How To Handle Stress in Trading: Part 1

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How To Handle Stress in Trading: Part 1

 

Regardless whether you are trading the forex market, stocks, commodities, indices, futures or any other possible market you can think of, there are two factors tightly correlated to your success and profits as well as your health, namely the stress and the psychology!

Before I move forward to discuss how these two relate to trading specifically, I want you to think about stress in general. We, the people of the developed world, we the slaves of the internet, smart phones, cars and technology. We, the people who forgot what does it mean to walk on the street and just enjoy life for a second, without rushing to get from point A to point B, we who forgot how to smile to a stranger and say “hello, how are you doing today?” We are the “free” and “independent” people of 21st century.

We eat so much more that obesity is becoming the new normal (assuming that there is a standard for normal but believe i’m not the one to get involved in putting labels on people, i’m talking purely from a health point of view), on the other hand we move a lot less. We always rush ourselves from meeting to meeting, from project to project, while life is passing by. While our kids are growing up without their father or mother or both of them giving them the needed attention. Funny thing is we accept it as something normal. Unfortunately this glorious and corporate lifestyle of constant pressure and stress is leading us towards an early grave and life full of missed opportunities, missed birthdays and a lot of unhappy and sleepless nights.

I want you to look at the glass of water above. I want you to imagine you are holding it in your hand. No problem right? It is probably 150-200ml. Now the absolute weight of this glass full of water is irrelevant. Focus on how long you are going to hold it. If you do it for 10 seconds it would be fine. One minute, five minutes, three hours? A whole day?
I don’t think so. You will start feeling pain in your hand. Your body will tell you that this is not good for it. It doesn’t like it, so please stop doing it. You body is communicating with you on daily basis, you just have to learn how to understand it and really start listening to it.

 

Same goes for stress. You can’t constantly put pressure on your body (be that may mental or physical pressure). One day your body will shut itself down – heart attack, insult, panic attack. Don’t let yourself reach that shutdown or reset point. Learn how to keep it in good shape. Just like your car. If you don’t maintain it, one day the worst could and would happen while you are on the road.
You must find a vent for your stress. A place, a hobby, a friend(or shrink) where all the bad energies are channeled. 

Now let’s see how stress, psychology and forex are linked. Below you will find some of the most frequent questions my students have asked me (you will see some more in part 2). I’m pretty sure you will be able to relate to those and find them helpful, as even I’m dealing with some of them every single day while trading.

#1 – Stress from losing trades

Let’s make one thing clear: losing trades are part of this business. You must accept it first of all and then deal with this fact. Losers have a great impact on you (mood, emotions, stress, happiness, future trading decisions). A losing trade will influence you more than a winning one – this is a fact. There are studies that have found out that people tend to give negative feedback more frequently than positive feedback.
It is more likely you will bad mouth a restaurant you visited recently in front of a friend, rather than share a good experience. It turns out our “negative limit bar” is very low compared to the “positive limit bar” which is extremely high most times. Something absolutely mind-blowing has to happen to us to get us excited. Everything else is one click away (information or products). This is also a huge topic to discuss but you are getting the point.

In summary – negativity (negative trades) hits a nerve in us that makes us react. 

How to overcome the emotions that follow the inevitable?

I can recommend you a few tactics that have worked for me. Here they are:

    1. Always look at the big picture. You are a pro trader. Your trading plan is proven to work. You have nothing to worry about. This losing trade is just a statistical number on your statement. Trade #84, losing -> next…

 

    1. Have you used a risk low enough to be comfortable when losing? Yes. What if there are 5 losing trades in a row, is your risk proper again? Yes. OK. Then you are really fine. If the answer to either of these questions is NO, than simply fix the issue by lowering the risk and you are ready to go! If you will feel stressed out no matter how low the risk is, you are probably trading with money you can’t afford to lose. This is a big one! Don’t do it. Don’t trade with your rent or food or mortgage money. It will crush you mentally. The stress and pressure are going to be enormous. Take my word for it and don’t trade with such capital – ever!

 

    1. Focus on good things in your life when you get a loser. Are you and your family healthy and happy? Yes. Is this losing trade or 4 losing trades really the end of the world? No. Am I kick-ass trader who follows the plan and has nothing to worry about besides FOLLOWING the plan like a robot? Yes. Well move on to the next setup than!

 

  1. Have a daily, weekly, bi-weekly and monthly risk limits. In other words if you reach your daily loss limit stop trading. If you reach your weekly loss limit on Monday, stop trading and so on… For example after 3 losing trades in a row I would give myself some break. In that time i calm down and prevent myself from trading bad setups. In that time the market is moving forward from whatever choppy and unpleasant state it was (unpleasant for me and my strategy of course, i’m sure plenty of people have made gazillion pips meanwhile 🙂 )

I’m sure you have your own way of dealing with losing trades and I’m really curious to hear about them. Please share it/them in the comments section below!

Now let’s move on to the next one.

 

#2 – Stress prevention techniques for traders

This one is not really a factor. I have three simple techniques that will help you reduce the stress in trading. Here there are:

    1. As mentioned above, completely and blindly trust your trading plan. I’m remind you, your trading plan consists of 3 fundamental pillars: trading strategy, risk management, money management. To trust your plan like you trust your mother, you must have thoroughly back-tested it (automatic testing with the help of an EA if possible) and forward tested it (manual trading on demo account). Believe me no matter how well you understand your trading plan, when you start trading it for real, it is a completely different feeling. You come across new situations where you don’t know what do to etc…So demo, practice and then move forward.

 

    1. Don’t over manage your running trades. I have noticed that many of my students, have executed a perfect entry, (by the rules etc) but all the psychological factors that I have discussed previously, pressure them and they over manage the position. That maybe moving the Stop Loss very early and placing it too close to the current market price. This way they leave no room for the trade to work and they are kicked out of a great setup, which proves them right at the end when it moves 300 pips in the original direction. Others drop to lower time frames (if they trade the H1 chart and everything is based on the H1 chart, they would drop to M15 for example) and would also get out too early, before the initial targets and levels are reached. Remember that if you exit plan is opposite divergence for example, on the H1 chart, you should follow the H1 chart, not the M5 or M15 divergences.

 

  1. Long term plan is what you should be focused on. I know it is hard, when you are completely swamped by the daily events, especially when trading intra-day and short term BUT it is really important to keep in mind what is your long term goal. No bank is going to give you 5% return per year. Yet most people are not happy with 5% per month. Think about it, my dear reader. Greed is not welcomed in the Trading Club. You can’t bribe the bouncer to get inside, you can’t bribe mr. Market who is the owner of this amazing club. You can’t cheat. There is only one way – not being greedy! This will get you inside the 5%ers club of successful and profitable traders that have made it! We all want to make $1000 a trade not $100 or $10 but a pro-trader knows how to control such urges and use proper risk!
This will be it for the first part of this subject. Stress is deadly important to your health and profits. It is a subject that most lecturers and schools won’t put in the projectors but I really want you to think about it. Think about your family, about your mood swings caused by stress and all great moments that you have missed and you are yet to miss. Moments that will never repeat themselves.

 

Also think about how much is 5% return per month for you (do the math for compounded return over a year). After you have done the math, convert it to money. Real money. The ones that you were ready to invest. Now think about the banks and their returns. There are 3 possible scenarios:

 

1. Greed = blowing up your account.
2. Returns from trading.
3. Returns from banks.
Which scenario you will write down in your life book’s empty page is up to you!

Please share this article if you like it, also feel free to drop a line below in the comments sections. Stay tuned for part two next week!

 

Yours,
Vladimir

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