June 8th 2005
Visualizing the Worst Case Scenario
Visualization is a powerful tool used by professional athletes and traders alike. A runner, for example, will not only run around the track for hours at a time, but also visualize an upcoming race over and over, anticipating what might go wrong and how to recover from an unanticipated setback quickly. Visualization can prepare you mentally to handle the stresses and strains of the trading day.
Trading is physical as well as mental. When you’re in the midst of a trade, for example, your adrenaline is pumping as you wait for a stock to reach your exit point. It’s useful to prepare mentally and physically for the trade.
Trading can be stressful. After you execute a trade, you don’t know what is going to happen until it happens. You’ve probably been in many stressful situations in your life, such as asking someone out on a first date or a stressful job interview. Running through possible scenarios over and over in your mind is helpful.
You can anticipate what might go wrong and how you will deal with it. When you were younger, for instance, you may have found it useful to think of what you might say if you asked someone out on a date and were told to call back another time. Avoiding the possibility, and not having a plan for dealing with the setback, before making the call will put you on edge. On the other hand, if you have a plan for dealing with the setback graciously, you’ll feel better, and when you do face the setback, you’ll handle it with ease.
That said, some people like the excitement of not being fully prepared. They wouldn’t think of anticipating what to say, but if you were prudent, you would agree that it is better to plan ahead instead of being caught off guard without a plan.
Trading plans are essential for disciplined trading, but many novice traders have trouble following their trading plan. The pressure can get to them and they abandon their plan prematurely. But visualization can help. By running through different scenarios over and over in your head, you can anticipate what may go wrong and pretend that you will handle the setback with grace and decisiveness, instead of panic and indecision.
How might you use visualization? Close your eyes and imagine executing your trade. Observe the thoughts that go through your mind. Imagine trying to stay objective and unemotional. (This is the ideal thinking strategy. You might also imagine thinking optimistically, but this can produce feelings of disappointment should the markets move against you.) Next, imagine the worst-case scenario: the price goes down and reaches the point where you planned to exit and take a loss. Imagine how it feels to lose. What thoughts are going through your mind? Depending on your experience, you may tend to feel anxious and afraid, but ideally, you should remain calm, and ready to exit the trade effortlessly.
The key to using visualization is to mentally experience a variety of scenarios. Run through the ideal scenario and the dreaded scenario. For example, you might want to mentally practice the worst-case scenario where you go through the entire situation calmly and according to plan, but also mentally practice variations, such as feeling a sense of panic when the price moves against you. After the initial feeling of anxiety, you can imagine telling yourself to calm down, feeling soothed, and exiting the trade decisively.
You don’t know what’s going to happen with a trade until it happens, but by using visualization exercises, you can anticipate various scenarios and be prepared. Visualization can help you handle any trading situation like a seasoned professional.