Behavioral Patterns That Sabotage Traders

Seven Things I Learned from People Who Trade for a Living
=========

Most trading problems are varieties of performance anxiety. This type of anxiety occurs when what is usually automatic becomes the object of excessive scrutiny. This over-attention on performance creates an interference effect, which impedes the performance’s natural flow. Such performance anxiety frequently interferes with athletic activity, public speaking, sexual performance and test-taking. Whenever fears about the outcome dominate the performance, outcomes are apt to suffer



Performance anxiety occurs as much during times of market success as during times of market loss. It is not at all unusual to find traders who are good at taking (appropriate) losses but who become fearful when they book a gain and take profits prematurely (i.e., prior to reaching their profit targets). Interference effects that follow strings of losses are no more debilitating than interference effects from pressure that traders feel when they are making money.
Traders commonly try to replace negative self-talk with positive self-talk during trading. This is a mistake. When traders are immersed in the market and focused on the screen, they are not engaging in self-talk at all.

Perfectionism is the most common source of performance anxiety among traders. Traders tend to be achievement-oriented and often set lofty goals for themselves. These performance goals contribute to tension when traders do not meet their goals. In general, it makes sense to replace performance goals with process goals. Instead of setting a goal of making $250,000 a year, a trader should, for example, set a goal of following a trading plan (entries, position sizes, exits) on 90+ percent of all occasions.

Perfectionism leads traders to overtrade. Overtrading is the most common source of losses among the traders I’ve interviewed. Traders overtrade when they feel internal pressures to make money. These pressures blind the trader to what is happening in the markets at the time. Trading when volatility is low, trading outside one’s trading plan or strengths, trading to make up a loss and trading imprudently large size are examples of overtrading.

Traders who master performance anxiety at one level of size (e.g., 5 contracts) frequently re-encounter it once they meaningfully increase their size (say, 50 contracts). We generally calibrate our emotions by the dollar amounts we make or lose. This makes a 50-contract trade much more difficult for traders than a 5-contract trade even though the setups may be identical.

Traders often think they have worse psychological problems than they actually have. When performance anxiety patterns have interfered with trading for a considerable period of time, traders often become convinced that they have deeply-seated emotional problems that need intensive psychotherapy. Often, the self-perception that one is damaged -- that one is emotionally unfit -- is a larger problem than the performance anxiety itself, which is a very solvable problem.

To be sure, there are problems other than ones related to performance fears that can interfere with trading. Many of these are described in my book. The unique thing about performance anxiety is that it can afflict highly successful traders every bit as much as rookies. This is because the root of much of the anxiety -- perfectionism -- tends to be present in the most achievement-oriented and successful individuals. It is truly a double-edged sword.

Somewhere between the extremes of performance pressure and complacent laziness is a happy medium where traders can focus on self-improvement without sabotaging their results. Trading is like dating: You want to keep initial expectations reasonable, enjoy it while it’s happening and learn from it once it’s over.