Wednesday, September 07, 2016

How to Break Negative Trading Patterns

Our psychology interferes with our trading when patterns we have learned--and overlearned--are triggered by events and play themselves out without our full awareness.  These can be behavior patterns, patterns of thinking, emotional patterns, or--as is often the case--an amalgam of all of these.  Very often, the triggering of these patterns is state-dependent and situation-dependent.  Most of the time, we exercise a reasonable degree of free will.  It's under conditions of frustration, loss, fear, or greed that we find ourselves behaving in ways that are contrary to all our plans and best intentions.

The first step in changing any pattern is becoming a good self-observer and recognizing when the pattern is starting to play itself out.  Often, we can become aware of common triggers to our patterns, so that we can respond more mindfully to challenging situations.  For example, if I recognize that certain topics tend to lead to arguments at home, I can quickly recognize myself become tense when one of those topics is raised and take a short break.  It's when we can observe patterns beginning to unfold that we become able to short-circuit the process and interrupt the negative cycles.

This is why keeping a psychological journal can be very useful in making changes.  We can use the journal as a tool for self-observation, writing in real time what is happening, how we're feeling, and how we'd like to respond.  It's at those times we can remind ourselves of the consequences of the negative pattern and the benefits of responding more constructively.  Such a journal becomes a mindfulness tool.

Here are common patterns impacting traders:

*  Negative thought patterns--worry and self blame--following losses;
*  Overtrading out of frustration following losses;
*  Becoming paralyzed and unable to act on opportunity out of fear of loss;
*  Becoming overconfident and overtrading after wins;
*  Procrastination and failure to prepare properly for the day;
*  Trading too small due to lack of confidence;
*  Trading impulsively out of a lack of patience.

The common element among these patterns is that emotional, physical, and cognitive states lead to suboptimal decision-making.  It's when we can recognize these patterns in real time that we can interrupt them, shift our states, and return to best trading practices.  In becoming observers of our patterns, we distance ourselves from them, and gain potential control over them.  Good psychological trading is staying fully conscious and self-aware, even during challenging situations.

Further Reading:  Core Ideas in Trading Psychology