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The Psychology of Handling Large Drawdowns
6 days ago
Friday, September 25, 2009
Yesterday Dr. Steenbarger gave a presentation to the traders at Trading RM. The focus of his talk to us was mental and physical preparation for the trading day. We all know that good traders do not arrive at their desks at the open and trade blind. Dr. Brett was able to break down mental preparation in three parts.
1) Be market focused vs. performance focused:
A trader who comes to the open worrying about how much he lost yesterday or celebrating how much he made yesterday is doomed for failure. The trader worrying about yesterday's loss is susceptible to a series of mistakes: over trading to "make back the loss," under trading out of fear of losing, and not focusing on the market. The trader who made too much may have unwarranted confidence or out sized expectations. (I am guilty of this, if I made $10k yesterday can I be happy making $2k tomorrow if that is what the market gives me?)
A trader should be focused on the market. What did Europe and Asia do overnight? What are currencies and fixed income doing? What do the daily, 15minute, and other charts look like? What names have been in play and look to be in play?
2) Be process focused vs. outcome focused:
The idea here is to trade well, not to trade to make money. The best analogy Dr. Brett gave us was that of a golfer focusing on his process. Every time Tiger Woods takes a swing he is trying to make the best swing he can given the conditions he finds himself in. He is not focused on holing the shot or his score for the round. He is focused on one good swing from start to finish.
I found this article from 2004 in the USA today. It details his mental toughness. This is what he said about his play as he trailed the leader by 7 strokes:
"I really don't have that appreciation for what I've been able to accomplish because I've been so focused ... and I don't see the periphery and what it really means," Woods has said. "All I see is trying to shape a shot and trying to make a putt."
Tiger was worried about the current shot (trade), not making up 7 strokes. The idea for traders is to trade well. Whenever I trade to make money it is a disaster. In theory I can trade really well and scratch the day or lose a little. But overtime if I trade well (take good swings) it will pay me immensely.
3) Be scenario focused vs opinion focused:
The idea here is to have a flexible mindset. We have all seen examples of a trader with an opinion that gets in the way of fact. I like to say "trade what is happening, not what you think will happen."
Dr. Brett advised us that part of having a flexible mindset is to continuously go through "what if scenarios." Not many successful traders say I am going to come in tomorrow and be size short/long. But a successful trader will say if I see x,y, and z tomorrow I will trade long/short. I will adjust my size up when I see a,b, and c. Figuring out those variables is a trader's job. To ignore those variables or to have no variables is a set up for failure.
Trading RM is able to go through the "what if" scenarios" using our morning worksheets.
Don't forget to sign up for a trial of our Trading RM Real Time product and follow along with our trader's decisions as they happen.
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