2. Ready, Steady, Go. One of the traps that eager traders fall into when they start coaching is that they want to make many changes all at once. As a result, traders overload themselves with too many goals, water down their focus, and never adequately follow through with any of them. If you have a list of five changes to make, select the one that you’re most ready to make (as noted above): the one that you’re most committed to taking action on. Work on that one goal intensively and daily until you make and sustain significant progress; then move to the next change. The momentum from your success with the first effort will carry over and help your work with the others. If you begin with a goal that you should work on, but aren’t fully committed to, you’ll stall out on your entire coaching effort. Keep your work doable, but keep it steady. Build momentum and success, and that will help with your later change effortsWhen you coach yourself, focus your efforts and let one success fuel others.
3. Double Down. When you first make a desired change, don’t let up. Rather, focus on what you did to make that change and redouble your efforts. Make your goal to sustain that change. All too often, traders let up once they make an initial improvement. That’s like hurting your opponent in a boxing ring and then not moving in to finish him off. You want progress to double your motivation, not let your bad habits off the hook. We’ve seen that the enemy of change is relapse: all of us too easily fall back into old patterns if we’re not making conscious and sustained efforts to build new ones. The key to change is relapse prevention: repeating new patterns so often that they become natural to us. Any change worthy of pursuit is worth repeating 30 times in 30 days. In Alcoholics Anonymous, a committed new member will attend 90 meetings in 90 days; “bring the body in and the mind will follow” is the slogan. Make the change consistently enough and it will be your change. Successful coaching means working as hard at maintaining changes as initiating them.
4. Stay Active. The research literature in psychology finds that change is most likely to occur when we are active in its pursuit. That is, we change by enacting new patterns—by doing new things—not simply by talking about change or thinking about it. I often joke that traders approach coaching like many people treat church: they go once a week to feel virtuous and forget about it for the next six days. A truly religious person wants to live their beliefs every day; if you’re going to get the religion of virtuous trading, it’s no different. That is why each goal should be accompanied by specific daily activities that help you make progress. If your goal is better risk management, then you want to work on managing the risk of every trade. If your goal is a better mindset, then you want to perform specific exercises each day to keep calm and focused. You won’t change your behavior by changing your mind; you’ll start thinking differently once you enact new behavior patterns.
5. Stay Positive. “If it ain’t broke, don’t fix it,” is the philosophy of those who fail to work on trading until they’re broke. If you’re trading well, that’s one of the best times to coach yourself . Your goal isn’t to change what’s working; it’s to become even more consistent in your efforts. Doing more of what works is a valuable goal that helps you press your advantage when you’re doing well. The alternative, sitting back on your laurels when you’re making money, will bring comfort, but not elite levels of success. I recently met with a prop trader who was trading very well on relatively small size. A quick look at his Sharpe Ratio and trading results suggested that he could be making much more money simply by running more risk in his portfolio and sticking to his bread-and-butter setups and markets. We developed a plan for doing that and he turned good success into outstanding success. By formulating positive goals—focusing on changes that involve doing more of the right things—he made the most of his strengths. It’s for that reason that I often tell people that the best time for coaching is when you’re doing really well and really poorly.
The best traders, I find, are those who have made self-improvement a way of life. Such traders are driven in their work lives, their physical fitness, and their recreations. They derive great meaning and satisfaction from being the best they can be. The same is true of great athletes: they love working out; they constantly challenge themselves. It’s when change is a lifestyle that we see exemplary performance. At that point, self-coaching becomes a life philosophy—an organizing principle—not just a discrete activity among many during the day or week.
COACHING CUE
What is the one change you most want to make outside of trading? Develop a daily plan for action on the goal that will help your trading efforts. It’s all about strengthening the coach within you, whether you’re working on your finances, your relationships, your physical conditioning, or your chess game. The goal is to become a change agent, a master of change across all spheres of life. Working on your nontrading life is a way of building your self-coaching as a trader.
RESOURCES
The Become Your Own Trading Coach blog is the primary supplemental resource for this book. You can find links and additional posts on the topic of change at the home page on the blog for Chapter 1: http://becomeyourowntradingcoach.blogspot.com/2008/08/daily-trading-coach-chapter-one-links.html
Some changes—particularly of problems that have been longstanding and that interfere with relationships and/or work in a significant way—may require more than self-coaching. Here is a referral list for cognitive therapists that I’ve found helpful: http://www.academyofct.org/Library/CertifiedMembers/Index.asp?FolderID=1137
For a detailed, research-based summary of the literature on change, check out Bergin and Garfield’s Handbook of Psychotherapy and Behavior Change, published by Wiley and in its fifth edition (2003). Of particular relevance are the chapters in Section 2, dealing with “Evaluating the Ingredients of Therapeutic Efficacy.”
