Maintaining a Positive Attitude in Trading

from Brian Tracy and Nightingale Conant:

THINK LIKE A WINNER

When I was 21 years old, a friend of mine and I decided to go off to see the world. Many of our friends were going to Europe and hitchhiking around with rucksacks. We decided to be different and go to Africa instead. It never occurred to us to ask why no one else was going to Africa. We found out later, much to our great regret.
To get to our destination in Africa, we had to cross the Sahara. We started out from London, riding bicycles across France and Spain. The labor was excruciating, the progress slow, and the pleasure was nonexistent.
In Gibraltar, we sold our bicycles and invested our last few dollars in an old Land Rover. We crossed from Gibraltar to Tangier into Algeria. We were on our way in Africa. Still, there was one obstacle between us and the greenery we were anxious to see. It was that darn old desert. We had no idea how serious and how difficult this adventure was to be.
As we moved south across the desert, we encountered endless problems, any one of which could have ended our trip and, probably, our lives. Yet, it was during this desert crossing that I learned one of the most important lessons in my life about attitude.
The French, who had controlled Algeria for many years, had marked a path across the desert with black 55- gallon oil drums. The drums were spaced exactly five kilometers apart. As we drove and came to an oil drum, the next drum, which was five kilometers ahead, would pop up on the horizon, and the last oil drum, which was five kilometers behind, would fall off the horizon. Wherever we were, we could always see two oil drums at a time — the one we had just left and the one we were headed toward. To cross one of the greatest deserts in the world, all we had to do was take it "one oil barrel at a time." We did not have to cross the entire desert at once. For me, crossing the Sahara was a metaphor for life. In order to maintain a positive attitude under all circumstances, all you have to do is take it one step, one oil barrel, at a time. As Thomas Carlyle said, "Our great business is not to see what lies dimly at a distance, but to do what lies clearly at hand."
In any endeavor we can choose to be positive and constructive, sit down and think through the situation, and then begin to deal with it one oil barrel — one small achievement — at a time. Of course, this isn't always as easy as it sounds. We all must overcome the four obstacles that tend to get in the way of our maintaining a positive attitude.
OVERCOMING THE FOUR OBSTACLES TO A POSITIVE ATTITUDE
These obstacles are fear, worry, anger, and doubt. When things are not working out the way we had expected, our immediate response is to become fearful and uneasy. We are afraid that we will lose our money, waste our effort, or forfeit our emotional or physical investment in what we have done. If we are not careful, we start thinking of our potential losses rather than focusing on our potential gains.
Fear triggers worry, and we begin to use our power of imagination to create all sorts of negative images that cause us unhappiness and insomnia, and make us unable to perform efficiently. Fear and worry create anger, or what has been called the "victim complex." Instead of moving constantly forward in the direction of our dreams, we begin to react and respond, and to blame other people and other situations for our problems and challenges at hand.
Surrounding these negative emotions is the mental quality of doubt. Doubt is a fertile breeding ground for the other three negative emotions. Therefore, to eliminate these obstacles to positive thinking, you need to systematically eradicate the weakening emotion of doubt.
How do you do this? It's simple. The only real antidote to fear, worry, anger, and doubt is positive action toward the achievement of some worthwhile ideal.
Psychologists tell us that the key to dealing effectively with life is what they call "cognitive control." This is the assumption that you can think about, and concentrate on, only one thing at a time, either positive or negative. Successful people consciously choose to think about what they want, rather than what they don't want. As a result, they are continuously taking action toward their goals, rather than spending their time thinking and worrying about the current difficulties or the inevitable challenges that are sure to face them.
WHAT IS HOLDING YOU BACK?
People who never achieve success do so because they fall in love with their excuses. It isn't the actual truth about yourself and your abilities that hurts you; it is the things you consider to be true but have no basis in truth that hold you back.
We naturally fall in love with our reasons for not moving ahead. Even if someone challenges those reasons, or tells us that we have the capacity to accomplish so much more, we will often argue with them.
We attempt to prove to ourselves and others that our limitations are real, and the less justification these ideals or beliefs have, the more adamant we become in attempting to prove them to others. Richard Bach wrote this beautiful line: "Argue for your limitations, and sure enough, they're yours."
So how do you change your beliefs? The starting point is to get up the courage to question these self-limiting beliefs seriously. Question your basic premises. Check your assumptions. Ask yourself, What assumptions am I making about myself or my situation that might not be true? Think about them. Remember, most of our self-limiting beliefs have no basis whatsoever in fact. They are based on information and ideas that we have accepted as true, sometimes in early childhood, and to the degree we accept them as true, they become true for us.
You can always tell what your true values and beliefs are by looking at your actions. It isn't what you say or wish or hope or intend that demonstrates what you really believe. It is only what you do. It is only the behaviors that you engage in. It is only the actions you choose to undertake. And out of your actions come all the elements of your life. You are where you are and what you are because of what you have done in the past. But the wonderful news is, the past doesn't have to hold you back. That's because we are in a perpetual state of becoming.
A STATE OF BECOMING
The clearer you are about your ideal result or future vision, the easier it is for you to alter your actions and behaviors in the short term to assure that you get where you want to be in the long term. You have no limitations on your potential except for those you believe you have. As Walter D. Wintle wrote:
The Man Who Thinks He Can
If you think you're beaten, you are;
If you think you dare not, you don't.
If you would like to win, but think you can't,
It's almost a cinch you won't.
Life's battles don't always go
To the stronger or faster man;
But sooner or later the man who wins
Is the man who thinks he can.
THINK LIKE A WINNER
Thinking like a winner is the first step to living like a winner. You will become that which you think about most of the time. You are the architect of your personality and character. Your goal, your desire, is to be as successful, happy, and prosperous as you possibly can be in every aspect of your life. Therefore, the systematic development of a positive attitude is something that you need to work on every hour of every day. Continue to work on yourself and your thinking until you reach the point where you absolutely, positively believe yourself capable of winning in anything you sincerely want to accomplish.
People succeed not because they have remarkable characteristics or qualities. The most successful people are quite ordinary, just like you and me. Most of us start off poor and confused. We spend many years getting some sort of direction in our lives. But the turning point comes when we begin to believe that we have within us that divine spark that can lead us onward and upward to the accomplishment of anything that we really want in life. So, become the man or woman who thinks, I can. And when you reach the point where you feel unshakable confidence in yourself and your abilities, nothing will be able to stop you, not even the Sahara. Just stay your course and take each challenge ... one oil barrel at a time.

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THE 3 DIFFERENCES BETWEEN OPTIMISTS & PESSIMISTS In his book Learned Optimism, Dr. Seligman claims there are three fundamental differences between optimists and pessimists.

1. The optimist sees a setback as temporary, while the pessimist sees it as permanent. The optimist sees an unfortunate event — something limited in time and that has no real impact on the future. The pessimist sees a negative event as permanent, as part of life, as destiny, as an indication of more to come.
2. The optimist sees difficulties as specific, while the pessimist sees them as pervasive. When things go wrong for the optimist, he or she looks at the event as an isolated incident largely disconnected from other things that are going on in his or her life. An optimist perceives an unfortunate business incident as just that — a business incident. The pessimist would question the validity of the entire business or business direction. The pessimist would tend to feel helpless, unable to make a difference to correct the issue.
3. The optimist sees events as external, while the pessimist tends to interpret events as personal. When things go wrong, the optimist will tend to see the setback as resulting from external forces over which one has little control but which one can overcome. The pessimist takes negative events personally and as an indication of a larger pervasive personal shortcoming.

