Managing your Mental Health when Trading

May 11, 2021 Written By LAT Staff
Maintaining good mental health is extremely important in life generally, but for those of us trading financial markets, it is an essential part of being successful. During Mental Health Week, we’re looking at ways that you can maintain your mental health while trading, so we’ve put together a few tips to make sure you stay on the straight and narrow, psychologically speaking…

  1. Focus on process goals, rather than profits and losses. Traders tend to set monetary goals for themselves, but this actually creates additional unnecessary pressures and failure to achieve these targets can adversely affect your mental health. A more effective goal would be to focus on the process of trading, such as sticking to your trade plan and limiting losses with stops. A useful mind-set is, “If I trade the right way, the profits will come.” This should relieve a lot of the performance pressure that you may inadvertently put on yourself by focusing purely on the money.
  2. Enjoy your life outside of trading. When something in life becomes all-important, the pressures that accompany that performance increase exponentially. Individuals who trade for a living and have little else going on in their lives are especially vulnerable to performance anxiety and mental health issues. If trading is your whole world and your trading is going badly, it’s going to feel like your whole world is collapsing. By placing your self-esteem eggs in a number of different baskets, you can stop bad periods in your trading from disrupting your self-confidence and mental health.
  3. Tackle risk incrementally. Risk places a psychological magnifying glass on situations and greatly increases the opportunities for performance pressure and mental health challenges. Traders who try to dramatically increase their risk amounts too quickly find that a trade that worked out well with 1 contract may not work with 10, because the added pressure of the bigger profit/loss swings adds too much stress. A gradual ramping up of trading size is far easier on your mental health than an impulsive leap for which you may be emotionally unprepared.
  4. Step away from the screen. If your trading is not going well, you should step away from the screen and refocus your mind on the bigger picture of what the market is doing. Take a few minutes to relax and “re-set” your mental state so that you can execute your trade plan with discipline and focus.
  5. Use mental rehearsals to make threatening situations familiar. This is perhaps the single most effective technique for reducing performance anxiety and therefore improving your mental health. By using your imagination to repeatedly face threatening situations and mentally rehearse how you would like to respond, you can eliminate much of the stress when those situations do actually occur. The goal here is to face the situation (like sitting on a winning or losing trade) so often that your coping response becomes automatic, like a habit pattern.
  6. Anchor mental rehearsals to distinctive mind states. By learning to place yourself in a state of calm and focus, and then by repeatedly rehearsing coping strategies for threatening situations (see point 5 above), you can create a link between your mental state and your coping response. Then, when you encounter a stressful situation, all you need to do is invoke the rehearsed mental state and the coping behaviours should come to into force. For instance, if you continually mentally rehearse a strategy for holding onto winning trades while sustaining a calm focus, recreating that same calm focus during your next winning trade will make it easier for you to manage the situation while maintaining mental calm.
  7. Perform a mental checklist before trading. Eliminating perfectionistic expectations at the start of each trading day can go a long way towards reducing performance pressures. Any time the word “should” enters your thinking, it’s time to step back. “Shoulds” include the aim of making a certain amount of money, to trade with a particular frequency, to make back money that has been lost, etc. Since performance anxiety is often fuelled by excessive self-demands, setting reasonable trading goals throughout the day can go a long way towards reducing performance pressures and improving your overall mental health.

Many traders who are convinced that they have deep-rooted psychological problems are probably just caught in a vicious cycle of perfectionistic self-demands. These demands upon yourself increase performance pressure, hence increasing anxiety and further disrupting your performance. This can have an extremely negative effect on your mental health and after a while, you may begin to doubt whether you will ever succeed. However, by addressing any problems at the source (i.e. the lofty expectations that generate performance pressure in the first place), traders can dramatically improve their mental wellbeing – and their trading performance - in a surprisingly short period of time.

Paddy Osborn, Academic Dean/Managing Director

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