Behaviour is often an effect
By David Hobart
In my article, Be – Do – Have: Your way out of a rut, I describe how we often get trapped in a have-do-be mindset, where we continue to project our past thoughts of lack into our future, leaving us with a sense of stuckness – as though nothing we do can get us out of our rut. This mindset can have us feeling like we have no control over our future regardless of how we behave. In this state, we tend to either fight or retreat, but either way, our energy reserves by now are quite low so our body naturally starts to respond by drawing additional resources from our nervous system.
At this point, it’s not that we want to become reckless, but as our sense of hopelessness grows our brains naturally defend themselves by seeking a dopamine hit. Dopamine is released upon anticipation of reward, which can lead us to engage in risk seeking behaviour. In trading this typically means increasing leverage or trading outside of model. After engaging in this risky behaviour and getting whacked by the market instead of receiving the anticipated reward, we then beat ourselves up, leaving us with an experience of self-loathing which requires another dopamine response to make us feel better. One can see how this becomes a cycle that is not altogether productive and in its extreme, forms the basis for addiction. Breaking this cycle before it costs us too much financial and/or emotional capital plays an important role in managing risk and avoiding deep and damaging drawdowns.
In order to break this cycle, one certainly needs to change behaviour. But understanding that the destructive behaviours in the first instance are an effect of a flawed way of thinking can be a good starting point. So what is a more productive way of thinking?
Start by recognising that losses in trading are the business equivalent of cost of goods sold. They are just a natural cost of doing business. If you have a plan with a positive expectancy and you execute that plan correctly, then you should know the probability of profit or loss on any given trade. You needn’t be attached to any single trade outcome and needn’t think negatively about the loss. If you find yourself feeling horrible after taking a loss that is within your current trading plan’s parameters, then there is probably one of two things going on.
1. Your strategy does not have a positive expectancy, despite what you’ve told yourself (your subconscious mind is telling you this) or,
2. You’ve got some negative self-dialogue going on which will probably end up costing you money.
Both of these can be remediated, just the approach required for both is very different. My approach when working with traders is to firstly use our data analytics capability to dive into your strategies statistics and secondly to employ a cognitive behavioural approach to give you a better understanding of the origins of your repetitive behaviours. In this case by recognising your thoughts as cause of your behaviour replaces helplessness with purpose and makes enduring behavioural change more probable.
About David Hobart
David has been a trader and portfolio manager since 1994. He has managed teams of traders for global investment banks and hedge funds including BT, Macquarie, ABN Amro and Blue Sky Alternative Investments. He has worked with numerous traders and portfolio managers as a trading coach/performance consultant. For a detailed review of David’s CV, please see his LinkedIn profile.
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