Trading Under Stress: Let’s Ask the Doctor:

Depending on they types of trades you have been making, and depending even more on how well you have been doing in the unidirectional stock markets of 2008 and 2009, you may be under a great deal of stress when trading.

Dr. Brett Steenbarger, PhD and author of three books [his latest is The Daily Trading Coach (Wiley, 2009)], offers some excellent advice.  His interests are focused on the day trader, and he pays a great deal of attention to technical analysis.  Despite the fact that we hold our positions for a longer time, his advice for traders/investors is appropriate for us.  Here are a few sample from his blog, TraderFeed:

1)The number one priority for stressed out traders is to stop trading and get themselves unstressed. 

There is not much to disagree with in this statement.  The difficulty is in recognizing the importance of this suggestion.  The common approach is to 'get back in the saddle' in an attempt to make some money. 

When trading for a living, it's especially important to follow this advice.  That means having a cash stash to be used when the steady income is absent.

2) When we are in the throes of flight or
fight,… we are less likely to calmly judge, plan, and weigh options or
more likely to act impulsively. All of us have known situations in
which one bad trade leads to another [in an attempt to] to make back the money. Before you know it, we've lost far more money than we ever
planned.

The urge to 'get back to even' should be resisted.  Another bad trade or decision is likely when you are under stress.

3) When we are under stress, we have a
tendency to become functionally fixed: we repeat the same behaviors,
even when they are not working. It is when we are calmly focused that
we're most likely to be flexible in our thinking. Under high degrees of
stress, we lose that flexibility. As one researcher emphasized, “we’re
lousy at recognizing when our normal coping mechanisms aren’t working.
Our response is usually to do it five times more, instead of thinking,
maybe it’s time to try something new.”

In
markets, doing something five times more can be the difference between
a losing day and a catastrophic one. This is why it is vitally
important that we pause during the trading day periodically, take our
emotional temperatures, and keep ourselves focused and relaxed.

As position traders, and especially for those who are new to the world of option trading, we don't tend to make as many trades as Dr. Brett – but the principles are the same.  Trading under stress is not advised.

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