Lesson 4: Mental Stress In Trading

Trading is a high-performance environment since it’s a results-driven occupation. Risk and uncertainty ultimately make trading stressful. We constantly make decisions that have consequences in the market.

The nature of the game is stressful. We, therefore, need to learn how to manage mental stress if we are to be successful traders. When money is at stake, some people become irrational creatures.

Life is, by nature, stressful. If you have financial pressures, you are likely to struggle trading or make poor decisions in the market. Most of your choices will be driven by a need to make money, and we know this is a losing strategy in the markets.

Stress in trading arises from performance pressures. A good example is losing a significant percentage of your account, also known as a drawdown. As the drawdown becomes more effective, the trader lacks confidence and needs to make his money back. These feelings ultimately lead to mental stress.

In this lesson, we will look at mental stress, how it affects performance, and the methods we can use to ensure stress does not affect our performance.

Stress

Stress can be defined as the adverse reaction people have to excessive pressure or other demand types.

Stress occurs when the perceived demands that a person is under exceed the resources they have to cope with those demands.

Stress creates unhealthy biological reactions, and prolonged stress can lead to both physical and mental health breakdown. In addition, if our brains are not in peak performance mode, it’s challenging to perform at a high level.

Life stress often results from financial pressures, personal issues like lifestyle, relationships, and many other things. However, in this lesson, we are more interested in trading stress.

Trading Stress

Trading stress arises from many tricky situations in trading. To trade successfully, we need to minimize some of these effects or prevent ourselves from falling into these traps.

Consider the following trading scenarios:

  1. Loss Trap – A trader executes a long position on GBPUSD. The markets open sharply against him during the London session. The trader decides to move his stop-loss point in the hope that markets will go up. The markets keep collapsing, and his losses grow bigger. He becomes paralyzed and does not know what to do. His losses keep growing, and the more significant the loss, the more difficult it is to cut. In such a scenario, the trader has gone through a brain freeze! Stress has taken over his mental processing capacities. His brain capacities are now limited due to stress.
  2. Performance anxiety – The risk of falling short of our goals can end up being stressful. In trading, feedback on our performance Is given immediately. If we are winning, we can’t help but be euphoric. If we are losing, stress is on our back.
  3. Money matters – Incentives can be stressful. Trading can quickly turn into a wins or losses game. If this is your perspective in trading, then it’s tough to be successful in trading. The responsibility of success can be stressful, and most people avoid success since they don’t want the responsibility that is needed for trading success.

We all have different responses to stressful situations. Some people have learned how to manage stress, while others have mastered the art of ensuring pressure does not turn into distress.

Biological Reactions of Stress

Stress generally prepares us for fight or flight responses. When our minds are stressed, our bodies react by getting ready to protect us. The problem is that our brain’s capacity to process information or think logically is impaired in this state.

We can spot the Fight or flight state using the following symptoms:

  1. Fast breathing – the spaces in your lungs dilate during this period. It happens so that more oxygen can flow into the body.
  2. Fast heart rate – Heart rate increases as more blood gets pumped out of each vessel.
  3. Your glands secrete hormones that increase heart, lung, and muscle activity.

These are some of the biological reactions of stress. If stress is not addressed, it could lead to distress. Distress can easily lead to physical illness.

Research has proven stress to be the number one cause of physical illness. Besides the biological reactions, physical stress can lead to emotional states like worry taking over our lives.

Signs of Stress

  1. Constant worry can easily lead to anxiety disorders.
  2. Fatigue, mental burn out and loss of energy
  3. Easily distracted or rather lack of focus.
  4. Negative self-talk
  5. Depression
  6. Mood swings
  7. Irritable behaviors
  8. Increased reliance on drug and substance abuse to calm down
  9. Heart problems or high blood pressure
  10. Panic attacks

How stress affects our performance

  1. Limited information processing capacity – Trading is about taking in information, processing it, and making a judgment. When we are stressed, we limit our abilities to process information. We restrict our creativity since we constantly think about our lack of resources. We are prone to negative self-talk, and this way of thinking ultimately leads to failure in trading.
  2. Less energy – We need both mental and physical energy to sustain suitable trading. In the event of stress, our energy level is lowered. Our bodies sink into inactivity led by our lazy and disturbed minds. By looking at the mind-body connection, we can understand why our bodies are affected by stressful situations.
  3. Trading behaviors are affected – We know that people are prone to over-react or behave in weird ways during stress. Anger and frustration are normal among stressed people. If we respond with rage at the market, we are signing up for failure. Anger limits our perceptions. We only focus on our anger, intensifying the state and restricting our thinking capacities. Unfortunately, markets don’t care. Anger responses like revenge trading or executing positions irrationally won’t help manage trading stress or trading well.

How to manage stress

  1. Breathing Techniques – Meditation which involves paying attention to our breathing, is an excellent way to minimize stress. When we turn our attention to our breathing, we change the nature of the brain. The parts of the brain which are activated by slow breathing are responsible for rationality and reason. Adopting this technique during stressful situations can help us minimize the effects of stress in trading. A trader who uses this mental arsenal will quickly realize stressful situations before they turn into distress.
  2. Using a psychological journal – A psychological journal helps us map our emotional and mental states. By keeping a psychological journal, we can reduce the effects of stress on our bodies and minds. We can also map out mental patterns that trigger anxiety. A psychological bulletin should include; our mental states, what started them, how they changed over a day, and other details
  3. Good Nutrition practices – We are what we eat. Eating a lot can be a hindrance to performance, just like eating little can affect our performance. Optimal eating is a prerequisite for good performance. It’s hard to think through things in some mental states. Hunger narrows our perception, at least till we are full. Psychotherapists have shown that regular meals can create stability over our moods during the day.
  4. Exercise and Rest – Good sleep habits are also critical for performance. For us to sustain high energy throughout the day, we need to sleep well. At least seven hours of sleep are required for execution. Exercises like swimming and lifting weights can also help in enhancing our concentration.
  5. Stress exposure – You can slowly build up mental resilience in trading through stress exposure. For example, by gradually increasing your position sizing, we can limit the stress of ramping up position sizing without a road map.
  6. Change our perceptions- Stress comes from perceptions. Suppose we view certain things as stressful. It’s hard not to encounter stress when we meet them. A trader who interprets losing as being foolish is likely to feel sad and lack energy after losses. Negative self-talk is also expected. On the other hand, A trader who has learned to take losses as learning opportunities is likely to experience this situation differently. Our perception, therefore, matters for our mental maps and experiences.