How to Avoid Choking While Trading

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How to Avoid “Choking” While Trading

Not physically choking, but rather how do you avoid messing things up when the stakes are high, as they can be with trading?

Research at Caltech found that our brains are wired to experience a decrease in performance as incentives rise. This is contrary to what most of us would intuitively think — “Pay me more and I will do a better job!” The opposite holds true in most cases. The part of the brain that is activated by incentives gets humming when an incentive is offered, but only up to a certain amount; then once the work started the activity in this part of the brain began to drop.

In other words, when incentives become high (like they can be trading) we apply added pressure to ourselves and the incentive actually becomes harmful and decreases performance. The researchers theorized that when offered a high incentive you really want, you view it as a gain, something you now have. But if you have it, you can also lose it, which is where the problem lies. “…when they’re actually doing the task, the thing that causes them to perform poorly is that they worry about losing a potential incentive they haven’t even received yet.”

If you have traded, you may be saying “Duh!” We know this because we face this issue often. The most noticeable time is when shifting from a demo account, or paper trading, to real money. Everything was easy-breezy in the demo account and when we were just doing research, but when real money is on the line, with a very real potential to build wealth quickly (at least quicker than most other jobs) our behavior can change. That strategy that was so easy to implement in the demo account all of a sudden isn’t so easy to implement anymore.

While the research helped us find out the cause, traders have been finding ways to bypass and overcome this mental charade for a long time.

Two Things to Avoid Choking

The study tells us that if we think about the money we are about to make on a trade, we could be setting ourselves up for disappointing performance. How can we get around this?

  • Don’t think in terms of money while trading, or even points. Simply work on following your plan. For each trade I have steps I follow, and if I just focus on those steps I am not thinking about the money. In this way it doesn’t matter if you are trading to make $1 or $1,000,000, because you are only focused on following a series of steps you have laid out for yourself.

Almost every person in every field will either consciously (or possibly unknown to even them) do something like this. Professional athletes at the top of their game aren’t thinking about the prize money or the trophy as they are making the big play to win the game. If they do start thinking about it, they will probably blow it. Instead they are focusing on what they practiced they every day and are relaxed (because they aren’t mesmerized by what is at stake) and therefore able to execute what needs to be done more effectively. They are “in the zone.”

Just knowing this isn’t going to help you avoid choking. It needs to be practiced. While trading, push thoughts of money, incentives, life style, quitting your day job, cars and all that stuff out of your mind. As the thoughts come back, push them away again…relentlessly. Then bring your attention back to executing the steps of your trading plan. This is a continual mental battle…bringing to your attention what needs to be done, and pushing away what is harmful.

  • Risk management and starting small is something else I believe helps traders. Many traders come to trading with every nickel they have saved; they can’t afford to lose it. This, added to the pressure of losing a potential incentive (not yet received) creates for an environment that is very hard to succeed in. No matter how small the account, never risk more than 1% of it on a trade (some traders use 2%, but when you are starting out stick with 1%).

1% can still actually be a scary amount to lose, depending on your account size and risk tolerance. When you start out, risk what feels comfortable (as long as it is less than 1%). Then over time, assuming you are successful, gradually increase your position size to the full 1%. Like exposure therapy for those with phobias, gradually exposing yourself to risk won’t be as big a shock to your brain because you are slowly getting used to it, exposing yourself to only what you can handle at each step.

This too takes a lot of work. You need to force yourself to stay within your limits at first. Then you need to force yourself to slightly push what you feel comfortable with so you can get to risking 1%. If you like to “risk it all” then you will need reign that in, and force yourself to only risk 1%.

Pulling it Together

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Per the first bullet point, if you aren’t focused on incentives then what you risk shouldn’t matter. But from a trading perspective we know we won’t be right all the time, so by risking only 1% on a trade you can have some peace of mind that even if you run into a string of bad trades, your capital it going to be fine. Without having to worry about your capital diminishing rapidly, and by working on forcing thoughts of money/incentives out of your brain you have a much greater chance at success.

Take the time to practice mindfulness and awareness – being aware of what is going in your mind as you trade (and throughout the day). Work on consciously bringing into your awareness that which you need to focus on, and pushing out that which you don’t.

How to Overcome Problems with Following Your Day Trading Plan

A good, tested trading plan sets out market patterns that work often enough that you can make good trading profits. But some people have trouble following their plan, and that leads to stressful mistakes. Following are some common problems and advice on how you can avoid — or overcome — them.

