Saturday, April 21, 2007

Handling The Performance Pressures Of Trading: Perspectives From Reader Comments

I recently proposed that performance anxiety is the most common psychological problem faced by traders. In the comments section of that post and in private emails to me, readers have weighed in with their successful approaches to dealing with performance pressures. This post will summarize reader comments; tomorrow's posts will synthesize perspectives from reader emails and add a few views of my own.

Let's start with views from the comments section:

* Reader Charles talks about an approach that is common among proprietary traders I've worked with. When he hits a slump, he temporarily reduces his size, takes pressure off, and then raises his size once he gets back into the groove. I will do something somewhat similar: I will temporarily limit my trading to my highest probability setups and get a winning day or two under my belt during a slump period. The reason this strategy can work is that it takes an important element in stress--perceived control--and puts it squarely in the trader's hands. Often, performance anxiety occurs when we feel out of control of a situation. By creating an enhanced degree of control, we can regain our sense of mastery and minimize stress. The one caveat in this approach is that position sizing is crucial. If you risk too much of your portfolio on individual positions and then hit a losing patch, you could dig too deep a hole for yourself--particularly if you reduce your size in order to recover psychologically. Not betting the farm on any single idea is one great preventive measure for performance pressures.

* Trader David offers a fascinating analogy between trading and skeet shooting. He also provides a link to an Olympic shooting coach who helps his students with performance pressures. He suggests visualization techniques to occupy the conscious mind, enabling the subconscious (i.e., our automatized skills) to take over. Most performance anxiety occurs when a task that normally occurs automatically is disrupted by our conscious focus on the outcomes of that task. Any exercise that absorbs our awareness and directs our focus away from the performance itself will be helpful in that regard. As I will indicate in tomorrow's post, enhancing our state of concentration and directing that concentration toward the process of performing (not the outcome) can form the foundation for an effective self-hypnosis routine. David's approach is much more than simple positive self-talk: it is a redirection of attention and hence a redirection of regional cerebral blood flows.

* Dr. Bruce, who has offered so many fine comments on this blog, puts his training to good use and recommends the use of beta blockers in combating performance anxiety. I cannot agree more. When I ran the counseling program for medical students in Syracuse, I encountered performance anxiety problems all the time: test anxiety, public speaking stress, etc. My first line of assistance was the use of specific behavioral exercises that research has found to be effective in dealing with anxiety. (More on those tomorrow.) There were times, however, when even those exercises were not sufficient to gain self control. The beta blockers were very helpful in reducing physiological reactivity, reducing the secondary anxiety that I mentioned in the prior article. Instead of becoming anxious about their own anxiety, performers notice their reduced arousal and focus on that. Here's a nice summary of the use of beta blockers for professional musicians. Note that these are to be used as temporary measures before major performances and must be prescribed and supervised by a physician.

* Dr. Bruce also recommends relaxation and biofeedback. At present, a combination of these, along with directed behavioral exercises, is my favorite intervention for performance anxiety. Here you're training the body to remain calm--and training the mind to stay focused--under varying emotional conditions. Much of my post tomorrow will deal with this combination. As Dr. Bruce notes, the techniques work much like the beta blockers: by reducing autonomic arousal.

* Finally Dr. Bruce emphasizes the role of preparation in preventing performance anxieties from taking over. Making skills automatic is the best way to enable performances to flow. When I have a public speaking engagement, I will always prepare the opening of my talk most extensively. I'll also use overheads to cue me through the opening. I know that if performance pressures are going to be present, they'll get to me early in a talk. By being super prepared with the first portion of the presentation with plenty of cues, I get into the rhythm of the speech and the automatic skills take over. Similarly, I will intensively mentally rehearse the entry of a trade and what I'll do if it goes against me. This preparation takes the scariness out of a situation and, as noted before, enhances the sense of personal control. Please also take a look at Dr. Bruce's point about running wind sprints (increasing your physiological arousal) when you're anxious; it's an excellent point. By exercising vigorously when you're anxious, you override your body's nervousness with normal pumped-up arousal, which no longer plays into the secondary anxiety. Indeed, as the good doctor notes, you can actually use your awareness of your pumped-up state to aid your performance.

* Trader Dan mentions a technique that psychologists call cognitive reframing. Remember that performance anxiety occurs when we perceive a situation to be a threat. By reframing the situation, we take much of the threat out of it. His reframing is based on an analogy to the baseball player: The hitter can get on base less than half the time and still be an all-star player. It is not necessary to win on each trade to be a successful trader, and all successful traders have strings of losers simply as a function of chance. Making losing a normal, expectable part of the game--and making sure position sizes are reasonable in order to survive those losing streaks--is very helpful in taking the threat out of trading losses. My own approach, as readers know, is to view outcomes in two ways: trades that make me money and trades that teach me something about myself and/or the market. By embracing loss as a learning experience, I reduce the stress often associated with thoughts of losing.

