Understanding Stress in Trading: What Makes Trading Stressful?
How to manage stress, anxiety, fear and greed when trading? - Mind of a trader series
Stress, the silent killer. The bogeyman of the 21. st century. Stress is not some objective thing that would be expressed or experienced by everyone in the same way.
It’s actually very individual. Some people are more inclined to being stressed over certain things than others and will have completely different reactions to the same situation. Even in trading, there is no one type of experience and one level of stress. Everyone will experience this differently.
Things that heavily impact our experience of the level of stress in trading are:
Our general financial well-being, are we broke or well off?
Are we a full time trader or just a part time trader?
Do we need the profits from trading to pay the bills?
Do we have other income streams, jobs, investments?
How much of our whole net worth are we trading with?
Our beliefs and experiences about money in general.
Our inclination or aversion to risk.
Our trading approach, time frames, risk management.
The volatility in our trading account.
Other personal factors that make us more or less inclined to getting stressed out.
Stress can be taught to manage and is almost in its entirety an internal thing, a mind problem (and consequently and emotion problem), but we’ll talk about that in further articles of the series.
Let’s start with the basics and look at some examples. We’re going to make up four specific traders with certain individual perspectives at throw them in the same scenario to see if we can extrapolate some lessons.
Trader Lee.
Trades derivatives with high leverage.
Doesn’t really use stops, because he’s glued to the screens all the time and closes open trades in real time.
He’s a day-trader.
Has a decent portfolio, well on his way to a million USD value and is comfortable with risk.
Lives in his mothers basement, doesn’t take profits except to fuel his car that he took on lease this year.
Trader Alphonso.
Trades only on the long side, spot only.
He likes altcoins for their “insane gains”.
Has all of his money in his trading account and it’s a middle sized account.
Doesn’t manage risk because he can’t stand losing money.
Is a full time trader, doesn’t have alternate income streams or a job.
Trader Janice.
Trades both sides, long and short.
Has a small account, and only about 20% of it on the exchange.
Manages risk meticulously as she trades with leverage.
Has a job that pays the bills, trading is just a side gig for her.
Trader Magnus.
Invests more than trades, thinks long term only.
Is a whale, a properly rich individual.
Keeps a small % of his wealth in crypto and even less in a trading account.
Has countless passive income streams and investments.
The scenario we’re looking at is a panic drop of BTC in May of 2021, a 50% drop that caught a lot of people off guard.
We were in a beastly bull market and have already breached previous ATH of 20,000 USD with ease and went all the way to 65,000 USD per BTC. Optimism and greed were prevalent in the markets. It was the so-called “up only” season all the way. Everybody was screaming for 100,000 USD BTC. And then all hell broke loose. A proper test of one's trading strategies, risk management and mental fortitude.
By this point, at 60,000 USD Bitcoin all four of our imaginary traders were printing money. They were on top of the world. All green all day, baby! 100,000 BTC here we come! They got cocky.
And then the price dropped for the first time. The price of Bitcoin dropped by 20% in a day or two. What a gift in this bull market, right? They all assumed that this was the worst of it, so they bought the dip with the remaining free cash and added to their long position. All in with their account, all of them.
At first it looked great. The price reclaimed the previous low and it looked good for the continuation of the moon mission. But then it suddenly turned back down and continued to panic drip for the next few days, dropping another 40% from the local top. The whole dump in a matter of days reached 50%.
How do you think that they perceived this situation?
What happened to them?
Who was financially hurt the most?
Who felt the most stressed out?
Trader Lee bought the dip and quickly built a large position on the way up. He was now leveraged 5x his whole account and was already counting profits in his mind. As everything was looking good, he took a pause and took a bathroom brake. By the time he came back, his whole gigantic position was now slightly below the entry, but his PNL (profit/loss) was showing - 50% on his whole account, because he was leveraged pretty damn high.
How do you think he felt at that moment?
He was in full blown panic mode! Everything he has worked so hard for, risking and trading all this time (years!), he lost almost half of it(on paper). But the charts didn’t look all that bad, the low was still holding, he told himself. “I can’t sell now and take this hit!” So he waited to see what would happen. If it bounced to break even, he would close and take a break, he promised himself.
But the bounce never came. Only red and down, down, down. In the next couple of hours he was liquidated. His whole account was gone! Everything was reduced to a cool story and an empty pocket.
One would assume he was experiencing a lot of stress at that moment. Don’t you think?
But the market didn’t cause that stress. He did, by being too greedy and reckless, not managing his risk properly. Even if he reacted in time, he would have still lost a lot of money. He would still perceive the whole ordeal as horrendous. And because of all the bad habits, he would probably try to revenge trade and lose the rest anyway. Now he has nothing and is even in debt for the car he leases. Time to get a job, mister.
Alphonso on the other hand didn't get liquidated. Not because he’s smart, but because he plays only on spot exchanges and buys coins, not futures contracts. Lucky him, right? Well, in this same moment he’s probably down some 50% on this last dip.
He’s sweating, believe you me, he’s sweating. Just because he can’t get liquidated doesn’t save him from losing most of his money. He’s in altcoins and they have a tendency to disappear once the music stops playing. The lower the price went, the more he bought. He’s been all in for a while now. He’s feeling the pain.
The longer the market shows weakness, the more stress he’s under.
Will the bull market continue?