Prevent choking while day trading

In sports lingo, an athlete who chokes starts playing so carefully that he or she looks like a beginner. Choking is often caused by over-thinking — by being so afraid of failure that the mind slows down and breaks the play down step by step. Watching a contender break down in a championship game isn’t pretty. The fans want to see a good match.

Anyone in a high-performance situation can choke. When a trader chokes, he seems to be following the plan, but it’s no longer automatic. Trading becomes so slow and deliberative that obvious trades get missed.

The more you trust your plan, the less likely you are to choke. Has it been tested? Are there parts that you can automate?

Reduce stock market panic

Panic occurs when you just stop thinking. Your most basic survival instincts take over, even when they are totally uncalled for.

You’re losing money? You start to trade more and more, off-plan, in a desperate gamble to win it back.

You’re making money? You close out all your trades right now so that you can’t possibly lose, even if your plan tells you to hold your positions. When you panic, you can’t think straight, and you can’t follow your plan.

When your positions are down and you seem to be losing money, you really should be buying and sticking it out so that you can make money later. The problem is that your panicked instincts are telling you to do the opposite. Following through on your plan rather than knuckling under to your instincts is tough to do and requires a lot of discipline. With experience, traders learn to avoid panic.

You’re probably going to have more than a few losing trades when you get started. In your trading diary, keep notes about how losing money makes you feel. Can you handle it emotionally? If losing upsets you too much, you may not be cut out for day trading. You can’t trade with a clear head if you’re bogged down with negative thoughts.

Nurture your confidence, not your ego

Day trading requires a lot of confidence because you are going to lose money and you are going to get beaten up some days. You not only have to remain confident in the face of adversity, but you also have to be careful that you do not cross from confidence into an inflated ego.

The more your trading success and failure become part of your personal identity, the more trouble you are going to have.

What’s the difference between confidence and ego? A confident person would say, “I’m smart enough to figure out what the market is telling me”; an egotistical person, “I’m smarter than the market.” The difference is crucial to your success.

SMB Training Blog

The most painful sports phenomenon to watch is choking. I can get almost nauseous when I see a skilled, highly practiced athlete fall apart in the last minute. Imagine- he’s been ahead the whole way and yet manages to snatch defeat from the jaws of victory. We know that the stress in these situations is huge but no one wants to choke under pressure.

A couple of days ago, I was fortunate to attend a lecture by Sian Beilock, a professor of psychology at the University of Chicago and the author of Choke. The book is about how our brain reacts to stressful situations and how we can mitigate the pressure that comes with it. Her research encompasses a variety of fields and has broad implications for managing stress and preventing choking.

Are there parallels for people in the markets? Of course there are. After all, we are also striving for peak performance under stressful conditions. What can we do differently in the markets to become peak performers and to avoid choking?

Let’s start by looking at how our brains act very differently when confronted by stress as compared to everyday situations. This explains why even top athletes can choke if the stakes become high enough—their brains are literally not working as they normally would. Unfortunately, because stress impacts us in the emotional nervous centers of the brain, we are always going to be vulnerable to it. The key is to find ways to prepare for and mitigate stress.

Dr. Beilock discussed the three ways that stress impacts us:

  1. You focus on step-by-step details and not on the end goal. For instance, hitters in a protracted slump will devote their focus to a variety of minute details, including the weight of their bat and how they’re wearing their pants. However, that distracts from their overall goal, which is to get a hit—and the most important things to getting a hit may be totally different. We need to stay focused on the end goal and flexible about how exactly we get there. Choking comes when we stop focusing on the overall goal and get bogged down in minor details—think of the golfer waggling his club 100 times before putting. One of the reasons that people narrow their focus to minor details is because when we feel threatened by stress, we retreat to something that we can control. We start to feel better once we can control something, even if it doesn’t actually improve our results. Heightened stress will just intensify this reaction, and soon we’ll be rearranging our deck chairs on the Titanic.
  2. By hurting our creativity. Beilock said that stress causes our brain to narrow our range of choices and to dampen our creative thought processes. The practical result is that we could lose sight of what options we have and just shut down. You see this often in sports, where at a critical moment someone won’t see the wide-open pass or will do the same-old play. It’s because they are coping with limited creativity. In addition, higher stress in one area of our life can dampen our creativity in other spheres. If you have a stressful home situation, it could hurt your creativity in the markets, even if the markets themselves are stable.
  3. Reduce our emotional control. As anyone who’s fought with their spouse can testify, our emotional regulation drops when we become stressed. This means that our personalities can become more volatile, more fearful and erratic. The flip side is that maintaining the same level of emotional control takes much more of our energy, leaving us drained. In the markets, we obviously can’t afford to have our emotions creep too much into our decision-making.

