The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

5.5. LEARNING FROM DRAWDOWNS

The loss of money in a market downturn often sets in motion a progressive development of such symptoms as psychological numbing, decision paralysis, and even confusion in some PMs who become trapped in their losing positions and unable to act as rationally as they can under normal circumstances. Therefore, the ability to self-assess after periods of drawdown demonstrates great self-awareness, lack of defensiveness, and willingness to change and to listen to coaching recommendations—all signs of someone with the capacity to adapt and win.

On the other hand, the highly stressed PM may find that his ability to make sound and timely decisions has been impaired so that he holds onto losing positions at a time when he ought to be delevering his book and reducing risk. Instead, he is rationalizing his decision to hold on as a good buying opportunity. He may be more suggestible to rumors and may find himself reacting excessively to the stressfulness of the markets as well as to his own stress. He begins to take more reckless positions than he might have in the past. While getting bigger in a losing position may be a sound decision, it must be carefully weighed; and you want to be able to hear the thoughtfulness behind the decision and not simply accept knee-jerk rationalizations as sufficient. Basically, the less skilled or experienced manager doesn't have a process, holds onto his losers, chases flyers, overreacts to the market drawdown or gets paralyzed, ...