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Picture your Future Success — and Get It!

Take every opportunity to surround yourself with images of what success means to you: Get brochures on new cars you desire; get magazines containing pictures of beautiful homes, beautiful clothes, well-toned bodies, and other things you will obtain as a result of achieving the success that you are aiming for. Each time you see or visualize those images, you trigger the thoughts, feelings, and actions that make them materialize in your life. But, don't wish for them ... that is day dreaming. Think about them as absolute certainties in your future and focus on who you must be today to achieve these icons of your future success.

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6 STEPS TO ASSURE A POSITIVE ATTITUDE There are six things you can do to assure that your attitude is the very best it can be under all circumstances.

1. Whatever challenges you face, focus on the future rather than the past. Instead of worrying about who did what or who is to blame, focus on where you want to be and what you want to do. Get a clear mental image of your ideal successful future, and then take whatever action you can to begin moving in that direction. As the New Testament says, "Let the dead bury the dead." Let the past take care of itself, and get your mind, your thoughts, your mental images on the future.
   
2. Whenever you're faced with a difficulty, focus on the solution rather than on the problem. Think and talk about the ideal solution to the obstacle or setback, rather than wasting time rehashing and reflecting on the problem. Solutions are inherently positive, whereas problems are inherently negative. The instant that you begin thinking in terms of solutions, you become more positive and constructive.
   
3. Assume that something good is hidden within each difficulty or challenge. Dr. Norman Vincent Peale used to say, "Whenever God wants to give us a gift, he wraps it up in a problem." Lloyd Conant said it this way: "You don't earn the right to solve big problems until you have solved the small ones." In other words, the bigger the gift, the greater the success you have coming, the bigger the problem you will receive and must surmount.
   
4. Assume that whatever situation you are facing at the moment is exactly the right situation you need to ultimately be successful. The situation has been sent to you to help you learn something, to help you become better, to help you expand and grow. What good is it to think anything else?
   
5. In every challenge, look for a valuable lesson. Assume that every setback contains a lesson that is essential for you to learn. Only when you learn this lesson will you be smart enough and wise enough to go on and achieve the big goals that you have set for yourself. Again, since you can think about only one thing at a time, if you are busy looking for the lesson, you cannot simultaneously think about the difficulty or the obstacle. You will always find the lesson if you look for it.
   
6. Whenever you have a goal that is unachieved, a difficulty that is unresolved, or a problem that is blocking you from getting where you want to go, sit down with a pen and paper and make a list of every single thing that you could possibly do to resolve the situation. Write down every idea, ridiculous or not. The more you think on paper, the more you will take control over your conscious mind and focus it where you want — on the solution. (Don't miss The Greatest Problem Solving Tool by Earl Nightingale in the next issue of AdvantEdge).

The Psychology of Winners

from Dr. Brett:

Last year I gave a talk at a conference of traders and concluded the session by giving out my email address and phone number and inviting the attendees to contact me for any help they might need. I made it clear that I would not be soliciting them as commercial clients for coaching and that I would not charge them for time spent with them.

One of the participants approached me at the end of the session and expressed surprise that I would make myself so widely available at no charge. He noted that there were over 100 traders in the session and that I could easily be swamped with calls.

I smiled and simply said, "We'll see."

Within a two week period, I counted all the contacts that resulted and tracked who initiated them. It was a very easy task, because there was only one contact. It was from a very successful independent trader. No one else followed up.
And that's the way it usually is: Of the people with professed trading passions, only a fraction will sustain keeping any kind of journal or performance record; of those, only a fraction will use the journal and performance data to set and pursue concrete goals; of those, only a fraction will reach out for assistance in achieving those goals.

On the whole, people fail to reach high levels of success because they are not doing the things that successful people do: they are not on a path that can possibly lead to success. Traders can repeat positive affirmations and invoke positive images, but nothing replaces the hard work associated with preparation, practice, and focused work on oneself and one's craft.

The motivation to trade? Everyone has that. The motivation to be more than who you are: that's what makes winners. 
And by the way, that one guy who did follow up and call me? He made well over $1,000,000 last year.

And he still calls.

More:

Turning Goals Into Habit Patterns

What Turns Goals Into Performance

Frustration and Trading Lapses

The first post in this series highlighted the link between frustration and loss of discipline in trading. Stated in a different way, lapses of discipline tend to be state-dependent: we enter a frustrated, angry, confused, or discouraged state and that colors how we process and act upon information. A major way in which these states disrupt decision-making is by interfering with the cues that provide an experienced trader with his or her "feel" for the market. One of my best posts details how this happens.

There are many psychological techniques for quelling frustration, from cognitive techniques to change our thinking to behavioral, relaxation methods. Ideally, however, a trader's goal should be to prevent frustration in the first place.

This brings us to what I will call "the well-being hypothesis". (See this post for a detailed presentation of emotional well-being and its components). The hypothesis is that frustration tends to occur against a backdrop of diminished well-being. That is, if we are generally happy and satisfied in life, normal events that interfere with our goals will not be experienced as overwhelming frustrations. It is only when such well-being is relatively absent that the frustrations of normal life become emotional focal points.

Relationships are a good example. A happy marriage can weather the frustration of an occasional disagreement or conflict. I can think of plenty of disagreements in my own marriage, but I can't recall a time of yelling, arguing, or fighting. The disagreements occur against a backdrop of general goodwill and connectedness. If we lacked the well-being that comes from common values, shared experiences, and an emotional bond, it would be easy for those frustrations to accumulate and fester.

Similarly, when I'm having a good day and everything seems to be going my way, getting caught in traffic is but a minor annoyance. I turn on the music in the car and make the most of my wait. If it's been a day without gratification, however, the traffic jam just might be the straw that breaks my emotional back, causing me to fuss and fume throughout the wait.

Happy, satisfied people, on average, don't experience frustration to such a degree that it will dominate thought and behavior. Indeed, for a reasonably fulfilled person, stresses can actually contribute to well-being over time.

If the well-being hypothesis is correct, then an important way to prevent frustration--and hence its disruptions of trading--is to maximize positive emotional experience. Said in another way, the problem with discipline may be as much about a lack of positive experience in trading as the presence of overwhelming negatives. Instead of working to eliminate frustrations--probably an impossible task--we need to find ways to sustain well-being during the most challenging market periods.

The next post in this series will address this challenge.

Goal-Setting and Frustration in Trading

Note: Previous posts in this series are:

* How to Overcome Frustration in Trading

* The Well-Being Hypothesis: A Framework for Addressing Frustration in Trading

In the most recent post in this series, we saw that frustration generally only disrupts thought and behavior when it occurs against a backdrop of diminished well-being. If people don't feel fulfilled, happy, and satisfied with their lives, they're more prone to react--and overreact--to the normal frustrations of daily life.

What is well-being? A previous post outlined four pillars of positive psychological experience. That post concluded: "The wise trader structures his or her day to maximize experiences of well-being: that is what sustains motivation, concentration, and the ongoing learning needed to adapt to ever-changing markets."

This is an important principle: how we structure our trading determines the level of well-being we are likely to experience.

Consider the recent article that I linked about basketball superstar Kobe Bryant. At 31 years of age--and after 14 years in the NBA--he can no longer sustain his old feats of athleticism. Surely that would have to be a source of considerable frustration to such a competitor.

The article makes clear, however, that Kobe is not beset with frustration in the least. Rather, he has focused on developing new aspects of his game that compensate for his lost abilities. This positive focus is what sustains his well-being, balancing any frustrations that he encounters from game to game.

