Home > Overcoming Trading Anxiety By Understanding the Causes and Process of Anxiety

Overcoming Trading Anxiety By Understanding the Causes and Process of Anxiety

Ever been afraid to pull the trigger on the trade, or felt afraid to trade altogether? It’s called trading anxiety and it affects a lot of traders at some point. Having a healthy respect for the market is one thing, but having fear related to our trading can cause big problems. Here are some of the symptoms, and how to get over trading anxiety.

Trading anxiety affects many traders at some point in their career. It often affects new traders when they start trading real money for the first time, but can also cause problems for experienced traders. I recall having it a few years back. I had a few days where I just couldn’t seem to do anything right. It was like every trade was a grey area, and I was making the wrong decision. It got in my head, and for a few weeks I remember having a real tough time getting into, and staying in trades. Just like in life, things can be going along magnificently…until they aren’t, and anxiety develops. A couple losing trades happen, and then we start to fear more losing trades, which causes us to make mistakes or misinterpret information, creating a downward spiral. This article looks at the causes of anxiety (when it occurs), so you can understand where it comes from and the reasons for it.

How the anxiety is handled will be addressed next; there are three ways to handle anxiety, two of which are destructive (often subtly) and lead to a cycle of anxiety, and one way that breaks the cycle of anxiety and actually harnesses its power.

By understanding anxiety, and how you choose (or not choose) to handle it, will allow you to connect-the-dots so you can manage your own trading anxiety when it appears. Not many trading examples will be used; instead, after you have read this article just sit for a few minutes and allow the ideas to sink in. Then explore how you can apply the concepts to your own trading and life situations.

The Causes of Trading Anxiety (and Anxiety in General)

Please note, I am not a psychologist. These are my views, largely derived from people whom I view as smarter than myself on this subject. The article is aimed at people without mental biological issues–if you feel your anxiety is biological in nature, or it is interfering with your life outside of trading, please seek professional help.

There are only two causes of anxiety. While you may be able to think of many anxiety causing situations, it’s very likely they all could fit under these two broad headings.

  • Loss: We feel anxiety over loss. Loss can be real, threatened or imagined. We lose a loved one and are anxious about what we will do without them. We may imagine losing our job and feel anxious about where we will live and how we’ll pay for food. We may be bullied, blackmailed or held at gunpoint where there is a threat of financial or physical loss.

Often (but not always) loss is the result of something external, and therefore out of our control (side note: suffering can be described as trying to control the uncontrollable–that which is outside ourselves and beyond our control). A trader will lose some trades no matter how much they prepare, study and research.

Therefore, anxiety will always exist, because there is always the possibility of real loss. But we can learn how to channel it in a more constructive way. We can also learn to minimize imagined anxiety and prepare ourselves to handle potential threats.

  • Lack of Confidence: If loss creates anxiety, then confidence is our belief in our ability to handle loss. Lack of confidence in regards to being able to handle a loss creates more anxiety. If you lose your job, a lack of confidence in your skills results in your mind focusing not only on the real job loss, but also on imagined and threatened losses, such as losing your house, your spouse, your kids, your car…..the list goes on. A “fear of the unknown” would also fall under this category, as fear of the unknown is simply anxiety about not feeling adequate enough to handle whatever may be out there.

If you have confidence in your skills, losing your job isn’t such a bad thing. Yes, there is a real loss there, and likely some anxiety, but you know you can find a new job and so don’t get caught in the cycle of creating additional anxiety for yourself.

If you train yourself in self-defense or negotiation, you increase your confidence in these areas and therefore will feel less anxious about things that threaten you with loss.

Confidence and lack of confidence are internal resources (or lack of). Therefore, unlike real losses, confidence is within our ability to control.

Confidence is created by courageous acts–constructive decisions which are made even when a lot of anxiety is present. How to be courageous is discussed below.

 The 3 Avenues of Trading Anxiety – Destructive Cycles and the 1 Way Out

You have three choices/decisions for how to handle your anxiety. Two of these choices are destructive, to you and potentially others. Only one choice gets you out of the destructive cycles which anxiety can cause.

  • No choice/Passiveness: In essence, this isn’t a decision at all. You are choosing inaction, and allowing your anxiety to run your life. It is a passive approach but is also very destructive–often subtly–over time.

By not making decision on how to handle your anxiety, and by taking a passive approach, you begin to operate on auto-pilot which results in acting on impulse, and not on conscious thought (by not developing or utilizing your decision and reasoning functions, your brain begins to operate off more basic drives, such as “fight-or-flight”). Impulsive behavior leads to overeating, over-drinking, destructive habits, overspending, not following a trading plan, etc. Usually, these things feel like they happen to you without your control, and it is because no conscious decisions are being made in real-time to monitor and steer behavior (monitoring behavior and thoughts in real-time takes practice, and requires you take an “observing” perspective on your own mind, body, and actions).

This impulsive, passive, anxiety-driven behavior results in a cycle where there are likely escalating feelings of loss as the ability to exercise control over life slowly disappears, and the lack of confidence in our ability to do anything about it also grows. This usually results in an even greater attempt to ignore the issues, which results in greater impulsiveness (because the real issues aren’t being handled) and the cycle deepens.

