Friday, August 21, 2009

The Number One Priority for Stressed Out Traders

The number one priority for stressed out traders is to stop trading and get themselves unstressed. When we are in the throes of flight or fight, our regional cerebral blood flow moves relatively away from the brain's executive center: the frontal cortex and toward the motor areas. We are less likely to calmly judge, plan, and weigh options or more likely to act impulsively. All of us have known situations in which one bad trade leads to another to make back the money leads to yet another. Before you know it, we've lost far more money than we ever planned.

Thanks to savvy trader and reader Adam for the link to this NY Times story on how the brain becomes enmeshed in vicious stress loops. When we are under stress, we have a tendency to become functionally fixed: we repeat the same behaviors, even when they are not working. It is when we are calmly focused that we're most likely to be flexible in our thinking. Under high degrees of stress, we lose that flexibility. As one researcher emphasized, “we’re lousy at recognizing when our normal coping mechanisms aren’t working. Our response is usually to do it five times more, instead of thinking, maybe it’s time to try something new.”

In markets, doing something five times more can be the difference between a losing day and a catastrophic one. This is why it is vitally important that we pause during the trading day periodically, take our emotional temperatures, and keep ourselves focused and relaxed with muscle-relaxation and deep breathing exercises, as well as biofeedback.

In sustaining calm focus, we also place ourselves in a mindset conducive to optimal learning. When we're reacting in to markets in emotional crisis mode, we're hardly likely to have the perspective needed to learn from our experience--or to access the learning that we've already acquired.