Check out the linkfest on goal-setting; it makes clear that goals cement learning and development in trading. When we have goals, we have tangible yardsticks for measuring our progress. Those yardsticks, when properly chosen, provide the basis for joy, satisfaction, and energy: they move us forward, even as we encounter day-to-day and trade-by-trade frustrations.

My experience is that the vast majority of traders do not set daily, weekly, and longer-term goals. Even fewer concretely track their progress toward those goals and make needed adjustments. In short, they are not pursuing their careers the way that a Kobe Bryant or Tiger Woods might.

This absence of goals and structured development not only prevents a trader from excelling: it robs the trader of potential positive experience. Every bodybuilder knows that specific goals--whether they be goals to lift particular weights or goals to improve the definition of certain parts of the body--are what sustain competitors through grueling training. Without the opportunity to achieve goals, physical training (like training in trading) is mere drudgery.

Few traders make the link between discipline problems and the absence of performance-oriented goals. You can do all the psychological exercises in the world, but if you're not structuring your development process to yield well-being, you'll miss out on the optimism, drive, and determination that propel elite performers.

Trading: What Benefit to Society?

from Dr. Brett:

An interesting question that arose during the Chicago trading seminar today was: What is the value of trading beyond making money?

It's a question that arises for many traders. So many occupations derive their nobility from contributing to the welfare of others in direct ways. Where is the nobility in trading?

In my reply, echoing Ayn Rand, I challenged the notion that nobility is solely or primarily a function of assisting others.

In mastering risk and uncertainty; in learning to pursue opportunity in effortful ways; in making ourselves better as decision makers; in becoming more disciplined actors; we improve ourselves as human beings. That carries over to many areas of life, so that we can become better business partners, spouses, parents, and friends.

Indeed, this might be the most important distinction between trading well and trading poorly: When we trade well, we make ourselves stronger, better; we tap into the best within us. When we trade poorly, we succumb to our lowest common denominators.

The value of trading is the value of any competitive performance activity: in its mastery, we become just a bit closer to our ideals--and that ripples throughout our lives.

RELEVANT POST: Achieving Greatness Through Trading

Overcoming Frustration While Trading

from Dr. Brett:
A while back, I wrote on the topic of steps to take to break patterns of frustration in trading and suggested resources for traders who find that frustration is interfering with their trading.

Much of what is viewed as a loss of discipline is actually the result of impulsive decision-making under conditions of frustration.

What that means is that you can best work on mastering frustration when you are actually in a frustrated state. It is difficult to prepare for making decisions in the heat of battle when you're in a cool and collected state.

This is where guided imagery is particularly helpful. By mentally rehearsing frustrating scenarios (such as missing a trade or getting stopped out) and including in the rehearsal a mental walk-through of what you want to be doing to handle the frustration, you can prepare yourself for adverse scenarios. This is very helpful in avoiding impulsivity, as you gravitate toward the positive coping that you've been rehearsing each day.

There are a range of brief therapy techniques that are effective in combating frustration. Check out this earlier post on short-term change methods, as well as Chapter 7 of The Daily Trading Coach, which describes behavioral techniques for overcoming stress.

In my next post on the topic, I'll address frustration from a different angle.

Shifting Emotional Gears As a Trader

from Dr. Brett-
A worthwhile blog post written by Richard Friesen describes what happens to traders when their brains downshift into flight or fight responses. In the post, he suggests a breathing and visualization exercise to achieve control of both body and mind. As I noted a while back, an effective way to prevent yourself from going on tilt in your thinking and trading is to exercise physical self-control.

Still another way to exercise self-control after a difficult trading period is to strictly control your trading size and the risk taken per trade. Large increases in position sizing magnifies the variability of profit/loss swings, which in turn magnify our emotional responses. The drama created by the increased risk creates potential trauma emotionally; once we're scarred from negative experiences, we end up trading scared.

A little while ago, I hit a high water mark in my yearly P/L and then took a full-sized position in a longer-term trade idea. Now, of course, we can increase the risk of trading not only through position sizing, but also through holding periods: the longer we hold a position, the greater the variability in returns. After all, the market moves up and down more in a week than in a day; more in a day than in a 20-minute period.

By trading full size over a much larger time frame (my average bread and butter intraday trade lasts less than 30 minutes; this one was a hold for several days), I increased my risk significantly. I felt justified in doing so, because I was confident in the trade idea.

Was I emotionally prepared, however, for a possible 20 point ES futures swing against me? Not at all. Instead of thoroughly thinking through that scenario and making sure I could live with it, I allowed my confidence to blind me to the possibility of being wrong.

And wrong I was. I took my largest loss of the year in a couple of days, erasing the gains of the prior two weeks.

Worse still, the experience left me frustrated and wanting to get back to my high water mark. The next day, eager to get back into the market, I forced myself to sit and watch. When I returned to the market, I limited myself to a single trading setup (a variation of my trusty transition pattern) and my short-term (intraday, under one hour holding time) framework. My trading size was kept moderate, so that potential losses would be entirely manageable.

Within a week, I recouped the loss and returned to my high water mark. I did so by chipping away at the drawdown, focusing only on my highest probability trades. The key was turning the frustration of the bad trade into a doubling-down of my determination to trade well. To accomplish that doubling-down, however, I needed to shift gears emotionally. Hitting the sidelines for a day and lowering my risk per trade were central to that effort. Had I tried to trade while I was hot, using size to recoup my losses all at once, I surely would have dug myself a deep hole.

Even though I've traded since the late 1970s, and even though I'm a psychologist who works with traders and all too familiar with trading pitfalls, I make the same mistakes--and am subject to the same biases and faulty decision making--as everyone else. No psychological techniques eliminate bias and bad trading. The best we can do is learn to shift gears, control risk, stay emotionally intelligent, and play to our strengths. That's what builds a trading job into a long term career.

Teamwork in Trading

from Dr. Steenbarger:

Using trading groups to move to the next level:
One of the most common concerns I hear from traders is difficulty "getting to the next level". Many have a sense that they've made progress, but can't quite take that next step toward consistent, significant profitability.

A tremendous advantage of trading within a firm is that you have multiple potential role models for getting to that next level. Within trading firms, you have colleagues who can discuss ideas with you, help keep you positive and motivated during dry spells, and inspire you to greater accomplishment.

Within a firm, also, you get regular feedback on your performance, assistance with risk management, and recognition for accomplishment.

All of these things are lacking for most independent traders.

I do not trade for a firm, but my work as a trading coach/psychologist brings me in contact with many traders and trading institutions. I cannot tell you how much I've learned simply by being around experienced, skilled traders. In such environments, you cannot help but absorb some of their knowledge and wisdom.

Does one need to actually join a trading organization, however, to benefit from group interactions with other traders? The popularity of chat rooms and Web 2.0 trading communities suggests that independent traders are using the online medium to create "groupness" and some of the advantages of affiliation with other traders.

But why not carry that forward yet another step and create actual virtual trading groups? Certainly the technology is readily available (instant messaging, Twitter, online conferencing) to facilitate interactions between and among traders in real time. If a truly committed band of traders decided to openly share ideas and trades, learning from mutual successes and setbacks, the gains in performance for the whole could be far greater than anything that might be achieved in isolation.

Such virtual trading groups would not require investments of capital or added risk. The only demand would be complete and total openness with trades, trade ideas, and trading results--and a willingness to both learn and facilitate the learning of teammates.

