Friday, December 30, 2016

How to Break Negative Trading Patterns

Many traders will observe a trading psychology problem, such as undersizing positions or overtrading, and will then lay out a goal for the next day to not make the same mistake.  If you fast forward several months, you commonly find that they're still making those mistakes, still setting those goals.  What's going wrong?

Noticing a problem is necessary to solving it, but not sufficient.  We need to address the factors that are causing and/or triggering the problem.  That requires real reflection.  Very often, when we experience a psychological challenge in trading, there is a problematic situation that brings an emotional response, which in turn triggers a poor trading behavior.  So, for instance, we might have a situation in which we exit a trade only to see it move further in our intended direction.  That situation can trigger feelings of frustration and internal dialogue of self-criticism, which then trigger taking a marginal trade to make up for the initial situation.  The problem is not just taking the marginal trade; the problem lies with the entire sequence.

When we chart the situations, thoughts, and emotions leading to episodes of poor trading, we become increasingly aware of our own patterns.  Very often, it's a handful of triggering situations that lead us to make our behavioral mistakes in markets.  Once we clearly recognize those situations, we become sensitive to them in real time and can catch them before they have their triggering effect.  Psychology journals can be remarkably effective tools for building this awareness, as we jot down situations in one column; our thoughts and feelings in the next column; and the poor trading practices triggered by those thoughts and feelings in a third column.  By becoming better and better at observing our patterns, we position ourselves to add a fourth column in real time, which is how we can channel our thoughts and feelings constructively.

Goal setting is excellent, but cannot take the place of understanding why problems are occurring in the first place.  Many, many trading problems are situation- and state-dependent.  They occur in particular contexts.  If we can master those situations and mentally rehearse constructive ways of dealing with them, we can address much of our worst trading before actually placing any orders.

Further Reading:  Working on Trading, Working on Ourselves