Traders experience a variety of challenges while in an actual trade. From the classic deer in the headlights syndrome (this isn’t happening, this isn’t happening, this isn’t happening), to the fear of pulling the trigger in the first place. We’ve all been there. We’ve seen that movie. Some of us are watching it right now.
At some point in our trading career, we get comfortable placing orders and managing risk. It doesn’t mean it works all the time. It just means we are starting to get a handle on our relationship with trading. This often occurs once we figure out our personality and how it fits best within the context of the overall markets. If the daily gyrations freak us out, we can opt for a strategy that sells far out of the money premium on quiet stocks. If selling far out of the money premium triggers an unstoppable yawn, we can day trade futures. The list goes on and on.
Our journey leads us down the path of learning to manage ourselves while we are in a trade. This and this alone determines our success as a trader. Because – in case you haven’t noticed – the markets rarely do what you think they are going to do. How do you handle that?
The human brain’s default response to uncertainty is anxiety. In the face of anxiety, our natural inclination is to reduce risk. Unfortunately in trading, this can cause us to get out of perfectly good positions way too soon. Just to make us feel better.
The main culprit, I’ve found, is not the anxiety caused by an actual trade. You know the one. You have a decent sized directional trade on and . . . it’s just not doing anything. It’s not hitting your stop or even close to your stop. It’s up a little, but not much. And the longer it’s not moving, the more anxious we get, to the point where we just say, “to hell with this” and close out the trade simply to make the anxiety go away.
Of course, once we are out of the trade, the market or stock in question moves exactly to our target, and our eyes well up with tears because we don’t have the guts to pay up and get back in. Why do we do this?
Often this anxiety we feel has nothing to do with the trade itself and is triggered by events that are unrelated to the decision at hand. This is called incidental anxiety. It’s a spillover effect. One event in your life causes you to be anxious, which then, in turn, causes you to reduce your risk in all areas of your life.
When we’re making decisions, we consciously or unconsciously check in with ourselves and ask, “How do I feel about this?” When you’re anxious from something else going on in your life, you end up absorbing this emotional state into your trading.
Let’s say, for example, you are undergoing an audit. This can cause anxiety. It’s in the back of your mind. “I wonder what they’ll do,” you think, “when they find out I deducted the dry cleaning?”
The squeeze fires off and you have the perfect setup, and you take it. The trade isn’t moving. It’s just sitting there. As you watch the action unfold, anxiety starts to creep in, then build up—to the point where you close out the trade to make “the anxiety” go away.
And yet the anxiety you felt had nothing to do with the trade itself. In other words, if you are feeling anxious while in a trade, check in with yourself. Are you really anxious about the trade? Or are you worried about what your wife is going to say when you tell her you forgot to take out the trash?
The key is to check in with yourself, build an awareness of how you’re feeling while making the decision.
“Wow, I’m feeling nervous or anxious here, but it has nothing to do with my trade. I just know how pissed my wife is going to be when she realizes I didn’t drag the trash cans out to the curb and missed the pickup. Although that will suck to absorb that wrath when she finds out, that has no bearing on the decision I’m making right now, so I shouldn’t be reducing my risk here to make me feel better.”
Though, on the way home, I should pick up some flowers.
There are a lot of different triggers that can cause you to feel certain ways. Once you realize what is causing you to feel that way, ask yourself if the event is relevant or irrelevant to the decision you are about to make. With this process, you can move towards blocking the influence of incidental anxiety on your trading.
PS – my amazing wife doesn’t actually get mad at me when I forget to take out the trash. Any more. You can see her great writings at www.thisonelife.com