Today’s WSJ reviews Morgan Stanley’s 2nd quarter on page C1 and on D8 prints what they might not have realized should have been a companion article. It pictures tennis’ Andy Roddick and golf’s Tom Watson in “After an Epic Loss, Then What?” which discusses “soul-crushing defeats“.

Now we take for granted that losing the title at Wimbledon after the longest 5th set played requires some down time to get one’s head “back together”. What on the other hand we don’t take for granted is that trading losses – or the near death experience of your whole trading desk as in the case at MS – requires the same sort of psychological process. A sports psychologist is quoted as “take a day” but the truth is managing your psychological capital takes as long as it takes – and is the single most important task any athlete, trader or even CEO like John Mack has on their plate.

Today’s neuroscience proves that the residual feelings resulting form one event can completely color your beliefs about the next event. It also proves you can’t act – or even make a decision – without emotional inputs. Therefore, managing those inputs – in the way that works – is a singularly profitable (and winning) endeavor.

Step One – Accept and embrace everything you feel about a trade that didn’t work.

Step Two – Put all of those feelings into words – writing, typing, talking, yelling… I don’t care. The key as the brilliant psychoanalyst Hyman Spotnitz said is to “Say everything.” (Note words are JUST words and feelings are JUST feelings and neither one makes your future reality in and of themselves).

Now this sounds easy enough – but in reality it isn’t. The dominance of pop-culture thinking like The Secret” and Tony Robbins’ NLP make this embrace of ostensibly negative feelings a bit like being accused of spreading H1N1 flu. Like the sports psych said (in so many words) – get over it. Well forgive me but does that work with swine flu? Of course not, you take the drugs, you sleep – you manage your body so that it does indeed get over it – in its own time.

This is the exact same process traders – floor, MS or independents – need to go through to recover from losses. If they do, they will truly, thoroughly and completely get over it and in doing so, see the markets in a clear way – the surest way to judge the optimal amount of risk to take.

P.S. Call us Mack if you want help. I mean after all, why should our neurons recover any faster than our bodies?