In trading, the common advice is to control two emotions - fear and greed.
However, for nearly every trader I've encountered, including myself, anger and depression remain as constant undertones. They are the primary drivers of super performance.
Here's how:
I am usually a calm and happy person, and very rarely lose my temper.Despite the many years spent honing the craft of trading, I've never truly felt the overt confidence or exuberance that many fintwits often exhibit. Even though the primal errors have been eliminated and my game has transitioned to mental and emotional acuity, there are often times when I feel angry and frustrated with my performance, despite reaching new highs in my equity curve.
It was during a @Qullamaggie stream, where he discussed his mental state during his trading journey, that I recognised blind spots in my own trading.
In poker terms, I'm an internal 'tilter' - I conceal my anger and frustration. Rather than showing external reactions, I become quieter and tenser. This change shows up in my risk-taking behaviour, as I start to take lower open risk or prematurely sell off profitable positions.However, this is a common phenomenon amongst traders, regardless of their experience and skill level. It was brilliantly conceptualized by Daniel Kahneman and Amos Tversky in the Prospect Theory.
Pain of losing > Joy of winning
Consider an investor presented with two pitches for the same mutual fund:
1) Mutual Fund XYZ has averaged a return of 10% per annum over the last 3 years.
2) Mutual Fund XYZ has returned 25%, 15%, and -10% over the last 3 years.
Both options essentially mean the same (ignoring compounding). However, most people choose option 1 over option 2.
This is due to the Prospect theory, which states that people tend to pick options that show perceived gains rather than losses. Even when probabilities and outcomes are identical, individuals tend to prefer options that steer clear of potential losses.
The theory suggests that losses have a more significant emotional impact on an individual than an equivalent amount of gains. The emotional toll of getting stopped out at (-) 1R is much higher than the satisfaction of a trade where you gain (+) 1R. Therefore, like most traders, if your win rate fluctuates between 35-65%, it still has a net negative impact on your emotional state.
The influence of Prospect Theory is particularly significant in trading, where we risk not just our capital, but also our emotional well-being, effort, and time. Even in a job you dislike, you still receive a paycheck at the end of the month. However, in trading, losses and the uncertainty of profits affect us more deeply because a good effort doesn't always yield a positive outcome. The joy of winning doesn't fully compensate for the pain, especially when both outcomes stem from the same process. Winning becomes more about escaping the distress of losing than generating happiness in itself.
However, Prospect Theory simply describes a pattern of human behavior. It's not an immutable law like gravity - behaviors can be identified and changed.
Mapping Tilt
In a bull market such as the current one, the tilt often isn't about stop losses, but rather about missed opportunities and profits.It's exciting to see the price rapidly increase when you enter a clean breakout, reaching multiples of your R within minutes. Unrealized profit often feels like it's already yours. However, as soon as the positions start turning against you, tilt seeps in because it feels like your money is being taken away. These are precisely the moments of weakness when you lose sight of your trade objective and settle for smaller profits.
At the end of the day, or when you step back from the overflow of tilt, you estimate how much your portfolio could have grown if you had just held on to that position. This is a fool's errand. Knowing the right course of action in retrospect is fundamentally different from knowing what to do beforehand. Even though you understand this, a part of you can't resist indulging in the fantasy, which in turn increases your frustration.
This is an excerpt from my earlier notes on how I mapped out my problem. The mental framework is based on what I learned from @jaredtendler 's excellent book, "The Mental Game of Trading."
1) What’s the problem: When I'm up in a trade, I believe I've earned the profits because of the hard work I put into identifying opportunities and adhering to my process. I don't want the price to drop back to my cost. If it does, all my efforts would be wasted and I wouldn't even secure the minimal profit I'm entitled to.
2) Why does the problem exist: I start to contemplate the utility value of the money - the unrealized profit equates to 3 months of my home loan EMI, 8 months of rent, or a family vacation. I believe I am deserving of a reward for my diligent effort and execution, and I am unwilling to let it slip away.
3) What is flawed: The aim of my trading isn't to support my everyday expenses or lifestyle, but instead to build generational wealth. By taking smaller profits prematurely, I'm limiting the leverage that could magnify the returns on my effort and time - same input with disproportionately larger output. The unrealised profit is not my money yet.
4) What’s the correction: Realised profit is the only profit that truly matters. A trade isn't successful when it becomes risk-free, but when you can leverage unrealised profits to achieve larger realised profits.
5) What logic confirms this correction: It is easy to start trading but easier to settle for mediocrity once you have started. Scaling up your portfolio will require you to overcome mental barriers more than technical ones. You also didn't learn to drive just to stay in second gear.
Closing Note
Anger arises when underlying flaws, biases, or illusions conflict with reality. At a fundamental level, anger represents this conflict which every elite performer has used as a core trigger to channel their performance.
Don't be swayed by the false bravado and portrayed perfection on social media. Superperformance as a trader involves enduring trials by fire, which regularly include prolonged bouts of anger and frustration.In the longer term, your skills and willingness to take risks are what will generate wealth. As @Qullamaggie puts it, everyone is in the same miserable boat -
https://x.com/i/status/1804725098940919924