We know the pitfalls that come with stress and how stress causes us to choke. The key question: how do we not choke? Beilock has studied the topic for years and assembled a list of tactics that can help us.

  1. Reframing the stressful incident. Reframing means changing the meaning and interpretation that we attach to something. For instance, if we get into an accident and total our old, beat-up car, then we could look it as a complete disaster—or as a blessing and a chance to acquire a new, better car. Similarly, if we fail, we want to view it as a learning opportunity, not as the end of the world.

Beilock recommended exactly this approach. Drawing on research from Canadian swimmers, she said that we shouldn’t dwell on past failures like choking in an important meet. Rather, the best swimmers took those failures as a chance to identify what areas needed more practice or more attention, giving their minds something productive to occupy themselves with. Instead of replaying stressful movies in their mind, they tried to get a little bit better, one thing at time. This is actually the same method that I prescribed in a blog post entitled How to Bounce Back From Failure. This focus on improvement meant that next time they came to competition, they would be less likely to suffer from an anxiety response and thus less likely to choke.

In her talk, Beilock pointed out that our coristol levels (a chemical associated with stress) fluctuate depending on what meaning we assign to events. If we view a bad trade as proof that we are destined to failure, then our cortisol levels will rise with market volatility—but if we just think of it as a small bump in the road on our path to success then we won’t experience nearly the same stress in the markets.

  1. Meditation and brain training. There is a wide body of scientific research that supports the value of meditation in boosting our mental faculties and in reducing stress. Beilock mentioned that as few as eleven hours of meditation have been shown to alter the brain physically, leaving it better equipped to handle stress. The real value seems to be in our ability to control our focus, as we can learn to be attentive when we need to be and to relax otherwise. The periods of letting our attention wander, like daydreaming, are highly beneficial for our brain, as it gets a break from being constantly engaged. This prepares us better for when do we have to be completely engaged, like in the markets.

She cited being in nature as something that can really help to manage our attention, allowing us to switch off from stress and the constant tug on our attention span from smartphones, work, etc. Being in nature, or even just looking at pictures of nature, have been shown to boost our overall resilience to stress.

  1. Practice under similar conditions. Part of the stress of a performance situation is that it is unfamiliar — and much harder than what we are used to. We can practice throwing a football with our friend in the yard and do it well, but it’s a new challenge when we have four huge guys getting in our face and trying to sack us or block the pass. The second would be much more stressful … if we hadn’t practiced it. Unfortunately, most of us prepare for game time by doing the first, leading to stress and choking when the difficulty increases dramatically.

Beilock recommended practicing under similar conditions to what we will experience in the game. She cited the example of Southern Utah University, which shot up the NCAA rankings for three throw percentage by changing how they practiced free throws. Instead of shooting a few in a drill before practice started, they started to practice free throws in the middle of games—with penalties if they didn’t make them. By practicing under more stressful conditions, they were no longer surprised and stressed during real games—it was something they had already learned how to deal with.

  1. How we hold our body and our physiology. How we feel can impact our physiology and how we carry ourselves. If we’re having a bad day, we can be dragging a bit or slump deeply into our chair. If we are feeling great then we will stand tall and puff out our chests a bit. We all know that our moods will change our physiology—but the remarkable thing is that the reverse holds too. As Beilock tells us, how we hold our body can have a big impact on our moods. Thus, some of the ways to deal with stress should include changing our posture. While it depends on the environment, we should still try to sit or stand straight; to adopt the so-called “power posture” where we are standing with our shoulders back and our feet spread apart; and making ourselves smile, whether or not we feel happy, because it will boost our mood.
  1. Journaling. Beilock identified journaling as an activity to do before an event, to reduce the anxiety attached to it. It gives us a chance to address our anxiety head on, by dumping out our thoughts about said event and hopefully realizing that the stressor isn’t as intimidating as we had previously feared. For any potentially stressful situation, it’s important to hold empowering thoughts, like realizing that failure won’t be the end of the world and that we have practiced over and over for this. Such thoughts lift a huge emotional burden from our shoulders, making it more likely for us to succeed.

