As traders, we take risks and always face the possibility of losing our hard-earned capital.
I’m sure all of us have had some degree of anxiety when our money is in the market.
However, there are some that are filled with fear and cave into the stress of it all. Once we begin to panic, our capability to accurately read the markets is lost.
Your Decision-Making Style Can Affect Your Market Readings
The way in which we approach the decision-making process can have a large impact on how accurately we can read the market.
This was shown in a study conducted by Ingmar Franken and Peter Muris (2005). When they began the study, the researchers asked participants to describe their decision-making style.
The Experiment: Calm VS Panic-Driven Decision-Makers
Some participants described themselves as calm decision-makers who were not only able to make sound decisions, but were also able to enjoy the thrill of achieving their goal. They were enthusiastic and optimistic individuals.
The other group of participants had a very different experience. They reported engaging in panic-driven decision making when having to make a fast judgement. They also said they had trouble thinking clearly in pressured situations and were often quick to change their mind when they thought they might be in a situation where things could go wrong.
Study participants were then asked to play a game of chance. They were given four possible strategies- two profitable strategies and two losing strategies that varied according to how much and how consistently they led to a positive outcome. They could be considered analogous to real-life trading strategies.
The participants were given the option to choose any of the four strategies to use in the game. Immediate and very large wins resulted from the two losing strategies, but losses over the long term were huge. On the other hand, the profitable strategies led to small gains in the short term, but these wins were regular and produced smaller losses.
The study participants were then instructed to use their chosen strategy to amass as much money as they possibly could. They were advised that once they saw how their strategy did, they had the option to reuse it or move on to one of the other strategies.
The Experiment: Results & Explanation
As I alluded to earlier, the decision-making style of the participant was shown to directly influence which strategy each chose to use.
This study demonstrated that in order for us to make the greatest amount of money, our perception of how successful the strategy was must be accurate. It also showed that if we are one of those individuals that become fearful and panics when it comes time to making decisions, we are more likely to choose strategies that will result in less profits.
When we must make quick decisions and we are overly stressed, we are more likely to choose investment strategies that will result in immediate gains, but in the long-run, will result in potentially devastating losses.
3 Things You Can Do If You Are A Stressed Out Trader
For those of us stressed out traders, there is still hope. There are some proactive things we can do to help us reach our investing goals.
1. Acknowledge that you are working at a disadvantage
The first step is to acknowledge that we are working at a disadvantage. Also, we must understand that because we have a tendency to panic, we will have to try much harder to combat this than other traders. Once we let the panic take over, our decision-making abilities will be greatly diminished.
2. Look for ways that can reduce your stress and pressure
We should look for ways that we can reduce the amount of stress and pressure we put upon ourselves. For example, we can try putting a limit on the amount of risks we take. This can be accomplished by making smaller trades which will help us to feel more secure and safer. We can also give ourselves a longer time frame.
3. Stay on top of your win-loss ratio
Another approach is to stay on top of our win-loss ratio. Watching our win-loss ratio closely will tell us whether we are making more money on our wins than we are losing on our losses.
It will help us to make decisions based on facts and give us the time to think before engaging in trades that will result in immediate gains, but huge losses in the longer term. Being informed will keep us aware of where we stand and give us the opportunity to switch to a different approach so that we can be more profitable.
Keep Your Stress In Check
A stressed trader who allows anxiety, panic and fear control them, is a trader who will not be able to make sound decisions.
It is important to do whatever it is that works to reduce the stress that leads us to this state of mind. If we can achieve a calm state of mind, we can achieve our investing goals.