When nervousness hits, the first thing you want to do is simply acknowledge that fact. Saying to yourself, “I am not comfortable with the trade right now,” cues you to extract the information from your experience. The next step is to ask, “Why am I not comfortable? Has something important changed in the trade?”
This latter question is crucial because it helps you distinguish realistic fear from normal anxiety you might feel in an unfamiliar or uncertain situation. I recently bumped up my average trading size per position and, at first, felt some nervousness in my trades. When I asked myself, “Why am I nervous?” I couldn’t find anything wrong with the trades: they were performing as expected. This led me to acknowledge that I was just feeling some anxiety about the increased risk per trade. I reassured myself of my stop levels and overall trading plan, so I was able to weather the anxiety and benefit from the increased risk. I needed to carry out that internal dialogue, however, to see if my body’s warning light—the nervousness—was based on a market problem or a problem of perception.
Fear is a warning light; not an automatic guide to action. It is our mind and body’s way of saying, “Something doesn’t look right.”
Similarly, if you’re experiencing fear about entering a position, you want to ask, “Why am I uncomfortable with this idea? Do I really have an edge in this trade?” This questioning prods you to review the rationale for the trade idea: Is it going with the market trend? Can it be executed with a favorable reward-to-risk balance? Is it a pattern that I have traded successfully in the past? Is it occurring in a market environment with sufficient volume and volatility?
When I work with a trader in live mode (i.e., coaching them while they are trading), I have them talk aloud so that I can hear their thought process regarding a particular trade idea. I mirror back to traders the quality of their thinking about their decisions, so I can help them figure out when nervousness is warranted (the trade doesn’t really have favorable expectancies) and when it might not be (it’s a good idea, but you’re feeling uncertain because you’re in a slump).
When you are your own trading coach, you can place yourself in talk-aloud mode as well or—if you’re trading in a room with other traders, as at many prop firms—you can use a brief checklist to review the status of your idea or trade. The checklist would simply be a short listing of the factors that should either get you into a trade or keep you in a trade. It’s your way of using the nervousness to differentiate discomfort with a good idea and discomfort with an idea because it isn’t so good. Many times, fear is simply fear of the unknown, the byproduct of making changes. As Mike Bellafiore notes in Chapter 9, that doesn’t mean you shouldn’t take the trade.
I have been trading for long enough that my checklist is well established in my mind. There was a time, however, when I needed to have it written out and in front of me. Is volume expanding in the direction of my trade? Is more volume being transacted at the market bid or at the offer? Is a growing number of stocks trading at their bid or at their offer? Even a very short-term trader can review such criteria quickly, just as a fighter pilot would check his gauges and radar screen in a dangerous combat situation. A fear response cues you to check your own gauges, to make sure you’re making decisions for the right reason.
You can use your fear as a cue to examine your trade more deeply and adjust your confidence in the idea, up or down.
If you can use fear in this way, even negative emotions can become trading tools and even friends. Your homework assignment is to construct a quick checklist that you can talk aloud or check off during a trade (or prior to placing a trade) when you are feeling particularly uncertain. This checklist should prod you to review why you’re in the trade and whether it still makes sense to be in it. In this way, you coach yourself to make your best decisions even when you’re at your most nervous. Confidence doesn’t come from an absence of fear; it comes from knowing you can perform your best in the face of stress and uncertainty.
COACHING CUE
Find a positive change in your trading that makes you nervous and then pursue it as a trading goal. As I describe in The Psychology of Trading, anxiety often points the way to our greatest growth, because we feel anxiety when we depart from the known and familiar. Trading a new market or setup, raising your trading size, holding your trades until they reach a target—these are nerve-wracking situations that can represent great areas of growth and development. In that sense, fear can become a marker for opportunity.
LESSON 18: PERFORMANCE ANXIETY: THE MOST COMMON TRADING PROBLEM
Imagine you’re about to give a presentation to a group of people as part of a job interview process. You very much want the job, and you’ve prepared well for the presentation. You’re nervous going into the session, but you remind yourself that you know your stuff and have done this before.
As you launch into your talk, you notice that the audience is not especially attentive. One person takes out his phone and starts texting while you’re talking. Another person seems to be nodding off. The thought enters your mind that you’re not being sufficiently engaging. You’re losing their interest, and you fear that you might also be losing the job. You decide to improvise something original and attention grabbing, but your nervousness gets in the way. Losing your train of thought, you stumble and awkwardly return to your prepared script. Performance anxiety has taken you out of your game, and your presentation suffers as a result.
Performance anxiety occurs any time our thinking about a performance interferes with the act of performing. If we worry too much while taking a test, we can go blank and forget the material we’ve studied. If we try too hard to make a foul shot at the end of a basketball game, we can toss a brick and lose the game. The attention that we devote to the outcome of the performance takes away from our focus on the process of performing.
