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

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.