5 things you should know about trading psychology
The overlap between trading and psychology is complex. Psychological
factors, such as performance anxiety, can interfere with clear-headed
decision-making about markets. Similarly, poor trading practices–such as
taking on too much risk with excessive size–can magnify the normal stresses of
the marketplace. Sometimes it is difficult to separate chicken and
egg. Many traders put their money at risk without a demonstrable
edge. It is difficult to imagine such trading *not* generating frustration
over time. Other traders ground themselves in solid methods, but these may
not fit their talents, skills, or personalities. A very short-term,
aggressive method of scalping markets, for instance, may work fine on paper, but
prove completely unworkable–and stressful–for a highly analytical, risk-averse
trader.
Sometimes, however, trading psychology problems have nothing to do with
trading. They are the results of pre-existing problems that will not be
solved by different trading methods. Nor will they go away with simple
coaching advice to control emotions and build discipline. If you have
considered getting help for trading psychology concerns, here are five things
you should know before deciding upon the kind of help that is right for you:
1) Psychological problems are more prevalent in the population
than most people realize – The prevalence of clinically significant
depression in the population is about 5-6%. There is a similar prevalence
among such anxiety disorders as phobias, obsessive-compulsive disorder, and
generalized anxiety. There is a prevalence rate of over 5% for substance
use disorders; 1% for bipolar disorder; 2-3% for eating disorders; and 1% for
post-traumatic stress disorder. That suggests that well over one in ten
people–including over one in ten traders–has a diagnosable emotional disorder
at any point in time. If, say, 20% of traders are experiencing emotional
disruptions of their trading, it is not unlikely that fully half of these are
dealing with treatable psychological problems.
2) Psychological problems can benefit from therapy
– A wide range of controlled outcome studies suggest that the average effect
size across various therapies is close to 1.0. That means that people
improve their functioning (lower their symptoms, report less interference with
their work and relationships) by close to a full standard deviation. Some
problems benefit more than others from therapy or require longer-term treatment.
Many anxiety problems, for instance, can be successfully aided with brief
therapies. Other problems, such as major depressive disorder and substance
use problems, have higher rates of relapse and may require more extended
assistance.
3) Psychological problems can benefit from medications –
Medications, such as selective serotonin reuptake inhibitors (SSRIs) for
depression and many forms of anxiety, can be quite helpful in situations where
symptoms are so debilitating that it is difficult to fully engage in therapy
and/or where symptoms are impairing functioning at home and work. There
are some conditions, such as bipolar disorder and attention deficit
hyperactivity disorder (ADHD), for which medications are typical treatments of
choice. Some research for depression, for instance, suggests that
intervention is most effective when combining medications and therapy.
4) Some psychological problems can benefit from very brief
therapy – In general, if a problem is not severe (i.e., it is not
impairing wide areas of a person’s life) and if it is not chronic (present
throughout a person’s lifespan), it will probably be amenable to brief forms of
therapy. This is particularly the case when problems are the result of
situational life stresses. When problems are chronic–and especially when
there is a family history of emotional disorders–it is much more likely that
longer-term therapy and/or medication assistance will be needed.
5) Some psychological problems can result from purely
medical/physiological causes – Fatigue from sleep apnea, high blood
sugar, or a host of other medical conditions can be mistaken for
depression. Endocrine disorders may manifest as signs of anxiety or
depression. There are seasonal forms of depression and depression related
to hormonal changes in pregnancy and menstrual periods that have a purely
medical basis. Many addictive problems have roots in underlying
attention-deficit/hyperactivity and resulting loss of impulse control.
Such conditions are not likely to go away with therapy alone and require
competent medical evaluation.
How do you know if your trading psychology problem is really just about
trading or is a sign of larger problems? Here is a quick checklist:
A) Does your problem occur outside of trading? For
instance, do you have temper and self-control problems at home or in other
areas of life, such as gambling or excessive spending?
B) Has your problem predated your trading? Did you have
similar emotional symptoms when you were young or before you began your
trading career?
C) Does your problem spill over to other areas of your life?
Does it affect your feelings about yourself, your overall motivation and
happiness in life, and your effectiveness in your work and social lives?
D) Does your problem affect other people? Do you feel as
though others with whom you work or live are impacted adversely by your
problem? Have others asked you to get help?
E) Do you have a family history of emotional problems and/or
substance use problems? Have others, particularly in your immediate
family, had treated or untreated emotional problems?
If you answered “yes” to two or more of these items, I would
recommend a professional consultation with a trained, licensed
professional. I would also recommend consultation with a physician to rule
out possible medical causes or contributors to your problem. Trading
coaches and self-help books have their places, but neither are likely to provide
the kind of help that research finds to be most effective in these
circumstances.
The bottom line is this: Do you feel you are in control of your
thoughts, feelings, and behaviors or do you feel that those too often control
you? The good news is that the vast majority of people can get help in
reasserting control. Your well-being will help determine the well-being of
your trading account.
Note: For research about the prevalence of emotional disorders and
the benefits and limits of therapy, I recommend the following book:
Roth, A., & Fonagy, P. (2005). What works for whom?
A critical review of psychotherapy research (2nd ed.). New York:
Guilford Press.
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). He has published numerous
peer-reviewed articles and book chapters on the topic of brief therapy and is
co-editor of The
Art and Science of Brief Psychotherapies (American Psychiatric Press,
2004). As Director of Trader Development for Kingstree Trading, LLC in
Chicago, he has mentored many 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 or therapy services to traders, but maintains an archive of
psychology articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
His book, Enhancing Trader Development, is due for publication this fall
(Wiley).