Creating the Emotional Filter

Discussion in 'Psychology' started by steveosborne, Jul 1, 2005.

  1. I have avoided a few mistakes in the past by realizing that what I was about to do is "what George would do" – always the wrong thing since George was a living encyclopedia of emotions leading to wrong decisions. Based on what I read here and there in this forum about very common emotions, I think that a list of typical emotions leading to wrong decisions might be much more useful than what we would first imagine.

    Based on various empirical studies, the percentage of successful calls made by traders following a system with discipline is not much more than 50%. Their success depends on how much they make when they make money and how much they loose when they loose money; and this edge doesn’t depend on the right structure of stops and filters (which changes continuously) as much as intellectual honesty and awareness about one’s reactions.

    I would like, with your help, to come up with a black list of behavioral patterns to be aware of and to avoid.
  2. Start of list

    - frustration about previous losses leading to revenge trading

    - fear of loosing an opportunity leading to impulsive behavior

    - searching for confirmation in news and comments supporting existing positions and rejecting contradictory opinions leading to denial.

    - lack of faith in trading/money management system leading to too much improvisation
  3. nitro


  5. LOL. I Have what I call GCS, the George Costanza Syndrome, which is the constant fear that there is no way in hell God is going to let you succeed. Now that Im getting the hang of it I am sure the economy is going to collapse.

    I totally agree with the first two on your list. They were and still are occasionally my biggest headache. It is interesting that the "bubble mentality" applies even on small timeframes; people piling in at the end of moves.
  6. whit688


    Here are a few more behavioral patterns that tend to work against our best interests:

    • Overriding the system because “I just know it won’t work.”
    • Not taking a position when all the signals are present because of one, or two, or three recent failed trades.
    • Relying solely on your indicators and not reading the price and volume characteristics of recent market action.
    • Not knowing how to read price/volume action and trading anyway.
    • Relentlessly beating yourself up with negative self-talk after a trade goes south.
    • Using multiple indicators that all evaluate the same thing (autocorrelation) because “I just want to see what this other indicator is saying.”
    • Frequently changing indicators before really learning how to use them; chasing the newest, coolest, bestest indicator, as if that will really help your trading.
    • Failing to keep excellent records of every trade.
    • Failing to paper trade every chance you get.
    • Trading too large a size for your account.
    • Taking a short (long) in an individual stock when the general market is trending long (short).
    • Not having a trading plan and your trading rules written out; not following same.
    • Thinking/acting “It’s more important to be right than to make money.”

    Well, these are a few I have committed (numerous times).

  7. Good link.

    I will add that playing the blame game is a big one.

    Blaming everything/anything but yourself allows a person to steer themselves away from developing a strong personal honesty. Personal dishonesty is a bad habit to get into and an even more difficult problem to overcome (I believe that this, more than any other pyschological aspect, keeps people from suceeding in trading).

    Once you go down that road of self-deception, the pyschological damage will last a very long time and will most likely never be reversible.
  8. Great list Whit! I have experienced all of these :( Working hard now to turn it around.
  9. whit688


    I think the most important one (for me, anyway) is the last one on the list -- It's more important to be right than to make money. Making money means trading in accordance with my trading plan, using stops and sound money management, taking small losses (or gains) when the market isn't acting as I had anticipated, accepting that not every trade will work out, and knowing that winners will more than cover loosers.

    This is actually paraphrased from a Marty Schwartz quote out of Market Wizards (or New Market Wizards -- I forget which one). I personally found his story to be quite inspiring, and his "flaws" very similar to my own.

    I seem to always need to be right across a variety of different contexts. It's my upbringing, I'm sure. It's always hard for me to admit to a mistake. So, trading is particularly difficult because, as we all know, we can never bat 1000.

    Now, I think it's very useful to list all this stuff; awareness is vital. The next question is: How do we keep it in awareness and how do we deal with it? I'm thinking it might be interesting and useful to talk about coping strategies?

    Keeping something we want to change in conscious awareness is important because a lot of our behavior -- especially the not-so-good behaviors -- is done out of awareness. It's not that we're asleep, but we really aren't consciously awake. This is especially true when we are in the middle of a trade and we feel under pressure with lots of anxiety, muscle tension, racing thoughts, etc. I don't know about you, but the more anxious I become, the dumber I get. It's actually a pretty well-established principle of psychology. Performance suffers as anxiety climbs above a certain level (mild anxiety is helpful for motivation and, thus, performance, but too much anxiety negatively affects performance, including clear thinking). So, when under pressure, we tend to quickly loose our bearings.

    So, one thing I did to keep this idea in mind while in the throes of trading was to tape it onto my computer monitor in a prominent place (like, right under my main chart -- I can't miss it).

    It's a simple solution that can be quite effective. Someone mentioned cognitive dissonance somewhere above. Here's how that works in this instance:

    First, I have become very committed to making money and firmly view this as more important than being right. I am very committed because I've lost too much trying to be right about the market. So now, when a trade isn't working out, I am committed to taking a small loss if necessary and exiting the market. I put the quote below my screen to remind me of this commitment.

    Now, I'm in a trade and it ain't going very well. It doesn't matter why, it just isn't doing what I had anticipated. My stomach starts to churn, I start having negative thoughts (e.g., I'll never be a good trader), I feel tension all over, more negative thoughts (e.g., My wife is going to be upset that I've had another loosing day, etc).

    But then, the market starts going in my direction -- for a bar or two. I start getting hopeful with a change in thought (e.g., Oh, this might work out OK; maybe I was right about this trade after all).

    Then, I see the quote. I pause, take a few deep breaths, relax and try to think calmly about this situation. (Here's where cognitive dissonance comes in). I know I should exit immediately because the market clearly hasn't acted right. This is my desire as reflected in the quote -- to make money and not be concerned about being right. But, my behavior to this point has been to sit anxiously and turn to hope -- behavior that is aligned with being right, not with making money. My behavior is inconsistent with my expressed desire (to make money and be unconcerned about being right). This discrepancy causes cognitive dissonance (I know I should exit and not just sit here hoping).

    If the desire of making money is strong enough, I'll exit the market and praise myself for acting in accordance with my trading plan. If my wanting to be right is stronger, the cognitive dissonance will dissipate and I'll likely end up with a large loss, beat myself up mentally, promise to be better next time, and start the (vicious) cycle all over again.

    It may take a few times, but if you stick with this it will eventually work. The key is to be very, very clear in your desire (in this case) to make money. I would think about this each night after the market closed, sometimes just repeating the quote as if it were a chant. After a while, it was so burned into my consciousness that it really was dissonance not to follow it.

    I don't know if this is helpful to others or not, but i would be interested in hearing from people about their coping strategies and methods they have used to create behavior change.

  10. Excellent description of the torture undergone during a trade. But I have a question about
    "I know I should exit immediately because the market clearly hasn't acted right."

    How do you know this is a bad trade?

    This question could also be the starting point of a new thread that would complement this one very well.
    #10     Jul 7, 2005