Was this just a fluke in the market?
Will his coin survive the onslaught?
Can he wait out a few years of a potential bear market, if the bull has finally left the building?
How will he pay his bills?
What will he do, if he has to sell his coins at these prices or even lower, he won’t get anything for them?
Since he didn’t get liquidated, his pain will last a long time. All the doubts, self criticisms and fears will be eating him up for as long as he holds on to his underwater coins. The only salvation is the sweet relief of actually selling the coins, even if it’s for a giant loss. The stress levels are unbelievable and unending. Let’s hope he can survive until the market turns around, financially and mentally, and somehow find a way to pay the bills with other means.
Now let's see how our first and only female trader of the group did, Janice. She tried longing the futures a few times, but kept getting stopped out on the moves. Shoe bought and got stopped out. Bought and got stopped out.
All in all, even if she did 10 trades and lost on all of them, since she manages her risk at 1% per trade, the damage was contained to a maximum of 10% of her trading account, give or take. She is out of all positions by the end of the day, having fought a tough battle and had a bad day for sure.
However she is now free. She has no underwater positions. She gave the market Gods their due, she paid her insurance in the form of stop losses, so she came out of this slaughter practically unscathed. She may decide to take a day or two off, to rest and let the market choose what it’s going to do next and then simply play whatever the chart will tell her to play. She took a small loss, she survived and is now free to take new trades in whichever direction she desires.
How does her stress level compare to our previous two traders?
I bet she feels a lot less pressure, fear, doubt and anxiety. In fact, I know from experience that it feels a lot better (less bad) to have taken a few small losses and be without positions, compared to either being liquidated on your whole account or dwell in the limbo of a large drawdown that remains open for a long time. She took the pain, but she took the first pain and the first pain hurts the least.
If she had let these losses accumulate, she could have lost the whole account, just like Lee did. And even then she would have a much easier time dealing with the whole affair as her account was only 20% of her whole portfolio and she has a job to rely on. It stings, but she’ll be fine and back in the game in no time.
Magnus, the whale investor hardly even noticed the whole ordeal. He saw the alert notification on his phone, took a quick look and simply bought a bit more Bitcoin. The whole stack represents just noise in the entirety of his portfolio. If it all goes to hell, the whole crypto space burns to ashes, he would just laugh and say it was fun while it lasted.
He’ll be checking on the price every week or month and if the prices become extremely cheap by his standards, he might just add a bit more to the stack. Maybe he sets a few ridiculously low buy orders, perhaps just sets the alerts. It doesn’t really matter. He’s got all the time in the world for the trend to reverse. He believes in the Bitcoin vision and has his sights set on prices well above the current top, and is willing to keep accumulating Bitcoin for years, preferably even decades to come, seeing it more as a hedge to his fiat portfolio.
For him Bitcoin is the gamble worth taking, it may be high risk, but he’s accounted for that with proper capital allocations and is willing to gamble on the possibility that it will one day pay out big, percentage wise.
How stressful do you think his experience of the monster drop in Bitcoin price was?
Why do you think that is?
Just because he’s rich or is it perhaps because the percent of his investments in this space is so small, compared to all his other investments, that he just doesn’t care all that much?
Is it possible that the cause of his calm is also his extremely long term view on things?
I’ve been in all of these situations, from most of the above mentioned positions and I have felt the difference in the stress myself. I have to tell you, it is incomparable! Since I’m a slow learner apparently, I’ve had to go through these situations and emotions multiple times. I’ve had to learn these lessons the hard way and I’m hoping that I can help at least some of you avoid the most painful ones.
This post is way too long as it is, so I will let you go now. Think about these few examples and really dissect what you can learn from them.
What are the biggest stress factors in these examples?
Is it the market?
The price change?
Leverage?
Risk management?
Position sizing?
Character?
Is it the objective situation or how people perceived it, because of various factors?
Could they have made better decisions?
Could they have set up systems that would significantly influence how much stress they had to endure?
Could it be that this same situation wasn’t equally stressful for all of them?
If so, could you think of other (non trading related) situations where different people would perceive the same situation completely differently?
Since we cannot see into the minds of these four individual traders, we had to take their trading approach and financial situation into account and extrapolate from there. They could all have made different choices, they could all have cultivated a different kind of mindset. That was in their power, what happened in the market, the outside event, was not. They, themselves were solely responsible for their stress levels regardless of the outside situations.
The situation, the danger was the same, but their perception of the situation, their reactions were very different. This is a very important lesson in regards to stress in our lives.
Is there perhaps something you can change in your trading approach or situation in order to mitigate stress, based on these four examples?
And no, becoming rich overnight isn’t really an option, my friend. We have to focus on what we actually control and have any power over in our lives and in trading. Leave the rest alone and forget about complaining. We must make the best of what we have at our disposal. Start here.
In the next article we’ll be looking at things that influence your state of mind when trading and how you can systematically arrange your trading and your mindset to best deal with the unpredictability of the markets and the insane volatility of this game.
Stress is something we had better learn to manage or better yet avoid as much as possible. Subscribe and don’t miss out on further posts on the topic.
Until then, trade well and keep a calm mind, no matter what the market is doing.
Disclaimer: nothing here is financial advice, just a fellow trader meditating on his trading journey, sharing the lessons he learned and debating some personal opinions that are only that, opinions and nothing more.
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