PERFORMANCE ANXIETY : THE MOST COMMON TRADING PROBLEM
Imagine youre about to give a presentation to a group of people as part of a job interview process. You very much want the job, and youve prepared well for the presentation. Youre 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 youre talking. Another person seems to be nodding off. The thought enters your mind that youre not being sufficiently engaging. Youre 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 weve 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
As weve seen in this chapter, our distressful emotions dont just come from situations: they are also a function of our perception of those situations. If Im convinced that Im a hot job candidate and believe that I have many job options, I wont 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 didnt 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 its 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 nights performance doesnt 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 Ive 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.
Lets 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
dont work. If a market is not behaving the way it normally does in a given situation, its sending you a loud message. If youre not executing your ideas the way you usually do, youre getting a clear indication to target that area for improvement. A simple assignment that can instill this mindset is to identifyduring the trading day (or during the week, if youre 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.
If you track your trading results closely over time, youll 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 its 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.
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 developing, and it keeps you in the positive mindset that best sustains your development. Every setback has a purpose, and thats to help you learn: to make you stronger. Performance anxiety melts away as soon as its okay to mess up.
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 traders 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 traders 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 modelssometimes 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 tradersand my own experience in the school of hard trading knocksis 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 batting 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 traders niche defines his sweet spots. Certain markets I trade well, others I dont. 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 theyve learned the value of waiting for those pitches.
The implication is clear: Our emotional experience reflects the degree to which were 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 were 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 were doing.
When you are your own trading coach, your job is to keep yourself within your niche, swinging at pitches that fall within your sweet spots and laying off those that yield marginal results. This means knowing when to not place trades, not to participate in markets. Equally important, it means knowing when your advantage is present and making the most of opportunities. A common pattern among active traders is that they will trade too much outside their frameworks, lose money, and then lack the boldness to press their advantage when they find genuine sweet spots. Its easy to see careers lost by blowing up; less visible are the failures that result from the inability to capitalize on real opportunity.
I recently talked with a day trader who was convinced that he would make significant money if he just held positions for several days at a time. Though it looked easy to find spots on charts where such holding periods would have worked, in real time that trade was much more difficult. It was not in the traders wheelhouse; it was outside his niche. Calibrated to measure opportunity and risk on a day time frame, he found himself shaken out by countertrend moves when he tried holding positions longer. Worse still, he mixed his time frames and tried to convert some losing day trades into longer-term holds. Outside his niche, he began trading like a rookiewith rookie results.
What is your wheelhouse? What do you do best in markets? If you could trade just one strategy, one instrument, one time frame, what would these be? Do you really know the answers to these questions: have you truly taken an inventory of your past trades to see which work and which have been low and outside?
There is nothing wrong with expanding your niche in a careful and thoughtful way, much as a company might test market new products in new categories. But just as management books tell us that great companies stick to their knitting and exploit core competencies, we need to capitalize on our strengths in our trading businesses. As we will see in Chapter 8, you are not just your own trading coach: you are the manager of your trading business. That means reviewing performance, allocating resources wisely, and adapting to shifting market conditions.
The greatest problem with overtrading is that it takes us outside our nichesand therefore out of our performance zones.
Heres a simple exercise that can move you forward as the manager of your trading business. At the time you take each trade, simply label it as A, B, or C. A trades are clearly within your sweet spot; theyre your bread-andbutter, best trades. B trades are your good trades: not necessarily gimmes or home runs, but consistent winners. C trades are more marginal and speculative: theyre the ones that feel right, but are clearly outside your wheelhouse.
Over time, you can track the profitability of the A, B, and C trades and verify that you really know your niche. You can also track the relative sizing of your positions, to ensure that youre pursuing the greatest reward when you take trades in your sweet spots and assuming the least risk when youre going after that low, outside pitch.
The more clearly you identify your niche, the less likely you are to get away from it. That clarity can only benefit your profitability and emotional experience over time.
If you categorize your trades/time frames/setups/markets as A, B, or C as outlined above, you have the start for good risk management when you go into slumps. When markets do not behave as you expect and you lose your edge, cut your trading back to A trades only. Many times, slumps start with overconfidence and getting outside our niches. If its the A trades that arent performing, thats when you know you have to cut your risk (size) and reassess markets and trends.