To be sure, such groups would require the right kinds of participants: ones sufficiently experienced to offer value to others, ones sufficiently committed to putting time and effort into learning, and--perhaps most of all--ones sufficiently secure to maintain an open kimono and share all the successes, failures, lessons, and letdowns.

A while ago, I conducted real-time postings of market observations, including my own trade ideas and trades. I then hit upon the idea of offering readers the opportunity to take turns leading these sessions via the blog, so that we could all benefit from multiple role models, myself included. Between 2000 and 3000 unique visitors access TraderFeed daily. How many responses do you think I got to lead even just one trading session by posting real time comments?

One.

Given that result, it's perhaps not so surprising that we don't see more virtual trading groups.

The most painful part of my training as a clinical psychologist was having to play tapes of my sessions for my supervisors. Every mistake, every missed opportunity was laid bare; there was no escape. In group supervision, getting a student to volunteer their tapes was torture. After initial hesitance, I pushed myself to volunteer; the worse the session, the more I forced myself to put it out there for learning.

That's what it took for me to get to the next level as a psychologist.

And that, I suspect, is why so few traders make it to that next level.

RELATED POST:

Performance and Profitability

Isolationism in trading:

A reader poses an excellent question:

What ideas do you have to help traders fight the isolation of trading alone with few outside contacts to discuss this style of making money? Most people are not very interested in discussing. Twitter is okay for news, but to share ideas it is just so so.

I addressed an important aspect of this issue in my post on virtual trading groups a while back; I also tackle this topic in the Trading Coach book. There is no question in my mind that, if I were to start trading full-time--knowing what I know now--I would either join a proprietary trading firm or would form my own "virtual trading group" by connecting online (and in real time) with a handful of like-minded traders.

Frankly, there is no guarantee that joining a prop firm will provide access to fresh perspectives and ideas, but at the good ones, the guys are always talking shop and you can pick up good stuff. My experience is that when you're prepared to give, you're likely to get. I often begin my interactions at prop firms that I work with by sharing my own ideas. It's surprising how often that leads to mutual brainstorming and exchange.

I know from my interactions with readers that there are many who are interested in mutual learning. Indeed, that is why many people responded favorably to my idea of a Chicago summer seminar in which the only "registration fee" was to bring one good, unique trading idea. My hope is that an event such as this could lead to further networking, from which could spring virtual trading groups.

Hint: Check out the most frequent participants in the comments sections of your favorite blogs and online forums. Many times, these will be the individuals most interested in networking and sharing ideas.

Finding trading teams:

In response to the posts on teamwork and performance and creativity and teamwork, several readers have asked how they might connect with others and enjoy the potential fruits of collaboration.

In her comment to the performance post, Michelle B. makes an excellent point. Teamwork cannot substitute for self-development. Before you have something to offer a team, you must first learn to coach yourself and bring the best out in you. Rarely can we offer more to others than we can provide to ourselves. Or, as Ayn Rand put it, one must have an "I" before meaningfully verbalizing "I love you."

This is why, in the Trading Coach book, Lesson 45 (Making the Most of Your Coaching Relationship with yourself) precedes Lesson 46 (Finding Positive Trading Relationships with others). Mastering our own self talk is helpful if we're going to talk constructively with others.

Michelle rightly points out that the Web offers a virtual treasure trove of potential collaborators. Take a look at your favorite websites and those that offer the best comments on those. Take a look at those who are sharing their work in blogs. Put your own comments and work out there. You'll be surprised at how many people you can network with and how many reach out to you.

Consider coaching in the world of athletics: the coach works with players in real time, during practice and during actual performance events. Teaching and coaching are seamlessly intertwined with the act of performing. Much of what makes teamwork powerful is that it occurs in real time, in the actual learning environment.

Real time electronic communications, from Twitter to IM and teleconferencing apps, make collaboration more possible than ever before. It is unfortunate that many of these efforts to date are pursued by performers who hope that teamwork will substitute for independent learning and gurus who desperately seek to profit from them.

You would not believe how many out-and-out frauds there are in the trading education, mentorship, and coaching worlds.

Don't let it get you down. Wherever and however it appears, seek out talent and let others share in your talents. Become your best and search for others who are doing the same. Over time, your team will coalesce.

Past posts have focused on the value of teamwork in trading and ways of finding teamwork in one's trading. The idea is to be part of a virtual trading group, even as one trades independently. This not only overcomes the problems associated with being isolated as a trader; it also creates a potential structure for accelerated learning.

A number of proprietary trading groups are recognizing the value of "groupness" and extending their work to independent traders. Trading RM in Chicago, for example, is offering a free trial of a service that enables traders to receive the actual trades placed by their prop traders, including stock and options trades. As their post points out, the idea is not to simply mimic their trades, but rather to use the information to highlight stocks showing trading promise. By tracking whether the traders are placing more long or short trades, subscribers gain an immediate measure of sentiment for the broad market.

Perhaps less obvious, such openness helps traders as well. Once all your trades become public, you become desensitized to losing. All your worst trades, as well as your best ones, are out there for the world to see. That goes a long way toward helping traders develop a thick skin during periods of slump. It's also harder for traders to lose discipline and "go on tilt" when they know that they're being tracked by colleagues within the firm and outside!  

No Perfection in Trading

from Abnormal Returns blog:

The perfect is the enemy of the good. – Voltaire

There is no room for perfectionism in trading.  Trading is a decidedly messy enterprise filled with false starts and missteps.  Traders trying to pick off the top and bottom ticks in the market are going to find themselves frustrated on a consistent basis.  Trying to wrestle perfection from a trading regimen is a false promise.
A need to achieve perfection is in some ways related to a need to be right.  To quote ourselves from an earlier post:

For traders, being right is overrated. It is far more important knowing when you are right, and when you are wrong, and acting accordingly.

Being right is only part of the process in attaining profitability as a trader.  In a certain sense we need only be good enough to attain profitability.

In summary, being right may be a necessary component of trader profitability, but it is not sufficient.  Proper money management techniques are required to turn trading decisions into trading profits.  While it is difficult some times to take, being wrong is a part of being a trader.  Don’t let the need to be right prevent you from becoming a better trader.

A need for perfectionism could manifest itself in any number of ways.  For instance, a chartist may be unwilling to trade if they are unable to find a stock with each and every indicator lining up in one direction.  If you are facing issues of perfectionism in the markets here are a few tips from Peter Bregman at the How We Work blog which provided the inspiration for this post.

Don’t try to get it right in one big step.  Just get it going.

Do what feels right to you, not to others.

Choose your friends, co-workers and bosses wisely.

A few quick notes on these points for traders.  The first point is especially relevant to systems traders who spend days/weeks/years trying to perfect a methodology before letting it loose on the markets.  The fact of the matter is that there are no perfect systems, and even good systems need to be adjusted over time.  Trading small may be a good way to overcome this initial anxiety.
The second point is something we touched on in another post.  No one person has all the answers.  There are as many different ways to trade as there are traders.  While it is crucial to try and learn from other traders it is you who are ultimately responsible for your trades.  So don’t let another trader’s viewpoint dictate your own actions.
The third point may be less relevant to trading, but let’s give it a try.  While most traders don’t have bosses or co-workers, but they do have friends.  This is especially true in today’s world of blogs, Twitter and StockTwits.  As Bill Luby at VIX and More notes it is important for traders to stretch themselves in search of new ways of viewing patterns and ultimately our approach to the markets.
It is often said that every trader gets what they ultimately crave from the markets.  Ultimately however what should be seeking is some level of fulfillment.  As Brett Steenbarger at TraderFeed writes:

Therein lies the appeal and the danger of markets: they can be arenas for self-development and mastery, or they can become battlegrounds for enacting our worst fears, insecurities, and conflicts. They can bring the kind of happiness on Nate’s face, or they can bring considerable suffering.

