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The Slippery Slope of Trading Addiction

Updated: Oct 25, 2020

I recently came across this video from TEDx. It’s not a fun video to watch, but it’s full of lessons. Furthermore, having helped at least 3 people in my career as a coach unravel similar situations, I decided to do a short write-up on the subject at hand: Trading Addiction. True, the video is a testimony of a former gambler, but trading addicts go down the same path. It’s a slippery slope, and it can sneak up on you before you notice it.

What follows is my commentary on the video, along with a description of the trading addiction and how toget out of it.

The Story of Mr.Dealer

This is the real story of Mr. Dealer. I had the opportunity, many years ago, of interacting with a successful former FX dealer that had also managed other people’s money and had eventually settled for trading his own capital. He had demonstrated the capability to make money and work the FX markets for years on end. Now, in his late 40s, he was at home trading for himself from his 1 screen computer.

Mr.Dealer had no trouble speaking of his trades. He took around 10 trades per day, and used a low amount of leverage per each trade. Each single position was a 1-lot position (100K). And this fellow was making around 3-4% per month. So he was successful. But as time went by, I started understanding that he had a problem. Why was such a successful person always upset with the world (he was very negative in his world view and always referred to his gains as “peanuts”), and why was he not happy with his life?

I started to observe when he would answer my questions, and how long he would stay connected to Skype. It turns out that his habits were akward. He was trading around-the-clock. He took some naps obviously but he could trade basically anywhere from 7AM in the morning to 3AM the next morning. This was the first tell-tail. He was evidently NOT working smart. He was working HARD. And he was not happy about it. Also, he had a very high win rate – around 84% – so basically he could have very much traded for less hours, adding a little more risk to each trade, and come out with the same %-return or even more. But he diddn’t.

Then I saw another pattern, that emerged from his comments and from his equity curve.

The pattern was always the same: he would be as consistent as a machine, trade away and then after a while make a bigger bet and wipe out a lot of gains. And then he started over. For some reason, he held onto losers because of his experience as a dealer, and would hedge them or rotate the position onto some other currency pair. For example, if he was long UsdCad and the market started going south, he would frequently hedge the problem. If it was an adverse USD-move, then he would sell UsdChf and hence transform the position into a short CadChf.

So while he was good at what he did, he also had this inherent bias towards not taking a loss. He would rotate his position, rather than take a loss. When he DID take a loss, it was around 1.5 times his average gain. So obviously his profitability came from his insane hit rate. While he was profitable and he had been a professional trader for years, it’s not really a good practice to hang your hat on a high win rate. It’s much better to have higher reward to risk ratios and a slightly lower win rate.

But despite all these technicalities, the worst part of Mr.Dealer’s trading habits was the recurrence of large hits. He would fight for weeks on end…and then shift his thinking from a short term perspective to a more longer term swing, and lose large sums. This of course was affecting his psyche. He would reduce his stake, take a couple of days off, and then come back and work his way back up the equity curve…until the next big hit. He was not able to control this self-destructing habit of his. When I enquired as to how he could let himself get into such a mess, he said that he had a natural habit of not respecting his risk parameters. This apparently “came from the days at the bank where I could hold onto positions for quite some time, because I knew that the market would come back sooner or later”.

So you see, even experienced traders get caught in some of the bad habits that novice traders frequently display:

  • falling into the overconfidence trap: “i know it will go my way” mentality;

  • holding onto lo losing propositions because they “fall into the swing category and not the scalping/short term trading category”;

  • Overestimating our capability to understand what’s going on (sentiment/intermarket correlations);

  • incapacity to identify and eliminate bad habits.

What eventually happened to Mr. Dealer? He kept trading 16 hours a day…he had a wife that was not able to help him…he started running low on energy and finally got himself tangled up in a long UsdChf position that cost him 80% of his entire trading account.

Mr. Dealer had a sickness. He was not satisfied with his life, and with what he was doing. He was “hiding” inside his trading habits, because it made him feel like he was “doing the right thing, doing something useful”. But his habits eventually brought out the truth: he was unable to let go. He was unable to have fun with his accumulated capital and take his trading less seriously.

The Rise and Fall of J.R. Larcombe (from TEDx Video)

If you watched the video, you’ll immediately notice some similarities between Mr.Dealer and Mr.Larcombe. Larcombe was a high performance person, always pushing himself to be better and not accepting a plateau. Unfortunately our modern society usually promotes this kind of overachiever, and Mr.Larcombe became the UK’s youngest Major.

Similarly to Mr.Dealer, Mr.Larcombe also had a vicious cycle going on in his life, that he was not aware of. From his recollection of events, the cycle I noticed goes something like this:

  • First, he was constantly seeking stimulus. So he pushed himself hard to achieve his goals;

  • Second, upon achieving a goal, he would immediately seek another, more ambitious goal;

  • Third, once he hit a plateau (having to wait 6 years to be promoted in the Army, or having to wait to be promoted at his financial services job, or having to accept that his son had cerebral palsy) he would not accept it, most likely because he “no longer felt in control of his own life and progression”;

  • Fourth, he would seek change: he would go somewhere else where he could push himself once more and reach goal after goal. This happened when he moved from the Army to the Insurance Sector, and when he moved from the Insurance Sector to the Financial Services sector in London, and then to Gambling.

