3 steps to developing good trading habits
In my
last article, and the first of this two-part series, I introduced the
topics of stress and coping. We saw that stress is intrinsic to
trading–and to all activities that involve high degrees of risk and
uncertainty. Whether this stress becomes chronic distress, however, is a
function of our coping. People utilize a variety of coping styles,
including emotion-focused, problem-focused, and avoidant strategies. These
methods for dealing with threat are neither good nor bad in and of themselves.
Most often, when they are problematic, it is because they have become fixed and
rigid. At one time in life, they may have served a useful purpose.
Now, however, they bring unwanted consequences.
Many traders are aware of behavior patterns that consistently lose them money
and can’t understand why they repeat these patterns despite their
awareness. This is the fundamental dilemma that brings people to
psychologists: knowing your problem patterns is necessary for change, but not
sufficient. Addicts, for example, are typically quite aware of their
problems. What waxes and wanes is their emotional connection to the
consequences of these problems. To some degree, we are all addicts: we act
on habit. Knowing our bad habits and sustaining the awareness to avoid and
change them are very different challenges.
Often, frustrated by their inability to change their patterns–and the
perverse tendency to repeat costly mistakes–traders become armchair
psychologists and conclude that they harbor, deep within themselves, a desire to
fail. Repetitive patterns are self-defeating, but this doesn’t mean
that traders have a hidden urge to do themselves in. In fact, just the
contrary: As we saw in the first article, problem patterns often began as
healthy coping efforts during an earlier life period.T his is why they are
so resistant to change: they have been overlearned precisely because they did
work so well for a considerable period of time. Imagine the trader who
grew up in an alcoholic household filled with conflict. Fearful of being
drawn into the strife, he learned to bottle his emotions and withdraw from
heated situations. Now, as an adult, he no longer lives in such an
environment, but bails out of trades at the first hint that they are moving
against him. This consistently loses him money, and–feeling like a
jerk–he wonders why he so often sells the lows. He doesn’t recognize that
the feelings evoked by the losing trade are sufficiently similar to the emotions
of the past that they trigger the old methods of coping.
So how can we change these overlearned coping patterns? Although the
particulars of each person’s change process are different, the structure of
change is remarkably consistent. Three stages appear to be essential to
change:
1) Pattern recognition – In some ways this is the most
difficult of the stages. It is not possible to change a pattern unless you
can recognize its appearance in real time. For this reason, many
therapists have their clients keep journals in which they observe situations
that trigger problem patterns and the correlates and consequences of those
patterns. By keeping detailed records, for example, you may find that your
pattern of impulsive, revenge trading after a loss is preceded by a high degree
of muscle tension and verbal expressions of frustration. This allows you
to use the tension and venting of emotion as cues for recognizing that your old
pattern is about to repeat. Adding a log of your emotions and behaviors to
your trading journal is extremely helpful in helping you see the patterns that
set you up for success and failure.
2) Pattern interruption – Once we become familiar with
the triggers and cues associated with problem patterns, we may not know what to
do instead, but we can actively choose to not repeat the pattern. If my
pattern is one of anger outburst and impulsive action, I can choose to walk away
from the situation and gain a new perspective. This is often most
effectively accomplished by interrupting the pattern with vivid reminders of the
consequences of those patterns. For instance, an alcoholic might
rationalize that it’s ok to go to the bar with friends, but will intercept the
“stinkin’ thinkin'” and remind himself that his last relapse began
exactly that way. By getting in touch with the consequences of that last
relapse (or that last bad trade), a person turns the motivational tables and
puts the brakes on automatic behavior patterns. I often tell my clients
that “You will begin to change when you consistently hate your old
ways.” Once you make the problem pattern an enemy and vividly remind
yourself of all the ways it has cost you money and grief, it is much easier to
interrupt its future appearance.
3 )Pattern substitution – After interrupting a pattern,
it’s necessary to try something different. The alcoholic of our above
example might choose to visit a friend or talk with an AA buddy rather than go
to the bar. A frustrated losing trader who is tempted to put on larger
trades to make her money back might instead take a break from the screen and
engage in biofeedback exercises until she is calm and focused. The goal
is to take the triggers of the old coping pattern and turn them into triggers
for new, more constructive coping. Imagery and mental rehearsal are
excellent ways of building new patterns for substitution. Before the
trading situation starts, for example, the trader might purposely visualize–in
great detail–a market scenario that has recently caused emotional havoc.
In her mind’s eye, she will watch himself feel tempted to make the same
mistakes, but then visualize herself interrupting this urge and engaging in a
better trading behavior. By rehearsing the desired trading behavior before
the market session and looking out for triggers during the session, the trader
tilts the odds in her favor that she will be able to extricate herself from her
old ways.
The key to making this work is repetition. You want to turn your
desired behavior patterns into habit patterns. Motivation is important
when you first make changes, but eventually you don’t want to have to muster
your motivation every time you want to do the right thing. You want the
right behaviors to occur naturally. This means that good trading behaviors
need to be repeated so many times that they become overlearned. Mental
rehearsal can accelerate this process, but ultimately we need to work the change
process every day in real time circumstances. Every trading day offers you
an opportunity to repeat old mistakes or to make changes. If you focus on
personal change, you can’t guarantee that every market day will make you money,
but you can ensure that every day will be profitable.
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.