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Behavioral Patterns That Sabotage Traders – Part I
By Brett N. Steenbarger, Ph.D.
Although I do not maintain a private practice of
counseling/coaching for traders, it is perhaps inevitable that
traders would contact me for assistance after reading my book on
The Psychology of Trading. Once in a while I take on a project
of working with a group of traders because of the opportunity to
push the envelope and use psychology to improve their trading
performance. In the past few years, I would guesstimate that I have
gathered personality questionnaire data and assisted over one
hundred traders.
That’s a decent-sized sample, and provides me
with worthwhile insights into the minds of traders and the problem
patterns that interfere with their trading. Below I outline a few
of the things I have learned from questionnaires and interviews with
individuals who are trading for a living.
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Most trading problems are varieties of
performance anxiety. Performance anxiety occurs when a
performance that is usually automatic becomes the object of
excessive scrutiny. This attention to the performance creates
an interference effect, in which the performance can no longer
flow naturally. Such performance anxiety frequently interferes
with athletic performance, public speaking, sexual performance,
and test taking. Whenever fears about the outcome of a
performance dominate the performance, outcomes are apt to
suffer.
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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 following strings of
losses are no more debilitating than interference effects from
pressure that traders feel when they are making money.
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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.
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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 the goals are
not met. 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+% of all occasions.
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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 that 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.
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Traders that master performance anxiety at
one level of size (e.g., 5 contracts) frequently re-encounter it
once they meaningfully increase their size (50 contracts). We
generally calibrate our emotions by the dollar amounts we make
or lose. This makes a fifty contract trade much more difficult
for traders than a five contract trade, even though the setups
may be identical.
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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. In
the second and final article in this series, I will take a look at
strategies traders can use to overcome performance pressures.
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Brett N. Steenbarger, Ph.D. is a clinical
psychologist and active trader, writer, and
researcher for the past 20 years, Brett is the
author of The Psychology of Trading (Wiley;
2003) and numerous articles on trading psychology
for print and online financial publications.
Click here for full
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