In conclusion, seeking perfection in the markets is a fool’s errand.  Traders can only strive to make themselves better with each trade and each trading session.  Only through this directed effort can one ultimately find fulfillment in the markets.
Afterword:  We are trying to practice what we preach.  This post is by no means perfect, but is in our opinion good enough to publish…

Dealing With Trading Addiction

from Dr. Brett:

My recent post reviewed research that suggests a link between risk-taking and addictive behavior. It's not just that an "addictive personality" will take undue risks; in addition, repeated large risk taking alters the structure and function of the brain so as to sustain addictive behavior. Many traders I've worked with never had discipline problems or out-of-control behaviors until they began frequent daytrading. When you think of traders at some firms placing 100 or more trades a day--basically one every four minutes--it's difficult to imagine that such frequent and unremitting risk/reward swings *wouldn't* affect the workings of mind and brain.

What's more, as Dr. Bruce Hong notes, is that exhausting frustration tolerance and willpower on one set of tasks appears to make us less disciplined on subsequent ones. That is how bad trading often leads to further bad trading, but also can lead to poor decision-making in other facets of life.

One of my first clues that a trader might be out of control is that he/she can't take a break from trading when he/she is losing money and can't reduce his/her risk after a series of losing days. This is very similar to the drinker who cannot stop imbibing alcohol even after the point of consequences.

If you are losing money and cannot stop yourself from trading--during a single trading day or after days of loss--I encourage you to take the hard look in the mirror at what you might be doing to your trading account, your emotions, your brain, your relationships, and your life.

Here are some posts regarding trading addiction that shed useful light--and offer helpful suggestions--regarding this painful and sensitive topic:

* When Trading Gets Out of Control

* Addictive Trading and Getting Your Life Back

* Craving Trading Highs

* Warning Signs of Trading Addiction

Being Right Is Over-Rated

from Abnormal Return blog (one of my favorites):

Joe Weisenthal at Clusterstock points out today an interesting (long) piece by Holman Jenkins at Hoover.org on the financial crisis. The gist of the article is that the financial crisis was by and large a massive financial accident that was unforeseeable.

Jenkins notes that even investors like John Paulson, who many claim to have foreseen the meltdown of the global financial system, did not in fact foresee the crisis. If they had they would have invested quite differently:

But those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes. Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less.

The point of the above quote is not whether the crisis was foreseeable, nor is it a criticism of Paulson. In today’s financial markets traders can express their viewpoints about the future through derivatives and structured products in a very precise manner. If Paulson had foreseen the collapse of the global financial system there were much easier ways to profit from (and express) that viewpoint. (Not that he is complaining.)

Much too much is made in the media about who is right, and who is wrong. (Not that these thing are well tracked.) On television, in print and on the Internet we are inundated with pundits who crow about their prescience, while omitting their missed forecasts. The funny thing is that for investors, being right is greatly overrated.

Investors and traders need only worry about one thing: profitability. Are you generating requisite profits from your portfolio for the risks assumed? Everything else is just noise.

The need to be right is a common error for beginning investors. Any one who has ridden a stock down for a large loss can attest to this. Behavioral finance experts have a term for this: the disposition effect. Investors tend to sell winners too soon, and losers too late. You could even think of this as ‘get-even-it is.’ Investors do not want to admit that they made a mistake.

The fact of the matter is that all investors make mistakes. It is simply a part of doing business. One way traders look at their profitability is expectancy. In a vintage post, Trader Mike does a nice job describing the components of expectancy. The take away is that the percentage of times you are right is only one component in your profitability. In theory, a trader could be wrong much more that 50% of the time and still be profitable, if the profits from their winning trades far exceed the losses on their losing trades. As he writes:

Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s).

Stated another way: For traders, being right is overrated. It is far more important knowing when you are right, and when you are wrong, and acting accordingly.

In summary, being right may be a necessary component of trader profitability, but it is not sufficient. Proper money management techniques are required to turn trading decisions into trading profits. While it is difficult some times to take, being wrong is a part of being a trader. Don’t let the need to be right prevent you from becoming a beter trader.

The Psychology of Behavioral Premises

from Dr. Brett-

I'm going to try to explain an important psychological concept and why it's of paramount importance to trading. The concept is something I call "behavioral premises". A behavioral premise is a rationale for our actions; it's the set of assumptions that drive our choices and responses in various situations. The network of our behavioral premises represents our belief system about ourselves, others, and the world around us. These beliefs may not be enunciated, but they are the filters through which we perceive the world, thus coloring how we respond.

An important principle is that our behavioral premises tend to evoke responses from other people that, in turn, reinforce those premises. That is, people's responses toward us will be shaped, in part, by how we approach them--and the beliefs that underlie our approach. Here are a few examples:

* A person has been hurt in past relationships and doesn't want to face rejection again. Her behavioral premises are that relationships are dangerous and that others don't really care about her after all. As a result, she maintains a guarded stance with people who might otherwise want to get to know her. Seeing that she is not approachable, others keep their distance from her and make no effort to open up themselves. This reinforces her premise that people are uncaring and unavailable, convincing her that she must stay all the more guarded.

* A job applicant believes that he has no chance to land a desirable position. His behavioral premise is that he lacks the charm and personality to come across well in an interview. As a result, he is nervous throughout his visit to the firm and comes across as unsure of himself. Sensing this, the interviewer concludes that he won't be an effective representative of the company and turns him down. This confirms the man's belief that he is not cut out to be hired for a good job, and he approaches the next interview with even less confidence.

* A businessman is convinced that others are out to cheat him. His behavioral premise is that he needs to be on guard at all times, because his employees can't be trusted. He establishes strict rules and maintains stifling oversight of his employees, even after their training phase has been completed. The employees, feeling untrusted and not valued, leave the business one by one to find a more suitable work environment. This convinces the businessman that he's right; that employees will just take his training, use him, and move on. As a result, he trusts the new group of employees even less.

Notice that each of these scenarios is one in which there is a vicious cycle. The behavioral premise leads to actions that bring outcomes that reinforce the premise. This is one major reason people stay stuck in self-defeating patterns.

The same dynamics occur in trading. Imagine that, feeling like a defeated trader (per the recent post), you act on the behavioral premise, "I just can't make money in the market." You follow your rules, enter a trade, and it moves a few ticks against you. This only reinforces your negative belief and you quickly exit the position before the loss becomes too great. Meanwhile, the market chops around a bit before eventually moving in the direction you had anticipated. All you can do is shake your head: your premise has proven true once again.

So how do people escape from these vicious cycles? Most people can't talk themselves out of their premises; they need direct, powerful emotional experiences to show them that their beliefs are wrong. This is one reason I emphasize solution patterns with the traders I work with. We spend extra time examining trades that have worked out and isolating what the trader did right on those trades. By creating a model for good trading out of these successful trades, we increase success and disconfirm negative behavioral premises.

One of my favorite exercises is to look at what happened in the market after exiting a trade. Very often the basic trade idea was right all along; it was the timing that was off. This also disconfirms negative premises. The message is that it's not that you can't read the market; it's just that you need to refine your execution: when you enter, how large you enter, and where you stop yourself out. I've often seen big results from such seemingly small refinements. Why? Because the process of making those refinements challenges the behavioral premises that led to the "stuck" patterns to begin with.

