Sunday, February 24, 2019

Primary and Secondary Problems in Trading

In this post, we'll explore a very important concept:  the difference between primary and secondary psychological challenges and why that difference makes an important difference in our trading.

A good place to start would be anxiety.  Suppose we experience panic symptoms where, out of the clear blue, we suddenly feel very high levels of anxiety.  Panic can be very scary for people because the anxiety seemingly makes no sense.  We can be resting in bed or walking on a street and suddenly experience overwhelming feelings of dread and fear.

Panic disorder would be considered a primary problem in our example.  It's treatable with cognitive-behavioral therapy and medication in a relatively short period of time.

Let's say, however, that we become so afraid of our panic symptoms that we stop doing normal activities.  The last time we had a meltdown was in a shopping mall, so now we'll avoid groups of people or public places.  Maybe the panic attacks have been when I've been alone, so now I try to avoid situations where I'm by myself.  Or maybe I feel as though I'm going crazy--there's something wrong with me--so I lose confidence in developing relationships and begin to feel lonely and depressed.

All of these are examples of secondary problems.  The fear of open places (agoraphobia) or the depressed feelings are the result of how I respond to the primary problem.  How I think and react to my problem can create entirely new problems.  That can make our situations seem quite complicated.

As Shakespeare's quote suggests, how we think about things creates our reality.  If we respond negatively to a primary problem, the odds are good we'll create a new, secondary problem.

Let's take an example from the trading world:

A young man I worked with was losing money in trading, largely by trading too often, sizing individual trades too large, and taking trades when not much was going on in the market.  As his losses mounted, he became frustrated and discouraged and stopped putting as much time and effort into his preparation.  His frustration spilled over to his relationship with his girlfriend and they were now talking about splitting up.  Nothing seemed to be going right in his life.  He was feeling pretty down when I met with him.  In fact, he had met with a trading mentor/coach, who encouraged him to calm himself, trade more patiently, and stick to his trading plans, but none of that seemed to help.

It turns out that the young trader's primary problem was attention deficit disorder (ADD).  The very thing that attracted him to markets--the stimulation and risk-taking--was the thing that got in the way of his staying focused in his trading.  The lack of focus led to impulsive trades and eventual losses, which then created secondary problems in his relationship and in his mood.

The trader addressed the primary problem through medication and with biofeedback exercises that train the mind for focus and this enabled him to trade in a disciplined manner.  He began to make money, felt better about his situation, and addressed the problems with his girlfriend by helping her understand what had been going on for him.  We worked on alternate ways of dealing with frustration, including ways of constructively engaging the relationship during times when trading didn't go well.  Had we not addressed the primary problem, however, no amount of "trading psychology" advice or techniques would have helped him.

Very often, what look like primary problems in trading--such as loss of discipline--are in fact secondary consequences of other, less recognized difficulties.  How we think about the actual primary problems creates the negativity and frustration that leads to the secondary overtrading, FOMO, etc.  The challenge facing us is to identify the problem underneath our poor trading.  

I recently suggested that a major primary problem affecting traders is using trading to meet psychological needs for which trading was never designed.  If we come to markets with self-esteem concerns; unmet needs for recognition; an inner sense of failure from previous efforts at achievement; or a lack of excitement and purpose in life, those primary problems will burden our attempts at trading with an open mind.  "It is amazing how much easier it is to tackle trading challenges, " I wrote, "when trading is not burdened with needs it was never meant to fill."

Take it to the bank:  people who trade out of unmet needs need to trade.

That is a common primary problem, and one that deserves priority.

Further Reading: