Thursday, September 4, 2014

Disconnect Yourself

Every single day the world seems like it is on the brink of falling apart. But then I look outside my window, and things look about the same as they did a week ago. It's almost a form of cognitive dissonance....Moby
When your self-esteem is not on the line, odds are you are trading objectively. All that is on the line then is mere money. There is an old cliché that states "Don't let your net worth define your self worth." This is not to say that making money is not important but it must be put in its proper perspective. Your overall trading over time is not dependent upon your next trade alone. The fact that your last trade was very profitable does not in and of itself make you a genius, therefore the converse becomes true, if your last trade was a loss or even part of a series of losses, it does not make you dumb or a loser. To the extent that you can trade with a logical and unemotional mindset the more effortlessly and profitably you will trade, most of the time.


This is much easier said than done. Although you will find performance is best when the outcome truly does not matter, it is very difficult to set up such circumstances. Outcomes often do indeed matter and disconnecting yourself from trading outcomes is emotionally difficult. In several research studies, it has been demonstrated that performance is hampered when outcomes are tied to your sense of self, or your ability to satisfy basic psychological or emotional needs. For example, when the outcome of a trade impacts your sense of security or identity, the pressure is on, and it will be hard to perform under the pressure. Relieving the pressure will improve your ability to perform.


The ideal situation, for example, is a multi-millionaire who can afford to make several losing trades and lose $5,000 a day with relatively few scars. Most of us, however, are not that fortunate. Perhaps the next best scenario is the trader who has a relatively small trading account and uses the profits from it to pay monthly leisure expenses, such as gourmet dinners or extra luxury items. If the losses really don't matter, the pressure will be lessened. Most traders however are not in one of those positions.


When traders become interested in trading for a living, that's when trading becomes really difficult. Be it the lone trader trying to support a family or the professional hedge fund manager trading clients' money. The outcomes of trades do matter. If too much money is lost, you do not survive economically. The psychological impact can be substantial. Your identity is usually closely linked to being a good provider, a successful member of society. When you lose a lot of money, your sense of self and self-esteem is diminished. In the back of your mind, you always know that should losses mount too drastically, you can actually be harmed financially and psychologically.


So how do you disconnect yourself from trading outcomes? Preventative measures can be taken. First, one can manage risk. If you know that it is unlikely that the outcome of a series of losing trades can hurt you, you'll feel more at ease and be able to remain calm and objective. Second, you must have a sense of self that is defined in many different ways. For example, don't just define yourself as "a trader." View yourself from multiple perspectives: a good friend, a loving spouse, a caring parent, and an upstanding citizen. Multiple views of oneself will lessen the importance of maintaining the view of oneself as "the winning trader," and will ease some of the psychological pressure. The more you can disconnect your trading performance from your sense of self, the more you can trade logically, effortlessly, and profitably.
Reprint from Prudent Trader Archives (2005)

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