Saturday, November 03, 2007

What Stresses Traders Out?

There are stresses inherent to trading, as with any high risk/high reward activity, as fighter pilots, brain surgeons, and poker champions can attest. But not all trader stresses are trading related; understanding *why* you're stressed is an important first step in ensuring that work demands don't interfere with performance.

Here are some of the most common sources of trader stress:

1) Excessive risk-taking: Traders who overtrade (trade more frequently than opportunity dictates and trade larger size than is prudent for their accounts) create volatility of returns, which enhances emotional volatility. By creating large drawdowns during slump periods and by ignoring stop loss rules (per trade, per day), traders generate stress through their poor trading practices. A great stress buster for these situations is to make good trading practices as rule-like as possible. By writing out rules and mentally rehearsing them (with imagery, self suggestions), traders can turn good trading behaviors into positive habit patterns.

2) Changing markets: When markets shift their behavior, becoming more or less volatile and changing their direction, traders' ideas can stop working. This creates potential frustration, as well as losses. It can also lead to temporary feelings of loss of control and confusion. Psychological research suggests that perceptions of control are important mediators of stress levels. Here is where it's very helpful to stay on top of your performance statistics and quickly recognize when your trading is deviating from its norm in a negative way. That can serve as a cue to cut your size, focus your attention on what *is* working for you, and build upon your strengths.

3) Unrealistic expectations: Another way traders can generate their own stress is by holding themselves to perfectionistic standards that they can't possibly reach. No one consistently buys the lows and sells the highs; that means it's always possible to focus on the money left on the table. Such rigid perfectionism turns winning traders into psychological failure experiences, generating frustration, negative self-talk, and stress. Cognitive techniques, such as those outlined in my book on trader performance, can be very helpful in learning how to turn negative thought patterns into constructive ones.

4) Personality patterns: Sometimes the trader's stress is part of a larger constellation of personality patterns that yield stress in other areas of life as well. For example, a trader may have a biological tendency toward depression, expressing itself through negative thinking and problems in concentrating. Similarly, anxiety disorders can manifest themselves in trading--excessive worry, catastrophizing--but also in such other areas as relationships and work. When stress patterns occur across life spheres, getting an evaluation from a professional is important. Not all problems that affect trading are trading problems.

5) Real life challenges: Stress can be a perfectly appropriate response to objective life challenges. When a trader is facing family or personal illness, relationship problems, or budget crises, these can easily intrude into decision making. The worst thing traders can do in these situations is try to put the problems out of their head. Rather, setting time aside to face the challenges directly, developing ways of dealing with them, and finding effective supports is the best way to ensure that realistic stress does not become overwhelming distress.

In short, it's helpful to diagnose when stress problems are coming from trading and markets and when they're coming from our own personality patterns.

A forthcoming book that is helpful in describing and illustrating (with multiple, helpful case studies) the varieties of stress that affect traders is the volume Mastering Trading Stress by Ari Kiev. Dr. Kiev covers such topics as the effects of fear on performance; risk management; and personality patterns that contribute to stress. It's a clearly written, well-organized, and concise volume--one of the very few practical resources on the topic.

As I've emphasized in past posts, however, stress--while vitally important--is only half of a larger emotional equation. The other side of that equation is emotional well-being. One of the greatest protections against stress and distress are life activities that bring joy, contentment, energy, and affection. The absence of positive emotional experience can be as corrosive to performance as an excess of stress.


Why Well-Being is Important for Traders

Transforming Stress Into Well-Being

A Personality Questionnaire for Traders