Turning your trading around
Part One: Gaining Control
The last couple of end-of-year periods I’ve noticed something interesting:
The Amazon rating for my book The
Psychology of Trading jumps up surprisingly before settling back down.
Amazon ratings, for those who aren’t familiar, weight recent sales more heavily
than past ones, so a rising rating indicates recent purchases of the book.
The jump in the ratings for my book indicates that there are a number of holiday
purchases of the text. Since my book neither tastes as good as fruitcake
nor is as fun to open as a gift basket, I have to assume other motives are at
work with these end-of-year purchases.
My best guess is that the buyers have the same concerns as many of the
traders who have been emailing me: They have had a difficult trading year and
want to get January off to a better start. Attending to their psychology
is one way of making improvements; it’s a kind of New Year’s resolution.
The problem, of course, is that such resolutions–always so earnest in
January–seem to lose their urgency as the year gets under way. That
doesn’t mean that we shouldn’t make resolutions. It just means that there
is a large difference between good intentions and viable performance
plans. My goal in this short series of articles is to help you take your
trading resolutions and make them stick for the New Year. It’s something
I’ll be doing with a group of professional traders in Chicago, and I’d be
honored to also be part of your turnaround.
Ready for a new start to the New Year? Let’s go.
The Sense of Control
Some traders come to me angry and frustrated; others are depressed, anxious,
or confused. The common denominator is that they experience the sense of a
loss of control over their trading. Think of it this way: If someone feels
in control of something in their life, there’s no way they’re going to feel
depressed or anxious over that thing. If I’m in control of my health, an
illness will neither depress nor worry me. If I have control over my
family budget, an unexpected expense will not prove upsetting. What
turns stress into distress is the perception that we no longer control something
that is important to our well-being. If I lack control over my
marriage, my health, or my career, the first result will be anxiety: I will
become mired in doubt and uncertainty. If I continue to lack control over
important aspects of my life, anxiety will turn to depression. The
perception, “I don’t think I can handle this” becomes “I know I
can’t handle it.”
Our first goal in your turnaround is to regain a measure of control. It
won’t happen all at once or in all areas of your life, but any movement in the
direction of greater control will help you feel more optimistic, more
energized. Depression, as psychologist Martin Seligman pointed out, is
grounded in learned helplessness: the sense that one is powerless. Any
constructive exercise of personal power helps dispel the helpless state.
A step-by-step strategy to regain control is far better than an unfocused,
shotgun effort. Many people, fired up at New Year’s to make grand changes,
tackle large goals–only to find themselves frustrated by their inability to
reach these quickly. It is much better to define smaller, achievable goals
that you can build upon than grand visions that will take months or years to
realize. Your effort to take control expresses your fighting spirit: your
determination to not let events control you. Even if that effort does not
lead to a complete turn-around–and it usually won’t–it is an important part of
the psychological turnaround that precedes larger life turnarounds.
Take the example of Lance Armstrong in his book It’s
Not About the Bike. He describes in detail his reactions to learning
that he had testicular cancer just as his cycling career was blooming.
Each piece of news seemed worse than the last one: his cancer turned out to be
late-stage; it metastasized to his brain. Even the optimistic physicians
gave him no better than even odds at survival and most assumed his career would
be over, due to the toll that chemotherapy would take on his lungs.
Armstrong first took control by learning everything he could about his
disease. He became a partner in the treatment process, not just a passive
patient accepting a doctor’s advice. The knowledge he gained helped him
assemble a team of professionals to assist in his care, including some
world-renowned physicians he would never have known about had he not educated
himself. When he was faced with a choice of who would ultimately guide his
cancer treatment, he selected a physician who understood his patient’s love of
cycling and took the extra step of finding chemotherapy agents that would not
devastate his lungs. During the difficult chemo process, he refused to use
the wheelchair offered to him, preferring to walk on his own. When a nurse
brought in a lung machine to test his capacity, he angrily blew into it as
strongly as possible and told her to never bring the machine into his room
again. He didn’t lose his fighting spirit. Staying in control of the
small things helped him deal with the big ones.
Finding Your Control
If there is a “cancer” in your life or trading, removing it may be
as difficult as it was for Lance, albeit in a different way. The problem
isn’t going to go away overnight and may require wrenching life changes.
Your control, however, like Lance’s, will come from your refusal to let fate
have its way. You can learn everything possible about your trading
difficulties the way Lance made himself an expert on cancer, so that you become
an active agent in your turnaround. A thorough review of the year’s
trading results will tell you a great deal about where you made money and where
you lost it. Most important, it will reacquaint you with your trading
strengths as well as weaknesses. Very often, I’ve found, such reviews
reveal that a relative handful of trading days made the difference between a
dismal trading year and a good one. If so, you want to focus your
attention on the common denominator within that handful of losing days–that is
going to be the enemy we do battle with. Can you find ways to anticipate
or avoid this enemy? You also want to focus attention on your big winning
days: clearly these were occasions when you defeated the enemy. What was
different in your trading approach on those days? What was different about
your state of mind? Can you reproduce these?
One trader I recently worked with was near despair over his tendency to give
back his gains. He felt that he had so many trading problems that he would
need to find a different occupation. When we carefully reviewed his
trading, however, a single pattern emerged: He tended to lose money on trendless
days where his mornings started out poorly. He typically raised his size
into the afternoon, facing even less opportunity. The result was that he
would get chopped up with his maximum size. Our initial strategy for
gaining control was very simple: We treated the morning and afternoon as
separate trading sessions and set a maximum allowable loss for each. This
level was large enough to allow him to trade normally, but not so large as to
prevent him from recovering from a bad start to the day. Finally, we
created a rule that his initial position size could never be raised to his
maximum if he was down money. In other words, he could only use maximum
size when he was trading well, not when he was in the mood for revenge. I
helped him monitor the following of these rules and, before long, they became
positive habits. As he stopped the large losing days, he saw the results
in his bottom line–and in his enhanced feelings of confidence and
control.
This example is not unusual among good traders in slumps. What seems
like an overwhelming set of problems is actually a single pattern that recurs in
different ways, at different times. If the pattern can be broken,
surprising changes can result, because it’s the pattern–not basic trading
ability–that is the problem. The first step of achieving control is
simply figuring the pattern out: learning everything you can about the
problem so that, like Lance Armstrong, you can find the right kind of help–and
the right helpers. Even if your first step is nothing more than stopping
what isn’t working and focusing on what you’re doing well, this will begin the
process of putting you in the psychological driver’s seat. As one trader
put it when he began to regain his sense of control, “The problem is my
pattern (of overtrading); I’ve been telling myself that I’m the
problem.”
Separating you from your problem is the first step toward mastery. In
the coming articles in the series, we’ll look at the next steps.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.