|
Behavioral Patterns That Sabotage Traders – Part II
By Brett N. Steenbarger, Ph.D.
Consider the following psychological scenarios:
A student needs to pass an anatomy course final exam in order to
successfully complete his first year in medical school. Because his
first several exams were on the borderline between passing and
failing, the course grade entirely rides on the final. As the time
approaches for the big test, the student finds himself increasingly
worried about the test—particularly when he misses questions from
his practice exams. The worry interferes with his sleep, which in
turn makes him even more concerned that fatigue will prevent him
from doing well. By the time he takes the exam, he is tired and
nervous and misses many questions, often by second-guessing right
answers.
A young woman has never been particularly uncomfortable in public
speaking situations, but now is asked to give the most important
presentation of her career. The result of this presentation could
spell the difference between landing a major client for her firm vs.
losing the client to a competitor. During the talk, she notices that
the audience members from the firm she is wooing don’t seem
especially attentive. This suddenly raises her anxiety, and she
desperately tries to spice up the presentation. When she loses her
place in the talk, she becomes flustered, and finishes the
presentation on a hesitant note.
A basketball player has been the team’s leading scorer, but starts
out a game missing his first five shots. The opposing team is
double-teaming him, and he is having difficulty breaking free for
open looks at the basket. Determined to take matters into his own
hands, he decides to penetrate the opposing defense and draw fouls.
Instead, he picks up two quick charging calls. Now fearful of being
taken out of the game for his fouls, he searches for his shot by
moving a little further out on the perimeter. When these shots don’t
fall, he stops looking for his shot and throws two errant passes.
A trader has several winning trades in a row and, feeling confident,
increases his size to take advantage of his hot streak. The position
initially goes in his favor, but quickly reverses when large orders
push the market lower. Forced to puke his position, he realizes he
has lost all of the profit from his previous, winning trades. He is
driven to regain the money and reenters the market, only to get
slammed by a second wave of selling. He now feels like he has
entered a cold streak and begins trading hesitantly, with reduced
size. By the time the market closes, he is down on the day and the
week. He feels like a jerk for becoming overconfident after his
gains.
No doubt you can detect a pattern in each of these situations. The
individual is in a performance situation where he/she experiences
pressure to succeed. The situation has taken on a distinct
importance in the person’s eyes, and now he/she is focused on the
results of the performance—not just the performing itself. This dual
focus—worrying or focusing on the outcome of performance while
trying to stay immersed in the performance—is the common element
behind all performance anxiety. Such anxiety is the single most
common trading problem I have encountered in my interviews with
traders.
How can traders reduce their level of
performance anxiety? Here are a few strategies that I have found to
be effective:
1. Focus on process goals when thinking about trading, rather
than profits/losses – Traders like to set goals for themselves, yet
often as not, monetary goals end up creating unnecessary pressures.
More effective goals are ones that focus on the process of trading,
such as limiting losses to two ticks if you’re a scalper or holding
trades until a trailing stop is hit. A nice mindset is, “If I just
trade the right way, the profits will come.” This takes much of the
pressure off the performance.
2. Tackle risk incrementally. Risk places a psychological magnifying
glass on situations and greatly increases the opportunities for
performance pressure. A foul shot in the first minutes of a
basketball game is the same foul shot in the final seconds of a tied
contest, but there is a huge psychological difference. Traders who
try to radically increase their size quickly find that the trade
that worked out with 1 contract may not work with 10, because of
pressures to (too) quickly limit losses or take profits. A gradual
ramping up of size is far more effective than an impulsive leap for
which one is emotionally unprepared.
3. Step away from the screen. The self-talk during periods of
performance anxiety actually interferes with the accurate processing
of market data, because the part of the brain responsible for
perceiving and acting upon market patterns is not being activated.
It is far better to step away from the screen and refocus on what
the market is giving you than to act blindly on one’s fears and
compound an already-difficult situation.
4. Use mental rehearsals to make threatening situations familiar.
This is perhaps the single most effective technique I have found for
reducing and eliminating performance fears. By using guided imagery
to repeatedly face threatening situations and mentally rehearse how
one would like to respond, one can eliminate much of the stress when
those situations actually occur. The goal is to so often face the
performance fears in your mind that the coping response becomes
automatic, like a habit pattern.
5. Anchor mental rehearsals to distinctive mind states. This is one
of the best strategies covered in my book. By learning to place
oneself in a state of unusual calm and focus, and then by repeatedly
rehearsing coping strategies for threatening situations, a trader
can create a link between the mental state and the coping response.
When there is a stressful performance situation, all the trader
needs to do is invoke the rehearsed mental state and the coping
behaviors that have been overlearned will come to the fore. For
instance, if you continually mentally rehearse a strategy for
holding onto winning trades while sustaining a calm focus,
recreating the calm focus during the next winning trade will make it
easier to summon the self-talk and behavior associated with holding
the position.
6. Perform a mental checklist before trading. Eliminating
perfectionistic expectations at the start of the trading day can go
a long way toward reducing performance pressures. Any time the word
“should” enters one’s thinking about trading, it’s time to step
back. “Shoulds” include internal demands to make a certain amount of
money, to trade with a particular frequency, to make back money that
has been lost, to not leave money on the table, etc. Because
performance anxiety is often fueled by excessive self-demands,
setting and affirming reasonable trading goals through the trading
day can go a long way toward reducing performance pressures.
7. Get a life. When something becomes all-important, the pressures
that accompany performance increase exponentially. Traders who trade
for a living and who have little else going on in their lives are
especially vulnerable to performance anxiety. If trading is your
whole world and trading isn’t working, it’s going to feel like your
world is collapsing. By placing one’s self-esteem eggs in many
baskets, traders can ensure that the inevitable drawdowns and cold
periods will not disrupt their self-confidence.
I cannot emphasize strongly enough: Most traders who are convinced
that they have deeply-rooted psychological problems or addictive
trading patterns are actually caught in a vicious cycle of
perfectionistic self-demands, increasing performance pressure,
mounting anxiety, disrupted performance, and renewed self-demands to
compensate for the failure. After a while, traders caught in such a
cycle begin to doubt whether they will ever succeed. By addressing
their problems at the source—the expectations that generate
performance pressure—traders can often turn themselves around in a
surprisingly short period of time.
 |
Brett N. Steenbarger, Ph.D. is a clinical
psychologist and active trader, writer, and
researcher for the past 20 years, Brett is the
author of The Psychology of Trading (Wiley;
2003) and numerous articles on trading psychology
for print and online financial publications.
Click here for full
bio >>
|
|
