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Stressed Out and Vulnerable
Ian wrote in and asked, “Over the past four months I have had a pretty rough time. I have had many medical issues...I don't get much sleep and I am constantly feeling run down. My symptoms have affected my life to such an extent that my long term girlfriend left me. I have gone bankrupt and folded the business I loved running. However, I do love to trade and when I devote myself to it, I can achieve consistent results. So my question is when all is falling apart, is it wise to tackle the markets?”
Thanks for sharing your circumstances with us. Many traders are under extreme amounts of stress these days and can relate to your predicament. For example, many traders have real estate investments in addition to their investments in the financial markets that may not be doing well. Also, many traders may feel stress from losses in the markets or from the generally unstable market conditions we have seen over the past few months. They may be hiding these feelings from their friends and family, and this may produce added stress. Stress levels may be higher than they have been in recent years.
Although generalizations may not apply to everyone, people in extremely stressful circumstances may want to avoid trading in earnest. A primary assumption I have made in my columns is that stress interferes with a trader's ability to maintain a proper mental edge. Here’s why: Trading requires risk, and tolerating risk is inherently stressful. Although people differ in terms of their ability to tolerate stress and to tolerate risk, humans have a limited amount of psychological energy when it comes to coping with stress and risk. It's hard enough to control impulses and emotions under ideal conditions, but when a trader is under a great deal of stress, trading becomes especially difficult.
You may be under a great deal of stress. To put it in perspective, consider your score on the Social Readjustment Rating Scale created by Thomas Holmes and Richard Rahe. Each life stressor has a stress score on the scale that can be summed to arrive at your total level of stress. In your case, your total stress score is moderate at slightly above 200.
- Marital separation = 65
- Personal injury or illness =53
- Business readjustment = 39
- Change in financial state = 38
- Change in sleeping habits = 16
You may be under stress, but not everyone handles stressful events in the same way. Some people are “stress resilient” in that they can take stressful events in stride. But it is difficult to handle stressful events easily.
Some people cope with stress by engaging in creative endeavors they love and trading surely falls under that category. So if you love trading, focusing on the markets may help you cope with stress. That said, you must be extremely careful. If you merely paper trade or study the markets for interest, you may be able to relieve stress. But there is a “sunk cost” in studying the markets and not trading. There’s a natural tendency to think, “Why am I studying the markets and not making a profit?” That’s when you might be in trouble. You may make risky trades while in a vulnerable, stressful state of mind, which may lead to losses and further increase your levels of stress. In the final analysis, it is better to stay away from the markets until you fully recover from the major life events that have happened in your life.
Many traders underestimate the influence of stress. Stress is not only a psychological reaction, but also a biological response. When you are stressed, your body reacts instinctively. You are agitated, on edge, and ready to lash out. Your attention is restricted. Your mind is closed and inflexible. The stress response has a specific biological, adaptive function: Your energy is channeled into making the simple response of fighting an opponent or running away to flee to safety. Not only is your energy channeled, but your perceptions are limited. Trading requires a more complicated skill set, though, and when you feel stressed out, you are bound to make a trading error. For example, you can have a very complete trading plan, where every aspect is spelled out clearly, and you may have a wealth of experience executing such plans, but when you are stressed out, even the simplest task can be difficult to complete. You may not see an obvious signal to take action. And even when you see the signal, you can make a small mistake when you're stressed. Again, when under extreme stress you are agitated and your psychological perceptions and intuition are restricted and closed off. You miss little things and have a tendency to respond quickly without thinking. While trading, we often do things automatically, without thinking, but stress can cause us to act so quickly that we miss something. We may forget to place an order according to plan or we may misread a signal and close out a position too early.
Don't underestimate the impact stress can have on your ability to trade with the proper mental edge. It is useful to practice stress prevention. Try to minimize the impact of stressors as much as possible. Stressful emotions can build up, and if not released occasionally, one can be overloaded by stress. You can't completely remove stress from the trading environment, but you can prevent the stressful aspects of trading from making you feel overly anxious and fearful by developing a stress management plan and following it. Some useful ways to manage stress include (a) avoiding caffeine, (b) exercising regularly, (c) minimizing daily hassles, and (d) seeking out social support. Caffeine helps many people wake up in the morning, but it may often elevate your nervous system to the point of making you hyper-alert to the slightest form of stress. Trading is stressful enough; it's not useful to pre-elevate your nervous system and feel a heightened sense of anxiety. Tension can also be reduced with regular exercise. Tension builds up during the trading day, and a regular exercise program ensures that pent-up frustration and tension are released, and do not build up to influence subsequent trading decisions unexpectedly. It's also important to reduce stressors in your environment. Daily hassles, such as time pressure, traffic congestion, or feeling over-extended can build up psychological tension and loiter in the back of your mind. Try to minimize these hassles and relieve the pent-up tension. But however you cope with daily hassles, don't ignore them; don't try to pretend they aren't important enough to deal with immediately. They can accrue and cause you great strain in the long run. Seeking out supportive friends can also be useful when managing stress. Friends can provide you with a sounding board, an alternative perspective, or even creative solutions to your problems that may have eluded you.
Trading requires an optimal mindset. When you are upset, tired, and emotionally distracted, you will have trouble following your trading plan. It's vital to return to a calm, focused mindset, a mindset where you are attentive and alert, and can trade like a winner. Don’t underestimate the impact of stress. Trading is very stressful. When you have stressors to mange outside the trading realm, you may be especially prone to making trading errors, taking unnecessary risks, and possibly increasing your dept. There’s plenty of time to trade the markets across your life. It’s better to patiently stand aside for the moment, wait for your “traumas” and feelings of stress to dissipate, and when you are rested, relaxed, and relatively stress-free, you can resume your trading endeavors with the proper mental edge.
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