Sleepless nights are a common predicament for most traders. It is the only time you are not consciously screening the markets. As stressful as it can be to sleep with volatile open positions, it is extremely important that you beat the urge to make impulsive moves and that you give your brain some rest.

Since the forex markets run 24/5, most people barely get enough sleep while the markets are open. But this kind of lifestyle will ultimately lead you to make sub-optimal biased trading decisions.

Depending on which part of the world you’re in, the markets might move the most while you should be asleep. For those here in Australia, we are sleeping while the US is in their trading day, which, when you have large open positions active in the market, can make it even more difficult to get a good sleep.

But here’s the thing most traders are not thinking about. Getting a good night’s sleep every day is just as crucial as your fundamental and technical knowledge. Still, many of us tend to overlook a good rest, thinking we can survive on far less than we need. Let’s look at why sleep is essential for forex trading and how to cultivate a good sleep routine.

Why is sleep important for traders?

Sleep plays a big part in our mental wellness, which then affects our decision-making for the day.When you’re placing trades that involve vast amounts of money along with prices that change every second, you want the part of your brain that makes decisions (the pre-frontal cortex, if we’re being precise) to be in tiptop shape.

Ask any elite athlete what one of the most essential tools they have for recovery is, and it’s often sleep. Lebron James, for example, reportedly sleeps as much as 10 hours a night. Now I know what you’re thinking, “Well, I’m not an elite athlete and I’m certainly not Lebron”. But you are trying to obtain peak (trading) performance, right?

Trading involves competent risk management. Before you execute those trades, you want to have a clear picture of the risks and benefits so that you can make calculated and well-informed decisions. When you don’t allow your body and mind to rest well, your practical decision-making is overshadowed by restless behavior patterns.

Basically, good sleep keeps you sharp and productive. On the other hand, studies show that lack of sleep tends to impair decision-making involving complex factors and unexpected occurrences, which occurs quite a lot when the markets are open. By having good sleep regularly, you allow your brain to make unimpaired decisions compared to when you are sleep-deprived.

And speaking of the brain…  

What’s the science behind it?

First, let’s look at what goes on in your brain when you sleep.

Throughout the day, when you’re awake, the brain accumulates metabolic waste. You don’t even have to exercise or move around to accumulate it. Your body already expends energy by just keeping your basic functions running, like breathing and pumping blood.

In using energy, metabolic waste builds up in various parts of your body, your brain included. In time, the buildup can interfere with the peak functions of your brain. When you sleep, your brain sees the perfect opportunity to do some house cleaning. The brain has a built-in waste removal system which is called the glymphatic system.

Sure, the glymphatic system also works while you’re awake, but the cleanup process is at least twice as fast when you’re asleep. This is because your brain knows that there’s not much going on in your body, which allows it to focus on clearing up.

This is why you always feel refreshed and focused when you wake up after a good night’s sleep. And since mental wellness plays a huge part in your trading psychology and your trading mindset, you always want to be in this “clear” state whenever you’re trading. When you’re sleep-deprived, the part of your brain in charge of your fight or flight reactions — the amygdala — is far more stimulated than it would be when you’ve had a normal amount of sleep.

What does this mean for you as a trader?

Well, try to go back to the last time your fight or flight reaction (or amygdala hijack) got triggered. Maybe you were in a disagreement with a colleague or a friend, or you were in an emergency. Wasn’t it hard to stay focused because you felt like a thousand things were going on at once? Now think about how you feel when you’re sleep-deprived and a trade isn’t going your way and a new announcement means you need to think about the implications and what’s next for the market. Are you at your best cognitively at this point? Probably not.

A stimulated amygdala makes it hard to make logical decisions. It also cuts off access to your pre-frontal cortex, which is in charge of making logical decisions. And as forex traders, our trading mindset should always be governed by logical, not emotional, decisions.

Unfortunately, your brain is more likely to go into fight or flight mode with a lack of sleep. You aren’t thinking or seeing the market clearly. Maybe you’re paranoid about your trade, or you see things that aren’t there, or maybe you enter or exit the trade too early.
  

How does a good night’s sleep benefit your trading?

A good night’s sleep gives you good preparation for the trades you’ll be making the next day. Your brain is clearer, and your mind is sharper. When you look at the charts, you’ll be less likely to be influenced by sudden price fluctuations, which we know are all too common in financial markets, particularly in forex trading.

By consistently making good forex trading decisions, you’re more likely to see bigger gains in your trades.

In fact, one study  suggested that sleep-deprived forex traders had relatively lower returns because their decision-making skills were affected.

A good night’s sleep also promotes a healthy work-life balance. You may be a forex trader, but it’s also important to look into your personal health outside the financial markets. You feel more energized and alert when you are awake, allowing you to see new opportunities in the market that an otherwise tired trader might not. This could be your edge.  

Tips for sleeping better

Now that we’ve talked about why sleep is important, let’s talk about developing good sleeping habits.

First, reduce your screen exposure before bedtime. Blue light keeps our brains alert, and this is the kind of light that you usually see from your phones and your living room lights.

Put the phone down and shut off your computer. As hard as it is, that will mean trying to keep your eyes off the charts. Try having herbal tea (Peppermint, chamomile is best for relaxing), reading a physical book (to avoid more screentime), or doing something that relaxes you to get your brain ready for bed. If you really must check your phone or computer late at night, try using apps that make the screen appear “warmer,” giving it an orange tint or via “dark mode” starting from a couple of hours before your bedtime.

Orange lighting is less harsh compared to blue light, which makes it easier to eventually fall asleep.

Second, if you can afford it, separate your workspace from your bedroom. You want your brain to associate your bedroom with rest and relaxation so that as soon as you walk into the bedroom, your brain “gets” it and starts powering down. Playing on your phone or laptop in bed is likely confusing your brain.

Third, keep your room to a cool temperature. Ideally, between 18-20 degrees Celsius.

Finally, one of the worst things you can do is get up and check your phone or computer for what’s happening in the market. The screentime on your eyes, the adrenaline rush, and more will only cause you to make an emotional decision.

If it makes you feel better, a stop-loss or a take profit takes a lot of the unknowns out of the equation. Your trade will either have one of three things happen: It’s still open, it’s been closed with profit, or closed with a loss. By leaving the outcome to the market, you are more likely to think too heavily about it all through the night.

Forex trading is not all about the technical and analytical aspects. A sound body complements a sound mind. You should take care of both aspects to make sure you are at your best. In our view, a well-rested trader will likely exceed a sleep-deprived trader that’s not at peak cognitive performance.