As an external observer (which is one reason coaches can be useful), his “plateaus” were messages from above saying something like “learn to be grateful and appreciate what you have because only the present moment exists and you are not living in it; you are projected into the future with your goals & aspirations but that future does not exist and you are missing out on life”.

At a certain point Mr.Larcombe said it himself: despite his success in life, he had a deep void inside. He was unhappy. Just like Mr.Dealer. He was unable to life in peace with what he had – and he had it all:

  • he had married the girl of his dreams;

  • he had a job paying mid-6 figure sums;

  • he had a big house;

  • he drove nice cars;

  • he had children.

But evidently he was lacking bigtime in some of the most important qualities you can ever develop:

  • humility

  • patience

  • gratutide

  • and I would add something like “accepting that there are externalities we cannot control”.

Falling into Addiction

Here is what led Mr. Larcombe – and that will lead anyone – into the addiction:

  • Isolation: he did not open up to his wife or speak about his dissatisfaction with life.

  • Lack of introspection: he did not attempt to understand what that void was inside him. He fled from it, seeking refuge in his work, and then in gambling.

  • Denial: once he started gambling, he did not tell anyone and he did not admit to losing large sums. He kept covering up his losses to save face.

  • Shame: he started feeling ashamed of his losses and this was magnified by being previously successful in life.

To make matters worse, Mr.Larcombe won his first bet.

This is exactly like beginner’s luck in trading: you can be lucky for a season and that makes you feel all-powerful, and to people that are trading in order to escape from reality/real life, it gives them the sugar-rush (dopamine) that they need. They will then constantly go seeking it more and more often – without dealing with the consequences.

Now remember that just like in the two cases stated above, addictions usually come from unmet needs like:

  • not feeling loved;

  • not feeling accepted;

  • not feeling “good enough”;

  • not feeling safe;

  • not being able to be vulnerable;

  • not feeling the “freedom to choose”;

  • feeling helpless;

  • etc.

And secondly, addictions are usually triggered by the same kind of situation in life. So ask yourself if you find yourself turning to trading after situations like these:

  • a hard day at work;

  • having a discussion with your significant other;

  • having some kind of disappointment;

  • etc.

That could be a sign that trading is actually an escape from reality, and you might need to talk to someone about it.

What goes on in the brains and bodies of people like Mr.Dealer and Mr.Larcombe (approximately 1 in 10 traders) who are addicted to trading or gambling? The researchers from UCLA Gambling Studies Program have gone in-depth and their insight is quite fascinating. Addicted traders feel the need to be in the markets at all times and feel the need to be trading. At one level, this is a type of addiction to excitement, mediated in part by a neurochemical called dopamine. It is the thrill of the game, and the rush that comes from the anticipation of reward. But a 2013 study from The Imperial College, London and the University of Cambridge has discovered that there’s more than just dopamine envolved. Dr. Tim Fong, Co-Director of the UCLA Gambling Studies Program says, “The brain of a pathological gambler is very different than that of a social gambler while they play,” he said. “The neurotransmitters dopamine, serotonin and norepinephrine play an important role in all addictions. In pathological gamblers, certain dysfunctions are present prior to addiction, and put people at higher risk of developing such behavior.”

MRI (Magnetic Resonance Imaging) scans show areas of the brain that activate or “light up” when a person believes he or she is about to get a monetary reward. There is a social stigma around money. It may, in fact, be the last great taboo of our culture. People will tell you everything about the most intimate details of their lives, but they will not tell you about their money: How much they have. How much they want. What they think about others who have more or less money than they do. What money really means to them.

Traders and others suffering from addiction are sick because of their secrets. In order to conceal their secrets, they lie and deny. But the brain can’t lie when it is placed in an MRI Scan. The brain images tell secrets that the addict can’t or won’t express. Money is the biggest secret of all. It’s more secret than drugs or alcohol. People have more emotions of shame, guilt, greed and lust around money than perhaps any other singular thing.

And so it goes. Traders boot up their computers, turn on their trading platforms and become hypnotized by the flickering ticks. Each tick of the market represents the sum total of the greed and fear of every single one of the millions of people trading at that time. We also know that the majority of people that are attracted to the “game” look for certainty and “excuses” to get active in the market through Technical Analysis.

Here’s how it happens. You turn on your computer, and first thing look at your charts. You stare at them, you zoom in, zoom out, add/remove indicators until you see it. An opportunity! “I have to get in right now, because the price is running away from me. If I just chase it just this one time, it should be OK because I see the price going up, and I am convinced that I can make a killing on this one. Why should I wait for the pullback? Maybe it won’t pullback at all, and then I will have missed it. ”

Your dopamine brain pathways, activated by potential for reward, kick into high gear. The dopamine neurons are firing on all cylinders. It’s all good and wonderful—until it isn’t. Suddenly, the position starts to turn against you. Drawdown is loss. Loss hurts. The brain registers losses 2.5 times more intensely than it feels gains. Chasing caused pain, and now the pain is financial, physical and psychological. Now what?

