Saturday, April 26, 2014

Trading and Performance Anxiety: Moving From Panic to Confidence

In response to the recent post on keeping trading journals, a reader raises the following scenario:

One major problem I seem to have is a fear of being down for the month. I report to my investors monthly and it seems like every little BP loss sets me off. On my whiteboard in my office, I write out that I will shoot for 3% monthly gains with the corresponding Dollar amount, and allow myself to lose 1.5% monthly with the corresponding Dollar amount. But it doesn't seem to work. Instead, I continually compare myself to my monthly starting point, and if I get below that point, I panic. If I'm a bit above that point, I have a hard time taking risk and risking my gains. Of course, this guarantees that I will stay just about flat and potentially set myself up for a big loss. What can I do to avoid this? How can I get myself out of this mindset?

A key to this situation might be found in the first two sentences.  Reporting to investors monthly is contributing to a fear of being down on the month.  This is the essence of performance anxiety:  the fear of a negative outcome is interfering with the process of making decisions.  As the reader observes, this has the potential to paralyze risk-taking with P/L moving little on either side of zero.

The tricky element in the situation is that a personal trading problem has become a business problem.  Investors get results monthly and quite possibly are habituated to results that neither excite nor scare them.  Any meaningful bump in risk taking is apt to look to an investor as an outlier.  An advance communication to investors, explaining the current opportunity set and how the fund plans to respond, not only defuses a WTF response to greater P/L variability; it also subtly changes the performance pressure from risk-taking to risk-aversion.  It's difficult to explain to investors why you didn't take meaningful risk after sending them a notice of pending opportunity!

From that point forward, I would mentally--and actually--rehearse giving talks to investors and writing letters to investors explaining moderate losses for the month.  The one inescapable reality of anxiety is that you can't overcome a fear of something by avoiding that thing.  That, for example, is how fears turn into phobias; how performance pressure morphs into performance anxiety.

I first began teaching on a large scale by delivering lectures at an introductory psychology course of 300 students.  At first I was panicked.  Giving the lectures every Monday, Wednesday, and Friday, however, quickly led me to become accustomed to the situation.  Eventually I got the hang of it and now I enjoy addressing large crowds.   

Imagine that you had to address investors every single day on a road show and explain a 75 bps loss on the month.  Eventually, you'd become so familiar with investor questions and concerns that the talks would become routine.  More to the point, however, a future responsible losing month would lose its scariness, because you've already been through what had previously been an ordeal and come out on the other side.

To overcome anxiety, gradually face the fearful situation--first in visualization, then in the real world--until that anxiety is extinguished.  This is the essence of the exposure approach outlined in the Daily Trading Coach book.  It is difficult to panic over situations that you make routine.  

Familiarity breeds content. 

Further Reading:  Brief Therapy Methods for Self-Coaching