NEW YORK (HedgeWorld.com)–As if trading is not hard enough, the terrorist attacks of 2001added another dimension of uncertainty to the environment.

In the three years since that shock, the geopolitical picture has been complicated by war and fear of continuing violence. Markets have vacillated, nobody has firm ideas on how to read them and approaches that did well in the past don’t seem to be working.

As many hedge funds go through rough patches, there is real danger that managers and traders will make mistakes in response to the stress. Classic examples are overreacting, becoming paralyzed or compulsively gambling by doubling up on losing trades in an effort to recover.

Some people have found the current market so difficult that they are retiring much earlier than planned. “Trading is always very stressful,” said Ari Kiev, a psychiatrist whose clients have included top traders as well as Olympics athletes.

“I think it’s probably wise, if somebody is relatively new, to talk to more experienced people who have been through some difficult markets,” he said. Such veterans may have a longer time frame that helps put current investment troubles into perspective.

Avoiding Traps

This is a tough time. Dr. Kiev, known in the hedge fund industry for counseling traders at Steve Cohen’s multi-billion dollar SAC Capital Advisors LLP, Stamford, Conn., suggests that challenging conditions do not mean you have to give it up–it just means you have to lower your expectations and set smaller concrete targets.

He generally advocates a systematic approach of setting goals, working on raising the level of one’s conviction and taking risk when the conviction is there. But, he said, this year he has recommended caution and more attention to risk management parameters.

For example, by obeying a risk control rule to cut the losses, a trader avoids the trap of losing more in trying to recover. “The markets are much less forgiving today than they were in the past,” said Dr. Kiev, whose books include The Psychology of Risk: Mastering Market Uncertainty (Hoboken, N.J.: Wiley, 2002). “It may be better to take profits and lower expectations for the year.”

Make sure you do not change your strategy in a panic, he said, but do consider how you can adjust to the markets and look for new ways to assess situations in seeking investment opportunities.

CKurdas@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.