Sunday, November 19, 2017

Trading Psychology Challenges - 5: Performance Anxiety

Real time stress is one of the most common psychological challenges faced by competitors in performance activities.  Even very experienced golfers have been known to get the "yips".  Most public speakers have had the experience of going blank during a major talk.  The student who has studied all night for the exam can "freeze" during the test and forget what he or she has learned.  Traders who have laid out promising plans for trades can find themselves exiting on a small move against them or--worse still--struggling to "pull the trigger" to enter the trade.

What causes this stress--or performance anxiety--and what can we do about it?

First, note that not all stress is a bad thing.  As I pointed out in a recent post, anxious feelings can point the way toward our growth.  In such cases, tackling the nervousness that occurs when we push our boundaries is very constructive.  The last thing we want to do is try to bury the feelings that point the way toward our growth!

Conversely, not all anxiety is performance anxiety.  Some people experience anxiety across a range of life situations, not just during periods of performance demands.  Broader anxiety problems, such as generalized anxiety disorder, panic disorder, and various phobias, require professional assistance, usually with behavioral methods and medication assistance.  True performance anxiety is specific to performance situations.  It occurs when we become so worried or concerned about the outcomes of our performance that our nervousness interferes with the performance itself.

Fear of loss is the most common reasons traders experience performance anxiety.  Instead of accepting loss as a natural part of playing a probabilistic game, such traders view loss as a threat.  This is important to understand.  It's not simply losing money that creates anxiety, but the interpretation of loss itself.  When we view losses as threatening, we naturally respond with the fight or flight stress response--and this colors our subsequent decision making.  Very often, we choose flight over fight and fail to enter good positions or bail out of existing positions at poor levels.

Sometimes this performance anxiety is the result of having taken large--too large--losses in previous trading.  The emotional upset associated with those outsized losses return when positions move against us, so that even normal noise is experienced as threatening.  In a previous post, I noted that drama in P/L can create trauma in our emotional responses.  Sound risk management is essential so that we ensure that losses cannot become truly catastrophic to our accounts--and to our psyches.

A rule that I have long advocated for active traders is to make sure you do not lose so much in a trade that you cannot finish the day in the green.  Similarly, you don't want to lose so much in a week or month that you cannot finish the month or year positively.  This is helpful psychologically, as no losses become undue threats to our success.

Should you find yourself overreacting to past losses, it is very helpful to return to modest risk taking, regain consistency in trading, and gradually rebuild size as the sense of security and confidence return.  This is how people recover from all traumas:  repeated experiences of mastery and safety eventually reduce the sense of threat.

The behavioral techniques described in The Daily Trading Coach are particularly effective in dealing with performance-related stress.  Visualizing hitting one's stop and taking planned losses while mentally rehearsing constructive self-talk and keeping yourself calm and focused with deep, slow breathing is a way of reprogramming catastrophic self-talk and the upsetting impacts of past losses.  If those visualizations are performed repeatedly before trading hours, they create what psychologist Donald Meichenbaum referred to as "stress inoculation".  We expose ourselves to manageable threats and this exposure provides us with a sense of mastery and perspective that helps us deal with drawdowns in real time.

I have worked with many successful traders.  The great majority lose money on a substantial number of their trades.  Where they succeed is that they keep the size of the losers small and profit more meaningfully on the winning trades.  If we cut our winning trades short because of performance anxiety, we create a situation where it would take an unrealistically high hit rate on our trades to ensure profitability.  Ironically, it's when we can accept and even embrace losses--ensuring that we learn from losers and thus take away something of value from our setbacks--that we can make the most of our trading strengths.