Thursday, November 22, 2007

Trading and Anxiety: Navigating Danger and Opportunity

Anxiety is the response of mind and body to perceived danger. At times of heightened market volatility, anxiety can be a useful warning signal and an impediment to decision-making.

Research suggests that people tend to become highly risk averse when they are anxious. In one way, this is quite adaptive. If we are accurate in our perceptions of danger, we can avoid taking potentially catastrophic risks at those times and preserve our safety. Some of the very best traders I know have greatly scaled back their risk during the recent market action, holding onto their capital and waiting for greater clarity and opportunity in the markets.

If we are not accurate in our perceptions of danger, then anxiety can inhibit normal risk taking during periods of opportunity. We can also be diverted from focusing on tasks at hand by our preoccupations with danger. This is one possible reason why anxiety appears to hinder decision-making among health care professionals. It is difficult to process clinical information effectively and come up with diagnostic formulations when we are attending to perceived threats in the environment.

The challenge of dealing with anxiety in trading is that, very often, the times of heightened threat are also times of enhanced opportunity. Becoming the deer in the headlights can destroy us if we're trapped in a losing position, and it can also prevent us from acting upon those enhanced opportunities. How can we use anxiety as an informative signal of mind and body and still reduce its ability to dominate decisions and actions?

We'll tackle that topic in the next post in this series. In the interim, you may find the related posts below to be helpful, especially during these turbulent market times.


Performance Anxiety and Trading

Techniques for Reducing Performance Anxiety