Managing Emotions While Trading


28 ratings



Rande Howell

07 Oct, 2010

in Psychology

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 traderís capacity to think effectively - and consequently the success of a personís trading.

The flaw is simple and counter intuitive to the rationalistic lens through which we view the world. Particularly given a traderís 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 traderís 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 itís 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 brainís 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 (thatís 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.

You need to be logged in to post comments or rate this article.

Re: Managing Emotions While Trading

Great article, I came across it just when I was acknowledging that trading will kill me. The emotions I go through after placing a trade, the sickness in the pit of my stomach and the head aches are unbelievable. I can speak of many opportunities that I have missed while staring at them and waiting for a "final confirmation", I then kick myself after seeing the trade go my direction and its too late to enter.
To succeed in trading you need more that a chef or a car mechanic needs in going about his day. This is especially true when you are trading a live account. How many of us out there perform sterlingly on demo accounts and fumble when trading real accounts? Am sure am not the only one. I am going to devour every piece of information am gonna come across that will help me get control of my state of mind when trading a live account.

Aug 10, 2013

Member (4 posts)


Rande, are you a trader as well as a psychologist?

I've seen much written in relation to the psychology of trading, yet I've never been able to understand why psychology should be considered to have any more significance in this field than in any other. There is little written on the psychology of cooking a fine meal, or maintaining your car or painting your house - all of which undoubtedly either benefit or founder as a function of the individualís state of mind at the time. But to imagine it is necessary to embark on this degree of introspection before being in a position to trade seems counter-productive in the extreme.

Iíve heard the phrase Ďanalysis paralysisí and I canít help think this is exactly what would result for many if they attempted what you suggest.

As a learning trader and far from experienced I suffer more than most I imagine with all of the failures and follies associated with being new to the game, but I donít believe looking inward is going to cure any or all of those problems. Iíll get the confidence and mastery I need to be successful in trading Ė it thatís going to happen Ė by being better at making good trading decisions. Those decisions can in my view only ever be based on whatís Ďout thereí where the action is and not inside where I reflect whatís going on out there. Itís never the other way round. My mood or mindset does not cause the market to do what it does.

I apologise for being less than generous for your significant efforts, and accept fully that I am only speaking for me and the very real possibility I am totally wrong, but new traders and those interested in trading should be chasing the data that will make them more effective in trading rather than that which will, in your opinion, make them a better person in general. The thing aspiring traders bring to the party is a passion in trading Ė not in being better people or knowing themselves better. The motivator which I suspect will drive them, into the wee small hours, is not introspection but empirical experience and data.

Your mindset or psychology is a function of your trading, not the other way round. Trying to invert that relationship may do more harm than good.

Aug 10, 2013

Member (1613 posts)

Re: Psychology

Treat trading as a game of points and numbers not so much how much money you are up or down.

Good to forget the involvement of real money.

Jun 27, 2013

Member (132 posts)