Monday, June 9th, 2008
Solving a trading psychology problem
In my last post I wrote about how frustrating it is to sit out bear-market rallies.
There are lots of profitable trading opportunities.
But my system – an aggressive-growth trend-following system – means my edge is not present during those types of rallies.
My system, which is based on my personality and temperament, isn’t designed to jump in and out quickly. I like to ride a strong trend for months, or even years.
But watching some stocks surge during a bear market rally creates enormous psychological and emotional angst.
It’s basically a psychological problem: my desire for profits ‘now’ is at odds with my system which requires patience.
One way of addressing it is to use cognitive therapy to challenge anxiety-creating thoughts.
I’ve used my ‘bear-market rally’ problem as an example of how to implement this technique, which I read about in Dr Brett Steenbarger’s book Enhancing Trader Performance. 
“Cognitive therapy is based on a simple recognition: how we feel about life events is a function of our thoughts and beliefs regarding those events,” Dr Steenbarger wrote. “The goal of cognitive therapy is to help you become an expert at thinking about your thinking: to become aware of your automatic thought patterns so that you can critically evaluate and change them.”
Dr Steenbarger outlines the A-B-C-D-E journaling method, which is used to interrupt and challenge automatic thoughts and allow us to change our behaviour.
You draw up a table into five columns.
A – Activating event:
B – Beliefs
C – Consequences
D – Dispute automatic thoughts and beliefs
E – Efforts at change
Above I’ve drawn a table up for my recent problem.
It has been amazingly effective in dealing with my problem.
The automatic thought ‘gosh I’m missing out on making money’ and the resulting anxiety has been challenged — and in most cases dominated — by the skiing analogy.
My system still says we are in a bear-market rally (for international readers this primarily relates to the Australian market).
Now when I see (some) stocks rising, instead of beating myself up about sitting them out, I just think it’s not winter time for a skier. The rises are just part of a summer flurry of snow and are not worth trudging up the mountains to ski. Yeah, I might get a few runs in, but its time consuming getting up there and very dangerous.
Word Count: 382. This entry was posted on Monday, June 9th, 2008 at 4:18 am and is filed under Investing psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 7th, 2008 at 1:26 am
[...] I recently used skiing as an analogy to help solve a trading psychology problem. [...]
April 6th, 2009 at 2:20 am
[...] sitting on the sidelines makes me question my system; a system that has always served me well. This happened last year during the big bear-market [...]