Sunday, October 11, 2015

What Is Your Emotional P&L?

You know a person's dreams are dying when they become solely focused on ways to not lose money in trading.  Risk management is a necessary component of success, but it's how we manage opportunities that ultimately puts points on the board.  Too many traders cut off the right tails of their return distributions when they trim the left tails.  They are quick to get out of losing trades, quick to avoid winners from becoming losers, and ultimately neither win nor lose all that much.  Sometimes we become so focused on staying in the game that we forget about winning the game.

Think about your emotional returns from trading.  What is your emotional P/L?  My recent Forbes post is an important read in this context; it focuses on flourishing.  Flourishing means making the most of the returns from your life's activities; it reflects the degree to which we are emotionally profiting from what we're doing in life.

Over time, can we expect trading to provide us with financial profitability if it is draining our emotional account?  Our emotional P/L reflects the balance between fulfillment and frustration.  When we are playing to our strengths, we get stronger and that is reflected in our levels of happiness and life satisfaction, as well as the quality of our relationships and the state of our physical functioning.  

An important implication of the recent post is that the times in which we feel most fulfilled in our trading reveal to us many of the things we need to be doing to sustain success in markets.  Fulfillment is more than just being happy with making money; it is that sense in life that we are on the right path, doing what we're meant to be doing.  Our emotional P/L is a source of crucial information; it is our most immediate confirmation as to whether or not we're playing to our strengths.  It also provides us with the fuel we'll need to get through inevitable periods of drawdown.

You know markets are controlling you when your trading P/L determines your emotional P/L.  Long-term success in trading means being able to sustain a positive emotional P/L even when the trading P/L is waning.  It starts by figuring out--each day--the psychological returns you'll be targeting and how you'll achieve those.  In other words, we need to toss out our daily to-do lists and appointment books and start generating daily plans for flourishing.  But that takes big dreams--and a visionary sense about how truly fulfilled we could be in life.

Further Reading:  A Key to Building Great Relationships