For an overview of short-term approaches to change, check out my chapter on “Brief Therapy” in the Handbook of Clinical Psychology, Volume 1 edited by Michel Hersen and Alan M. Gross, also published by Wiley (2008).
A worthwhile collection of creative approaches to change can be found in Clinical Strategies for Becoming a Master Psychotherapist edited by William O’Donohue, Nicholas A. Cummings, and Janet L. Cummings (Academic Press, 2006), including my chapter on “The Importance of Novelty in Psychotherapy.”
CHAPTER 2
Stress and
Distress
Creative Coping for Traders
If you plan on being anything less than you are capable of being, you will probably be unhappy all the days of your life.
—Abraham Maslow
When traders seek coaching, one of their most frequent requests is help with reducing stress. The assumption is that less stress is better and, if they could eliminate stress, trading would go well. But is that true?
In this chapter we’ll take a look at stress and distress, as well as the difference between the two. We’ll also explore coping and what makes for effective and ineffective responses to stressful situations.
One of the great challenges of coaching in a high-intensity, competitive field is making sure that normal, expectable stress doesn’t turn into performance-robbing distress. In practice this means distinguishing between the stresses that are part and parcel of the trading profession and those that we unwittingly place on ourselves.
Let’s take a look at how you can make stress work for you in your self-coaching efforts.
LESSON 11: UNDERSTANDING STRESS
It’s common to hear suggestions that traders eliminate or greatly minimize psychological stress. This, of course, is impossible. The very act of trading requires daily encounters with risk and uncertainty. Psychological stress is assured when we operate in such environments. If minimal stress is your objective, trading should not be your vocation or avocation.
Many traders—and trading coaches—confuse stress and distress. Not all psychological stress brings distress, and not all psychological stress is bad. If you are going to coach yourself for trading success, it’s important that
you understand stress: how it helps performance, and how it can become distress and interfere with decision-making.
So let’s start with an everyday example. You’re driving on a highway on a long trip, and you’re feeling a bit bored. Suddenly the wind picks up and snowfall becomes heavy. Your visibility is greatly reduced, and you can feel the road becoming slippery. Before you know it, you’re hunched over the steering wheel, staring intently through the windscreen and reducing your speed. Your boredom has quickly turned into alertness. You’re no longer operating on auto-pilot.
This is psychological stress: a heightened physical and cognitive state that prepares us for dealing with challenges. It’s been called the flight or fight response, because it mobilizes mind and body to avoid challenging situations or to face them head on. Muscle tension, alertness, and the flow of adrenaline: these are but a few cues that we’ve entered a state of stress.
Note that this is an adaptive state in the example of driving in the snowstorm. Had you remained on autopilot, you might not have slowed your speed and taken measures to avoid an accident. The state of stress has mobilized your energy—shifted you from your boredom—to cope with the immediate situation. You can appreciate how silly it is to talk of minimizing stress in such a situation: when you’re in a blinding snowstorm in a moving vehicle, your mind and body should mobilize!
Stress is a mobilization of mind and body; it can facilitate performance.
But let’s take our example one step farther. I lived in the Syracuse, New York, area for more than 20 years, so the snowstorm is challenging, but not unfamiliar. I’ve experienced similar conditions before, and I know what to do when they arise. My stress never becomes distress, because I never perceive the storm as an acute threat.
Suppose, however, I am from Florida and have never experienced such a storm. I’ve heard of cars getting into pileup accidents under those conditions, and I’m worried that my tires will lose their grip. The storm is highly threatening for me; I don’t feel capable of mastering it. My stress quickly becomes distress, as alertness turns into anxiety.
The simple example of the car illustrates that perception and experience make the difference between stress and distress. When I was an undergraduate at Duke University, David Aderman and I performed an experiment. We had two groups of subjects deliver a speech. Both groups received negative feedback about their performance. The first group was told that speaking ability was linked to personality and could not be changed. The second group was told that they could improve their speaking skills relatively easily. At the end of the session, the first group reported significantly more distress than the second group. It wasn’t getting the negative feedback that generated distress; it was the perception that they were not competent to change the negative situation.
Our interpretations of situations turn normal stress into distress.
So how does this relate to trading? When you put your capital at risk, you’re like the driver on the snowy road. You will be alert, processing information in real time to make quick mid-course corrections if needed. If you view losing as a natural part of trading, have experienced and bounced back from losses before, and have mechanisms in place to limit your losses, stress is unlikely to become distress. The losing trade is a mere annoyance, like having your trip delayed by a snowstorm.