We will always live up to our most deeply held behavioral premises--for better or for worse.

RELATED POSTS:

Solution Focused Trading

The Question to Ask When You're in a Slump

Three Questions to Ask At the Start of the Trading Day

from Dr. Brett--
Here are three questions to ask at the start of the trading day:

1) Am I bringing baggage to the day's trade? Am I carrying over frustrations from losing money or missing opportunity? Am I feeling particular pressure to make winning trades? Am I locked into a view of markets because those views haven't been paying me?

2) Am I prepared? Have I identified significant price levels for the day? Have I gained a feel for how various markets have been trading overnight? Do I know if economic reports are scheduled for the day and what the expectations are?

3) What am I working on? Do I have goals for the day? What have been the mistakes I've been making that need to be corrected? What improvements have I made that I want to cement? What kinds of trades have been working best for me, and am I prepared to actively look for those?

The idea is to become a good self-observer: it's harder to get locked into negative patterns if you're standing apart from those patterns. It's also easier to enact your best trading patterns if you're fully aware of them. Just asking where your head is at when you're trading helps you interrupt patterns that hurt your trading.

Reader Comments on Handling Performance Pressures

from Dr. Brett--
I recently proposed that performance anxiety is the most common psychological problem faced by traders. In the comments section of that post and in private emails to me, readers have weighed in with their successful approaches to dealing with performance pressures. This post will summarize reader comments; tomorrow's posts will synthesize perspectives from reader emails and add a few views of my own.

Let's start with views from the comments section:

* Reader Charles talks about an approach that is common among proprietary traders I've worked with. When he hits a slump, he temporarily reduces his size, takes pressure off, and then raises his size once he gets back into the groove. I will do something somewhat similar: I will temporarily limit my trading to my highest probability setups and get a winning day or two under my belt during a slump period. The reason this strategy can work is that it takes an important element in stress--perceived control--and puts it squarely in the trader's hands. Often, performance anxiety occurs when we feel out of control of a situation. By creating an enhanced degree of control, we can regain our sense of mastery and minimize stress. The one caveat in this approach is that position sizing is crucial. If you risk too much of your portfolio on individual positions and then hit a losing patch, you could dig too deep a hole for yourself--particularly if you reduce your size in order to recover psychologically. Not betting the farm on any single idea is one great preventive measure for performance pressures.

* Trader David offers a fascinating analogy between trading and skeet shooting. He also provides a link to an Olympic shooting coach who helps his students with performance pressures. He suggests visualization techniques to occupy the conscious mind, enabling the subconscious (i.e., our automatized skills) to take over. Most performance anxiety occurs when a task that normally occurs automatically is disrupted by our conscious focus on the outcomes of that task. Any exercise that absorbs our awareness and directs our focus away from the performance itself will be helpful in that regard. As I will indicate in tomorrow's post, enhancing our state of concentration and directing that concentration toward the process of performing (not the outcome) can form the foundation for an effective self-hypnosis routine. David's approach is much more than simple positive self-talk: it is a redirection of attention and hence a redirection of regional cerebral blood flows.

* Dr. Bruce, who has offered so many fine comments on this blog, puts his training to good use and recommends the use of beta blockers in combating performance anxiety. I cannot agree more. When I ran the counseling program for medical students in Syracuse, I encountered performance anxiety problems all the time: test anxiety, public speaking stress, etc. My first line of assistance was the use of specific behavioral exercises that research has found to be effective in dealing with anxiety. (More on those tomorrow.) There were times, however, when even those exercises were not sufficient to gain self control. The beta blockers were very helpful in reducing physiological reactivity, reducing the secondary anxiety that I mentioned in the prior article. Instead of becoming anxious about their own anxiety, performers notice their reduced arousal and focus on that. Here's a nice summary of the use of beta blockers for professional musicians. Note that these are to be used as temporary measures before major performances and must be prescribed and supervised by a physician.

* Dr. Bruce also recommends relaxation and biofeedback. At present, a combination of these, along with directed behavioral exercises, is my favorite intervention for performance anxiety. Here you're training the body to remain calm--and training the mind to stay focused--under varying emotional conditions. Much of my post tomorrow will deal with this combination. As Dr. Bruce notes, the techniques work much like the beta blockers: by reducing autonomic arousal.

* Finally Dr. Bruce emphasizes the role of preparation in preventing performance anxieties from taking over. Making skills automatic is the best way to enable performances to flow. When I have a public speaking engagement, I will always prepare the opening of my talk most extensively. I'll also use overheads to cue me through the opening. I know that if performance pressures are going to be present, they'll get to me early in a talk. By being super prepared with the first portion of the presentation with plenty of cues, I get into the rhythm of the speech and the automatic skills take over. Similarly, I will intensively mentally rehearse the entry of a trade and what I'll do if it goes against me. This preparation takes the scariness out of a situation and, as noted before, enhances the sense of personal control. Please also take a look at Dr. Bruce's point about running wind sprints (increasing your physiological arousal) when you're anxious; it's an excellent point. By exercising vigorously when you're anxious, you override your body's nervousness with normal pumped-up arousal, which no longer plays into the secondary anxiety. Indeed, as the good doctor notes, you can actually use your awareness of your pumped-up state to aid your performance.

* Trader Dan mentions a technique that psychologists call cognitive reframing. Remember that performance anxiety occurs when we perceive a situation to be a threat. By reframing the situation, we take much of the threat out of it. His reframing is based on an analogy to the baseball player: The hitter can get on base less than half the time and still be an all-star player. It is not necessary to win on each trade to be a successful trader, and all successful traders have strings of losers simply as a function of chance. Making losing a normal, expectable part of the game--and making sure position sizes are reasonable in order to survive those losing streaks--is very helpful in taking the threat out of trading losses. My own approach, as readers know, is to view outcomes in two ways: trades that make me money and trades that teach me something about myself and/or the market. By embracing loss as a learning experience, I reduce the stress often associated with thoughts of losing.

* Reader AnaTrader, who has also graced this blog with many fine comments, offers several perspectives from her mentor. The essence of her mentor's approach is enhanced self-awareness: taking one's "emotional temperature" hourly to monitor stress levels and thought patterns associated with stress. AnaTrader passes along a key insight: the importance of staying focused in the present. It's when we become wrapped up in the past or future--worrying about past losses or possible future ones--that anxiety is most likely to appear. By using breathing techniques to stay grounded in the present and reduce physiological arousal, it is possible to regain a present-centered awareness. Citing Steidlmeyer, AnaTrader's mentor notes the value of immersing yourself in current market data as a way of staying focused on the present. Immersing oneself in meditation music and constructive self-talk, as AnaTrader notes, can also short-circuit the worry process that generally precedes performance pressures.

* Trader Jeff mentions returning to paper trading mode as a way of regaining one's rhythm. This is similar to the above-mentioned technique of reducing trading size, but now it takes money off the table altogether and just has the trader focus on the process of putting on trades and managing them. This approach is common in the area of sexual performance anxiety, where psychologists will help couples by telling them to *not* engage in intercourse and simply get comfortable with themselves and their partners in bed. By taking the performance pressure away from the sexual situation, couples can allow their natural feelings to take over. Similarly, the trader who goes back to paper trading temporarily can find his or her rhythm return relatively quickly, making it easy to return to putting money on the line. One caveat here is that you don't want to retreat to paper trading for too long a time; that could be an escape that would not enhance a trader's sense of master. As a temporary measure for getting away from money pressures and returning to sound trading practice, however, going into simulation mode can be very useful.

