I’ve wanted to write something about stress and trading for a while, and there are many directions I could go in.  I decided to not go in the direction of  brain biology, which is already well covered by many. Although it’s interesting to read about the brain and neurochemicals and the body’s response to stress, I think there is another compelling aspect of stress to write about, especially for traders.

As traders we are faced with the need to make decisions in a timely manner. Decisions that are in our own best interest as a trader.  When we experience a crisis, or perceive or interpret a situation as a crisis, it produces what is referred to as stress, or a stress response.

When experiencing a perceived crisis and the associated stress, our brains capacity to develop and sustain focus on the correct stimulus is significantly reduced.  Experiencing high levels of stress is also associated with an increase in distracting thoughts and a decrease in productive thoughts. Additionally, there is a direct relationship between the degree of stress and the brain’s capacity to process incoming data.   The more stress one experiences, the brain’s ability to process incoming data decreases. These relationships have been well researched and are well accepted in the world of neuropsychology and mental health as a basic fact.

Interestingly, the response to stress is both ubiquitous and unique. Ten traders can experience the same situation, report similar levels of stress, but there could be ten different types of stress response and actual internal experience.  We are all exposed to the same ubiquitous issues that face all traders, but the inner experience of each each trader, and therefore the outward actions of each trader will be unique.  The reasons for the differences include genetics, how we were brought up, our life experiences, amount and quality of sleep, physical health, etc.

Traders work in an environment of constant uncertainty and ambiguity.  A significant stress response is also associated with a distorted perception of the degree of threat, often resulting in impaired judgment or poor decisions. A high stress response also makes it more difficult to process ambiguous information.  And ability to tolerate ambiguity is a very common issue I see among struggling traders.

In addition to distorting the degree of threat and impacting decision-making and judgment, stress is also associated with extremes in emotion.  And it is well known in the field of psychology that extreme emotion distorts perception.

When experiencing a significant stress response, immediate survival goals supplant longer-term goals. The greater the stress response the greater the chance the trader will pursue a risky action, they may freeze or hesitate, add to a loser, enter an impulse trade, etc. The degree of negative emotion such as fear, frustration, anger is directly related to the tendency to engage in aggressive or escape behavior. High stress levels are also associated with cognitive rigidity. In other words, stress is associated with the tendency to prematurely latch onto response choices without considering viable alternatives.

Traders can do themselves a huge favor by regularly engaging in stress reduction efforts. Some of these include regular exercise, good sleep habits, proper nutrition, leading a balanced life with interests outside of trading, stable personal relationships, meditation, biofeedback, and others.  The main idea is to DO SOMETHING (the more the better) to inoculate oneself from extreme stress responses. Reading about it here and elsewhere is a fine start, but the results your looking for won’t come until you actually do something, and commit to it.

I can tell you that among my coaching clients the ones that improve their trading performance the most and show sustained improvement over time are the ones that commit the most to the exercises and techniques I teach them. A certain amount of stress is simply part and parcel of trading, and it could even be argued that a degree of stress is needed to get one out of complacency. I strongly encourage you to explore and identify your stress level, and commit to your own stress management program, one that is meaningful to you.