Wednesday, May 16, 2018

Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part Three: Overcoming Anger and Frustration

In the first post in this series, we took a look at the cognitive behavioral self-help techniques described in the new book by Dr. Seth Gillihan and how we can overcome our tendencies toward procrastination.  The second post in the series examined the fear of missing out (FOMO) in trading and specific techniques for moving past that fear.  This final installment deals with anger and frustration and methods for ensuring that these do not bias our decision-making.

We typically feel frustrated when we are pursuing a goal and find our path blocked.  If we want to reach a destination and we are slowed by traffic, we can respond to the situation with a flight-or-fight response, cursing the situation.  When the situation becomes more personal--if we believe that someone stands in the way of our achieving our goal--the frustration can become anger and even rage.  We most often experience anger if we believe our rights have been violated; that we have been mistreated or wronged.

In the case of trading, our goal is to make money through our ideas and this goal is often thwarted by the adverse behavior of the market.  We are faced with a loss instead of a gain and this can frustrate us.  If we tell ourselves that other market participants are somehow cheating or gaming the system, our frustration can turn to anger.  Once we're worked up in the flight-or-fight mode, we can make subsequent reactive decisions, turning one loss into many more.

If a core skill of short-term trading is pattern recognition, then success hinges upon a high degree of focus and open-mindedness.  When we lose peace of mind, we lose focus and openness and we trade what we want to see, not what we're actually seeing.

Dr. Gillihan outlines several powerful techniques for moving past frustration and anger, including:

1)  Know your triggers - Typically, there are a limited number of situations that have the power to set us off.  If we are aware of those situations, we can mentally rehearse them and practice calming self-talk.  For example, we can imagine ourselves losing on a trade, feeling frustrated, and then reminding ourselves that any edge in markets is only probabilistic and that losses are part of the game.  This acceptance can help us regroup and generate the next idea.  Self-awareness of triggers can also enable us to step back from trading temporarily when those occur, so that we don't allow frustration to impact our behavior.  One especially powerful technique when a trigger occurs is to remind yourself of the costs of anger and how acting on the trigger has hurt you in the past.  That way, frustrated behavior becomes the problem, not the triggering situation.

2)  Relax and breathe with your anger - If you temporarily lost your faculty of vision, you would not blindly put trades into the market.  The fight or flight response creates emotional blindness, so that you may no longer see yourself or the market clearly.  If you use emotional arousal as a cue to relax and breathe more deeply and regularly, you practice self-control.  Each episode of frustration thus poses an opportunity for you to achieve self mastery.  You can actually engage your competitive instincts and look forward to losses as opportunities to beat anger.  That way, every trade is a winning trade.  You either make money or you build inner strength.

3)  Practice acceptance - It is OK to lose as long as you exercise sound risk management in the sizing and management of your position.  As we recently saw in a post on turning mistakes into trading successes, it is not uncommon for a losing trade to lead you to reassess your view and eventually generate a much better trade idea--often in the opposite direction.  A sound trade that loses can provide useful information.  By accepting the loss as a tuition for learning, we can move past frustration and gain from the lessons learned.  I recently placed a good trade with high odds of taking out a prior market high.  We moved toward the high, stalled, and then started to reverse on higher volume.  I quickly got out of my trade at a small loss and flipped short, accepting that we had likely make the high for the day.  The subsequent down move, trapping the longs, more than made up for the loss on the long position.

We cannot prevent setbacks in life but we can ensure that we use these as sources of learning and development.  Every day can be profitable if we're always using experience to make ourselves better.  Once we realize that setbacks are opportunities, we can actually respond to them with gratitude.  If life is a classroom, our setbacks are our lessons and we can give thanks for the opportunity to grow.