Managing stress in the forex markets

The management of money is an extremely stressful thing, particularly when that money belongs to other investors, or is based on large amounts of debt or leverage.

Trading stress typically comes from three main causes. The first comes from taking too much risk and the very real chance of financial ruin. The second cause of trading stress is being in a market and not knowing what to do. The third cause is being in a market, knowing what to do, but not doing it. Since it is one thing to know the market, it is a completely different thing to trade in the correct way when real money is on the line.

Knowing these causes of stress, however, is useful as it means we can better prepare ourselves with the tools needed to manage the stress.

Keep risk small

The easiest way to keep stress to a minimum is to keep risk very small. How much stress can you really be under if you are trading with just 1-2% of your total trading capital?
Most professional traders will not risk much more than this on any one trade as it allows them to trade stress-free and therefore to see the market more objectively.

Have a trading plan

If we consider that the second cause of trading stress is not knowing what to do in the market, then clearly, it is important to make sure we understand what to do before placing a trade. The best way to do this is to study the market and formulate a trading plan for the next trading session. You don’t want to be creating a trading plan on the fly, it’s far less stressful to have one ready to go before the market opens.

Back testing your strategies

The third cause of trading stress comes from knowing what to do but not doing it. Typically this occurs because you have a trading plan or strategy but have a hard time acting it out or pulling the trigger on trades.

One solution to this is to back test your strategies over past data. That way you can gain more confidence in your system and this will help you to make the trades when they arise. Similarly, paper trading for a lengthy period is a good way to build up enough confidence to make trades.

Ignore the noise

Another problem that causes stress in the markets is paying too much attention to minor price movements or watching the tape too closely and for too long. Stock platforms and their flashing lights can induce gambling so it is better to stay away from the charts and not watch them constantly.

Try placing a trade and leaving it alone instead of sitting in front of the screen deliberating your next move. Only consider changing your trade if a real market event affects your risk/reward. Such market events are much rarer than most traders realise.