Tuesday, August 28, 2007

Four Steps Toward Improving Your Coping as a Trader

I recently offered a self-assessment of coping strategies in trading. This post will conclude the series by outlining four steps traders can take to enhance their coping.

1) Step One: Become A Skilled Self-Observer - Many traders are unable to work on their ability to cope with adversity because they've never stood back and identified what they do to cope with challenges and whether those coping responses are working for them. The self-assessment from the previous post is helpful in breaking coping responses down into eight basic categories. Traders can incorporate these categories into their trading journals and simply observe the steps they have taken each day and week to deal with market challenges. Over time, it will be possible to identify coping patterns that tend to occur during successful trading and those that are associated with unsuccessful trading. The first step toward changing any pattern is becoming aware of that pattern as it is happening. Becoming an observer to your own coping is a first step toward changing the coping.

2) Step Two: Think in Terms of Coping Sequences, Not Individual Behaviors - How we assemble our coping responses into coordinated strategies is more important than the individual coping mechanisms we employ. As a rule, coping strategies that are more complex tend to be more effective than simple strategies that rely upon one or two behaviors. In my work with traders, I will often diagram these sequences as flow charts, showing how coping efforts connect with appraisals, decisions, and emotional consequences. These diagrams help traders become more aware of their own patterned responses to threats. For example, I know that, in my own coping, my first response is usually one of self-control (take deep breaths, tell myself to not overreact), followed by planful problem solving, and positive reappraisal. This coordinated sequence represents how I respond to most challenges, not just ones in the market.

3) Step Three: Become Aware of Deviations From Your Usual Effective Coping - As I stressed in the Psychology of Trading book, alterations in our coping are usually preceded by shifts in our physical, emotional, and cognitive state. These shifts lead us to begin our coping sequences in very different--and usually less effective--ways. For example, when I am coping poorly, I generally follow a sequence of: confrontation/venting, taking responsibility, and avoidance. That is, I will vent my frustrations, blame myself for a bad trade, and then avoid the markets. The change in my coping begins with a shift in my emotional state that leads me to vent rather than engage in self-control. Knowing this shift helps me interrupt the poor coping sequence as soon as I catch myself venting, and I have the opportunity to consciously attempt self-control.

4) Step Four: Mentally Rehearse Effective Coping - Once you're aware of the coping strategies that work for you, you can mentally rehearse (use guided imagery paired with relaxation) challenging market scenarios and walk yourself through the proper sequence of coping behaviors. By vividly imagining how you would like to cope with market adversity, you engage in what psychologist Don Meichenbaum called "stress inoculation": you prepare mind and body for dealing with those challenges in real time. This takes repetition and a willingness to sit with the exercises for more than just a few minutes at a time. The payoff is that, after repeated rehearsal, the good coping sequences become increasingly automatic.

It is not realistic to think that stress can be eliminated from trading. Any field of endeavor that involves decision making under conditions of risk and uncertainty necessarily entails stress. An important key to successful performance is to ensure that the risk and uncertainty never become so overwhelming that they shift you out of the mature coping strategies that you've developed over the years. By becoming aware of what works for you under conditions of threat and systematically rehearsing that, you take an important step toward becoming your own trading coach.


Becoming Your Own Trading Coach

The Most Important Step in Self-Coaching

Letting Profits Run