Psychology

The Emotional Dynamics of Trading

The markets offer an endless stream of opportunities to trade. Each trade or series of trades provides the chance to wipe the financial slate of the past clean, find trading redemption, and claim the lucrative future. Each trade has the potential to announce that your dues are paid, that you are maturing as a trader, and that finally you are poised to enter the elusive circle of consistent winners. The lure and promise of financial freedom through the clicks of a mouse offers a sense of adventure, challenge, and stimulation rarely matched in other activities or professions.

Only a very select few are able to ascend and remain atop this Darwinist ladder and garner consistent profits. The majority of traders find themselves nursing a depleted account balance and a sense of bewilderment. Statistics tell us the cold hard truth that many losers fill the pots of a few winners. They don?t reveal the shattered emotional landscapes, and even financial ruin that take their toll on those at the bottom of the trading food chain.

It is sometimes stated that you need to remain detached from your emotions whilst trading. This represents a noble aspiration, but aside from the fantasy world of the paper trader, where real, hard-earned money is on the line emotions will kick in strongly, and therefore we have to know how to make them work to our advantage. Despite our best efforts to override or subdue them, emotions, enhanced and crystallised into sharper focus by the market environment, will gnaw at us and dictate actions which are often contrary to what we intended when getting into the trade. Some traders struggle to take the action they know is right because they pay more attention to their own process in a negative way than to the process of the trade itself. The challenge is to fully accept your emotions as they arise during trading and in so doing, relate to them as reliable, trustworthy guides. The greater your emotional self knowledge the more clearly you will be able to gain transparency into the actions of the other market participants.

Understanding the market from such an emotional perspective brings many benefits. It means, for example, that you are able to fully embrace the risk inherent in trading. Knowing from your experience that anything can happen in the market, you will be prepared to catch and hold any emotional fallout that results from your trade. You feel
secure within your overall expectation of profit, and are thus able to give breathing space to individual trades. It means that you are more likely to take the hard decisions quickly because you possess an inner fluidity that allows you to respond with nimbleness and acuity.

The market maxim of following the line of least resistance probably equates to following the line of most resistance in yourself, something that becomes easier as you become accustomed to relating your nuances of feeling to the market action. Emotions can be good contrarian indicators. With practice, you can begin to guess where others are ready to throw in the towel and be there to gladly relieve them of their position. The candles on the charts are graphic illustrations of hope, fear, greed, and belief as well as the footprints of money.

It is crucial to appreciate the emotional dynamics that underlie this game of wealth redistribution. In the market context some emotions may have a different resonance and payoff than in everyday life. For example, if you are in a place of deep despair and hopelessness in your everyday life, then perhaps this can be talked about, processed, worked through in therapy, or offered to your particular God. Usually there is a way of finding some light at the end of that tunnel.

Transferring the same emotional dynamic with its inbuilt hope to the market, based on some apparently abiding faith that things will be OK is tantamount to financial suicide, a margin call probably being the only salvation.

Filtering Process
It is important to create for yourself an inner filtering process, perhaps a small simple ritual, so that you do not find yourself bringing to the market arena emotions and qualities which serve you well in everyday life but which could prove detrimental to your trading. For example, determination is a great quality to possess when used for the right purpose. You need to retain a determination that you will triumph in your quest to achieve your trading goals. This does not mean that you have to express your determination on every single trade and try to force results where they aren?t going to happen. You also have to be on the lookout for when you are using a particular quality in the market that maybe belongs elsewhere in your life. Similarly, suppose you have recently been successful in some other endeavour in your life. You assume that the same set of principles apply to becoming successful at trading. You follow your common sense and replicate your approach. It yields disappointing, confusing results. You may feel like quitting; but if you can pause to reflect and consider, you may discover that it is in the ashes of this temporary distress that the phoenix of the winner is waiting for an invitation to emerge.

Spiritual Parallels
The journey from loser to winner is, if you like, a trade in itself, the ultimate buy low sell high, exchanging ignorance, loss, and what you don?t yet know for self-knowledge, consistency and a degree of mastery. It?s a tough deal and only those who are willing to undertake serious, searing self-scrutiny and practice rigorous self-discipline will make it. Many, as they say, are called. Few make money.

