“I need a drink.” And I didn’t mean water… Breathing quick and shallow breaths, I made futile attempts to massage out the tension in my neck and shoulders. My shoulder muscles in particular were burning from the prolonged strain. My fingers were tapping nervously on the table almost as fast as my heart was pounding nervously in my chest. As I hunched forward, the pin-point stinging in my eyes told me I had forgotten to blink for too long. Was I diffusing a bomb? At gun-point? Nah… just tradin’ some stocks.
This is the third installment of the Evolution of a Trader series. It’s a series about important learning experiences I had while developing as a trader. I spent a lot of money on these lessons… I hope you don’t have to! If you are new to the series, you might want to check out the other entries.
The Ideas
The opening paragraph is no exaggeration. I used to be a real mess during my trades. Around November of 2005, when I used to hang out in trading chat rooms, we all used to joke about the stress of trading. We’d say “looks like the markets are calling for the hard liquor today,” or the classic “looks like I picked the wrong week to stop sniffing glue.” At least, I hope we were all joking. It was fun to chat about, but the stress was very real, and clearly not healthy.
As soon as I put on a position, I would immediately grow tense and fixated on the chart. Even when the stock had moved in my favor, I was just sick watching for any sign that I should get out. So, I started looking for ways to counteract the problem.
I’m not ever content to just theorize… I prefer to try things out, even if they seem ludicrous. Some ideas I tried include:
- Stretching and light aerobics before trading. This way, at least my muscles were loose and relaxed prior to the stress onslaught. After a few minutes, though, that benefit was long gone.
- Stretching and light aerobics during trading. I had some success with this, but it kept me from doing any real typing while trades were on, which hurt my productivity. Also, I was still under the same amount of stress; I was just channelling the energy a bit.
- Moderate alcohol consumption… as in a couple glasses of wine early in the trading day. What can I say… I guess we joked about it until it started to sound like a good idea! I found that I could get just as worked up during the stressful times, so it didn’t really help. Worse, during the boring times, my attention would drift. (an aside: I had this cabernet last night, and thought it was pretty good)
- Meditation. I did this already, but at night. I tried fitting in some meditation before the trading day, to see if that would help. Like pre-trade stretching, this helped me go into the day nice and relaxed, but the effects wore off pretty quickly.
- Listening to music during trading. I tried a variety of styles, with no discernable benefit. During a stressful trade, I was tuning the music out. During the boring times, it was a distraction. Also, a big part of my trading style back then was watching the tape, and getting in synch with the action. I found that music interfered with my ability to do that, because I would inadvertantly correlate the ebb and flow of prints with the rhythms in the music!
- Trading in a massaging chair. I found that, when stressing out over a trade, the little massaging motors were more painful than soothing. But, when not trading, I love that thing.
- Trading on more sleep, and less sleep. The ideas were “I’ll be fresher,” and “I’ll be too tired to care,” repectively. Wrong, and wrong.
How I Overcame My Stress
As usual, though, I was taking completely wrong approaches. I was attempting to treat the symptoms, and not attacking the cause of the stress and anxiety itself. I guess, at that time, I felt like tension and stress were a part of trading that needed to be accepted. After all, one of the traders in Stock Market Wizards had an aneurysm, and Pit Bull recounts Marty Schwartz’s trading-related health problems. I could cite several more examples. However, I no longer think extreme stress is a necessity.
At some point early in 2006, I happened to notice that I was under a bit less stress than before. Something had obviously improved, and that was the catalyst that got me really thinking hard about what could have changed. I tried to go from there to identify the real root causes of all that tension. Here’s what I came up with (this is an actual text file I saved off on my hard drive, somewhat edited for presentation here):
- Too much focus on reward, too little focus on risk. One bad trade could erase several days of profits. (I’ll be making a subsequent evolution post to cover this topic fully).
- Not enough confidence in the setups I was trading.
- Trading too much of the noise, and not enough of the bigger stock moves
The big stress-reliever that I had already experienced came from addressing issue #1. I had recently achieved a much firmer grasp of risk:reward ratios, and the concept of risking a fixed % of current equity per trade (for more on these topics, see articles such as this one and this one, among others). By controlling and understanding my risk better, I felt more in control of my trades. I felt like my perfomance was more predictable. Therefore, less stress.
Items #2 and #3 were other stress factors I thought up in my brainstorming. It seemed reasonable that if I could systematically address these, I could further reduce the problem.
So, to improve my confidence in my setups, I implemented a backtester, and also started keeping close track of my trading expectancy. It is soooo much easier to face a trade that’s going against you, when you have some reason to believe that you will make the money back (and more!) soon, trading the same way. Think about that… that’s powerful knowledge to have. I also did more thinking and reading about the chart patterns that are the basis for a lot of my trades. I tried to gain a deeper understanding of the market mechanics that make them work. I find it’s easier for me to trade against what I think market participants are doing, and harder for me to trade against what looks like a “head and shoulders” shape on a computer screen.
Over time, I came to realize that Item #3 (regarding trading noise too often) was a valid concern. Really, it’s a close relative of Item #1 (poor risk control). I still, even today wake up sometimes with the notion that I should throw some money at the opening volatility. I wake up literally imagining the killing I could make, in detail. I guess the memories I have of making $1200 in a couple seconds are just too sweet to kill. On the other hand, I have to look at my old trading records to remind myself that I lost $2000 or more just as often on the same silly trades. Selective memory is deadly! But, aside from that, I was making a lot of trades with a goal of picking up a few cents on a wiggly $90 stock. That’s a miniscule move on a $90 stock, and can happen at random, in an instant. It was too unpredictable, and too hard to control my risk properly. My expectancy record keeping made it clear that I had to stop making trades like this. Though they don’t spark my imagination like those opening-minutes trades, I still want to trade noise sometimes, too. But, I know better now, and I have the facts to back me up, so I can resist.
Making these adjustments, and working on my overall workflow so that it fits my personality better, has dramatically reduced my in-trade stress. I no longer feel like I am doing myself physical harm by trading. It’s also just a lot more fun, this way!
Summary
I think a lot of beginning traders feel like high stress is an unavoidable cost of doing business. To some degree, trading is going to be stressful, true enough. However, if you have a stress level anywhere near what I described above, you need not suffer through it. In my case, it took me a long time to realize that I could attack my stress, head-on. You don’t need to wait like I did. Get to the root cause of your tension, and address it. I would wager that in many cases it boils down to the same two issues I had: a lack of confidence, and poor risk control.
