How to Enjoy Stress-Free Trading

Jul 7, 2021

Trading is a great way to make some additional income, but not if you’re constantly pulling your hair out. Here I offer 7 tips to help make your trading profitable and stress-free. 

I recently came across a trading meme:

Jokes aside, it is well known that trading can be a rather stressful activity.

If you’re trading using algorithms, you’ve already taken a leap towards becoming stress-free. You won’t have to spend long hours staring at your charts; neither will you face the risk of execution errors.

Here’s what else you can do to sleep better at night:

7 Tips for Stress-Free Trading

1. Be Patient

Trading is probability-based.

This is often a bitter pill to swallow. It’s human nature to expect good performance to be rewarded, but in trading, this does not always happen in the short-term.

Even a casino, whose games have a constant edge over the gamblers, may suffer losses in the short-term.

If you flipped a coin 1000 times and counted the percentage of heads as you progressed, you’d get the following chart:

It takes about 200 flips for the percentage of heads to converge towards the theoretical value of 50.

So be patient; your edge may only become apparent after a few dozen trades. Losing trades should be viewed as a cost of doing business, much like how you need to purchase raw materials to manufacture a product.

A loss of patience could make you interfere with normal strategy operation, invalidating your hard-earned backtest results.

2. Have Realistic Expectations

If you’re a new trader, chances are you won’t be making 100% a year.

I believe such lofty expectations are fueled by the hordes of trading gurus promising high returns within a short time.

There are probably legitimate gurus who indeed consistently make such returns, but you won’t hear them boasting online, and they probably won’t be selling you a course.

So what’s a realistic expectation?

If you’re starting out, forget about returns for the time being.

Focus on trading well instead. That means developing robust strategies, and trading them as planned.

Once you’ve got in the groove, you can set a personal profit goal, or find a market benchmark. For example, you could use the S&P500.

The S&P has doubled in the last 5 years, translating to a year-on-year growth of 15%. Of course, you’ll want to beat this benchmark since passive investing in the S&P requires practically zero effort.

I would say a year-on-year return of 20-25%, with a maximum drawdown of 15% or less, is a reasonable target.

Unrealistic expectations often cause traders to take on excessive risk, usually in the form of aggressive position sizing.

3. Be Conservative With Position Sizing

Your position sizing should be based on how much capital you’re willing to lose, not how much profits you expect to earn.

In other words, focus on the drawdowns in your backtest, not the returns. You can use metrics such as maximum drawdown, Ulcer Index, and the risk of ruin.

Here’s how position sizing affects your equity curve. The strategy below risks a certain percentage of the account per trade.

Maximum drawdown increases drastically as position sizing becomes more aggressive. As a rule of thumb, you should risk no more than 3% of your account per trade.

Personally, the exact position sizing method used isn’t that important, as long as you stay conservative. If you’re interested, I compare two popular position sizing methods – fixed fractional vs. fixed ratio, in this post.

Here’s a common problem:

Say you’re willing to accept a 30% maximum drawdown, so your backtest reveals that you should risk only 2% of capital per trade.

You’re unhappy with the corresponding returns, however. Instead of increasing your position sizing, I suggest trading a diversified portfolio.

Diversification has the benefit of increasing your risk-adjusted returns. A portfolio of average strategies can still produce good overall performance.

The chart below shows how combining a EURUSD and GBPUSD strategy leads to superior overall results.

I discuss the ins and outs of portfolio composition here.

4. Understand Your Strategy Inside Out

Here’s a quote from my favourite astronaut:

No astronaut launches into space with his fingers crossed. That’s not how we deal with risk.

The more you know, the less you fear.

-Chris Hadfield

Here are some strategy parameters you should be familiar with:

  • Entry & exit conditions
  • Returns & drawdowns
  • Trading frequency
  • Win rate
  • Longest losing streak

Armed with this knowledge, you’ll know what to expect, and you’ll quickly know when something goes wrong.

5. Monitor Your Strategy and Have Contingencies

There are numerous free online platforms that allow you to track strategy performance. Myfxbook and FX Blue are some popular examples.

Here’s an example of a portfolio I’m monitoring with Myfxbook.

You can also import your results into Excel and do your own custom analysis. For the portfolio above, I maintain an Excel sheet that charts each strategy’s performance on a trade-by-trade basis.

I explain how to plot these strategy performance charts here.

Despite your best development efforts, there’s a possibility that your strategy will underperform in real-time (same for manual strategies).

Before you go live, you should determine a quit point for each strategy, and how to replace that strategy if the quit point is hit.

If it’s time to remove the strategy, just do it and save your mental capital for other challenges. I find analysis paralysis to be particularly detrimental and frustrating for traders.

Plan your trade, and trade your plan.

6. Debug Your Strategy

There’s no bigger impediment to stress-free trading than a whole string of runtime errors.

Your strategy development process should include a debugging phase. Try to foresee every possible scenario and simulate it using MT4’s visual strategy tester. The Journal tab is a great place to spot potential errors.

A red symbol in the Time column means an error has occurred.

For more complicated strategies, some forward testing using a demo account (also called incubation) may be required.

Incubation also lets you decide whether your strategy’s real-time performance is emotionally appealing.

7. Minimize Your Time in the Market

It’s impossible to be completely risk-free if you’re in the market. Even with a stop loss in place, extreme volatility may increase slippage and make you lose more than expected.

A recent example is the CHF disaster in 2015, where the EURCHF flash crashed 20% within a minute, thanks to the Swiss National Bank suddenly removing the EURCHF peg.

Here are some ways to minimize market exposure:

  • Trade on the lower timeframes
  • Focus on high probability trades by using entry filters
  • Implement a time-based stop, e.g. exit after 10 bars, or exit before the weekend

An example of weekend volatility is when the EURUSD gapped down 130 pips after Saddam Hussein was captured. Such incidents are few and far between, however.

If you’re thinking of adding a particular exit to minimize exposure, I recommend doing a backtest and let the results speak for themselves.

Wrapping Up

It’s difficult to exhaustively list all the requisites of profitable, low-risk trading.

After all, trading is a difficult game, and it’s certainly not everyone’s cup of tea.

Hopefully these 7 tips will help you enjoy stress-free trading, and help you stay in the game long enough to win it.

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