It should come as no surprise that trading is a difficult profession. It’s even more difficult if you’re not wired correctly to deal with the side-effects of market/portfolio swings, time-frames aside. It is my hope that over the next few weeks I’ll publish a series of posts related to the “Neuroticism and Trading” post. Up first is the topic of stress as every market participant experiences stress to varying degrees.
If we consider stress as being psychological then we can manage (cope) with the events (stressors) in order to combat the negative impacts on our mental health. Two areas to focus on from a psychological standpoint are appraisal and coping. Appraisal is the interpretation of the stressor and is rooted heavily in our belief systems. Coping refers to strategies, both cognitive and behavioral, that allow us to manage stress.
Stressors come in many shapes and sizes from large draw-downs to setting a stop too tight only to watch the stock run in the “right” direction sans you. However, it is the interpretation of the stressor (through the lens of our belief system) that will provide the milieu to cope. I’ve written about Rational Emotive Behavior Therapy (REBT) before and suggest you read that post as well as search the term to get a better understanding for REBT. Powerful system of therapy.
Trading occurs in a stressful environment whether you trade your own account from a desk tucked in the corner of your family room or manage millions of other people’s money in an office of a downtown Manhattan high rise. Some of the more common themes regarding stress deal with time pressure and information overload. Both of these factors can increase the perceived complexity of a task (trading) and thus exacerbate the stress associated with them.
The shorter your time-frame is in trading the more susceptible you are to task stress. You’d better have your homework done before you pull the trigger as there is extreme time pressure on decision making when you are looking at tick charts. Other factors that can make trading seem more complex than is warranted include the perceived importance of the trade and the volume of data you have to digest.
If you have a daily goal of making $1000 dollars per trading day and you don’t achieve that goal on Tuesday, what’s your mindset on Wednesday? Do you assume more risk to not only make your daily goal but to make up for the money missed on Tuesday? Does not making your daily goal lead to irrational thoughts that lend to stress? Not a good place to be mentally as that is undue pressure. Some days the market doesn’t provide an opportunity to participate and forcing trades is not the answer here.
The last factor I’ll discuss here is the volume of data. It is very easy to be inundated with data from blog posts, tweets, charts, fundamental data, TV, magazines, radio shows and others. If there is too much noise you can’t not feel stressed. If your trading isn’t a match for your personality and you’re still trying to find what works for you then this is an area where you need to spend considerable time. Keeping it simple isn’t as easy as it sounds, but focusing on one strategy/system until you master it is worth the effort.
One of the best ways to reduce the stressful situation of trading is preparation. I’ve always been a proponent of homework and trading proactively rather than reactively. Here’s a link to a webinar I did with TradeKing entitled “The Three P’s of Trading Psychology” in which I discuss preparation. I believe that if you have taken the time to form a hypothesis for potential outcomes, and more importantly how you respond to each, that your trading will improve and your stress will lessen.
- Great article on decision biases, something for everyone here.
- Excellent chapter on stress exposure training.
- Take a few stress related assessments here.
- Keep it simple. A few common sense tips to combat stress.
- The American Institute of Stress.