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Managing Emotions While Trading

Discussion in 'Forex Discussions' started by painofhell, Aug 10, 2016.

  1. painofhell

    painofhell Content Contributor

    Jun 24, 2015
    Likes Received:
    Integrating Left Brain and Right Brain Thinking for Balanced Trading

    Trading seems so easy on the surface. Traders, while learning a methodology, are told (and believe), "Just follow the rules of your methodology and trading plan and you are on your way to achieving your dreams. Oh, and by the way, keep your emotions in check."

    This little add-on after-thought, "just keep your emotions in check", comes to haunt nearly every trader until they learn to master and learn from their emotions. Curiously the highly left brained orientation (logical problem solving skill sets) of trader educational systems blind both educators and traders to the influence that our right brain (our emotional brain) has over a trader’s capacity to think effectively - and consequently the success of a person’s trading.

    The flaw is simple and counter intuitive to the rationalistic lens through which we view the world. Particularly given a trader’s bias to find predictable certainty in the market. We get stuck in a way of viewing the world that believes, on a basic level, that if we really know the causal rules that logically govern the market, then we will succeed. This mindset depends on the existence of a set of rules "out there" that, once found, will be the Holy Grail of trading success. This is the essence of left brain thinking.

    What neuro-science has discovered, however, turns our understanding of thinking and states of mind on its head. That seismic shift is this: The kind of thinking that a trader’s mind produces (for better or worse) comes out of the emotional state of the trader. And that is what influences the world that the trader sees and reacts to. There is no world "out there" that is deterministic - the world the trader sees is colored by the mindset of the trader who observes the world. And this is where traders get in trouble.

    All thinking is emotional state dependent

    Thought and state of mind follow emotion. Emotion does not follow thought. You trigger to emotion based on a disruption of an established familiar pattern. Then you begin thinking and reasoning from this emotional cloud. How can that be? It does not sound rational at all. And it’s not. It means we create our understanding of our world from our adaptations to our deepest fears and desires.

    Take the housing bubble fiasco as an example. After the housing market blew up many observers began examining just how lenders could have possibly thought that they could loan money for houses to people who could not afford to pay back the loans. In fact, these people were incapable of making even the first loan payment. Yet, the house of cards continued to build. Everybody was doing it and nobody "saw" there was a problem. The entire industry never saw the disaster coming. When it blew up, they were surprised. But other people, who had not been sucked into the delusional thinking that comes from greed (fear of missing out), saw it coming and bet against it. They were not surprised. Very bright people were seduced by greed, and in the mindset that came out of greed, they became blind to the long term consequences of the short term nature of the emotion of greed. They became drunk on greed and their thinking was compromised.

    What does this look like in trading? Most traders actually lose before their trading day begins. They enter their day already in a cloud of fear. (Most will have pushed the awareness of this fear out of their mind so they can avoid dealing with it - which is the biggest mistake the trader can make.) From this state of fear, their right brain’s biological wiring for negative appraisal biases their evaluation of trading opportunities. The emotion ramps up, seizes any semblance of impartial evaluation of the trade, and either the trader jumps in impulsively to avoid having to endure even more fear or he stays on the side line of the trade, waiting for more confirmation, until the opportunity passes.

    And here is the kicker. When the trader goes back to review his trades, he looks at his trades incredulously and asks, "What was I thinking? I know how to trade - how could I have possibly made such a stupid decision?" The difference between the thinking from which he later evaluates his trading day and the thinking that drove his trading during heat of the trade is his emotional state.

    Even before he started his trading day, his thinking was corrupted by fear. Out of his emotional state of fear came the mindset that evaluated the market. That mindset saw danger, not opportunity. That mindset blinded him to his risk management skills, and, instead, focused his attention on the avoidance of fear. Out of that, he acted irrationally and made decisions not consistent with his trading plan.

    Then, after his trading day was over and he was in a calm state of mind, he reviews his trades and could not understand what possessed him to trade so foolishly. In his rationally (that’s an emotional state just like fear) trained mind (read bias toward the left brain), he can execute trades with confidence and consistency. Unfortunately, not being able to regulate his emotions, the trader does not know how to manage his emotional equilibrium in the heat of battle. This is exactly why the military trains their soldiers in conditions that resemble the chaos of battle where the fear of death is a real and present danger. They train soldiers to the clear-headed thinking that is needed for the emotional state of fear and its management. Traders need to train in a similar way.

    The First Step to Emotional State Management

    People do not have an effective understanding of what an emotion is and what it does. Until a trader grasps the power an emotion has over thought, particularly fear and greed, the door to understanding and managing his emotional nature will remain elusive and cannot be opened.

    First, emotions are biological in nature and take over our psychology. They are not part of our psychology, but rather they are biological. They shape our psychology (our perception of the world). Fear, in particular, is the most primitive of our emotions. It is the mother of biologic survival. That is why a trader must learn how to manage fear, or it will continue to overwhelm the impartial, disciplined, patient, and courageous kind of thinking upon which successful trading is built. Though fear will never be eliminated from a trader’s psychology, its intensity can be regulated so that it does not sweep the mind away in a cascade of negative thinking that leads to catastrophic results. Once managed, fear can be directed to help build an effective methodology for risk management. This requires left brain and right brain integration.

    The problem with most traders is that they attempt to push fear aside or ignore it. This certainly can be done on a short term basis, but as the trader has draw-downs on his trading account, it becomes clear that avoiding his fears in trading cannot be sustained successfully long term.

    Traders must learn to honor their internal struggle with their fears. To do this, the fear must be approached - not avoided (hesitating to entering trades) or attacked (impulsive trading). When the trader approaches his fears and learns from them, he (or she) opens the opportunity to re-organize himself into a more effective trader.

    This is not the "cure" to compromised thinking. It is the first aid relief of an emotional hijacking - much like an emergency room physician is going to first stop the bleeding before the real problem is addressed. The calmness releases tension from the body, which in turn helps slow down thinking. A calmer mind is necessary to develop the powerful skills of discipline, patience, impartiality, and courage that are so important to peak performance trading. This is where the trader’s state of mind for peak performance can be developed.

    Mindfulness - the Second Step to a Peak Performance Trading Mindset

    Getting your body, brain, and mind calm does not solve the problem of creating a performance state of mind for traders. However it does provide the trader skills and tools for the first level of emotional state management. Next you have to wake up from your mindlessness. You need to develop an awareness of the thoughts in your mind and begin to examine them. You have to become an observer of the thoughts in the mind, rather than blindly drifting wherever your thoughts take you.

    What does that mean? Let’s use an example to illustrate. Imagine being in front of your computer screens waiting for a set up to appear. You are waiting with anticipation as several possibilities emerge. You watch as the possible trade approaches the entry point. Now it is at the entry point and you find yourself looking for confirmation and more confirmation. Tune into the conversation in your mind as you watch this trade. "Should I take this trade? What if I’m wrong? I need a little more confirmation before I pull the trigger! It’s here; pull the trigger before this one slips by? Are you sure?"

    Have you ever found yourself in this type of internal conversation? If you are not lying to yourself (mindlessness) - then sure you have. In this case though, you are being asked to be mindful of your thoughts rather than to be swept away by them without observing them. Without training, most of us get swept away into this line of thinking without ever waking up to the activity going on in our mind. This is called mindlessness. And it produces disastrous trading results. Being mindless while trading is a set up for failure.

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