The dopamine and other reward pathways of the brain shut down, and the brain connections that mediate fear begin to activate. This is your emotional volatility. The end result is confusion, frustration, blaming, self-sabotage, addiction and systemic toxicity. All of these drain the trader and leave him feeling empty, confused, disillusioned and just plain worn out.

Losing makes people physically ill. A study by Joseph Engelberg and Christopher Parsons from the University of California at San Diego showed that a one-day drop in equities of approximately 1.5% is followed by a 0.26% increase in hospital admissions on average over the next two days. Additionally, the impact on psychiatric conditions such as anxiety or panic disorders is even stronger, with hospital admissions nearly doubling in one day. Losing money makes people sick and sick people even sicker!

But addicts – even successful ones like Mr.Dealer – don’t know when to stop trading. They lie to themselves, cheat, and steal to do this. Eventually, they fail. The hit they eventually take is not just on their financial capital. It’s a whole lot more than money. It’s psychological, physical, emotional and spiritual. They are lost and floundering. When a trader is stressed, sleep-deprived, contaminated with continual worrisome thoughts or in a toxic state because of bad trades, there is nothing but despair, self-loathing, anger or depression.

Even if we assume that traders do not have more frequent addictive behaviors than the general population, the statistics tell us that, in all likelihood, nearly one trader in every ten has a diagnosable addictive problem.

  • for those that have attention deficits → trading provides action and you can buy a dozen screens;

  • for those who cannot tolerate boredom → trading provides action;

  • for the trader who is depressed (like Mr. Dealer) → trading can provide an escape from the self and a sense of immediate gratification.

Such traders need to trade and keep trading whether they have an edge or not. They frequently lose their money, generate failure experiences for themselves, and create hardships for their families.

Exiting the Addiction

I’m only a coach, not a certified therapist, so what I’m writing about are simply common denominators I’ve seen with my own clients (which were not clinically addicted) and with Mr.Larcombe and other case studies.

The first thing is to actually admit having an addiction. Mr.Larcombe did this when he finally suffered an “ego-death”, fell to his knees and for the first time in his life, prayed. Deeply felt prayer has the same power as meditation and mindfulness: it helps the brain regenerate, it reverses the ageing process and it helps us admit our own limits and bring out into the open what we tend to keep locked up inside.

There are all sorts of benefits that were unlocked in Mr.Larcombe’s life, simply because he reached the end of himself, and finally recognized he needed help. So many overachievers and high-performance individuals fall into the same trap and only stop when they suffer “ego-death”. This is humility: the realization that we do not have it all figured out, that we are always in need of help in some form or another. We are social creatures and we are meant to help one another. We all have flaws & limits, but we also have strengths and unique features.

His first prayer helped Mr.Larcombe to come out of his denial. He had hidden his addiction and his financial losses from his wife, family, friends. For the first time he admitted having a problem, and needing help.

Then, he was able to face the feeling of shame. Shame can really paralyze us: it’s a self-attack that makes us feel inadequate, unlovable. It’s a harsh judge. What is the solution? Don’t ignore it because the feelings will not go away. Recognize it and be aware of the inner judge at work. Find out what the trigger is. Then get in touch with someone what will accept you just the way you are, with all your flaws, and show you non-conditional acceptance and love. This is what his parents did, by knocking on his door and letting him know they would be there to help, if he had any desire to make things right.

Next, he came out of his isolation. Isolation is an emotional disconnection. It keeps the focus on yourself, your problems, your vicious cycle, your internal judge…and it makes it even harder to come out of it. Studies have found that what really helps people come out of additions is connecting with others that have faced the same issue. Understand they are not alone. Understand that others understand them and accept them just the way they are. Understand that there is hope.

Then Mr.Larcombe started doing things for others. He set up a charity and he did volunteer work. This mix started up feelings of altruism and gratitude in his life. Gratitude can really protect us in the worst situations. Gratitude is love, which is an antidote against jealousy, victimism, anger, negativity. It’s a sensation of peace & joy for our life, exactly how it is. It’s the realization that everything is a blessing.

Over to You

People hardly ever talk about the negative impact that Trading can have on you. Trading can become a way to escape from reality; trading can turn into the ultimate tool with which to channel personal problems. It’s not always easy to understand whether this is the case or not, because it happens to profitable traders as well as losing traders. Here is where it’s good to have some sort of confrontation, whether with a spouse/partner or with a support group like fellow traders. If you lose contact with society/reality, then it’s much easier to lose yourself in the markets. Keeping in touch with loved ones and/or with fellow traders can help you identify personal issues if they may arise – but only if you’re totally honest with yourself.

Good Luck!

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