Indeed, being stressed is no treat! Stress typically occurs when we perceive threat. That places our bodies in the classic flight-or-fight response, mobilizing for coping with the threat. That mobilization draws blood flow away from our brain’s frontal cortex, leaving us least grounded in our center of planning and reasoning just when we most need our rationality. This becomes a particular problem when stress turns into distress: anger, frustration, anxiety, etc. As I emphasized in an earlier post, our first response to stress should be to identify where it is coming from. In general, there are three sources of trading stress:
1) Markets have changed, no longer behaving in ways that match our expectations. In such an event, our stress represents information. Just as we might feel uncomfortable if we should walk from a safe place to a high crime area, our stress in the new market environment alerts us to potential danger. The proper response to this stress is to pull back from trading, reassess our environment, and revise our plans. We need to adapt to the new environment. The best trades come to us; that requires an open, focused mind. The best trade ideas are of limited value if we trade them in a distracted mind state.
2) Our stress is self-generated, reflecting pressure we’re putting on ourselves. It is easy to be our own worst critics. When our self-talk focuses on everything we’ve done wrong or should have done differently, that negativity creates anger, frustration, and discouragement. Perfectionism is a great example of such negative self-talk: good is no longer good enough. Cognitive techniques can be extremely effective in changing our self-talk, as described in The Daily Trading Coach; see also this series of three articles.
3) Our risk exposure exceeds our psychological tolerance. Many times traders feel a need to make money and convince themselves that a huge opportunity is at hand. They oversize their positions, creating volatility of P/L. When the market itself becomes more volatile, the moves in the trading account can be difficult to tolerate. The perception of threat that creates the stress is a function of the risk being taken. Each of us has a different tolerance level for risk; the key is trading with a sizing that is not emotionally disruptive. To be sure, we can have the opposite problem and not take enough risk in our trading. That creates a different kind of frustration and distraction. Good risk management is essential to good self-management.
The most important point is that stress can impact our trading for many reasons. By clearly identifying the source of our stress, we can best figure out how to move forward constructively. A surgeon would not want to be stressed out during a procedure; peak performance requires peak focus.