Saturday, February 13, 2010

Three Steps in Overcoming Psychological Trauma

The above posts will help you understand psychological traumatic reactions, what causes them, and whether they are impacting your trading.

Now the question is what to do about those reactions.

The disruptions of decision-making that occur as a result of trauma are akin to flashbacks: they occur when current, stressful episodes trigger thoughts, feelings, memories, and coping responses from past traumatic episodes.

A simple example from my book: If I am a passenger in a car and a driver takes a turn too sharply, I find myself tensing up. There is no reason for tension: the turn is not dangerous and there are no cars or pedestrians in the way of the turn. Still I feel anxiety because it was a driver's turn onto a highway that put me in a significant car accident. Our car flipped over and I was propelled from the front passenger seat out of the car's rear window. That accident happened over two decades ago and I still experience occasional aftereffects.

Closer to trading home, I experienced far and away my greatest trading losses in the second half of 1982. I had made good money shorting the market to that point and missed the inflection point in August that signaled the start of the great bull market. The ferocity of the market rally melted a year's worth of profits within days and dashed my hopes of making trading a significant part of my income as a young psychologist. I traded only sparingly over the following decade, following markets relatively closely, but never trading my prior size. Only after completely remaking my trading--focusing on the day timeframe and learning about market timing and risk management--did I reenter markets in a meaningful way. Still, a very sudden and sharp move against my positions gives me an emotional jolt: a reminder of those events long ago.

Several concrete steps enabled me to move forward in the face of these events:

1) Stepping Away - It was quite a while before I allowed myself to be a passenger in a car. After 1982, I stopped trading for a number of months. Those decisions were key in rebuilding a sense of safety and normalcy. Stepping away allowed me to come back to the situations with a fresher perspective.

2) Wading in Slowly - Once I did return to the passenger seat, I started slowly. First I sat in the driveway in the seat without the car moving. I used imagery and relaxation methods to take passenger rides in my mind. Only after I was comfortable at that level did I tackle being a passenger in a moving vehicle with drivers I totally trusted. Similarly, when I returned to markets, it was first on paper, then with small size/risk that built over time. Wading in slowly enabled me to build experiences of safety and re-establish a sense of control.

3) Taking Away Positives - This is perhaps the most important step of all. I became determined to not allow the traumatic events to change me or restrict me. I became a much safer driver as a result of my accident; I also became a more sensitive and helpful passenger when it was time to teach Devon and Macrae how to drive. Had I not lost my money in 1982, I would not have developed the style of trading that has served me well over the years. Nor would I have found the interest to apply my psychology interest to the trading arena.

I recently posted about my 26th anniversary to my wife, Margie. The untold story is that I met Margie only after a considerable period away from serious relationships following a multi-year, very destructive relationship. I stepped away, I waded back into dating slowly, and I took away a positive: I became determined to do relationships differently. Being in a bad relationship taught me what I needed to find in a good one. Being in bad trades taught me what I needed to do to develop good ones.

The greatest traumas can become the greatest learning experiences. But not right away. First you heal: you rebuild a sense of normalcy and security. Then you set about doing things differently--often very differently. In retrospect, I would not have my trading career, my coaching career, or my marriage had I not hit the wall in markets and in love. You can't undo the past, but you can rework it to make sure it doesn't become your future.


Lesson #68 from The Daily Trading Coach outlines exposure methods that are useful psychological techniques during the "wading in" stage of overcoming traumatic events and reactions.