If, however, you don’t accept losing as normal and natural—and especially if you don’t have position size limits and stop-loss levels in place to control your losses—the stress of a trade going against you is more apt to become distress. Your ability to focus and make those rapid mid-course corrections will become impaired. You’ll be like the Florida driver in the Northeast snowstorm.
Position size limits, trading plans, and stop-loss levels are like snow tires on your vehicle: they may not seem to do a lot for you when things are going well, but they certainly help you deal with adverse conditions. A panicky driver in the snow doesn’t feel that he can control his car; an experienced winter driver knows that he can. Similarly, the panicked trader feels unable to control losses; the experienced trader knows that losses can always be limited.
Your challenge as your own trading coach is to embrace stress—and always ensure that it does not become distress. A fantastic goal to work on for your trading is to start the day with position sizing guidelines, per-trade loss limits, per-trade price targets, and daily loss limits that you can readily live with. The amount of risk you’re willing to take on each trade should be meaningfully smaller than the reward potential built into your profit targets. The amount of money you’re willing to lose each day should be a fraction of the money you make on your best days. If you’re a frequent trader, no single loss on a trade should prevent you from making money on the day; no single daily loss should be so large that you can’t be profitable on the week. Preparation and familiarity keep stress from becoming distress, because they enhance your sense of control. If you plan your loss levels and review those plans thoroughly, they become familiar and you become prepared. (See the brief questionnaire in Figure 2.1 to assess whether your stress is turning into distress.)
If you are prepared for adversity, you will respond with normal stress, not distress.
FIGURE 2.1 Brief Distress Questionnaire
Trading will always be stressful, but self-coaching ensures that it won’t be filled with distress. Remember, your job is to maintain a mindset that keeps your confidence and motivation high: under those conditions, you’ll work harder, learn more, and grow your trading account over time. That doesn’t mean repealing stress; it means creating active firewalls between stress and distress. Risk management is one of the best psychological firewalls of all.
COACHING CUE
Plan for every possible glitch in your trading: if your broker can’t be reached; if you lose your online connection; if your equipment fails; if your data vendor goes down. My own trading station is small, but there is redundancy in each of these areas. I have multiple brokers, multiple online connections, multiple computers, and multiple data streams. There’s always a rehearsed Plan B if something fails when I have a position on. The glitches still cause stress, but not distress.
LESSON 12: ANTIDOTES FOR TOXIC TRADING ASSUMPTIONS
What we expect from life shapes our emotional experience. If we expect good things, we tend to be optimistic and energetic. If we expect negative outcomes, we tend to feel anxiety. If we expect that success will elude us, we’ll feel discouraged and depressed. If we expect perfection, we’ll be continually disappointed with reality.
To no small degree, our emotions are barometers of the degree to which we are meeting or falling short of our expectations. That is an important principle, because psychological research suggests that, if our expectations are biased, we’re likely to experience skewed emotions.
The relationship between emotion and expectation is particularly important for the developing trader. If you are your own trading coach, one of your overriding priorities is to foster the kind of positive experience that will sustain your motivation and learning efforts. Discouraged, defeated, and fearful learners are not effective learners. If you are going to maintain that zone of focus and concentration that maximizes learning efforts, you have to be absorbed in markets. No one can be absorbed if they’re also battling emotional distress.
In the spirit of Ayn Rand, who encouraged people to “check their premises” when they arrived at contradictory conclusions (“I should be happy” but “I shouldn’t be selfish”), I’ll now ask you to check your expectations—particularly if you’re finding that distress is interfering with your learning and development. The following expectations are among the most trader-toxic:1. A Good Day Is a Winning Day. Here’s an assumption and expectation that ensures that our emotional experience will rise and fall with our P/L. We generally expect to have a good day; by equating a good day with a winning day, we set ourselves up for disappointment when the normal uncertainty of markets leaves us in the red. A good day is one in which we follow s
ound trading practices, from skilled execution to prudent risk management. Some good days will bring profits, others will not. We can trade poorly and stumble into a profit; we can place a trade with a two-thirds probability of success and lose money as often as an all-star baseball hitter gets a hit. We should expect to have good days, if those are defined by sound trading practice. If sound practices don’t generate profits over time, we may need to tweak those practices. But going into trading expecting profits each day is a formula for emotional letdown.Never set a goal if you’re not in full control of its attainment.
The Daily Trading Coach Page 6
