What’s Behind the Monster Which Could Interfere with Your Trading Decisions?
Does this happen to you when you are trading?
- You become anxious and exit a good trade before it has an opportunity to mature to its profit target
- You become frustrated and take off a position that totally goes against your back-testing and planning.
- You're fearful of missing a trade and enter at the worst possible time.
- You're hesitant to take a loss at your designated stop limit, and end up with a much larger loss.
I doubt there are any traders out there who would not agree with “been there, done that”. In the world of trading, as in so many other aspects of life, most of us learn from our mistakes over time.
What causes us to make these mistakes which cause stress and distress to interfere with making consistent, sound decisions?
Figuring out the root cause of your stress and distress can help shorten the painful learning curve and help you stay on track with your trade plan. Do you as a trader have some of the following issues? Many traders say the market itself causes stress and distress while trading. A slow market can cause a trader to become bored and subject himself/herself to overtrading. A choppy market that immediately reverses after an adjustment is made can generate frustration and impulsive trades. Because these emotions are triggered by a market event, traders experiencing this type of stress and distress assume that the market must be responsible for their feelings.
Can the market itself really be the underlying cause of stress and distress in trading?
In reality, if the market itself possessed the power to instigate emotional reactions, then ALL traders would respond the same in a similar situation. However, that rarely happens. Not all traders resort to overtrading from being bored in a slow market; not all traders become frustrated and make impulse decisions when a position reverses against them. This has been micro-analyzed by many psychological gurus, but simply said there is more to the cause of stress and distress than external events.
Let's use an example….
For the purposes of elaborating on the underlying cause of stress and distress in trading, I'll use the sample of a trader watching the market move like a snail, mid-day one trading day. If that trader viewed this slow market as an opportunity to do some much-needed paperwork, prepare for the next trade entry, etc. this slow market will not be troubling at all. Or, this slow market may present an opportunity to step away from the computer, go outside, and take breath of fresh air.
However, if the same trader begins to fret and tells himself/herself, I must make “x” amount of money each day, then the slow market can be viewed as a threat to one's income goals. It is no surprise, in this case, that the slow market could trigger distress and over-trading.
You can see it is not just the slow market action that is generating stress and distress; it is the “perception” of that market. If we look through a distorted piece of glass, the world may be viewed in distorted ways. If you look into a mirror that is distorted, you will see your reflection in a distorted manner. If this distorted perception is brought into trading, you may very well likely experience trading in a distorted manner.
It's important to distinguish between ACTUAL threats from PERCEIVED threats. How can you make that distinction?
Every time you experience stress and/or distress while trading, consciously ask yourself, “How do I perceive the current position and/or market movement a threat?” Asking yourself this question can turn your attention to the perceptual process, which gives you a chance to separate perceived threat from real threat.
A simple example might be that you have a position on which is nearing target profit. You begin to feel stressed, distressed, and nervous about the trade. You quickly ask yourself, “Why am I stressed with this trade? Why do I perceive the trade with so much nervousness?” After just few moments thinking through that question, you realize that the position was perfectly fine, and progressing according to plan. Perhaps the nervous feeling was brought on because you were coming off a large loss, and feeling generally uneasy about recovering the realized loss.
Once you identified the fact that your stress and distress was “perceived” rather than a real threat, you began to relax knowing that your position was progressing according to your plan.
If you keep this in mind while trading, it may help deal with the stress and distress that overcomes all traders at times.
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If you have additional thoughts about how to deal with stress and distress while trading, feel free to comment below.