Saturday, November 11, 2017

Trading Psychology Challenges - 4: Frustration

Of all the psychology problems I observe among highly competitive traders, frustration is the most common.  Indeed, as I recently noted in a presentation to fund managers, frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities.  When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration.  That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain's prefrontal cortex.  Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day.

As the above quote suggests, frustration comes from expectation.  When we have a goal and the achievement of that goal becomes blocked, we are wired to take action to remove that block.  That can be helpful if, say, our path out the driveway is blocked by high, wind-blown snow.  The frustration of the situation can energize us to take out the shovel and remove the block.  But what if we cannot take remedial action?  If a car suddenly pulls in front of us without signaling and nearly causes an accident, there is no ready, constructive action we can take.  So we blow off steam and curse, hit our horn, etc.

Suppose, however, that we are in a *rush* to get to our destination.  We need to be on time, and the car suddenly pulls in front of us and causes us to get stuck at a red light.  That's when frustration is likely to be channeled as anger.  The inconvenience is now processed as a threat and our fight/flight mechanism goes into overdrive.  It's not just having a blocked goal that creates frustration; it's the *need* to reach that goal that sets us up for a performance-destroying response.  Should we react to the traffic situation by running the red light or suddenly switching lanes ourselves, we could create a real accident.  Those are actions we would never take under normal driving conditions.

As I point out in The Psychology of Trading, many times frustration and anger are responses to current situations that bring up the feelings from prior challenges and conflicts.  In such cases, our frustration seems out of proportion to the immediate situation.  That is because we are responding to past situations, not just the (similar) current one.  For example, if we experienced considerable difficulty learning in school, perhaps because of a learning disability, normal setbacks in trading can feel like past failures, eliciting self-criticism, negativity, and frustration.  In such cases, our frustration problems will not be limited to trading contexts.  When the past intrudes into the present, that typically affects a broad swath of life domains, including relationships and work.  If those patterns are interfering with many life areas, it can be very helpful to seek professional help.

When frustration is more situational and shows up dominantly in the trading context, the techniques described in The Daily Trading Coach, such as building positive associations and exposure methods, can be quite helpful.  (Another way to access resources relevant to frustration is to Google "Traderfeed frustration" and you'll see quite a few posts pertinent to the topic).  One particularly powerful approach is directly addressing the perceived *need* that fuels the shift from frustration to anger.  It is natural--and not necessarily problematic--to be frustrated when we don't reach a desired end.  When we tell ourselves that we *must* achieve that goal *now*, we set ourselves up for overreaction.

In such cases, training ourselves to embrace losses and learn from them is very helpful to our trading psychology.  Quite a few times, I have entered a good trade with a positive expected return and it hasn't worked out.  When that has occurred, I will say to myself, "That should have worked!"  That leads me to entertain the hypothesis that the market cannot sustain the expected direction and may indeed trade the other way.  That can be very useful when a breakout trade suddenly stalls and returns to a prior trading range.  Embracing the loss and now looking for a possible retracement of that range, given that others are similarly trapped, can turn the losing trade into a tuition for an even more profitable winning trade.

Other times, we may extract useful information about our trading mistakes from losing trades.  Perhaps our entry execution was sloppy, triggering us to work on firmer rules for entries.  That channels the frustration constructively, away from anger.  Many traders I work with become very alert to the cues of mind and body to recognize frustration as it's brewing.  They are able to recognize that as an emotional pattern that has cost them money in the past, and that triggers them to step back from screens and regain emotional equilibrium.  We are best able to change an emotionally driven pattern if we're aware of that pattern.  Mindfulness is a great antidote to reactive trading in the heat of battle.