Saturday, January 30, 2010

A Technique for Defusing Trading Stress and Anxiety

My recent post on moving beyond fear and anxiety emphasized the difference between experiencing threat and allowing that threat to color decision-making.

A very simple technique that I use in my own trading for containing stress consists of several steps:

1) Observing the Stress - Openly acknowledge to yourself that you're feeling fear and threat. The idea is to become the observer of your emotions, not the person who is lost in those feelings;

2) Reducing the Stress - Take a few deep breaths and focus your attention. It is difficult to lose control and perspective if you're under control physically and cognitively;

3) Identifying Why You're Stressed - Locate the source of your threat. In my case recently, for example, a trade had gone my way and then stalled. I was afraid that we'd see a sharp reversal that would eliminate my profits in the trade;

4) Questioning the Source of Stress - I double down on my market observations. Is anything happening in the market right here and now to lead me to abandon my position? I look at correlated indexes, sectors, and asset classes; I look at buying and selling sentiment. If the picture has not substantively changed, I tell myself that the rationale for the trade has not changed;

5) Facing the Threat - I actively tell myself that I can live with the scenario of losing my paper profits. It will be annoying, but not catastrophic. I also remind myself that I will feel much worse abandoning a good idea for no reason other than fear than incurring a stop at breakeven due to a rogue market move.

In other words, my technique involves distancing from my feelings, establishing control, and reworking my self-talk to regain perspective. This kind of self-talk is really the coach in me talking to the trader in me. When the technique works particularly well, I can even use my anxiety to remind myself that others must be feeling the same way--and add to my position at exactly the time I'm tempted to bail out. That transforms fear into opportunity.