Updated from its original posting on 2011-03-28
Forex trading, at the very least, requires you to deal with risk and the unknown every single day. Because of the uncertainty surrounding trading, you will most likely encounter events that may change your comfort level, aka “stress you out.” Psychological stress is natural in trading, just as it is for Cyclopip to eat baby rabbits.
But wait a minute… Isn’t stress always bad?! The only thing that seems to be good about being STRESSED is that it’s DESSERTS spelled backwards! (That’s good,huh? I’m so original…)
Kidding aside, psychological stress can be good when it gives way to a flight-or-fight response, wherein you become more alert and mentally prepared to deal with challenges. It’s like a jolt of adrenaline to the brain, which tells your mind and body to react and mobilize. In this case, stress can help you protect yourself and improve performance.
On the other hand, a forex trader who does not positively react to stress can hinder his/her trading performance. This is when you perceive an event as a threat. Instead of feeling alert and being prepared to react to a challenge, you get bogged down by your fear of the unknown and you become anxious or freeze. This kind of stress can be crippling for making good decisions as you lose your ability to remain calm and focus.
Imagine that you are crossing the street and, all of a sudden, a ten-wheeler truck comes out of nowhere speeding in front of you. How do you react?
Naturally, stress kicks in. If you’ve developed the ability to positively react to stress, or even ignore it all together, your body will immediately react and you run to safety. If not, you freeze in the middle of the road with the deer in the headlights expression on your face…and I can only imagine what’d happen next.
At the end of the day, it’s how you perceive actions or events that give way to either the good or bad reactions to potentially stressful situations. And it’s during these critical situations, how you handle your stress is what determines whether you sink or swim.
How can we use this newfound understanding of stress in trading?
The first step is to know that losing is a natural part of trading and that a single trade, or a string of losing forex trades, is not the end of the world–with proper risk management of course! Once you have recognized this fact, you can focus your mind on what you CAN do, rather than on what you CAN’T do.
Secondly, you need to realize that in potentially stressful situations, you have to be able to learn respond well (calmly staying focused and rational) instead of negatively (freeze and/or act impulsively). In other words, when faced with stress, you’ll have to train yourself to recognize then dive to get out of the way of that speeding ten-wheeler just as an action star would do, instead of freezing from anxiety and get squished like a bug!
Accepting that losing is a natural part of forex trading and developing a positive response to market events and your trading actions can only come through one thing: deliberate practice. Through deliberate practice (taking many DEMO trades then observing and adjusting your psychological/physical responses), negative responses to trading stress can be reduced significantly or even be used as a tool to help sharpen your senses to make better on-the-spot adjustments to your trades as new information comes your way.
Learn to accept stressful situations. Embrace it… And heck, once you master your mind and body over it, you might even love it!