Home Advanced Psychology and trading The Significance of Stress in Trading

The Significance of Stress in Trading

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When one reads books on trading and psychology, it is sure to have come across stress in trading. Famous trader W.D. Gann says that “a brilliant mind cannot work successfully with a weakened body”. Another trader Henry Harper says trading itself is a drain. The pressure of the market is so much that even knowledge and experience will not be helpful.

Harper and Gann each have come up with a fundamental truth about trading stress. Trading performance is affected due to the increasing needs of life. That point, when life’s demand is high, we are not feeling good about ourselves. We somewhat start to feel “out of sorts”. These basic demands that one makes is known as general stress.

The second type of stress not only affects trading performance but also produces heavy losses. These demands are complex. Everyone feels stressful in different market situations. A market condition which might be stressful for one might not be stressful for another. Few examples of stressful situations are sudden losses, making high profits etc. We call these trading demands as trading-specific stresses.

General Stress

Stress causes wear and tear of our bodies due to demands made by our life. The Public Health Services estimate that there are one million premature deaths in America each year. In this, 75% of the people were suffering from stress-related disorders. Americans are suffering from various problems. The number of Americans suffering is high in number. The various problems are:

  • 30 million blood vessel diseases
  • 1 million heart attacks
  • 8 million cases of ulcers
  • 12 million cases of alcoholism

Many people cannot handle everyday stresses, so they turn to drugs. Stress leads to physical illness. But practically people seem to be not physically hurt. This is because of drugs. Drugs are affecting their mental state if not their physical state. And hence, it affects their trading performance.

With the rapid development and technological advancements, humans are making life more relaxed and comfortable. But it is also bringing with itself new stresses. Innovations have made it possible for people to work from their houses, bringing “commuter” stress with it. People have started to work overnight in planes which bring jet lag pressure. If the computer sector is creating new jobs on one side, it is displacing daily workers from their jobs on the other side, producing stress. Not just the job sector, people are taking a high amount of stress due to family problems and uncertainty in the family household.

Hence, a trader is required to deal with all these stresses and try not to affect his trading performance. 

Trading-Specific Stresses  

Stress limits our ability to handle a large amount of information in trading. Which is why we are not successful most of the times. In the above paragraphs, we have seen the different stress situations in our social life’. But there are also many stressful situations in trading that traders perceive. For some traders, stress is equivalent to losing. Biggest of them is the speculative loss, which is trading-specific stress. Since losses are unacceptable for many, they tend not to close their position in the hope of recovering their losses. The psychological impact of a large loss upon an average trader can be devastating. We will look at some of them.

  • The lure of rewards can be stressful. And money itself is the biggest reward in trading. People cannot think rationally when money is at stake. Since trading involves money, just being present in the market can be stressful.
  • Being able to trade successfully can be stressful. The profit of each trade and its amount is stressful for most of the traders. The profit amount is stressful based on the percentage of profit made. Some traders may find $1000 as comfortable, whereas for some, a profit of $100000 can be stressful.
  • Some traders are trading because of mere pressure. They may be under financial pressure or social pressure. Few traders can take this stress actively without harming themselves.
  • Traders who are trading professionally in an investment bank or hedge fund are also under stress. Even though floor trading is slowly disappearing, it is a high tension scenario. They continuously need to absorb new information. There are lots of people sitting with you, and it is a noisy environment. These also contribute to stress. In an investment bank, the trader makes or loses a million dollars in a day. There is always uncertainty surrounding you, of whether you will make money or not. This is a drain to the trader’s energy.
  • Being idle and not doing anything can also be stressful. The fact that you could make money if you were present in the market is itself very stressful. You can watch your position double overnight sometimes if you don’t do anything. Similarly, you may sit on a losing trade while it goes down in value. This loss situation is stressful, which is a result of doing nothing.

Conclusion

Every person reacts to stressful events differently. What might be stressful for one person might not be stressful for another one. All these together produce fear and anxiety in people.

The purpose of this article is to let you know various types of stresses in trading and how it can affect your trading style.

The result is loss in trading. You can at least now realize how dominating stress can be. In coming articles, we will help you protect from its effects.

You can self-evaluate yourself on parameters like stress susceptibility, stress exposure and stress protection.

In general, we will try to reduce general stress and trading specific stress. Later we will also discuss stress prevention techniques, relaxation procedures, and how not to allow stress to affect your trading performance.

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