This is a common problem among traders, probably the most common one that I encounter in my work at proprietary trading firms and hedge funds. Sometimes the performance anxiety occurs when a trader is doing well and now tries to take more risk by trading larger positions. Other times, traders enter a slump and become so concerned about losing that they fail to take good trades. A trader may feel so much pressure to make a profit that she may cut winning trades short, never letting ideas reach their full potential. As with the public speaker, the performance anxiety takes traders out of their game, leading them to second-guess their research and planning.
More on performance anxiety and how to handle it: http://traderfeed.blogspot.com/2007/04/my-favorite-techniques-for-overcoming.html
As we’ve seen in this chapter, our distressful emotions don’t just come from situations: they are also a function of our perception of those situations. If I’m convinced that I’m a hot job candidate and believe that I have many job options, I won’t feel unduly pressured in an interview or presentation. When I came out of graduate school, I went to a job interview in upstate New York and was asked by the clinic director to identify my favorite approach to doing therapy. I smiled and told him that I preferred primal scream therapy. That broke the ice, we had a good laugh, and the interview went well from there. I knew that, if this interview didn’t work out, other opportunities would arise. That freed me up to be myself.
Had I told myself that this was the only job for me and that I needed the position badly, the pressure would have been intense. I would have been far too nervous to joke in the interview and probably would have come across as wooden and not very personable. If I had viewed the possibility of losing the job as a catastrophe, I would have ensured that I could not have interviewed well.
Traders engage in their own catastrophizing. Instead of viewing loss as a normal, expectable part of performing under conditions of uncertainty, traders regard losses as a threat to their self-perceptions or livelihood. When traders make money, they feel bright about the future and good about themselves. When they hit a string of losing days, they become consumed with the loss. Instead of trading for profits, they trade to
not lose money. Like the anxious job interviewer, traders can no longer perform their skills naturally and automatically.
A common mistake that traders make is to try to replace catastrophic, negative thoughts with positive ones. They try repeating affirmations that they will make money, and they keep talking themselves into positive expectations. What happens, however, is that they are still allowing a focus on the outcome of performance to interfere with performing itself. The expert performer does not think positively or negatively about a performance as it’s occurring. Rather, he is wholly absorbed in the act of performing . Does a skilled stage actress focus on the reaction of the audience or the next day comments of reviewers? Does an expert surgeon become absorbed in thoughts of the success or failure of the procedure? No, what makes them elite performers is that their full concentration is devoted to the execution of their skills.
Thinking positively or negatively about performance outcomes will interfere with the process of performing. When you focus on the doing, the outcomes take care of themselves.
What gives these expert performers the confidence to stay absorbed is not positive thinking. Rather, they know that they are capable of handling setbacks when those occur. If a given night’s performance doesn’t go quite right, the actress knows that she can make improvements in rehearsal. If a surgery develops complications, the surgeon knows that he can identify those rapidly and take care of them. By taking the catastrophe out of negative outcomes, these experts are able to avoid crippling performance anxiety.
One of the most powerful tools I’ve found for overcoming performance anxiety in trading is to keep careful track of my worst trading days and make conscious efforts to turn those into learning experiences. This turns losing into an opportunity for self-coaching, not just a failure.
Let’s say that you have a very reliable setup that tells you that a stock should be heading higher. You buy the stock and it promptly moves your way. Just as suddenly, however, it reverses and moves below your entry point. You note that the reversal occurred on significant volume, so you take the loss. In one frame of mind, you could lament your bad luck, curse the market, and pressure yourself to make up for the loss on the next trade. All of those negative actions will contribute to performance pressure; none of them will constructively aid your trading.
Alternatively, you could use the loss to trigger a market review. Are other stocks in the sector selling off? Is the broad market dropping? Has news come out that has affected the stock, sector, or market? Did your buy setup occur within a larger downtrend that you missed? Did you execute the setup too late, chasing strength? All of these questions offer the possibility of learning from the losing trade and quite possibly setting up subsequent successful trades. For instance, if you notice that a surprise negative earnings announcement within the sector is dragging everything down, you might be able to revise your view for the day on the stock and benefit from the weakness. When you are your own trading coach, you want to get to the point where you actually value good trading ideas that don’t work. If a market is not behaving the way it normally does in a given situation, it’s sending you a loud message. If you’re not executing your ideas the way you usually do, you’re getting a clear indication to target that area for improvement. A simple assignment that can instill this mindset is to identify—during the trading day (or during the week, if you’re typically holding positions overnight)—at least one very solid trading idea/setup that did not make you money. That good losing trade is either telling you something about the market, something about your trading, or both. Your task is then to take a short break, figure out the message of the market, and make an adjustment in your subsequent trading.
