last post in this series will focus on techniques for overcoming traumatic emotional reactions. The posts below and their links address this issue from a variety of angles.