Indeed, there are many parallels and echoes, for those inclined to look, between what is required on a journey of spiritual development and that of becoming a successful trader. The Buddhist concept of ?the narrow way? certainly has resonance with the statistical certainty that many traders will fall by the wayside and only a small dedicated percentage will develop the requisite inner qualities and get through. Many spiritual paths demand of their adherents a degree of asceticism, forgoing something in the present and enjoying the virtuous action that will yield them future rewards. Deferring the temptation to snatch a quick profit and practising the patience that may bring the greater reward if a winner is allowed to run is just one example where an adherence to a more rigorous ethic could be more profitable. Most spiritual traditions encourage an awareness of the present moment, for it is in this ?eternal now? that one becomes free from the veil that masks the true reality of being. I am not especially trying to reconcile God and mammon here, but I am acknowledging that if you could remain in present moment awareness whilst you are trading, you are likely to be more effective than if you are caught up in the hopes and fears of the future and the regrets of the past. If you can trade from the place of ?what is?, then you remain closer to the pulse of the action. Discipline is freedom, they say, and apart from perhaps becoming enlightened, nowhere does this ring more authentically than in the trading arena.

A trading apprenticeship involves becoming unhappily familiar with the trader?s lament, the phrase ?if only?. Regret for trades not taken, not exited quickly enough, or exited too soon must be dealt with in a way that doesn?t prejudice future trading The winner changes if only to ?only if? ? only if he is disciplined, focussed, alert, and grounded will he succeed. He develops an inclusive relationship with the inevitability of loss in its many guises. He learns to gracefully receive the lessons in humility the market so unfailingly provides.

Actual and Potential
Perhaps the most crucial factor in determining trading success is how you manage the relationship between the apparently limitless potential for profit and your actual results so far. Anything not resolved within the boundaries of this relationship will leak out and seek expression elsewhere in your trading. If ?potential? constantly looms larger for you than ?actual?, then impatience, frustration and recklessness will likely ensue, with predictably damaging results to your account. Similarly, if you dwell on the potential without undertaking the necessary psychological work to improve upon the actual, then you are merely attaching yourself to hope which is projected on to your trades. Hope is a burden that refuses to be displaced until it is ousted by something of substance. This is why it is so vital to grow your trading size slowly and incrementally so that the energetic relationship remains proportionate and balanced. The journey, ideally, synergised by self discipline, moves from the actual to the actualisation, cumulatively incorporating potential on its way, yielding its secrets in response to the intensity of commitment and effort expressed.

We can regard the evolution of a trader as a Gestalt cycle moving through its respective stages, as illustrated below (see figure 1).

This cycle relates to both micro and macro, anything from an individual trade to overall progress as a trader. Round and round we go, each time getting closer to what we know we are capable of. It is, of course, possible to interrupt the positive flow of the cycle and refuse to co-operate with the process, going AWOL in response to your own idiosyncratic resistance to change. In my work as a trading coach, I encourage people to always remain aware of their place and desired destination in terms of this model, and to use the information it imparts to make wise trading decisions.

Group Behaviour
The study of group dynamics tells us that when people engage or convene together for a particular purpose, they usually assign themselves a place or position within the overall group that is familiar to them. Often unconsciously, they seek to adapt to the pre-existing group based on their emotional history and what they have come to believe about themselves. Without awareness of this process, a karmic train of action is set in motion which somehow gives the market the responsibility of being the arbiter of what is truly deserved or desired. Understanding your chosen place in this anonymous cast of thousands, the group that are your fellow market participants, can shed light on your trading behaviour. Given the high-risk nature of the trading environment, maybe it is inevitable that people seek out the safety in numbers of the losers rank.

Consistent success comes to those who grasp the essence of the oft repeated but rarely followed rules, an essence that remains forever opaque to those who resist the necessary self-enquiry and self-discipline. Consistency originates in will and is nurtured on the firm foundations of self-esteem, self-acceptance, and self-responsibility. It requires that you have tamed your inner demons, or at least made a pact with them that they will strut their stuff on another stage well away from your trading.

