Wednesday, January 30, 2008

The Key to Breaking Trading Slumps

I'd like to add just a few words of perspective to Chris Perruna's worthy post on the topic of focusing on decisions rather than outcomes. In a larger sense, I'm interested in using posts to initiate some cross-blog discussions of issues: sometimes to agree and elaborate, sometimes to respectfully disagree and offer alternatives. If you're a financial blogger taking a reasoned stand on an issue or taking the time to elaborate a point of importance to traders, by all means send me your URL and I'll do my best to include your work in a discussion post.

OK, back to Chris. He emphasizes that:

"...too many investors focus on the short term results or the money won and lost in each trade rather than the net result. The idea of the game is to make the right choices and understand that some of those choices will turn out to be losers. Losers are part of the game and must not affect you emotionally as long as the decision was correct."

This advice is spot on. Performance anxiety occurs when we become so concerned with the outcome of a performance that our worries interfere with the process of performing. Who hasn't had the experience of fretting over making a perfect entry, only to have the market make its move without you on board? Or seeing a market move away from your entry point and telling yourself you won't "chase" the market, only to see it make the extended move you expected all along? Those are manifestations of performance anxiety.

The cure for performance anxiety is twofold:

1) Temporarily reduce size - Take P/L out of the equation, at least for a short while. Once you don't have to worry about profits and losses, you're free to focus on the markets and what they're doing. When you get your rhythm back, gradually bump your size back up, maintaining the consistency of your execution and trade management.

2) Keep yourself focused on process goals - Your goals should focus on how you trade, not how much money you'll make. You cannot control the profitability of any single trade; at any time a news report or spate of program trades can stop you out. What you *can* control is *how* you trade: how you enter trades to maximize reward and minimize risk; how you set stop loss points; how you size positions; etc.

In my own trading, I have a minimum trade size (1 unit) and a maximum (6 units). Most trades, under conditions of average volatility, will enter with 3 units and build to the maximum if I have conviction in the trade. (When volatility is quite high, I'll enter with one or two units and build to 3 maximum. I prefer to keep my equity curve as constant as possible, having learned that--for me--high volatility does not always pose high opportunity).

If I'm in a losing spell, however, I'll cut my sizing in half until I regain my feel for the trade. That enables me to just focus on markets and how I'm trading. I'll review my most recent trades, identify what I'm doing right and set some goals to avoid doing what's lost me money.

In other words, during times of performance pressure, it is imperative to become process oriented. Many traders, as Chris points out, focus extra hard on performance during those times when they're not performing well. Imagine doing that in other areas of performance: public speaking or (perish the thought) sexual performance! The result would be a complete freeze-up. When we focus on outcomes, performance cannot naturally flow from our efforts. Work on process and outcome will follow. Chris' advice is key to breaking trading slumps.


The Most Common Problem Traders Face

Techniques for Overcoming Performance Anxiety

Handling Performance Pressures: Insights from Readers