To a large extent, human nature dictates that we seek pleasure and avoid pain or discomfort. In the effort to seek pleasure and avoid discomfort, humans (and traders) can engage in irrational behaviors. The much talked about mental bias of loss aversion, which comes from Prospect Theory, is an example of an irrational attempt at pain avoidance. But that’s another topic for another day.
Before I entered the financial world in 1995, I worked as a psychological consultant for the U.S. Dept. of Defense. During my two years of consulting I learned a lot and met some interesting people. One of the things I learned was how the military ‘thinks’ or plans a mission, including missions carried out by Special Forces. Navy SEALS know that an enemy that is experiencing chaos will not be able to focus or perform as well as an enemy that may be in pain.
Pain may not be conducive to making a rational decision that is one’s best interest, but the experience of chaos has an even greater negative impact on the ability to focus and make a rational decision.
Now that you know something about the difference between pain and chaos, can you see how this applies to trading? If you enter a trade and it goes against you, chances are that to some degree you are feeling uncomfortable (pain), but are you also experiencing chaos?
Being uncomfortable at times when trading is part of the game, but experiencing chaos shouldn’t be. On some level, most traders have to learn to increase their ability to tolerate discomfort and make a good decision, one that is in their best interest as a trader. But many traders don’t work on their own psychology, and therefore when pain or discomfort arises and goes unchecked, it easily turns into chaos. Ignoring the effects of un-managed emotion can be dangerous.
Learning to tolerate pain, and building resilience and fortitude to defend against internal chaos so a trader can consistently act in their own best interest is a significant part of my work with traders.
[…] This post was mentioned on Twitter by SMB Capital and John Reizner, Andrew Menaker. Andrew Menaker said: Understanding the Difference Between Pain Versus Chaos and How it Impacts Your Trading. http://bit.ly/bHp8EF […]
[…] The first step in managing emotions is to identify what the emotions are. Emotion analytics involves a process of tracking one’s emotions, and is used by some very sophisticated traders. Emotion analytics can occur in many different formats including but not limited to charting emotions like a price chart, recording emotions in a journal or audio or video tape while trading, or using a biofeedback device. What do you think would happen if you tracked your internal state as closely as you track the market? You would not only see patterns in the market, but you would see patterns of internal states that correspond to your performance as well as corresponding to market patterns. Categories: Uncategorized Tags: Comments (0) Trackbacks (0) Leave a comment Trackback […]
[…] work in an environment of constant uncertainty and ambiguity. A significant stress response is also associated with a distorted perception of the degree of threat…. A high stress response also makes it more difficult to process ambiguous information. And […]
[…] Trust me, awareness is more then half the battle. As you continue to build internal awareness you also become more aware of the previously unknown gap between thought-emotion and the subsequent action or behavior that follows a thought-emotion. You gain a new sense of personal efficacy and a truly solid self-confidence (not elusive self-confidence that disappears as soon as the going gets tough, or a precariously inflated ego that masquerades as confidence). […]
[…] Here’s the interesting part; and this is what keeps psychologists, like me, in business. The more important the old concept of reality is to someone, the more important it is to his or her self-esteem, sense of inner worth, and/or sense of status in the eyes of others……the more tenaciously they will hold on to their old concept, and will ignore or reject new evidence that conflicts with one’s old but familiar perception or belief. […]