* KC Equity Trader makes a super-important point about making sure you can always survive losing trades. In my own position sizing, I always assume that I could have six consecutive losing trades. If my bets are so large that six consecutive losers would put me in an emotionally bad place (and a large P/L hole), then I know I'm trading too much size for my own risk tolerance. Because KC Equity Trader knows he's always going to survive to make another trade, no single loss is unduly threatening for him. KC's point about keeping things mechanical--carefully following planned entry and exit signals--also makes the trade automatic, reducing performance worries. By making losses planned and routine, the trader takes away their threat.

* Dinosaur Trader mentions how it's easy to become more focused on P/L when a new child enters the home and there are greater household expenses and perceived trading pressures. He also mentions reducing trading size as a way of reducing this pressure. Sound financial planning is also key: making sure that you always have cash reserves to handle unexpected expenses, loss of a spouse's income, etc. I'm a firm believer that one should not be trading one's household savings. There should be separate accounts: one for savings/investment that remains safe and secure and one for trading. If your trading account is also your savings and retirement capital, that is too much objective pressure for most traders. What that means in practice is that a portion of trading profits should always be devoted to rainy days, trading slumps, and future needs. It also means that new traders should have enough reserve capital not at risk (or secondary sources of income) to survive their learning curves. That having been said, I know many traders who have traded more cautiously (and smaller) immediately following a major life event (marriage, birth of a child, relationship break) until they're sure they have their equilibrium. The ounce of prevention in such cases is truly worth the pound of cure.

* Finally Trader M. mentions anxiety that comes from being unable to anticipate market trends. He engages in considerable market preparation to make such anticipations and feels pressure to incorporate new methods/information in order to not miss anything. The risk here is one of perfectionism: setting a standard of being able to predict trends that not even highly successful traders live up to. Many, many successful traders (trend followers, short-term traders) don't succeed by anticipating market trends. Rather, they identify shifts in trend as those are occurring or right after they've been confirmed. I know quite a few successful breakout traders who don't try to predict the breakout: they simply go with it once it's confirmed by volume and the participation of large traders. Trader M. perceptively notes that trading is like speed chess. In speed chess, however, you don't succeed by trying to predict your opponent's moves. Instead, you train yourself to respond to board configurations as they emerge. Moderating one's demands on oneself can be a powerful method for reducing performance pressure.

So there we have it! There are many more fine insights from commenters than you'll get in any high priced seminar or coaching session. Tomorrow, I'll summarize the equally astute insights of those who have emailed me with comments and then I'll post my own techniques for handling performance anxiety. Thanks to all who have participated in this exercise and shared their learning and experience!

I recently posted comments from readers regarding ways of handling performance anxiety. In this post, I'll summarize emailed ideas from readers and also add a few thoughts of my own. Because these readers opted to email me rather than comment publicly, I am not mentioning them by name to preserve their anonymity.

* Trader O recommends a book by Terry Orlick entitled In Pursuit of Excellence: How to Win in Sport and Life Through Mental Training. Orlick is a former Olympic athlete and coach and has worked with many Olympians on mental training. His methods include focused goal setting, visualization, relaxation, and methods to block out distraction. Recall that performance anxiety occurs when concerns about the outcomes of performances interfere with the actual act of performing. By learning how to direct awareness and achieve a state of focused concentration, a performer can become immersed in the act of performing. For instance, during my best trades I focus intensely on what various sectors are doing and how volume is behaving. My thoughts are on how the market is trading, not on whether my trade will make money. As Trader O and the book suggest, one can train oneself to sustain such focus as a positive habit pattern.

* Trader M observes that "The most effective technique I use for dealing with anxiety is to remember that anxiety is missing the letter ‘d’. There is no entry in any English dictionary entered as “andxiety”." His excellent point is that we tend to lapse into thought patterns where we see ourselves as either all good or all bad. Anxiety can be seen as a form of justice, pushing us toward a more balanced perspective. The word "and" itself adds a balancing element, reminding us that we are subject to both good and bad: winning and losing. This simple reminder--by turning "anxiety" into "andxiety"--helps a trader think and feel with "and". That's a balanced perspective that doesn't put pressure on the performer.

* Trader S recommends the book Emotional Intelligence and its description of methods to resolve problematic emotional patterns. He particularly mentions becoming aware of your own breathing, especially when it becomes short and shallow. By purposely elongating those breaths, he is able to slow himself down both mentally and physically. He has used the Journey to the Wild Divine biofeedback software to help him learn to control his body's arousal. Finally, after undergoing some traumatic losses, Trader S. has limited himself to trading one contract and losing only $100 per trade. This takes the possibility of large losses entirely off the table and enables him to regain confidence. In my next post, I will outline some of my own uses of biofeedback to deal with performance pressures. This can be a very useful tool for self control.

* Trader A mentions a technique from a book that helped him greatly when he started a new trading position with a firm. He kept a daily journal and wrote down the time of day whenever he experienced feelings of panic regarding his trading. He then wrote down the time of day when that anxiety subsided. Although it seemed as though the nervousness was lasting a long time, he could see that, in fact, it only lasted a few minutes at most. Each time he repeated the exercise, the duration of the anxiety period lessened. This is an excellent method, because it reinforces for the trader the sense of "This, too, shall pass." It is one easy way to deal with secondary anxiety: the fear of becoming anxious.

* Trader F recently went through a harrowing loss and dealt with it by shedding half his position and protecting his remaining capital. He notes that such a loss can spiral, taking a trader out of his discipline and interfering with subsequent opportunities. I believe his basic point is so important : we should always have loss limits in place that we can live with. This takes much of the pressure off of losing. I personally try to ensure that no single loss in a day's trade could prevent me from having a green week; no single losing week could prevent me from being up on the month. The key is to have control over one's losses, rather than letting them control you.

Once again, I thank readers for sharing their experiences and life lessons. One great advantage of a blog is that it can become a two-way vehicle for communication, in which we learn from each other's experiences. In the last post and this one, readers have written a virtual manual regarding how to overcome performance pressure. My next post in this series will offer a few perspectives of my own and attempt to contribute to that manual.

Favorite Techniques for Overcoming Performance Anxiety

from Dr. Brett-
A little while back I made the observation that performance anxiety is the most common psychological problem that I encounter among traders. It occurs in many forms--during slumps, at times when traders attempt to raise their size/risk, when life's financial needs add pressure to trading outcomes--but the common element is that a concern with the results of trading interferes with the process of trading itself.

I thought that both the comments of readers and their emailed suggestions offered very useful ideas regarding the handling of performance pressures in trading. In this post, I'll add two suggestions of my own.

* Self-hypnosis - This builds on the ideas from my first trading book, The Psychology of Trading. When a trader is responding to a trading situation with anxiety, I ask the trader to close his eyes, breathe deeply and slowly, fix his attention on a musical selection, and hold his hands in front of him with palms facing each other a couple feet apart. The music, taken from Philip Glass' early works, has a highly repetitive structure and serves as an object of focus. After an extended period of the slow, rhythmical breathing and focus on the music, I then suggest to the trader to imagine that there is a magnet between his hands, pulling them slowly and steadily together. As his hands are drawn closer and closer, I suggest, he will find himself feeling more and more relaxed, calm, and confident. The exercise is brought to a close when the palms finally touch. Altogether the exercise lasts at least 15 minutes.

