Wednesday, February 10, 2010

A Psychological Checklist for Traders: Is Emotional Trauma Disrupting Your Trading?

The recent post took a look at psychological trauma, the brain, and resulting disruptions of financial decision-making.

One of the key ideas from that post that I will be elaborating upon is that traditional self-help techniques are of limited benefit when traumatic emotional responses are interfering with performance. Coaching advice to stick to trading plans, visualize market outcomes, etc. all fly out the window when events trigger traumatic memories and responses.

But first things first: How can traders identify if their trading problems are the result of emotional traumas?

Here is a checklist that might be useful for self-evaluation:

1) Have you experienced one or more recent large losses in markets that shook you emotionally?

2) Have you experienced a recent painful loss in your personal life that has left you feeling more vulnerable in your finances and/or your personal sense of security?

3) Have you experienced a recent threat to personal safety that shook you emotionally, such as a violent attack or a serious accident?

4) Do you find yourself emotionally "overreacting" to what should be normal trading stresses and losses? Are you experiencing significant anxiety, frustration, anger, or depressed feelings when trades don't work out?

5) Do you find yourself "overreacting" in your trading behaviors during what should be times of normal stress? Are you freezing up and not acting on your ideas or impulsively lurching into trades after losing periods in markets?

6) Do you look back on your trading and feel confusion, shame, or puzzlement over actions that you took that run completely contrary to your plans for the day?

7) Have you tried to reduce your emotional and/or behavioral reactivity to markets, only to see the same destructive patterns return during times of stress?

A "yes" answer to any of items 1-3 and a "yes" answer to any of items 4-7 suggest that a degree of traumatic emotional stress may be interfering with your trading.

A "no" answer to items 1-3, but "yes" answers to some of the remaining items suggests that past emotional conflicts or issues--not necessarily recent traumatic stresses--may be compromising your ability to keep a clear head and execute sound decisions when you are facing meaningful risk and uncertainty.

In either case, present-day stresses from markets have the potential to trigger emotional reactions from our past, leading us to think, feel, and behave in unwanted ways. This compromises our freedom of will, leading us to react rather than act.

The first step toward changing repetitive patterns of behavior is to recognize them in real time. My next post in this series will focus on that before we tackle steps you can take to reprogram and overcome these patterns. The links below should get you started in that direction.