I used yellow color to highlight important words.
In this article, I might be referring to ideas/concepts that I digested from many other books and articles, of which I am not able to directly point out the exact source. Feel free to correct and comment.
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Psychological trauma is a type of damage to the psyche that occurs as a result of a traumatic event. When that trauma leads to posttraumatic stress disorder, damage may involve physical changes inside the brain and to brain chemistry, which changes the person's response to future stress.
A traumatic event involves a single experience, or an enduring or repeating event or events, that completely overwhelm the individual's ability to cope or integrate the ideas and emotions involved with that experience.
Trauma can be caused by a wide variety of events, but there are a few common aspects. There is frequently a violation of the person's familiar ideas about the world and of their human rights, putting the person in a state of extreme confusion and insecurity. This is also seen when people or institutions, depended on for survival, violate or betray or disillusion the person in some unforeseen way.[2]
After a traumatic experience, a person may re-experience the trauma mentally and physically, hence avoiding trauma reminders, also called triggers, as this can be uncomfortable and even painful. They may turn to psychoactive substances including alcohol to try to escape the feelings. Re-experiencing symptoms are a sign that the body and mind are actively struggling to cope with the traumatic experience.
Triggers and cues act as reminders of the trauma, and can cause anxiety and other associated emotions. Often the person can be completely unaware of what these triggers are.
Consequently, intense feelings of anger may surface frequently, sometimes in very inappropriate or unexpected situations, as danger may always seem to be present, as much as it is actually present and experienced from past events. Upsetting memories such as images, thoughts, or flashbacks may haunt the person, and nightmares may be frequent.[6] Insomnia may occur as lurking fears and insecurity keep the person vigilant and on the lookout for danger, both day and night.
The person may not remember what actually happened while emotions experienced during the trauma may be reexperienced without the person understanding why (see Repressed memory). This can lead to the traumatic events being constantly experienced as if they were happening in the present, preventing the subject from gaining perspective on the experience. This can produce a pattern of prolonged periods of acute arousal punctuated by periods of physical and mental exhaustion.[7]
In time, emotional exhaustion may set in, leading to distraction, and clear thinking may be difficult or impossible. Emotional detachment, as well as dissociation or "numbing out", can frequently occur. Dissociating from the painful emotion includes numbing all emotion, and the person may seem emotionally flat, preoccupied, distant, or cold. The person can become confused in ordinary situations and have memory problems.
Some traumatized people may feel permanently damaged when trauma symptoms do not go away and they do not believe their situation will improve. This can lead to feelings of despair, loss of self-esteem, and frequently depression. If important aspects of the person's self and world understanding have been violated, the person may call their own identity into question.
Responses to psychological trauma: There are several behavioral responses common towards stressors including the proactive, reactive, and passive responses. Proactive responses include attempts to address and correct a stressor before it has a noticeable effect on lifestyle. Reactive responses occur after the stress and possible trauma has occurred, and are aimed more at correcting or minimizing the damage of a stressful event. A passive response is often characterized by an emotional numbness or ignorance of a stressor.
Those who are able to be proactive can often overcome stressors and are more likely to be able to cope well with unexpected situations. On the other hand, those who are more reactive will often experience more noticeable effects from an unexpected stressor. In the case of those who are passive, victims of a stressful event are more likely to suffer from long term traumatic effects and often enact no intentional coping actions. These observations may suggest that the level of trauma associated with a victim is related to such independent coping abilities.
End of Quoted text from wikipedia
The above paragraphs is an academic description about psychological trauma.
In my humble opinion, it has profound impact toward trading.
There are many examples I can illustrate. Feel free to comment if you can find any similar experience. Many years ago, I held Nortel stock over earning, back in 2000, I think.
Right after the earning report, it dropped from 65 to 57 or so, sth like that. It has been a decade so I don't remember exactly what happened. But I never forget my feeling. It felt like hell.
I said to myself, damn it, I will never do this again. I cut it. This trade turned out to be one of the
best losing trade I made. Nortel never never looked back and returned to my sell price.
But this trade changed me. To this date, I still have inner fear on holding anything over ER or even overnight. And I mean real inner fear.
It was trauma. If you stay long enough in the market, you experienced trauma, year 2001 internet crash, 9/11, fat finger, 2008, and the famous spx 666...
A lot of experienced investors and traders were traumatized by the volatility of market and never was able to get over it. They basically doubt any bull market from the bottom of their hearts, no matter if it is valid or not.
Many of us still live in the trauma of missing the reversal day of spx at 666. How hard could it be, especially for Chinese. 666 means fortune and luck in Chinese. And this pain never went away for many of us. That freaking reversal day when Citibank announced the news that they actually make money...
We are trading stocks and future, but we are still living in the past.
Uncertainty is an important character of the market. No matter how we plan it, how we TA/FA/PA/...,
it has risk. We can not avoid it. Period. The moment we are in the market, with real money, it creates
stress. Stress is fine. But when stress is fierce in terms of speed and volume, it becomes trauma.
Specifically, it can be but not limited to the following triggers:
1. Over exposure to the market; creating volatile moves of your account balance
2. Gain turning into loss when market takes a sharp turn
3. Wrong timing or hesitation, and as a result, missing a very well planned execution
Interestingly, trauma does not have to be LOSS. EXCESSIVE GAIN can create trauma.
This can be more catastrophic. I've seen myself and other traders get traumatized by excessive gain.
The direct results can be:
1. Trader no longer follow the money management rules. Instead, using excessive size to seek unreasonable profit potential
2. Setting Unreasonable goals and in turn create more stress
3. Not able to follow the risk control when market turns against them
Trauma can dramatically change the way you think, you feel, and you act.
It is articulated very clearly in the wiki paragraphs I quoted above.
I don't have to rephrase it.
What's the solution? I'll probably explore a bit more in future posts on how I cope with trauma.
But the first step is to prevent yourself from exposing to trauma in the first place.
That means "prevent yourself from exposing to excessive risk in the first place".
Specifically, you should cut your trading and swing holding size to a level that you can comfortably control, according to market volatility. For beginners, I always advise them not to touch small cap and illiquid stocks.
After you win a series trades, always cut your size, so that you don't give away all the profit you made. It is not timidness. It is to "prevent yourself from trauma".
Face your past trauma experiences and review them, you will find gems.
That's enough bullshit from me for now :-) I did this nonstop, so please excuse me if I don't make much sense and cause trauma to you. You know I meant well.
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