Friday, November 23, 2007

Getting a Handle on Anxiety and Trading

In the last post, we took a look at anxiety and its effect upon decision making. Anxiety affects trading in many ways, including:

* Inhibition - Failing to take trades indicated by one's research or setups;

* Freezing Up - Failing to exit positions that have hit or exceeded one's stop loss level;

* Cutting Winning Trades Short - Exiting trades before targets are hit;

* Chasing Markets - Entering markets late in a move out of a fear of missing the move.

Notice that these include some of the most common "discipline" problems faced by traders. They are eloquent testaments to the ways in which anxiety can alter our processing of information and skew our actions.

The first step in dealing with anxiety effectively is to assess its causes. There is no "one size fits all" solution for anxiety; an assessment by an experienced, trained professional is important. Here are a few of the assessment questions I ask when working with a trader who has been wrestling with anxiety:

1) Is the anxiety a response to objective danger? - Anxiety is not necessarily maladaptive. Sometimes the dangers we face are very real and anxiety is a useful signal of mind and body telling us to trim our risk. If one's ideas aren't working and market volatility has greatly increased, anxiety may be helpful in holding back, preserving capital, and waiting until conditions (our own and the market's) right themselves. Anxiety is also adaptive in situations in which traders start trading before they've received proper training and experience: their minds are telling them that danger lies ahead!

2) Is the anxiety chronic? - Do anxiety problems predate our trading? Do they show up in areas of life outside of trading? If so, we might be dealing with an anxiety disorder, which affects an amazing 18% of all Americans during any given year. There are structured cognitive-behavioral methods and effective, non-addictive medications (not tranquillizers!) for dealing with anxiety disorders. Getting help from a professional experienced in these modalities is key to lasting progress.

3) Is the anxiety a reaction to trauma? - Very painful, emotional events can leave their imprint as traumatic stresses. Sometimes these events are trading-related; other times they reflect difficult past life events. If the trauma has been recent, the anxiety may not be chronic, but may still require the assistance of a professional who is trained in dealing with traumatic stresses. Behavioral, exposure-based methods are very effective in overcoming traumatic responses.

4) Is the anxiety part of a dysfunctional thought process? - This is a tricky one to tease apart. Anxious feelings can stoke anxious thoughts, but negative thinking can also generate anxiety. Sometimes we see traders engaging in constant worry and catastrophic thinking, especially after a period of loss. This thinking maintains the body's state of preparation for danger, which we experience as anxiety. Cognitive restructuring methods are proven modalities for changing these thought patterns and interrupting periods of anxiety.

5) Could the anxiety be part of a larger medical problem? - To complicate the picture further, a number of endocrine imbalances can manifest themselves as anxiety and mood disorders. If the anxiety is not fitting a typical pattern of situational response or identifiable disorder, getting a thorough medical evaluation can be crucial.

My book on trader performance concludes with chapters outlining behavioral and cognitive methods that can be useful in overcoming anxiety. When self-help methods are insufficient, however, seeking more formal, professional assistance is essential. I have no reason to believe that traders are exempt from the emotional problems that affect the general population. If 18% of the population experiences anxiety disorders in a given year, it means that nearly one in five traders probably are seeing their results hampered by this problem.


Brief Therapy for the Mentally Well

Dr. Brett's Brief Therapy Text