How to deal with Stress during trading

Recently During my training session trader asked me the following question:

How to cope and manage the stress that comes with trading. I have been able to cope with the stress for a while now, but in times of market volatility I have more trouble with dealing with stress and it spilling over into my personal life.

It’s a great question; let’s tackle it first by clarifying our terms.

Stress is the result of challenge.  When I lift 5 Kg more than my normal workout weight in the gym, I create stress for my body.  Distress is a breakdown resulting from a poorly managed stress.  If I try to lift twice my normal weight, I can damage muscles: that is distress.

Or, to take another example, If I want to take a vacation.  either I could go to a familiar location like Goa  and have a relaxing week.  That would be stress free.  Or we could go to Himalayas , navigate cold and steep height , and see things we’ve never encountered before.  That would have its stressful moments.   There is no growth and development without stress.  Stress is the natural result of testing our boundaries and moving out of our comfort zones.

When you are developing as a trader (and hopefully all of us are), you always want markets to challenge and stress you–just like you always want workouts in the gym to challenge and stress you.  Show me a stress-free workout and I’ll show you one that did not result in further aerobic fitness or strength.  We grow by taking the challenging path to Himalayas, not the well-worn path on the beach.

So when our developing trader laments recent stress in markets, he’s really saying that market action is overwhelming him, not just challenging him.  He isn’t simply going to Himalayas.  What he is experiencing is distress–a kind of breakdown when we can no longer manage a challenge.

One of the least appreciated features of markets that contribute to stress is their ever-changing nature. Markets are not just volatile; they shift in volatility within the day and across days. Sometimes markets trade in slow, narrow ranges. Other times they swing wildly or trend persistently. Just as a trader adapts to one market environment, that environment is likely to shift. How many traders have we all known who made money during the great bull market of the 1990s, only to lose their touch early in the 21^st century? In many fields, we can learn skills and remain confident that these will serve us well throughout our career. Trading, however, requires constant adaptation: the skills that worked in one market regime can fail miserably in another. I have met very few professional traders who feel that they have job security. This is profoundly stressful for traders raising families, paying off mortgages, and planning for retirement. When a trader enters a slump, the greatest source of stress is often not the lost capital; it’s the nagging fear of having lost one’s touch.

Distress can provide painful and ultimately valuable learning experiences, but no one performs at their peak while in a state of distress.  We want markets to test us and make us elevate our game, but we don’t want markets to traumatize and impair us.  When stress morphs into distress, we are on the path to trauma.

All of this means that we have a twofold mandate:  maximizing the value of stress and minimizing the likelihood of distress.  We want to learn and grow in the face of trading challenges, but we don’t want those challenges to cripple us.  How we navigate that twofold mandate meaningfully shapes our learning curves–and our P/L curves.