Mastering Your Emotions and Mind When Risking Capital
Risking capital under pressure can be like a time bomb ticking away in your head. One moment everything is under control and then (in the blink of an eye) the thought or threat of losing capital pulses through you – creating an emotional avalanche that covers up rational thinking. It may be at an entry point, where you have to come to grips with the possibility that you could lose money – and a shudder runs through you. It could be when your position goes against you and you feel the money slipping through your fingers – and an urgency consumes you to get it back before it’s too late. Or it could be after your position has turned profitable and waves of anxiety pulse through you – and you regretfully get out way too early with a skinny profit. Or even worse, after a string of victories, you give it all back in a flush of over-confidence.
In theory, decision making in trading or actively managing positions looks so simple. Logically you know what to do and how to do it. It’s pretty straightforward. Then, in real time, you have to take action where you put your money at risk. Then all bets are off. Where a logical human being stood only moments before, now an emotional hostage is on the loose. And often you do not even notice it. What happens in the moments before or after you put capital at risk that transforms you from the rational Dr. Jekyll to the out of control Mr. Hyde?
The Collision of the Emotional and Thinking Brain
On the surface it appears that thinking is the king of the mountain. From the cradle you are taught to keep your emotions in check and be rational when making decisions. So ubiquitous is this line of reasoning, that it never occurs to you to examine the veracity of that assumption. Logically, you should be able to stay rational throughout a trade or while you are holding a position, giving you a tremendous edge in executing your plan. And by not letting emotions into the equation when capital is at risk, you should be able to stay cool and calm. You simply need to control your emotions by the force of logic, right? However, this is the thinking that leads you into emotional ambushes.
Unfortunately, thinking and emotions do not work that way. You may not notice the emotion behind thinking (which doesn’t matter in the overall scheme of things) but thinking follows emotions. We are taught that emotions follow thinking, but Emotional Intelligence theory holds that all thinking is emotional state dependent. The emotions are there, in the background, dictating what you think. You may have pushed the emotion out of your working awareness, but it is still operating waiting to be activated by any event that occurs that could negatively or positively impact your performance in the moment. Uncertainty while risking capital is such an event.
The reason you can appear to possess freedom from emotion is because you believe that you are in control – you are wired that way through adaptation. Reactive emotions do not need to activate when you believe you are in control of outcome or believe you are right (which is another way of saying that you are in control). The problem occurs when your belief conflicts with actual experience – as so often happens when risking capital. In active investing and in trading, no matter how much you BELIEVE you are in control through your logic – you discover constantly that what you thought was control was, in fact, only an illusion.
Your investment or trading account demonstrates clearly that you do not control outcome – no matter how much you want to believe otherwise. And, no matter how much you want to believe that you are in control of outcome, your trading account keeps reminding you that is not true. There is simply no place to hide from this reality. Then the experience of not having control activates the fight/flight response of the sympathetic nervous system, and you are on the short list for an emotional hijacking.
The emotional brain has just knocked out the rational brain in the first 30 seconds of the first round. In Emotional Intelligence work you quickly discover that not only is all thinking emotional state dependent, but also that the thinking brain is not rational – it is rationalizing in nature. The thinking brain makes up explanations to support what the emotional brain has already decided. The logical left brain likes to believe it is the horse that pulls the cart, while actually it is the cart that the emotional brain pulls – thinking follows emotion. The logical brain is not in control – it only appears to be. But in moments of stress, when the money counts, everything reverts back to the emotional brain. And unfortunately most active investors and traders are unprepared for this reality. This is where the survival instincts of the emotional brain take over and thinking becomes a slave to the primitive emotional responses to the threats inherent with an encounter with uncertainty. The old brain wins every time if you do not know how to work with it.