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.

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.

  • 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.
     
  • 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.
     
  • 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 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.
     
  • 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.
     
  • 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.
  • 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.

Brett N. Steenbarger, Ph.D. has been actively involved in the financial markets since the late 1970s. He most recently served as Director of Trader Development for Kingstree Trading, LLC in Chicago and is currently Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY.

A clinical psychologist and active trader, writer, and researcher for the past 20 years, Brett is the author

His book chapters on brief psychotherapy can be found in such reference works as The Psychologist’s Desk Reference (Oxford University Press, 1998) and the Encyclopedia of Psychotherapy (Academic Press, 2002). His newest, coedited book, The Art and Science of the Brief Psychotherapies (American Psychiatric Publishing, 2004), has been selected as a core training text for psychiatry residency programs, and he will be a contributor to the 2006 Textbook of Psychiatry.

In July, 2004, Dr. Steenbarger stepped down from his medical school faculty position and began intensive work with professional traders at Kingstree Trading, where he also coordinated their training program for new traders. A year later, he moved his work with traders to a part-time basis in order to pursue modeling research, his own trading, and the writing of a new book on trader performance. Drawing upon an intensive research program that began in 1998, he has created a number of unique measures of market trend, momentum, and institutional activity designed to aid short-term traders. These measures–and the trading strategies derived from them–have been chronicled daily since June, 2002 in the Trading Psychology Weblog and on this site.

Dr. Steenbarger resides in Illinois with his wife of 21 years, Margie, and their two children, Devon and Macrae. He grew up in Canton, Ohio, receiving his B.S. from Duke University in 1976 and his Ph.D. in Clinical Psychology from the University of Kansas in 1982. Dr. Steenbarger does not offer coaching or other commercial services to traders.

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