STRESS AND INVESTING!

This is from an article we found, that we wanted to share....

Psychological stress is a response to threat. Cognitive psychologists emphasize that the stress response is not only a reaction to events, but to our interpretation of those events. What counts as a threat is partly a function of our perception: how we think about the world around us. That is very true among traders. Two market participants may experience the exact same market move, but respond very differently based upon their interpretation of events. Although it is common for traders to attribute their stress to the market action that particular day, it would be more accurate to point the finger at how they had processed the market move. How traders interpret market events frequently makes the difference between a constructive response to adversity and an impulsive and destructive one. Several months ago I undertook a survey of over 60 active traders and investors. The survey examined their approaches to trading, their personality traits, and their coping styles. Not surprisingly, there was a close connection between the self-reported stress of the traders and their self-reported trading results. Poor trading contributed to greater emotional upheaval, which in turn further impaired trading. Interestingly, one of the personality traits most correlated with self-reported difficulties in the markets was "neuroticism", the tendency toward negative emotional experience. Overall, traders who experienced a high degree of anxiety, frustration, and depression tended to report worse trading results than those who were more even-keeled. This finding led me to inquire as to the emotional patterns that distinguish successful traders from less successful ones. Here are a few tentative conclusions that form the basis for hypotheses for future studies: 1) Successful traders tend to be successful at activities other than trading. Most of us are acquainted with the concept of diversification. We don't bet all of our trading capital on one position; nor do we place all of our investments in a single stock. Successful traders tend to be more diversified in their life positions than unsuccessful traders. They report satisfactory involvements in their social and personal lives apart from trading. 2) Successful traders tend to moderate their risk exposure. Traders who were reporting high stress and poor trading results tended to have small account sizes, but frequently took leveraged positions and held these for long periods of time. Indeed, the account sizes of the unsuccessful traders were less than half of that of the successful ones, but their reported positions were very similar. This meant that the unsuccessful traders were taking on much more risk (variability in returns as a percentage of trading capital) than the successful ones. 3) Successful traders tend to utilize some form of quantitative analysis to guide their decision making. Of the handful of traders who reported consistent profitability, all indicated that they utilized some form of data analysis to guide their trading methods. Of the traders who reported consistent unprofitability, none utilized data analysis. Instead, they relied entirely upon discretionary trading and their intuitive feel for chart and indicator patterns. 4) Successful traders tended to utilize problem-focused coping styles rather than emotion-focused ones. When problems in trading hit, successful traders tended to have already reviewed their options and had strategies ready to limit their losses, reverse their positions, etc. Losses were accepted as part of the business. Unsuccessful traders, however, often did not rehearse adverse outcomes, possibly because they found these to be too threatening to their egos. As a result, they were more likely to become frozen by markets moving against them, racking up fearful drawdowns and losses. The moral of the story, I believe, is that emotional mastery of the markets begins with mastery of good trading techniques. A few psychological methods or exercises directed toward positive thinking will not make a person a fine surgeon or basketball player. Nor will they transform the average trader into a money-making machine. A scientific approach to trading is the best psychological technique a trader can adopt. If I could offer advice to traders in just a few lines, it would be this: Risk the same, small proportion of capital on each trade and ground each trade in a historical analysis that places the odds on your side.                                  Brett N. Steenbarger, Ph.D @  BGFOREX for the complete article. Index Protrader Services Your Online Protrading Marketplace Unlocking Professional Expertise For The Individual Investor