Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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Too much defiance, egged on by too much pride, leads into the trap of hubris…John Baldoni
This week, I am following up on a Trading Wisdom from February 11, 2007, titled "The (Over)Confidence Game." I think it is important at this time because of what we are seeing in the markets. Wednesday was the most powerful rally of 2007, fueled by Tuesday’s decision by the Federal Open Market Committee to lower its target for the federal funds rate by 50 basis points to 4.75% and also to lower the discount rate by 50 basis points to 5.25%. This caught investors off guard. Those holding puts or shorts, including the hedge funds with massive short positions, were stampeded and forced to cover. Those underinvested or not invested stood like small children with their noses pressed against the window of the candy store. It was among the most highly emotional days in the markets in some time.
Tuesday, I received a barrage of e-mails from one of my coaching students. He told me that he absolutely knew that the market was going to go down that day, because the Fed was going to cut rates by 25 basis points or not at all, and that he had positioned himself massively short. He was absolutely outside of his trading size and deviated completely from his strategy because he had just had two sensational weeks of trading and had made more money during these two weeks than he had over the past four months. He was so full of hubris and greed that he could not see straight. The dopamine surge into his rat brain overtook his ability to coordinate with his prefrontal (new) brain and made him feel invulnerable. He was absolutely convinced that he was right and refused to lighten up on short positions in the S&P 500 e-mini futures (ES). Even when he was sent a coaching alert to avoid going into the Fed announcement heavily short, he did not listen. As the markets started to go against his short positions after the Fed announcement, he removed his stops and added to his short positions. Why? Because he knew that the markets were wrong and he was right, and it was only a matter of the next hour or two that he would be proven right. What do you think happened to this trader today?
He gave back everything that he had gained over the last two weeks and called me sobbing. He told me that the markets had "cheated him." He told me that the markets were "rigged" and that he was disgusted because the markets were not free and that they existed only to feed the pockets of the rich and the banks. He told me that, despite his losses, he knew he was right.
Let me repeat this: He told me that although today he gave back every dollar he made during the past two weeks, he was right.
The English word hubris has its roots in the Greek word hybris. It refers to the excessive pride that almost always precedes the downfall of the tragic hero in Greek drama. Anytime a person is given praise and rewarded based on some measure of what they do (as opposed to who they are as human beings), that person is vulnerable to falling into a state of hubris. I have seen this over and over again in my own trading and in the trading of those who have just come through a period of large gains. If pride is not contained, put into perspective and managed completely, it morphs into a dangerous state. This is the point where the trader is most vulnerable and begins to set himself up to lose.
I saw the same thing earlier this year in another coaching student of mine. She has been trading full-time for over 13 years, and trades money for herself and other people, managing over two million dollars. She was up something like 50% in three months. Everything she touched in the markets turned to profits. But despite years of study and discipline, something happened to her. In one of the accounts she trades, she turned a $200,000 gain to a $100,000 loss in less than six hours. She immediately shut down everything and stopped trading. She refused to tell me exactly what she did, other than to say, "I don’t know. Something went wrong."
She did not communicate with me until about a week ago—a hiatus of over five months. She told me that it had something to do with the platform she was trading and that she "thinks" she might have made some kind of mistake in order entry and stop placement. That was progress for her because she, for the first time since we had starting coaching together, spoke up and took personal responsibility for the loss. It was not a huge show of humility, but it was a beginning. Up until that time, she told me that every time she had a loss it was because of her platform or the broker or something not related to her.
This small step in taking personal responsibility was a real breakthrough in her trading. She didn’t want to hear this, and could barely say the words, "I made a mistake." Nonetheless, she did, and it was huge for her.
The first step in the development of hubris is to have a series of gains or praise. If those gains are attributed to the some unique ability, skill or intelligence, they will contribute to the pattern of overconfidence. Overconfident traders ignore or change their risk parameters and puff up their egos to the point that they feel they are invulnerable.
Over the coming months, I will continue with the theme of hubris and overconfidence that I started in "The (Over)Confidence Game" on February 11.
Until then, I urge each of you to take a close look at your feelings about yourself during and after the trading day. At those times when you feel that you can do no wrong and that everything you touch will turn to profits, please reflect on the stories above. Allow yourself to be in humility and gratitude for the gifts that you are privileged to receive from the markets. Always remember that making money is a by-product of planning your trade, trading your plan and setting aside your ego.
Proud people breed sad sorrows for themselves…Emily Brontë
Until Next Time,
Good Trading and (Revitalized) Brain On!
Janice Dorn, M.D., Ph.D.
janice@thetradingdoctor.com
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