I worked with a client recently who when he signed up for coaching had lost about $215k over the last few years trading fast moving stocks that gap up or down at the open. He had about $35k left from his inheritance and was worried about falling below the minimum account size for day trader margin. That’s what got him to call me.  

This client is a very competitive fellow and works very hard at trading. He would have 3 weeks of steady gains that boosted his account 20-30% and then lose all the gains and more in a couple of bad days. Do you know anyone who trades like this?

It’s actually a fairly common syndrome, at least among men. When faced with challenges, men are taught to suck it up and try harder. This is the imperative we hear from listening to testosterone’s song. It’s not just ego, its hormones. In trading, Hormones + Uncertainty make us stupid, at exactly the moment when we should stop and think with another part of our brain.

Specifically, hormones bias us to think with what Nobel Prize winning Behavioral Finance expert Daniel Kahneman calls System 1, which is an approach to problem solving based on making snap judgments. It ignores the ‘known unknown,’ which leads to over-confidence and a lack of receptivity toward feedback from the market. This is why on Saturday when you review your trades for the week you wonder who the heck was in charge and why didn’t you see XYZ, which is so obvious in hindsight.

System 1 leads to tunnel vision and it also biases us to underestimate risk. Oddly, this client had no appreciation for risk whatsoever even though he was losing money hand over fist. He actually thought he was making progress and just needed a little help. Instead he was over-trading and bleeding cash.

Fortunately the story has a happy ending and he was able to turn the ship around before it rammed into the rocks. Sometimes, it takes a near death experience to wake us up. Damn hormones.

www.daytradingpsychology.com (Peak performance coaching for private traders)

www.trader-analytics.com (Peak performance coaching for RIAs, banks and hedge funds.)