Saturday, November 04, 2017

Trading Psychology Challenges - 2: Perfectionism

In the Enhancing Trader Performance book, I identify a powerful obstacle to developing successful trading strategies: perfectionism.  "Perfectionism clearly plays a role in preventing us from cultivating superior strategies," I wrote.  "In a very important sense, perfectionistic traders are not seeking to make money.  They are trying to not lose money.  Their intolerance of loss keeps them moving from method to method in search of a certainty that markets cannot provide." (p.157).

The phrase here is apt: *intolerance* of loss.  The perfectionist is not seeking self-improvement.  The perfectionist is intolerant of anything that falls short of ideal.  This sets the stage for self-blame and frustration.  While it might look like a shield of high standards that protects us, in fact that shield burdens us, weighing down our performance.

A review of one's trading journal often reveals when perfectionism is a problem.  A trader might have identified a good idea, placed a trade at a good level, and taken profits at a target, only to see the trade go further in his or her direction.  The journal entry will focus on what the trader *should* have done (holding the trade longer) rather than what the trader did well.  The "should" is not grounded in any tested rule; that same trader will be equally self-blaming over a trade that is initially profitable but reverses when he or she holds for a further target!  Such perfectionism is hindsight bias at its worst.  

Note how such perfectionism turns a winning trade into a psychological loss by exclusively focusing on shortcomings.  It is not constructive, because it does not create concrete learning lessons.  It is frustration channeled as self-blame.  As such, it robs us of the fulfillment we otherwise would feel after a good trade and leaves us feeling diminished.  Over time, such self-blame takes a toll on our energy and outlook, contributing to the problem of burnout.

How many of your journal entries and how much of your review time are spent on what you did wrong?  To what degree do you learn from your successes and reinforce your best practices?  If you are parenting a young child, you would use positive reinforcement, not just punishment, to teach the right behaviors.  As a trader, you are always a young child, always developing, always learning.  You want to be as constructive with yourself as you would be for a daughter or son you love.

Perfectionism wears people down.  Perfectionism tears people down.  We want to channel frustration toward learning and improvement, not toward self-blame.  We want to direct our anger toward our problem patterns, not toward ourselves.  That is a very important distinction.

So what can we do about perfectionism?  Three strategies stand out:

1Restructuring Our Reviews:  By giving ourselves realistic report cards, grading each area of our trading process, we can readily identify what we're doing well and what we're doing that needs improvement.  We want to go forward with positive goals--building on our successes--as well as remediation goals, correcting our weaknesses.  Every review should identify strengths and improvements and should lead to goals of continuing to do what is working.  Every review should also focus on constructive steps we plan to take to improve our shortcomings.  The focus of the review is on improvement, not blame.  We focus on getting better, not being perfect.

2)  Cognitive Strategies - The cognitive strategies described in The Daily Trading Coach enable us to identify negative thought patterns as they occur, so that we can redirect our processing in real time.  Very often, perfectionistic ways of thinking are ones we have inherited from parents, teachers, and other early life role models.  When we can separate their voices from our own--a great application of cognitive journals--we allow ourselves to stand outside our perfectionistic patterns.  In short, when we adopt a cognitive perspective, we turn rigid, negative thinking into the enemy.  That allows us to coach ourselves in an empowering way, not in a way that demoralizes us.

3)  Behavioral Strategies - Very often, perfectionism is triggered by frustration.  Of course it's frustrating to take off a trade only to see it go much further in our direction.  That frustration shows up as physiological tension, which in turn cues the negative thought patterns.  One of the greatest insights I came to as a trader was the recognition that my poor trading was entirely state-dependent.  When in the fight-or-flight mode, I was much more likely to miss what was happening right in front of me and impose my own needs onto markets.  Behavioral strategies allow us to pull back from trading screens and change the state we're in, becoming more calm and focused--and much more able to recruit solid coping skills.

Sometimes negative, perfectionistic thinking is pervasive, occurring across life domains, not just during trading.  If that is the case, it's worth consulting with a psychologist and developing a structured plan for changing those patterns.  It's also worth ruling out depression as an underlying problem, as the depressed state can lead to chronically negative thought patterns.  As I emphasized in the post on diagnosing our trading problems, it's always a warning sign when patterns disrupting our trading are also disrupting other areas of life.  That's when we want to move beyond coaching and get concerted professional help for overlearned patterns.

We will never be perfect as traders.  That's what keeps us ever-learning, ever-growing.  Our challenge is to use our shortcomings as inspirations, fueling continued improvement.