By continuing to be passive, and not make conscious directive decisions, the cycle continues.

  • Decision – Masochism: Many people will choose to do something about their anxiety, but quite often in a destructive way. They feel loss and a lack confidence, which creates a “poor me” mentality. Playing the victim, and expressing hopelessness and helplessness are other ways to describe this action. This mentality is destructive because it results in behavior that is based on a “scarcity” and “win-lose” actions (side not: scarcity is the root of aggression, based on a belief that there is not enough, so you must forcefully take; this too is destructive to others and you). While trading is a zero-sum game, if you approach it with an attitude of “the market is abundant and has lots to offer” your results will be much better than thinking constantly about how tough it is.

When choosing to act in a “poor me” fashion, a choice is made to make others (or the market) feel responsible for losses and to lack confidence in one’s own life. A choice is made to play the victim where the (often) underlying belief is that there are scarce resources and “I’m inadequate (lack confidence) to get them, so if I continually show this in my behavior then maybe I will get some handouts.”

This once again creates a cycle. By continually dumping problems on others the masochist person is creating a win-lose scenario, where they win (they get to vent and dump on others and hopefully get some freebies…but never really get what they want) while the other person/market receives their negativity. This is only short-term win-lose though, eventually it becomes lose-lose. Over the long-term, help will become unavailable for those that don’t help themselves, because no one wants to be on the losing side of a win-lose game all the time (because that too is destructive to allow ourselves to dumped on continually)–there is no value there.

Such behavior results in a continued lack of confidence and possibly even greater loss as the perpetual inability to take personal responsibility pushes others away, thus driving the cycle.

  • Decision: Do Courage–The Way Out: As mentioned earlier, we can’t get rid of all our anxiety in all areas of our life. It is a part of us, and a very valuable part. When anxious about loss or lack of confidence, there is only one way to constructively handle the situation–consciously choose to do the right thing even while feeling highly anxious.

“Doing the right thing” is doing what you know you should do, or what you have trained for;  it may also be having the courage to seek help or resources, or simply inwardly or outwardly admitting a problem. Doing the right thing is striving for win-win action and behavior, where you don’t simply take from others, but try to give back in some way.

Courage is not fool-hardy though. It is not succumbing to every whim (that is passive).

Most of us read self-help books so we can decrease our anxiety so that we can then act courageously. This is flawed. We need to do courage first, which in turn reduces our anxiety over time. A conscious choice must be made to do the right thing, despite anxiety.

Being courageous while anxious increases confidence——>confidence increases our ability to handle anxiety related to loss——->having the confidence to know we can handle most losses gives us more confidence and inspires us to continually act courageously.  

This is a positive and constructive cycle to be in.

Figure 1 shows most of this information in one chart (excuse my infrequently utilized PowerPoint skills).

Figure 1. Anxiety–The Causes and Process (click to enlarge)

trading anxiety, causes and fixes

Overcoming Trading Anxiety – Final Word

There has been little mention of actual “trading” anxiety in this article. This is on purpose; reflect on the general concepts of anxiety above–the causes and your decisions in response to anxiety–and then ponder how this can be utilized in relation to your trading anxiety. The main takeaways are that:

  • Losses will always occur, in trading and life. Therefore, anxiety will never completely go away, although you can almost eradicate it in certain areas of your life by repeatedly making constructive decisions in spite of the anxiety. Anxiety is beneficial, it alerts you to potential danger and can result in courageous acts which build confidence and feel great. By developing confidence in different areas of your life the amount of time and energy spent on imagined losses will greatly decrease, which in turn decreases the overall sense of anxiety.
  • The only way to constructively handle anxiety is to do the right thing even when feeling anxious. Courage is something we DO–it is not “try,” “should” or “will”–courage is a present state of action when required.

Hopefully, by understanding the causes of anxiety and destructive nature of the other options, you’ll choose to do courage, even though you will be extremely anxious while doing it.

For example, if you have trouble sticking to your trading plan, make a decision to monitor your anxiety, to remain present during the trade and stick with it even in the face of extreme emotion. Don’t back down, don’t let impulsiveness to end the suffering take over. Stay the course, and after you are done you will have a great sense of accomplishment (a slight boost in confidence). By doing this repeatedly, you’ll gain confidence in what you are doing and know that you can handle any situation which may arise; your anxiety levels decline and you enter a constructive cycle of doing what you are supposed to.

This is, of course, assuming you have dedicated time, effort and study to your trading plan in the first place. By putting in this effort, you also gain confidence (it is a decisive and conscious act) that what you’ve accomplished is of value…now you just need to gain the confidence to actually implement it (see paragraph above). It’s a cycle, so put yourself in the right cycle, instead of a destructive one.

By Cory Mitchell, CMT

Additional reading:

Trading Psychology Quirks – Availability Bias

Trading Mindset-Your Purpose for Trading Affects Your Results

Trading Psychology – The 4 Stages of Trader Development

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