How Bad Sleep Destroys Trading Risk Management

Lack of sleep is probably affecting your trading in ways you weren’t even aware of.

Everyone knows poor sleep can have harmful effects. It leads to more illnesses, worse overall health and deficits in cognitive processes like concentration, attention and memory.

Sleep loss can even lead the brain to start ‘eating’ itself, as astrocytes consume portions of synapses.

Despite knowing of the negative health effects, traders still fall victim to hustle culture and sacrifice sleep for more chart time.

According to the CDC, about 35% of adults receive less than the recommended duration of sleep, which is between 7 and 9 hours per night.

“That’s OK”, you might think to yourself. “If I’m tired, I’ll just use caffeine and other stimulants”.

That’s a reasonable suggestion. After all, caffeine will make you feel more awake and vigilant, which will lead you to believe you’re performing at an acceptable level.

But you’re not…

It’s been found that decision making and other aspects of cognition that are affected by poor sleep are unrelated to our awakeness or vigilance. So caffeine isn’t going to be a solution. The only possible fix is getting the right amount of sleep.

The Effect of Poor Sleep on Trading

Some of these negative effects significantly impact trading. How we assess and make decisions based on probabilities, risk and reward are disrupted.

Many studies have found that a lack of (or poor quality) sleep leads us to take riskier actions without necessarily realising we’re doing it.

Studies on risk-taking found that people who get the right amount of sleep are less likely to distort the probabilities of gains and losses, meaning they can make better financial decisions.