* Reader AnaTrader, who has also graced this blog with many fine comments, offers several perspectives from her mentor. The essence of her mentor's approach is enhanced self-awareness: taking one's "emotional temperature" hourly to monitor stress levels and thought patterns associated with stress. AnaTrader passes along a key insight: the importance of staying focused in the present. It's when we become wrapped up in the past or future--worrying about past losses or possible future ones--that anxiety is most likely to appear. By using breathing techniques to stay grounded in the present and reduce physiological arousal, it is possible to regain a present-centered awareness. Citing Steidlmeyer, AnaTrader's mentor notes the value of immersing yourself in current market data as a way of staying focused on the present. Immersing oneself in meditation music and constructive self-talk, as AnaTrader notes, can also short-circuit the worry process that generally precedes performance pressures.

* Trader Jeff mentions returning to paper trading mode as a way of regaining one's rhythm. This is similar to the above-mentioned technique of reducing trading size, but now it takes money off the table altogether and just has the trader focus on the process of putting on trades and managing them. This approach is common in the area of sexual performance anxiety, where psychologists will help couples by telling them to *not* engage in intercourse and simply get comfortable with themselves and their partners in bed. By taking the performance pressure away from the sexual situation, couples can allow their natural feelings to take over. Similarly, the trader who goes back to paper trading temporarily can find his or her rhythm return relatively quickly, making it easy to return to putting money on the line. One caveat here is that you don't want to retreat to paper trading for too long a time; that could be an escape that would not enhance a trader's sense of master. As a temporary measure for getting away from money pressures and returning to sound trading practice, however, going into simulation mode can be very useful.

* KC Equity Trader makes a super-important point about making sure you can always survive losing trades. In my own position sizing, I always assume that I could have six consecutive losing trades. If my bets are so large that six consecutive losers would put me in an emotionally bad place (and a large P/L hole), then I know I'm trading too much size for my own risk tolerance. Because KC Equity Trader knows he's always going to survive to make another trade, no single loss is unduly threatening for him. KC's point about keeping things mechanical--carefully following planned entry and exit signals--also makes the trade automatic, reducing performance worries. By making losses planned and routine, the trader takes away their threat.

* Dinosaur Trader mentions how it's easy to become more focused on P/L when a new child enters the home and there are greater household expenses and perceived trading pressures. He also mentions reducing trading size as a way of reducing this pressure. Sound financial planning is also key: making sure that you always have cash reserves to handle unexpected expenses, loss of a spouse's income, etc. I'm a firm believer that one should not be trading one's household savings. There should be separate accounts: one for savings/investment that remains safe and secure and one for trading. If your trading account is also your savings and retirement capital, that is too much objective pressure for most traders. What that means in practice is that a portion of trading profits should always be devoted to rainy days, trading slumps, and future needs. It also means that new traders should have enough reserve capital not at risk (or secondary sources of income) to survive their learning curves. That having been said, I know many traders who have traded more cautiously (and smaller) immediately following a major life event (marriage, birth of a child, relationship break) until they're sure they have their equilibrium. The ounce of prevention in such cases is truly worth the pound of cure.

* Finally Trader M. mentions anxiety that comes from being unable to anticipate market trends. He engages in considerable market preparation to make such anticipations and feels pressure to incorporate new methods/information in order to not miss anything. The risk here is one of perfectionism: setting a standard of being able to predict trends that not even highly successful traders live up to. Many, many successful traders (trend followers, short-term traders) don't succeed by anticipating market trends. Rather, they identify shifts in trend as those are occurring or right after they've been confirmed. I know quite a few successful breakout traders who don't try to predict the breakout: they simply go with it once it's confirmed by volume and the participation of large traders. Trader M. perceptively notes that trading is like speed chess. In speed chess, however, you don't succeed by trying to predict your opponent's moves. Instead, you train yourself to respond to board configurations as they emerge. Moderating one's demands on oneself can be a powerful method for reducing performance pressure.

So there we have it! There are many more fine insights from commenters than you'll get in any high priced seminar or coaching session. Tomorrow, I'll summarize the equally astute insights of those who have emailed me with comments and then I'll post my own techniques for handling performance anxiety. Thanks to all who have participated in this exercise and shared their learning and experience!