Thursday, April 10, 2014

Navigating Trading Stress and Distress

Well, not too many traders getting desserts from the markets lately, but quite a few reverse desserts!

A developing trader wrote to me recently:

I have a question that I would like to ask you. It has to due with the recent turn in the markets. My question is how to cope and manage the stress that comes with trading. I have been able to cope with the stress for awhile now, but in times of market volatility I have more trouble with dealing with stress and it spilling over into my personal life.

It's a great question; let's tackle it first by clarifying our terms.

Stress is the result of challenge.  When I lift 10 pounds more than my normal workout weight in the gym, I create stress for my body.  Distress is a breakdown resulting from a poorly managed stress.  If I try to lift twice my normal weight, I can damage muscles: that is distress.

Or, to take another example, Margie and I are taking a vacation in May.  We could go to a familiar Florida beach and have a relaxing week.  That would be stress free.  Or we could go to northern Alaska, navigate fjords and glaciers, and see things we've never encountered before.  That would have its stressful moments.  (Of course, we're going to Alaska).  There is no growth and development without stress.  Stress is the natural result of testing our boundaries and moving out of our comfort zones.

When you are developing as a trader (and hopefully all of us are), you always want markets to challenge and stress you--just like you always want workouts in the gym to challenge and stress you.  Show me a stress-free workout and I'll show you one that did not result in further aerobic fitness or strength.  We grow by taking the challenging path to Alaska, not the well-worn path on the beach.

So when our developing trader laments recent stress in markets, he's really saying that market action is overwhelming him, not just challenging him.  He isn't simply going to Alaska; he's alone with a dogsled miles outside of Nome.  What he is experiencing is distress--a kind of breakdown when we can no longer manage a challenge.

Distress can provide painful and ultimately valuable learning experiences, but no one performs at their peak while in a state of distress.  We want markets to test us and make us elevate our game, but we don't want markets to traumatize and impair us.  When stress morphs into distress, we are on the path to trauma. 

All of this means that we have a twofold mandate:  maximizing the value of stress and minimizing the likelihood of distress.  We want to learn and grow in the face of trading challenges, but we don't want those challenges to cripple us.  How we navigate that twofold mandate meaningfully shapes our learning curves--and our P/L curves.  The next post will take a concrete look at how we can meet that mandate.

Further Reading:  Overcoming Trauma