Wednesday, August 13, 2008

A Dozen Thoughts on Trading Stress and Emotion

* Everyone has a stop-loss level: For some, it's a price; for others, it's a pain threshold.

* It's not stress and emotion that get in the way of trading; it's the stress and emotion that results when trading becomes personal: about you, rather than about supply and demand.

* The measure of a trader is how hard he or she works when markets are closed.

* Much bad trading is hormonal: too much testosterone, too little.

* When traders don't track their results, it's because they don't want to know them.

* The best traders have a passion for markets; the worst have a passion for trading.

* When it comes to market history, there are only two choices: trading with awareness of it, trading in ignorance of it.

* I recently encountered a daytrader of currencies who was trading EUR/USD with high leverage. News came out in Europe and the market blew through the trader's mental stop-loss. The trader had no idea that an economic report was due at that time; he was only looking at chart patterns. That represents trading at its worst.

* Losing a job or not wanting a 9-to-5 one is not the right reason to pursue trading.

* Markets tend to move in the direction of the greatest number of stops.

* The best traders are not relaxed *and* they are not anxious. They are alert.

* Deep down, traders who don't prepare don't feel they deserve to win. We always gravitate toward our just desserts.


IDkit aka Ana said...

You said:
The trader had no idea that an economic report was due at that time; he was only looking at chart patterns. That represents trading at its worst.Unquote

I concur with you here; in fact, I post a weekly economic calendar at Idkit to help newbies form a good habit of looking out for economic reports:

Like for today, there is the Retail Sales figures to reckon with a bit.


Excelent comment Bret. As usual you get right to the point. I´m coaching traders daily and I cannot tell you how incesive I´m am when it comes to record keeping. It makes the difference. Also on our daily vBlog I´m always addressing this important issue. Thank you for the opportunity to learn from your profound knowledge.



Mark Wolfinger said...


Excellent post. But it raises some questions in my mind.

Surely your advice cannot apply to the casual investor who owns mutual funds. Nor can it apply to the person whose only market activity involves investing in a retirement plan.

It seems to me that this material applies to active, short-term traders.

Thus these question:

What's the definition of 'trader?'

How much of this is relevant to the investor/trader (that's me) who adds to positions on an (almost) daily basis, but whose strategy is to hold positions for one to three months?

I've been a professional trader for more than 30 years and currently buy iron condors on the Russell 2000 (RUT). My diligence is directed towards risk management and money management. I don't try to guess where the market is headed, and I don't stubbornly sit by and watch money disappear. I strive to remain within my comfort zone at all times.

Trading without stress and emotions is crucial - I agree. But I don't do a lot homework when the markets are closed, nor do I study charts. Is that a big mistake in your opinion?

bruce said...

This is a really good list. The only one I have a problem with is the one that included:
"The trader had no idea that an economic report was due at that time; he was only looking at chart patterns. That represents trading at its worst."

If someone has truly done their homework and studied a chart pattern over a long period of history,and found a good edge, then to not enter that chart pattern because there is a number coming out, I think is going to open up a whole new can of worms. Were you supposed to see if a number came out as the pattern developed over all of those test cases?

Likewise, it would be similar to saying that a fundamental trader should know that his trading vehicle was setting on a trendline or something, or else he wasn't trading properly.

It would be great to know everything, but if you established an edge with certain criteria, I think a case could be made to just act on it. No?

Firebird said...

Hi Dr.,

"Everyone has a stop-loss level: For some, it's a price; for others, it's a pain threshold."


Bruce, I think that trading at its worst refers to the trader having no idea that an economic report was due (i.e. not doing his homework) not to the concept of placing a middle-long term trade in spite of expected short-term volatility.

Best trading,


Ryan said...


I am in complete agreement. If you have a clearly defined discipline, it does you no good to know which economic news happens to be coming out. We do include Fed announcement data in our historical models, but even that is a useless gesture . . . We can't draw any significant conclusions with regards to how our strategies act around Fed announcements because there simply aren't enough Fed announcements in our sample. Brett, I want to reiterate Bruce's question. What is a trader supposed to do with this information? Is he supposed to abandon his discipline and bail out of his position if the market starts to move against him on account of the economic news? Or should he avoid taking a position if there is potentially important news coming out? If a trader has no rules for incorporating economic news into his strategies, he will be better off not knowing what news just hit the market. Such information is just a distraction.


Stock Shotz said...

I have lost more money based on my emotions than anything else. I was the king of moving stops for a long time. I interviewed Denise Shull of TRADER PSYCHES
The interview can bee seen on our blog at

Thanks for posting the list.

IDkit aka Ana said...

I wish to add what I learn from my mentor.

It depends on context and timeframe.

For intra-day and short-term swing traders, knowing what reports are due and when is crucial. A pattern is a reflection of the buying and selling sentiment - this can swiftly change if the figures are outside the expected range.

For longer-timeframe traders, context is important. Generally a figure has only a short-term impact - akin to an 'act of God' like Chernobyl. Price will return to value.

However, if the figure represents an event that changes the underlying structure of the market not recognised by traders as such, then value will lead price and we'll have a new trend.

MagickMystik said...


Can you elaborate on 'passion on markets' and 'passion on trading'?

Thank you

Brett Steenbarger, Ph.D. said...

Hi Mark,

Thanks for the clarification. My post applies to traders and portfolio managers, not investors who make infrequent decisions. As for your style of trading, I would suspect that daily preparation might consist of reviewing markets and setting plans for adding to positions at advantageous prices, not unlike how a portfolio manager might trade around a core position.


Brett Steenbarger, Ph.D. said...

Hi MagickMystic,

A passion for trading reflects an interest in risk taking; a passion for markets reflects a fascination with markets themselves and their patterns. The former leads to risky behavior; the latter can sustain a lifetime of learning.


Brett Steenbarger, Ph.D. said...

Thanks for the interesting comments on the post; I tried to clarify some issues in my subsequent posting. I appreciate the opportunity to think through these issues--


Highgamma said...

"I recently encountered a daytrader of currencies who was trading EUR/USD with high leverage."

For me the operative words here are "high leverage". No matter how good your system is, leverage increases the impact of "tail risk" on your ability to survive.

So my question is how would your advice differ for traders who use leverage and traders who don't.

Brett Steenbarger, Ph.D. said...

Hi HighGamma,

Most traders I work with use leverage. The issue is whether or not a trader uses proper leverage: leverage that is proper for prudent risk management, and leverage that is proper for a trader's level of psychological risk tolerance.