Tuesday, February 19, 2008

Emotions and Trading: Understanding Anxiety

Because trading involves risk taking in an environment of uncertainty, it necessarily engages us emotionally as well as intellectually. In this series of articles, I will review emotions common to trading and their significance for trading performance.

In this and the next post, we’ll take a look at a family of emotional experiences related to anxiety. These include nervousness, tension, stress, fear, and worry. All represent a response to perceived threat. They are part of the “flight or fight” response that enables us to deal with dangerous situations.

No two traders experience anxiety in the same way. For some, it is primarily a cognitive phenomenon in which thoughts become speeded up and worry sets in. For others, the cognitive component is joined with physical manifestations: a speeding of heart rate, tensing of muscles, and increasing of shallow breathing. Sometimes the manifestations of anxiety are primarily physical and not even consciously noticed by the trader. This most often occurs when muscle tension is the main way in which the anxiety is expressed.

Because anxiety represents an adaptive, flight-or-fight behavior pattern that is hard-wired, it prompts us for action. Regional cerebral blood flows engage the motor areas of the brain, bypassing the executive, frontal cortex responsible for our planning, judgment, and rational decision-making. For this reason, we can make decisions under conditions of anxiety that are not ones that we would normally make if we were cool, calm, and deliberate.

Note that anxiety is a response to perceived threat. Such threats may be real, or they may be ones that we create through our (negative) ways of thinking. For instance, two traders with the same account balances may go through a losing month. One views it as a normal drawdown and experiences little fear or tension. The other questions his trading ability and responds with significant anxiety. It is not just reality, but our interpretations of reality, that mediate our flight or fight responses.

The two immediate challenges for traders experiencing anxiety are to become aware of the manifestations and to determine whether threats are primarily real or perceived. Knowing our unique manifestations of anxiety is invaluable in interrupting the flight or fight response and returning ourselves as early as possible to the cognitive state in which we can engage our sound, executive capacities.

Most of us have signature “tells” that reveal our states of nervousness and fear. A characteristic pattern of muscle tension, a typical sequence of negative thoughts, a hollow feeling in the pit of our stomach, shakiness, a surge of worried thought: all of these are common “tells”. Our initial goal is simply to become aware of what we’re feeling as we’re experiencing the emotions. We cannot change something if we are not conscious of it

A good practice is to periodically during the trading day make note of our thoughts, feelings, and physical sensations and correlate those to market behavior at the time and to our trading decisions and outcomes. Over time, you will notice distinctive patterns: certain constellations of thoughts, feelings, and sensations that recur under challenging trading conditions. Once you observe your own anxiety-related patterns and actually see how they’re interfering with decision-making, you’re in a much better place to interrupt and change those patterns. Some ways of altering those patterns will be the topic of the next post in the series.


Biofeedback for Performance

Brief Therapy Techniques