This is Beilock’s advice and it’s all solid. I think that we would be helped by doing any one of these, especially practicing under the most strenuous conditions possible. We can most likely attribute most of the success of great athletes like Michael Jordan and Jerry Rice to their famously grueling practice regimens, which more than prepared them for game-time conditions. Jerry Rice summed up his philosophy about exceptional practice by saying that “Today I will do what others won’t, so tomorrow I can accomplish what others can’t”.

Is there anything else that can we do to prevent choking? The popular and academic literature on peak performance places a large emphasis on mental practice as a helpful supplement to regular physical practice. A famous study by Alan Richardon demonstrated that visualizing free throws was as effective as actually shooting free throws. While it may sound fanciful, it works because mental practice utilizes the same brain circuitry as regular practice, thereby strengthening the existing neural connections. The more that you reinforce these neural pathways, then the more automatic your behavior becomes—and the less likely it is that external stress can disrupt you. I have written an extensive guide on mental practice and visualization for traders to help you.

What are the lessons for traders? We need to bring all of Beilock’s lessons to bear in the markets. My takeaways would be as follows:

  • Adopt a growth mindset. As Carol Dweck discussed in her wonderful book, Mindset, there are two mindsets: growth and fixed. A fixed mindset assumes that our abilities are inherent and largely fixed and that our success or failure at a particular task is a just a reflection of our innate ability. On the other hand, a growth mindset assumes that success at a particular endeavor is a reflection of effort, and that we can keep working to improve and conquer obstacles. A growth mindset is much more conducive to success, because it encourages us to keep working and doesn’t take failure personally—we view failures as temporary setbacks, rather than as a reflection of a complete lack of ability. By viewing failures as temporary, we give ourselves permissions to fail, lowering the emotional stakes. It also makes it easier to reframe and bounce back from any setbacks, as we will concentrate on making the necessary changes and doing the work to get better. Remember, a muscle must be broken down and will hurt before it grows again. This is the lesson we should take from Bielock’s points about reframing stressful incidents.
  • Perfect practice makes perfect. Everyone has heard the rule of thumb that 10,000 hours of practice are necessary to achieve mastery. I think that a better rule would be that we need 10,000 hours of perfect practice to achieve mastery—as bad practice is of no help at all.

For trading, we need to do all of the things that look like practice and to do them at the highest level. Practice could include our daily preparation before the markets open and on the weekends; a careful and regular review of what we’ve been doing in the markets. If we are not actively trading, then perfect practice could mean following the markets and paper trading before we start risking real money, in order to simulate the experience. As our practice gets better and more conscientious we will be better prepared for any experience and our actions will become automatic. This is the only way to prevent choking.

  • Mental practice. As I just highlighted, mental practice is another way to work out the same mental circuits that we use in doing the activity for real. Mental practice provides us with a way to simulate events and to rehearse possibly stressful scenarios which we can’t actually practice—like hitting the game-winning shot at the buzzer.
  • Rest and relaxation. Since trading is mostly mental, it can be mentally fatiguing and we need to recharge our batteries. Just as Beilock highlighted about relaxing our attention span and enjoying nature, we need to find ways to rest and to relax. They could involve spending nature time in nature, or running, or reading a good book that completely absorbs you. Whatever you favorite type of R&R is, find a way to incorporate it into your life regularly, such as every day after work or when the markets aren’t open. Your brain needs to recover from the stress, otherwise it will be too worn down to perform at its peak. If you don’t have enough focused attention left, then you will end up choking exactly when you don’t want to.
  • A journal for traders and investors can take many forms, including keeping track of positions, market thoughts, etc. It’s important to discuss some of your thoughts and feelings related to the markets. As Beilock highlighted in her talk, the mere act of getting them onto paper or the computer screen will help you to crystallize what’s going on and to relieve some of the tension. Usually, when you can see them written down, you’ll realize that some of your anxiety is not warranted—and to help take a different, more constructive viewpoint. Make a place in your journal to get your thoughts, feelings, frustrations on to paper. It will help you to cope better.

Choking can be a terrifying experience, but it doesn’t necessarily have to happen. With proper preparation and ongoing management of stress, we can get ourselves in the right state, so that we are always performing at or near our best. By integrating the advice of one of the world’s experts on choking, we can take our performance to the next level.

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