What causes the distress that interferes with trading decisions?

I am trying to develop patience with letting some trades develop over longer timeframes – Jesse Livermore described letting winners run as something that didn’t bother him as the money from the paper profit was never really his in the first place.

I was re-reading The Daily Trading Coach by Brett Steenbarger (for the umpteenth time).

daily_trading_coach

This is from Lesson 13:

I really wanted to finish the week on a high-water note in my equity curve and found myself
with a nice profit on a Friday morning trade to the long side. As the trade moved my way, I moved my stop to breakeven. The trade continued to go my way a bit before making a small reversal. It then chopped around for a few minutes. I found myself becoming nervous with the trade, as if it were on the verge of plunging below my stop point.

I quickly asked myself, “Why am I nervous with this trade? Why am I perceiving the trade with so much uneasiness?” A moment’s reflection and review of the market told me that the trade was perfectly fine and progressing according to plan. It was my desire to end the week profitably (after an extended flat period of performance, I should add) that turned the potential reversal of a winning trade into a threat. If all the market can do after the run-up is chop around in a flat way, perhaps this is an opportunity to add to the position, I reasoned. I calibrated my risk/reward on the added piece to the position (and for the position overall, given my new average purchase price) and added a small portion to the trade. The added increment wasn’t large enough to dramatically affect the profitability or risk of the trade, but it was an important psychological step: I turned a perceived threat into opportunity.

The key here is to distinguish between actual threats—markets that truly are not behaving according to your expectations—from perceived threat. That requires reflection about markets and about personal assumptions. Once I saw that the trade was proceeding normally, I was free to challenge the filters that were leading me to become nervous with a good trade.

After you identify a perception that turns a normal event into a threat, the next challenge is to find opportunity in that normal event. I might feel threatened by a difference of opinion with my wife, but that threat can be turned into an opportunity for fruitful communication and problem solving. We might feel threatened by a trade that starts modestly profitable but then stops us out, but that threat can be turned into an opportunity to flip our position or reassess our views of that market.

Identify the perceived threat; turn the perceived threat into an opportunity:

that is a two-step process that addresses the true cause of emotional reactions that distort trading decisions. By keeping a journal specifically devoted to your thinking and perceiving, you can structure this two-step process and turn it into a habit pattern that you activate in real
time.

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