November 22, 2017
How Stress Enhances Trading Performance | Trading Psychology
Today’s Trading Psychology question of the day…
“I’ve been trading for a few months now, and I find myself feeling stressed before I take a trade, which causes me to miss profitable trades, and I wind up chasing the trade and taking losses afterwards. Do you have any advice on how to handle the stress of trading?”
Great question… I think everyone, especially traders, deal with stressful situations, and I think I can definitely help.
First of all, I want to make sure we make a clear distinction between positive stress and negative distress.
To do this, let’s use a real-life example…
I moved to Los Angeles almost 10 years ago with my wife Megan.
I had been living here for only a few months when I was at the bank, and I experienced my first earthquake.
The entire building started to shake, windows rattling, and everyone in the bank got under the desks, or in a doorway, almost as if they knew the quake was coming… they were calm, cool, and collected. They new exactly what to do.
Meanwhile, here I am, new to LA, huddled in the corner of the room calling my mom to tell her I love her… I literally thought that this was the end of the road for me.
In my mind, the building was going to collapse on top of me, I’d be trapped without oxygen, I’d probably starve to death before they finally found my body buried under the rubble.
After an agonizing 15 seconds of tremors, the earthquake stopped, everyone else got back in line and resumed what they were doing…like nothing had happened.
…meanwhile, here I am… breathing into a paper bag, counting backwards from ten to avoid a complete panic attack, and making plans to move some place where the ground DOESN’T shake underneath me!
I use this example to show the contrast between how I reacted, and how everyone else reacted.
Do you see the difference? Different people handle stress differently in that situation.
Everyone in the bank felt the earthquake, which raised their level of stress, triggered their “fight or flight” instincts, which then mobilized their mind and body to perform the actions that needed to be taken to avoid harm. They got under the desk, into doorways, and stayed calm until the danger had passed.
The earthquake caused stress for everyone, but not everyone reacted the same way.
People who had experienced an earthquake before, used that stress to take action. Well… my wife used it to laugh at me… but you get the point.
Meanwhile, someone like me, who had never experienced such a feeling, allowed my MIND to interpreted the situation differently, which caused extreme distress.
The stress of the situation kick-starts our mind and body to avoid harm.
Distress of the situation is paralyzing, and usually causes more harm.
The people in the bank who followed protocol and got under a desk, avoided the danger of falling debris.
Me, on the other hand, I was paralyzed, standing there like a fool, and exposed to danger.
In other words, our level of experience determines how we interpret the situation, and our interpretation of the event is what turns beneficial stress into harmful distress.
Stress is good for us, distress is bad.
Now that you know the difference, let’s apply it to trading…
When you’re trading, and you have money at risk, you are going to feel stress. Its natural.
That stress is going to kick-start your “fight or flight” instincts, which will make you more alert, and more capable of managing the task of trading.
When you’re trading, losses are part of the business, and if you have a trading strategy that minimizes losses, maximizes the winners, and has clearly written rules for every possible situation, the stress involved with trading is unlikely to become distress.
Furthermore, if you view losing as part of the business, if you’ve seen yourself bounce back from losses, and you know from previous experience that you can handle every situation… that stress won’t become distress.
So, when someone tells me that they feel extreme stress when they’re trading, it tells me that they simply don’t trust the way they trade.
It tells me that they are one bad trade, or one bad decision, or one unexpected move from blowing-up, losing all their money, and starting again from zero.
Which one are you?
· Are you the trader who embraces the idea of losses because you know that your strategy can handle it?
· Have you tested your strategy over 100+ trades in real-time price-action to earn your own trust in your strategy?
· Do you use proper risk-management with correct position-sizing to allow your strategy to embrace the law of large numbers?
· Have you seen yourself dig out of holes because you kept following your rules?
If so, the stress you feel is “good stress” … it’s perform-enhancing stress.
If not, the stress you’re feeling is actually “distress”, and it’s dangerous, and it will kill your career if you allow it.
Distress from trading is a good sign that you aren’t prepared, you’re inexperienced, you don’t trust your strategy, or you don’t have a strategy at all.
Distress in trading comes from your inability to control losses, a feeling of being completely out of control of the situation, and unable to find consistency.
Distress in trading feels like jumping out of an airplane with a parachute that you don’t trust will work!
Stress in trading makes you BETTER at executing your plan.
Distress in trading makes you a “deer in headlights”… you freeze, you second-guess yourself, you avoid making important decisions, or make important decisions without the proper guidance.
Avoiding Distress in Trading:
Here are some tips that will make sure your stress doesn’t become distress:
· Intimate Relationship (familiarity) with your trading strategy (tested for 100+ trades)
· Risk-Management is one of the most powerful tools (big losses causes distress)
· Proper Position-Size Guidelines (never risk > 3% of your account)
· Proper risk-reward-ratio on each trade (risk should never be larger than reward)
· Per-Trade Loss Limits (risk < 3% of your account)
· Daily Loss Limits (how many losses are you willing to take each day?)
· Daily Profit Targets (at what point do you take your money and go home for the day?)
These are just a few of the many different aspects of a professional trading strategy.
An experienced trader knows the answers to these questions, and uses the stress of trading as a means of executing his/her plan more effectively.
An inexperienced trader doesn’t have the answers, or the answers are unrealistic (such as a 1:6 risk-reward-ratio for example), or they haven’t invested the time to familiarize themselves with the different aspects of the strategy.
Remember, our job as traders is to build a mindset that is positive, and keeps our confidence and motivation running high at all times.
When your confidence levels are high, you perform at a much higher level, which leads to more progress, and success comes faster.
Stress in trading doesn’t hurt your confidence, it enhances confidence.
Distress in trading kills our confidence, it paralyzes our actions, and it leads to destructive trading decisions.
Wrapping things up…
There’s no way to remove stress from our trading day, and we don’t want to, because stress enhances performance, it makes us better at executing our plan.
But positive stress turns into negative distress when we allow our minds to interpret the situation in a dangerous way, not as opportunity to grow, but as unknown threat to our safety.
You can avoid distress by using a proven trading strategy, that you’ve tested for over 100+ trades, when you’ve seen yourself dig out of a hole and come back stronger, when you know that losses are part of the business and that with disciplined risk-management, they aren’t going to kill you if you do your job correctly.
Your Homework
So, your homework is to find someone with a proven trading strategy that you can learn from…
…or start the long process of developing your own strategy.
In the meantime, that distress your feeling is your internal alarm clock telling you… “this is not safe.”
It’s alerting you to danger, and if you don’t listen to it, you will soon see the negative results that you’re actually worrying about come to fruition. It’s a simple as that.
That’s the way you remove distress from your trading… you master the execution of a proven trading strategy… and I hope the I get the opportunity to do it with you every day in my trade room.
Guys… I hope you found value in today’s trading psychology lesson…
…and I would love to hear from you about additional topics that you’re struggling with as traders.
Do me a favor…drop me a comment below this video with any topics you’d like to see me cover in my trading psychology video…
…make sure to give me a thumbs-up if you found value, and share it with a friend who can benefit from this information as well.
It doesn’t matter what market we trade, or the strategy we use, even the best traders battle with their emotions when there’s money on the line.
And don’t forget, you can find me every morning @ 8:00am EST in my trade room with all of our members here at SchoolOfTrade.com, I have a great free trial on the homepage of our website, I publish my Nightly Newsletter every evening on my blog before 8:00pm EST, and I’m excited to see you again soon on my next trading psychology lesson.
===========================================================
Learn the Strategy & Join the Trade Room; Click here to register for the Free Trial