The exercise becomes a self-hypnosis routine when traders give themselves suggestions during the time that the hands are moving together. For example, they might suggest to themselves (internally or even via a self-made audio tape) that, as their hands move together, they will feel increasingly accepting of a recent loss and able to put it behind them. The key is to enter a highly focused and relaxed state prior to the self-suggestions and to perform the exercise thoroughly and regularly on a daily basis. Over time, traders find it easier to enter the focused state of relaxation and invoke their own suggestions. Eventually it's possible to get back to that state (and activate the suggestions) by merely taking a couple of deep breaths and bringing one's hands together. This makes the technique very practical for real-time trading situations, when all you have time for is perhaps a few deep breaths and a simple gesture. Repetition is essential to such mastery.

* Reprogramming Anxiety Through Biofeedback - Regular readers know that I consider biofeedback to be a best practice in trading, with broad application to a variety of emotional situations that affect performance. Of late, I've been making use of heart rate variability feedback through the Freeze-Framer program, which offers a nice graphical interface to help users track their progress and visually determine whether or not they're in "the zone". In the first step of biofeedback training, I simply teach traders how to enter the zone, as above, by regulating their breathing and sustaining a tight cognitive focus. This, by itself, is a very useful skill that can serve as a preventive measure regarding performance stress.

Once the trader becomes adept at this, I then add a second component to the exercise: The trader must vividly visualize a mildly anxiety-producing trading situation while hooked up to the biofeedback and maintaining the calm focus. Once the trader can repeatedly visualize this low-anxiety situation and sustain "the zone" on the biofeedback readout, we then move to a second, higher-level anxiety scenario. Often it's helpful to vividly imagine variations of the same scenario in separate biofeedback sessions. Eventually we move to the most anxiety-producing situations, repeating them over and over in variations, until the trader can sustain the calm focus even in the worst case scenarios. The added benefit of this method is that it teaches traders what they need to do to get their minds and bodies under control. This awareness can then filter down to real time, when all the trader needs to do is focus attention and regulate breathing during stressful market periods. A variation of the biofeedback work that is quite effective involves practicing constructive self-talk while staying in the zone.

Notice that both of these methods involve shifting one's state--physically, cognitively, and emotionally--as a way of dealing with performance pressure. By enhancing our control over our states, we can place ourselves in modes of thinking and feeling that are incompatible with performance anxiety. My experience is that traders can learn this competency on their own or with only a minimum of coaching intervention. With steady practice, one develops a degree of self-mastery that carries over to other areas of life. I believe I'm much more able to deal with life's various stresses as a result of what I've learned from managing my trades--and my reactions to those trades!

Breaking Through Slumps

from Dr. Brett -
It's never easy going through a trading slump, but it's especially frustrating and difficult when markets are moving and you're missing out on so much seeming opportunity. I've received quite a few calls and emails from traders in slumps lately, and frustration is the common emotion: frustration that is channeled as self-blame. It's not just that the traders are losing money; they also hold themselves responsible for their losses--and they can't let it go.

Generally, what initiates a trading slump is not what sustains it. The initial cause is often a misreading of markets, an outsize losing trade, or a careless trading error. Those are things that happen to any trader who participates in markets long enough. Rarely, in and of themselves, do these initial mistakes and losses ruin overall profitability.

What does ruin profitability is compounding these unfortunate but expectable errors with subsequent bad trading. By "bad trading", I don't just mean trades that lose money. Rather, I'm referring to trading decisions that one would not have taken had those initial losses not occurred. The bad trading could entail ignoring an obvious signal to buy or sell. It could result in buying and selling in the absence of signals. It could result in a shift in position sizing or a large change in how manages the risk associated with each trade.

This transition from normal, expectable initial mistakes and losses to subsequent bad trading is what turns loss into slump: it is what sustains a slump. The trader cannot accept the initial loss or mistake, learn from it, and put it behind them. They cannot simply deal with it as one of those normal, expectable frustrations, like getting caught in traffic or like choosing the wrong restaurant. Instead, the initial losses and mistakes are personalized. They become threats, not so much to P/L, but to self-esteem. Suddenly, the trader convinces himself or herself that this is not acceptable: I must get my money back or I must stop trading altogether, because I have performed so poorly.

Can you imagine a professional athlete--say, a football quarterback--who throws an interception and then becomes so self-blaming or so fearful of repeating the error that he abandons the game plan that he rehearsed with coaches and players? That is the trader who turns mistakes into slumps.

Of course, once the initial error is compounded, now the motivation for self blame is doubled: the slump becomes self-reinforcing. The more money is lost and the more the trader makes bad decisions, the more he or she alters those "game plans".

The answer to this problem is to embrace your fallibility. You *will* throw interceptions at times. On occasion, you'll lose, and, on occasion, you'll make mistakes that cost you victory. That happens to professional athletes, chess players, performing artists trying out for positions, and business leaders. What makes you a professional is not perfection--making no mistakes, taking no losses--but the ability to accept setbacks, learn from them, and move on.

It sounds paradoxical, but mistakes and losses won't turn into slumps once you embrace those setbacks as opportunities to learn: to learn about markets, to learn about yourself. Every mistake is there to teach you something; you're either losing because you've missed something in the market, or because you did not execute an idea properly. Either failing is there to teach you something, to provide you with an opportunity to grow. We overcome losses by accepting and transforming them; it's when we fight them that they turn into frustrations and then slumps.

For more information related to slumps and positive trading performance, I've selected several past blog posts below for additional reading.

RELEVANT POSTS:

Why Traders Lose Their Discipline

Characteristics of Successful Traders

Improving Your Well-Being

Overcoming Performance Anxiety

Coping Effectively With Trading Stress

from Dr. Brett--
I recently read a book that claimed that the best traders trade completely clear headed, free of emotion. What rubbish. The best traders I've known have been highly competitive individuals who take significant risk and seek significant reward. They are no less emotional than boxers in a ring or basketball players at tournament time.

What enables these traders to perform at high levels is that they are able to prevent the normal stresses of work from becoming distress. Another way of saying this is that they employ effective techniques for coping with the daily stresses of managing money in uncertain and volatile markets.

Here is the post I linked yesterday via Twitter; it will enable you to assess your coping style.

Many times, we employ coping methods that have worked for us at one time in life or in other situations, but do not work in trading situations. We go back and back to the same ineffective coping behaviors, not because we're self-destructive, but because we have overlearned those behaviors through past experience.

Here are a few examples of such good coping gone wrong:

* A person who has learned to confront problems head on cannot back away from markets when trading poorly;

* A person who withdraws in situations of conflict to keep the peace finds themselves unable to stay in good but uncertain trades;

* A person who deals with problems by taking responsibility for them becomes self-blaming and punitive during periods of normal drawdown;

* A person who has learned to put a painful past behind them fails to focus on trading problems and never adequately addresses them.

In all these cases, coping actions that have been effective do not work for the trader.

This is where the solution-focused approach can be quite useful. In the solution mode, we focus on examples of times when we *have* coped effectively and figure out what we did that worked. Once you can identify a positive pattern--a way of dealing with challenging market situations that works for you--the task is then to rehearse it to the point at which it becomes second nature.

As I emphasize in the chapter of the new book devoted to this topic, traders frequently run into problems when they fail to enact their best coping strategies. Tracking how you deal with challenges when you are at your most effective enables you to create a mental model of that coping that you can call upon during periods of high stress. We cannot avoid the stresses of trading, but those do not have to generate distress and biased decisions.