5 Things You Should Know About Trading Psychology

from Dr. Brett:

The overlap between trading and psychology is complex. Psychological factors, such as performance anxiety, can interfere with clear-headed decision-making about markets. Similarly, poor trading practices--such as taking on too much risk with excessive size--can magnify the normal stresses of the marketplace. Sometimes it is difficult to separate chicken and egg. Many traders put their money at risk without a demonstrable edge. It is difficult to imagine such trading *not* generating frustration over time. Other traders ground themselves in solid methods, but these may not fit their talents, skills, or personalities. A very short-term, aggressive method of scalping markets, for instance, may work fine on paper, but prove completely unworkable--and stressful--for a highly analytical, risk-averse trader.

Sometimes, however, trading psychology problems have nothing to do with trading. They are the results of pre-existing problems that will not be solved by different trading methods. Nor will they go away with simple coaching advice to control emotions and build discipline. If you have considered getting help for trading psychology concerns, here are five things you should know before deciding upon the kind of help that is right for you:

1) Psychological problems are more prevalent in the population than most people realize - The prevalence of clinically significant depression in the population is about 5-6%. There is a similar prevalence among such anxiety disorders as phobias, obsessive-compulsive disorder, and generalized anxiety. There is a prevalence rate of over 5% for substance use disorders; 1% for bipolar disorder; 2-3% for eating disorders; and 1% for post-traumatic stress disorder. That suggests that well over one in ten people--including over one in ten traders--has a diagnosable emotional disorder at any point in time. If, say, 20% of traders are experiencing emotional disruptions of their trading, it is not unlikely that fully half of these are dealing with treatable psychological problems.

2) Psychological problems can benefit from therapy - A wide range of controlled outcome studies suggest that the average effect size across various therapies is close to 1.0. That means that people improve their functioning (lower their symptoms, report less interference with their work and relationships) by close to a full standard deviation. Some problems benefit more than others from therapy or require longer-term treatment. Many anxiety problems, for instance, can be successfully aided with brief therapies. Other problems, such as major depressive disorder and substance use problems, have higher rates of relapse and may require more extended assistance.

3) Psychological problems can benefit from medications - Medications, such as selective serotonin reuptake inhibitors (SSRIs) for depression and many forms of anxiety, can be quite helpful in situations where symptoms are so debilitating that it is difficult to fully engage in therapy and/or where symptoms are impairing functioning at home and work. There are some conditions, such as bipolar disorder and attention deficit hyperactivity disorder (ADHD), for which medications are typical treatments of choice. Some research for depression, for instance, suggests that intervention is most effective when combining medications and therapy.

4) Some psychological problems can benefit from very brief therapy - In general, if a problem is not severe (i.e., it is not impairing wide areas of a person's life) and if it is not chronic (present throughout a person's lifespan), it will probably be amenable to brief forms of therapy. This is particularly the case when problems are the result of situational life stresses. When problems are chronic--and especially when there is a family history of emotional disorders--it is much more likely that longer-term therapy and/or medication assistance will be needed.

5) Some psychological problems can result from purely medical/physiological causes - Fatigue from sleep apnea, high blood sugar, or a host of other medical conditions can be mistaken for depression. Endocrine disorders may manifest as signs of anxiety or depression. There are seasonal forms of depression and depression related to hormonal changes in pregnancy and menstrual periods that have a purely medical basis. Many addictive problems have roots in underlying attention-deficit/hyperactivity and resulting loss of impulse control. Such conditions are not likely to go away with therapy alone and require competent medical evaluation.

How do you know if your trading psychology problem is really just about trading or is a sign of larger problems? Here is a quick checklist:

A) Does your problem occur outside of trading? For instance, do you have temper and self-control problems at home or in other areas of life, such as gambling or excessive spending?

B) Has your problem predated your trading? Did you have similar emotional symptoms when you were young or before you began your trading career?

C) Does your problem spill over to other areas of your life? Does it affect your feelings about yourself, your overall motivation and happiness in life, and your effectiveness in your work and social lives?

D) Does your problem affect other people? Do you feel as though others with whom you work or live are impacted adversely by your problem? Have others asked you to get help?

E) Do you have a family history of emotional problems and/or substance use problems? Have others, particularly in your immediate family, had treated or untreated emotional problems?

If you answered "yes" to two or more of these items, I would recommend a professional consultation with a trained, licensed professional. I would also recommend consultation with a physician to rule out possible medical causes or contributors to your problem. Trading coaches and self-help books have their places, but neither are likely to provide the kind of help that research finds to be most effective in these circumstances.

The bottom line is this: Do you feel you are in control of your thoughts, feelings, and behaviors or do you feel that those too often control you? The good news is that the vast majority of people can get help in reasserting control. Your well-being will help determine the well-being of your trading account.

Note: For research about the prevalence of emotional disorders and the benefits and limits of therapy, I recommend the following book: