Monday, May 25, 2015

Three Steps In Overcoming Trading Fears

Many situations can be interpreted as threats.  That leads to an anxiety response and an activation of the body's fight-or-flight stress response.  Once we perceive something as a threat, we can either run from it or we can face it.  Facing a fear does not necessarily mean fighting or fleeing.  Sometimes facing a fear means refusing to act and choosing to not accept a situation as a genuine threat.  This is particularly the case when the source of threat comes, not so much from the present situation, but from past associations triggered by the present situation.  If I have taken a huge loss in a volatile market, the next time volatility rears its head, I might panic out of my position.  

Generally, there is no such thing as an "overreaction" to a situation.  Whenever something seems like an overreaction, it means that we are reacting to something in the past on top of what's happening in the present.  The extreme of this situation is traumatic stress, in which painful experiences in the past intrude in our perceptions of safety in the here and now.

As Mike Bellafiore's recent post points out, even positive events can be interpreted as threats.  If we've been stung when we've held onto winning positions, only to have them reverse and hand us losses, the next time we're up on a position, we might respond to winning as threat.  I've worked with many people who have been so hurt in relationships that they respond with an anxiety response any time a person tries to get close to them.  At such junctures, we often act in ways to reduce our anxiety--which may not be ways that are ideal for handling the situation at hand.

So how do we avoid the extremes of flight and fight and instead face our fears with a degree of realism?  Here are three important strategies:

1)  Slow Down - That fight or flight response speeds us up.  Under the influence of an adrenaline rush, our thoughts race, our bodies tense, and blood flows shift to the motor areas of our brains.  When we sit still, breathe deeply and slowly, and focus our attention, we slow down the body's fight or fight responses.  Cooling down when events heat up is a great way to stay mindful and planned.  The best way to cool panicky feelings is to keep the body in a chilled state incompatible with those feelings.

2) Treat Emotions As Information - Your emotions are either telling you about a genuine threat in the world or a perceived one.  The key is sorting those two out.  If you can stay mindful and use the emotion to trigger an analysis of the situation, you can either appropriately act on the threat or remind yourself that your reaction is more to the past than the present.  When you treat emotions as information, you go into information processing mode, not blind action mode.

3)  Rehearse To Perfection - Too often we step onto life's stage without proper rehearsal.  Any situation that generates a threat response can be mentally rehearsed through vivid visualization.  If we can keep ourselves chilled when we imagine stressful situations and visualize ourselves acting constructively, we create new mind-body connections that eventually carry over to real life.  If you conquer a fear 20 times in vivid mental rehearsals, it's much harder to overreact to the 21st situation that occurs in real life.

The recent Forbes article is an important one, not only because of the social issues it addresses in the trading world, but also because of its implications for the psychology of trading.  Research suggests that male traders are particularly prone to overconfidence bias.  Under greater illusions of control, they are more likely to overtrade.  This, in turn, creates more frequent losses--and more opportunity for subsequent emotional overreactions to loss.  It is not unusual to see traders swing between bold overconfidence and fearful underconfidence: the first sets up the second, especially when boldness leads to oversized losses.

The best antidote to fear is realism.  If we can turn fear into a stimulus for self-awareness and market awareness, we are most likely to face fears constructively.  Realistic trading expectations, including emotional preparation for inevitable periods of drawdown, are powerful tools in proactively addressing trading anxiety.

Further Reading:  The Naomi Principle: Overcoming Trauma