Thursday, July 26, 2007

When Traders Lose Confidence - Part Two: Changing Your Self-Talk

Confidence is not something we have, like money or a car; it is something we do. Confidence is our appraisal of our capacities relative to the challenges we anticipate. Within the confines of our minds, we are judge and jury. We render the verdicts as to whether we are able to face reality as we perceive it. The emotional expression of those judgments manifest themselves as confidence--and more globally as self-esteem.

When we lack confidence, we have made an active judgment as to our ability to deal with a situation at hand. Sometimes, that is a realistic judgment. I do not at all feel confident in my abilities to perform mechanical tasks, such as fixing things, around the house. From an early age, IQ tests found me remarkably deficient in this area. My lack of confidence dampens any motivation I might feel to jump in and fix the leaky pipe in my bathroom. That is adaptive. I call a plumber, and the job is done right.

Other times, however, our judgments are based on faulty perception. Suppose I have two losing trades in a row, wipe out a week's worth of profit, and now am frustrated. I call myself an idiot and I start worrying that maybe I'll lose the month's gains. My negative self-talk is an expression of my frustration, but it is also a self-appraisal that leaves me feeling less capable of facing the market going forward. I become hesitant; I won't trade until I see the market set up perfectly. But it doesn't set up perfectly, and I miss the trade. That adds to my frustration and my negative self-talk. In such ways, slumps--both emotional and trading--are born.

Confidence can also be eroded by excessive expectations. If, in the back of my mind, losing is not acceptable, each normal loss in the market will lead me to feel that I have fallen short. I've worked with a number of traders who tell me that they can have four winning trades and one loser and will focus on the loser. That perfectionism is not a drive to achieve (though it often masquerades as such); it, too, is an expression of frustration. The result is that we can turn winning performances into psychological losers by emphasizing shortcomings at the expense of strengths.

The bottom line is that how you process information relevant to your performance will impact your level of confidence. The first question to ask when you're experiencing a loss of confidence is: Should I feel confident? If the market is not behaving normally; if you don't identify a clear edge to your trade ideas, perhaps a lack of confidence is realistic and a worthwhile signal to stay out of the market until you have the advantage.

If, however, you find yourself lacking confidence at the times you most need it and should have it, then you want to get into the mode of thinking about your thinking. Keeping a journal of daily situations, how you're thinking about them, and how you're feeling is an excellent initial step. That will enable you to identify patterns of negative thinking that may be eroding your sense of confidence. In my Psychology of Trading book, I refer to this as "taking your emotional temperature": every so often just asking yourself: "How am I talking to me?" If it's not in a way that you would talk to a best friend or loved one, you know that it's time to change the self-talk.

The key to changing the self-talk is to become aware of when you're doing it. Most often, the negative talk is automatic. Journals are effective because they force us to reflect on our thinking and interrupt those automatic patterns. Similarly, I've had great results working with traders who talk their thoughts out loud into a tape recorder and then play them back. It's an excellent way to become aware of your thinking, stand apart from it, and break the flow.

Yet another strategy is to go through guided visualizations of challenging market scenarios while you're calm and focused (before trading starts) and then mentally rehearse the self-talk you'd like to engage in during those situations. This helps to build new, positive patterns of self-talk.

The key to all these strategies is repetition: you're training yourself to process information in new ways, and such training requires practice. At AA, they encourage new members to attend 90 meetings in 90 days. "Bring the body and the mind will follow," is the slogan. Repetition is the key to internalization. Engage in a desired behavior pattern 90 times over 90 consecutive days and it is likely to become part of you.


* Using brief methods to become your own trading coach.

* In the Enhancing Trader Performance book, Chapter 8 details cognitive strategies for changing self-talk, including the use of journals.

* This post contains links to self-help articles on my personal site.


stephane said...

Dear Brett,

brilliant post, as usual !! In fact the key to avoid such negative self-talk is to focus on the "process" and not on the result of any given trade as you mentioned clearly in Part 1 of "When Traders Lose Confidence". As far as I am concerned, I find that judging the quality of my trading every 25 trades based on clear metrics helps me to stay objective and avoid this type of negative self-talk. If somebody is interested in how I do it you can find it in my blog:



Dinosaur Trader said...


Thanks for this post.

The advice you give about "becoming aware" of your self-talk and then being able to change it is invaluable.

You need to hear yourself and when you have a bunch of stuff going on at once it isn't always easy. Slowing down, keeping a journal, starting a BLOG! haha, are all great ways to "hear" yourself.

Thanks, DT

Brett Steenbarger, Ph.D. said...

Great points, Stephan; thanks for the comment. Thanks also for the link. Reviewing performance is a great way of staying grounded in reality!


Brett Steenbarger, Ph.D. said...

Hi DT,

You're absolutely right; keeping journals--and blogs!--are a fine way to get some perspective on markets and self. Thanks for the note--


Krasimir said...


Great post about cognitive techniques for changing the way of thinking. Another great technique, you describe in your latest book, is keeping a Cognitive Journal. The so called A-B-C Journal is a great tool for finding automatic negative thought patterns.

Deborah said...

Another excellent post. Right now I've decided to just watch the market and I do question if it is eroding confidence or that I truly do not see the risks as worth it.

So the head game goes something like which is worse, loss due to unrealized gains due fear of being in the market and the market goes up while you watch, or suffering real losses due to being in the market and it goes down.

I think that I'm just not finding the same value in stocks and what I do look at exceeds my comfort zone in terms of downside risk rather than eroding confidence.

But at the same time I think my fears have also increased because I do not want to lose my gains.

whitesapling said...

very Zen. i love it.