Stress and Instincts in Trading

14 Dec

PsychologyTrading Stress

Trading stress is stress that is caused by the act of trading. For example, the fear of losing money can place a trader under significant stress. Perversely, trading stress only compounds the original problem. For example, if a trader is having difficulty making a trade management decision, the stress that ensues will only make it harder to make the decision, and will almost guarantee that the decision is made badly.

The solution to trading stress is knowledge and experience. Knowledge gives a trader the ability to trade well, and experience gives a trader the confidence to trust in their knowledge. When a trader knows that they have the ability to be profitable, and they also have the confidence to believe in themselves, it is much easier to overcome any stressful situations that might arise.

External Stress

External stress is stress that comes from any source other than trading. For example, a trader might be having relationship problems with their husband or wife (which happens more often than you might think due to the solitary nature of trading). External stress is the most difficult type of stress to avoid, because its cause is often out of the trader’s control.

The solution to most external stress (at least from a trading perspective) is to temporarily trade in simulation instead of trading live. Trading in simulation during stressful times allows a trader to continue trading, but without risking any real money. Once the stressful situation has been resolved, the trader can go back to trading live without having to make up any stress related losses.

Intuition and Instincts

I was suggesting to the trader that they use their intuition and instincts in deciding if the market was moving as they required, rather than a fixed measurement (e.g. an indicator being above or below a particular level). Intuition and instincts either play an important role in trading, or they play no role at all. This is because they apply differently to discretionary and system trading.

Discretionary Trading

Discretionary traders can (and very often do) use their intuition to confirm (or negate) their trading decisions. For example, a trader might decide not to make a trade because the trade would require a slightly larger stop loss than usual, even though all of their entry requirements had been met.

While discretionary traders are able to use their intuition and instincts in their trading, they need to make sure that they do not confuse them with fear and greed. For example, whenever a trader decides not to enter a trade based upon their intuition or instincts, they need to know why they are doing do, otherwise it is possible that the decision is based upon fear of a losing trade. Similary, if a trader decides to hold a trade longer than usual, they need to make sure that it is their intuition rather than greed that is making the decision.

Knowing the difference between intuition and emotions is something that will come with experience. In the meantime, if you are making a trading decision and you find that your heart is racing or that you are starting to sweat, you are probably making an emotional rather than an intuitive decision.

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