Emotions, Decisions and Discipline

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Steve Ward

27 Apr, 2012

in Psychology

Man v Machine

In 2006 I had a very interesting meeting with a Professor of Finance at a university in London where they were launching a Masters Degree in Financial Trading. We had a good discussion about the world of trading and he was very much a believer that the future of trading was automation and saw a terminator style rise of the machines occurring over the next few years. He told me that their masters program was all based around automated trading and also suggested that I might like to possibly consider a new career as, within the next few years, there would be very few human traders left for me to work with.

During the course of 2006 I worked with a lot of traders in 1-to-1 coaching and workshops, and one repeating request that I encountered was ‘can you help me to trade without emotion – I have a great trading strategy and I know that without emotions getting in my way I could double, triple or even quadruple or more my returns.’

Is this the same for you? Would you also like to be able to trade without emotion?

Professor Sam Wang, a neuroscientist at Princeton, states in contrast to the above that emotion is critical to the decision making process and that cognition and emotion are intertwined. Emotions help us to focus on what is critical, to shape our behaviour and to action our decisions. The key, however, is to harness the right emotions, and to recognise that emotions towards an extreme – let’s say fear, high anxiety or stress, anger, frustration, extreme happiness or overconfidence - are the ones that are detrimental to decision making and trading performance and, indeed, his advice is to avoid making a decision at an emotional extreme wherever possible. Professor Wang also very interestingly suggests that a weakness of automated trading systems is their lack of emotion – and that there are programmers who are trying to program emotion into these systems to improve them; this is called affective programming.

So the latest neuroscience findings seem to indicate that emotions are key to decision making and that the aim is to identify and then harness the right emotions, whilst being aware of any movement towards emotions at an extreme. This is of course in reality what my coaching clients had really meant in their requests – trading without emotion for them really meant trading without negative emotions such as fear, anxiety, stress, frustration, overconfidence and excitement.

Harnessing the Right Emotions

In my days of working in sports psychology I helped athletes to harness the right emotions by identifying their IPS – ‘Ideal Performance States’ and provided them with techniques to enter these states, and to recognise when they were out of such states and recover if needed. In trading I use the phrase ‘Ideal Trading States’ – ITS. This is that set of harnessed emotions that help you to make your best trading decisions, to be disciplined and achieve your best performances.

Take a moment now to reflect on times when you have been at your best in your trading. How did you feel? What mental, emotional and physical states did you experience?

As Jim Loehr in ‘Stress For Success’ tells us ‘performance is state dependent’, and this is best summarised in trading terms by Brett Steenbarger who reminds us that ‘our best trading behaviours coexist with our best trading emotions and that our worst trading behaviours coexist with our worst trading emotions’.

Take a moment to think about your ITS – what positive trading behaviours do you experience in these states?

Now take a moment to think about the emotions that you know interfere with your trading performance. What behaviours exist alongside these states?

Developing Emotional Awareness

Armed now with some understanding of emotions and their effect on your trading performance, the first key skill to develop better emotional management is emotional awareness.

How are you feeling right now?

Can you name that feeling?

Naming the emotion you are feeling is actually a key skill in what is called emotional literacy and is cited by neuroscientists as being a fundamental part of managing emotion.

How did you know that was how you were feeling?

What was is your thinking like in that emotional state?

How does it feel physiologically? Muscle tension? Heart rate? Breathing? Body language? Energy levels?

Are there impulses or instincts for action (or inaction) that go along with it?

How much intensity or energy is there behind the emotion?

Do you perceive it as being positive or negative?

These are all key questions to ask to help you to understand how you are feeling right now and can be put into a really simple and effective technique called ‘Checking In’.

Quite simply you rate yourself on a 1-10 scale where 10 is your Ideal Trading State and 1 is the other end of the scale – basically get me away from the trading screens NOW! Throughout the day, or before or after key events – a data release, a win, a loss, the open – assess where you feel you are on the scale. Get a feel for the numbers that represent your peak zone, caution zone and no-trade zone.

Recognising that trading decision making and performance is state dependent and managing yourself and your risk taking accordingly can have a big effect on your returns. Just having this awareness is a significant step forward in emotional state management and is one that is quick and easy to use. As a reminder to ‘Check In’ you could have a post-it note or similar on your desk/screen, or set an alarm on your PC/phone.

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Re: Emotions, Decisions and Discipline

I've met Steve and spent time on his course...he works with the best of them and his insights were very very interesting

If you are already trading well and want to explore this area to seek more improvement (as many professionals do) then he is the best man in this field :thumbsup:

N

May 29, 2012

Member (34056 posts)

Re: Emotions, Decisions and Discipline

I should just not say anything and walk away, but what irritates me is that many will waste time with this. If youíre into cognitive psychology and even behavioural finance, sure, itís great to play around with coining new terms for old patterns and inventing new introspective techniques and processes for achieving desired outcomes. In that respect, this article is a tasty little intro to the opportunities for those wishing to develop a career in writing & training in pseudo-science related to X. Where obviously, X can be anything.

Where X is trading it rankles as the time would be better spent learning everything you can about trading. If you want to learn everything about yourself; go to an Ashram.

When youíre trading well, your psychology is just fine and dandy. Getting the latter Ďrightí first wonít cause the former.

Iím not knocking (or rating) the article content or structure. Itís well written.

May 26, 2012

Member (8395 posts)

Great! Thank you.

Great post. I would highly recommend Steve's book, High Performance Trading.

May 26, 2012

Member (6 posts)

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