By acting on the idea that losses present opportunity, you take a good part of the threat out of losing. That keeps you learning and
COACHING CUE
If you track your trading results closely over time, you’ll know your typical slumps and drawdowns: how long they last and how deep they become. Know what a slump looks like and accept that they will arise every so often to help take away their threat value. Many times you can recognize a slump as it’s unfolding and quickly cut back your trading and increase your preparation, thus minimizing drawdowns. Most importantly, if you accept the slump as a normal part of trading, it cannot generate performance anxiety. Indeed, it is often the slumps that push us to find new opportunity in markets and adapt to shifting market conditions. Much of success consists of finding opportunity in adversity.
developing, and it keeps you in the positive mindset that best sustains your development. Every setback has a purpose, and that’s to help you learn: to make you stronger. Performance anxiety melts away as soon as it’s okay to mess up.
LESSON 19: SQUARE PEGS AND ROUND HOLES
One of the central concepts of Enhancing Trader Performance is that each trader can maximize his development and profitability by discovering a niche and operating primarily within it. A trading niche has several components:• Specific Market and/or Asset Classes. Markets behave differently and are structured differently. Some markets are more volatile; some are more mature and offer more market depth; some offer more information than others. The personality of the market must fit with the personality of the trader. Someone like myself, who thrives on data collection and the analysis of historical patterns of volume and sentiment, can do quite well in the information-rich stock market; not so well in cash currencies, where volume and moment-to-moment sentiment shifts are more opaque.
• A Core Strategy. The trader’s core strategy or strategies capture her ways of making sense of supply and demand. Some traders gravitate toward trend trading; others are contrarian and more countertrend in orientation. Some traders rely mostly on directional trade; others on relational trades that express relative value, such as spreads and pairs trades. Some traders are highly visual and make use of charts and technical patterns; others are more statistically oriented and model-driven.
• A Time Frame. The scalper, who processes information rapidly and holds positions for a few minutes, is different from the intraday position trader and even more different from the swing trader who holds positions overnight. A portfolio manager who trades multiple ideas and markets simultaneously engages in different thought processes from the market maker in a single instrument. Your time frame determines what you look at: market makers will pay great attention to order flow; portfolio managers may focus on macroeconomic fundamentals. Time frame also determines the speed of decision-making and the relative balance between time spent managing trades and time spent researching them. My personality tends to be risk-averse: I trade selectively over a short time frame. I know many other, more aggressive traders who trade frequently and others who hold for longer periods and larger price swings. Time frame affects risk, and it determines the nature of the trader’s interaction with markets.
• A Framework for Decision-Making. Some traders are purely discretionary and intuitive in their decision-making, processing market information as it unfolds. Other traders rely on considerable prior analysis before making decisions. There are traders who are structured in their trading, relying on explicit models—sometimes purely mechanical systems. Other traders may follow general rules, but do not formulate these as hard-and-fast guidelines. My own trading is a combination of head and gut: I research and plan my ideas, but execute and manage them in a discretionary fashion. Each trader blends the analytical and the intuitive differently.
What you trade and how you trade should be an expression of your distinctive cognitive style and strengths.
My experience working with traders—and my own experience in the school of hard trading knocks—is that much of the distress they experience occurs when they are operating outside their niche. Ted Williams, the Hall of Fame baseball slugger, offers a worthwhile metaphor. He divided the plate into a large number of zones and calculated his batting average for each zone. He found, for instance, that pitches low and away provided him with his lowest bat
ting average. Other pitches, those high and directly over the plate, provided sweet spots where his average was quite high. With certain pitches, Williams was a mediocre hitter. With others, he was a superstar. The source of his greatness, by his own account, was that he learned to see the plate well and wait for his pitches.
A trader’s niche defines his sweet spots. Certain markets I trade well, others I don’t. Certain times of day I trade well; others fall short of breakeven. If I extend or reduce my typical time frame, my performance suffers. If I trade patterns outside my research, I suffer. Like Williams, I trade well when I wait for my pitches. If I swing at the low and away balls, I strike out.
One theme that emerges from the experienced traders in Chapter 9 is that they know which pitches they hit, and they’ve learned the value of waiting for those pitches.
The implication is clear: Our emotional experience reflects the degree to which we’re consistently operating within our niche. That is true in careers, relationships, and in trading. When there is an excellent fit between our needs, interests, and values and the environment that we’re operating in, that harmony manifests itself in positive emotional experience. When our environments frustrate our needs, interests, and values, the result is distress. Negative emotions, in this context, are very useful: they alert us to potential mismatches between who we are and what we’re doing.
The Daily Trading Coach Page 9
