A few weeks ago, I attended the annual meeting of The Social and Affective Neuroscience Society (SANS) – a seemingly unlikely place to figure out how to resolve a trading mistake! Those who follow me know I am not only a closet academic but that many of the advanced trading psychology ideas I teach originate with research I’ve been exposed to at SANS and other neuroscience society meetings.

market Mind Games by Denise Shull

Check out my 2012 book MARKET MIND GAMES to get more background but in the meantime, here’s an interesting study from SANS that can help with bouncing back from a bad trade. DiMenichi and Tricomi of Rutgers have shown that writing about a failure reduces the stress response and improves attention in a subsequent challenge. When study participants did NOT write about a failure, they showed an increase in cortisol, the stress hormone, when faced with the next stressor. Those who reflected on a failure presented more normal, “calmer” cortisol levels. Those writing about the failure also displayed fewer errors in the Sustained Attention to Response Task (SART) which could broadly be imagined to resemble the job of sitting and watching prices change.

The practical message for traders and portfolio managers is that expressively writing about a failed position can help an individual recover from the loss, be more attentive and most importantly, less anxious over the next market decision.

It’s an idea that fits many intuitions but one most of us are disinclined to implement. For some, it’s just taking the time and for other’s it’s the emphasis on positive psychology that scares people into not fully reflecting on a failure.

DiMenichi and Tricomi’s work however adds to the growing body of research supporting the value of putting negative feelings into words.

markowitz alternativeJournals are of course the best place to collect before and after stories. Keeping subjective data with objective data ultimately fills in the whole picture. To that end, terrific work is being done by companies like Essentia Analytics in London. Essentia offers a comprehensive tool to connect the dots between market analysis, position results and self-analysis. As avid journalers know, self-awareness increases one’s ability to qualitatively distinguish among risks partially by making beliefs conscious – an essential first step noted by no less than Nobel Laureate Harry Markowitz himself.

We’ve known that resolving feelings about a failure creates a calmer, clearer mind. Quiet minds make better risk assessments. Now, thanks to the efforts of some young affective neuroscientists, we have physiological and behavioral research to further the case for facing the negative feelings of a trade gone wrong. Literally, the body will be less stressed – the foundation of a clearer mind.