It’s a situation all too familiar to traders and portfolio managers: After you’ve been seeing markets well and making good coin, you suddenly can’t buy a winning trade. One loser is followed by another and another, as the demons wrack the brain: What if I can’t get out of this? What if my edge in the markets has eroded? You try to adjust your trading, only to miss trades that normally would have been winners. Nothing is working. You’re in a slump.
Many factors can create series of losing trades: shifting market trends, correlations, and volatility; outside distractions; and simply the random chance of being wrong X times in a row. A series of losing trades does not become a slump, however, until it plants itself in the trader’s mind and affects both thought and behavior. In that sense, the real cause of slumps is not what initiated the losing streak, but what sustains that streak. Most often, that sustaining influence is performance anxiety.
In today’s New York Times, Karen Crouse has an excellent article on how performance pressures affect athletes. She notes that the serve in tennis, like the free throw in basketball, is completely within the athlete’s control. Once the tennis player becomes aware of the pressure of the situation and the stare of the crowd, however, natural performance suddenly becomes unnatural. Double faults accumulate, free throws clang off the rim.
As one analyst explained in the article, “It’s like I cringe when people are serving second serves on key points…You can see it in their faces–it’s almost like their mind is freezing up and they just look like they’re not going to win this point.” What is surprising is that such pressures affect even the best, most seasoned performers.
Trading is like free throw shooting and tennis serving in that the actions are wholly under the performer’s control, there is intense scrutiny of outcomes, and there is plenty of time to think (worry) about those outcomes.
Indeed, performance anxiety will occur any time thinking about the outcome of a performance interferes with the actual act of performing. That is what prevents many men from performing in the bedroom; what bedevils many a public speaker or college test taker.
Traders overcome slumps the same way that athletes do: by re-establishing a focus on the process of performing and de-emphasizing outcomes. Caught in her own serving slump, tennis pro Dinara Safina advised players, “Please try to see your ball when you serve.” In other words, stop focusing on where the serve will land and just concentrate on hitting the ball well.
The best portfolio managers will temporarily cut their risk during a period of slump, to the point where their overall profitability won’t be greatly affected by the next trade. With profit/loss off the table, it becomes easier to focus on the process of generating ideas and executing them well. Cutting position sizes has the effect of shifting the trader’s focus. This short-circuits the vicious circle in which performance anxiety leads to more losses, leading to ever greater pressure.
Psychiatrist Milton Erickson recognized that insomnia is basically a sleep slump. Once insomniacs start thinking and worrying about their lack of sleep, they can no longer relax and enter the frame of mind needed to naturally drift off. In one famous case, Erickson advised an insomniac to get out of bed when he couldn’t sleep and meticulously scrub his kitchen floor with a toothbrush. Willing to try almost anything, the patient followed the therapist’s advice and promptly became so dulled by the tedious task that he dragged himself to bed for a good night’s sleep. The task broke the cycle in which thinking about sleeping interfered with the process of falling asleep.
In solution-focused approaches, a coach will work with traders in a slump to focus on those trades that are going well. Rarely, even in a slump, does a performer truly lose all the time; it just feels that way. By bringing attention to what the trader is doing right, the focus shifts from one of performance outcomes to the process of following one’s own best practices. It’s the trading equivalent of seeing the ball when you serve.
As a rule, slumps don’t just end; they have to be broken. Ironically, it’s when performers let go of their need to perform well that they suddenly gain fresh access to the skills that produce elite performance.