A playwright creates a drama based on the enduring premise that character is destiny. You become what you think, you create situations for yourself, consciously or not, that lead you to where your greatest learning edges lie. Beware what you ask the mercilessly neutral market environment to resolve. It could cost you a fortune.

Pain
It?s unlikely you?ll become a truly great trader without a prolonged enrolment in the school of pain. Pain cuts sharply through our preconceptions and illusions and indicates to us that our market actions are inappropriate. There is chronic pain, which probably reflects a deep stubbornness, rigidity, and perhaps obstinacy for which the market will prove a costly healer. A degree of acute pain is the inevitable cost of being in the game. The language of pain is stark. It forces decisions, often in haste, upon us. Are we in or are we out, do we hold or do we fold? Pain can be a great teacher, alerting you of its imminent appearance, as you consider potentially unsound trading actions. It can and does catch you off guard. Unless you?re ready for it, it will overwhelm you into decisions you will regret. You need to become the master of pain rather than its slave. Those who resist pain may find themselves setting wide stops so as to postpone its arrival. Those who accept it learn to be comfortable with the messages it brings, even if this does stop some way short of a fully-fledged friendship!

Winners
Winners develop a good, ongoing relationship with their markets of choice. Their expectations are realistic but always positive. Winners know the pitfalls well and are on respectful terms with them. They clearly understand the emotional potholes on the path to success and are able to see through their camouflage. They are not afraid of the markets because they trust themselves. They are brave enough to let go of accustomed assurances and allow themselves to enter the place of unknowing.

Winners rely on their finely honed, seasoned market instincts. They engage with the uniqueness of each moment. It is my belief that an experienced trader can achieve far better returns through the disciplined use of market instinct and some simple tools than through a purely mechanical system. Systems appeal because they offer the
illusion of control. However, even great systems, if they exist, extensively back tested and individually tweaked to carry the expectation of profit, are likely to produce losses if traded by someone who lacks emotional stability and self-discipline. Creating and
developing a system is all very well, but if one of the reasons you are drawn to trading is because it offers an environment that imposes little structure, then what makes it likely that you will follow the indicated entry and exit points?

For winners, the adventure of trading, ostensibly about the acquisition of money and its rewards, is an inner journey of expansion. They enjoy the visceral sensation of unknowing and uncertainty. They welcome the uncomfortable feelings of running their winners and cutting their losses and allow the unfamiliar to burn open new pathways for them. They enjoy defying their intuition and the boldness of the counter intuitive approach. They are untroubled by the energetic polarities of right and wrong. They just do. They have released themselves from conflict so they can watch and act with equanimity upon the flashing numbers that populate their screens. Knowing that change is permanent, in the markets as in life, they live in the present. They get themselves out of the way. They know themselves so they know others.

Martin is an experienced, qualified facilitator/coach with a number of years full time trading experience.  His focus is on large cap, very liquid FTSE stocks, primarily using CFDs, though he has also traded both FTSE and S&P emini futures.Martin offers one to one and group coaching sessions and workshops that focus on the emotional dynamics of trading. You can contact Martin by visiting his website at http://www.tradingcoach.co.uk

Martin is an experienced, qualified facilitator/coach with a number of years full time trading experience.  His focus is on large cap, very liquid ...

CJIA

Active member
202 15
A very good description of the evolution of the mind to detach itself from being driven by your emotions.Complete Self awareness is the key,that is why Trading is an Art.
Trading consistently can take a long time for some including myself ,it depends how far along the journey of self-awareness and the ability to detach your self from your emotions during trading.
If i read this 5 years ago it would have helped me a lot,but probably i would not have understood it then.
Excellent Article
 

Simon Gordon

Active member
126 1
Top stuff!!!

I found Transactional Analysis excellent in helping me understand my internal conversations and the importance of being a mental winner.

I think for an under-achieving trader investing time and money with a therapist is worth every penny.

Here are some choices:

If you are very logical Transactional Analysis.

If you are very emotional Gestalt.

If you are hooked on your childhood Psychodynamic Counselling.

If you are very artistic Art Therapy.

If you are very intellectual Philosophical Counselling.

If you are very rich Psychoanalysis.

If you are a humanist Person-Centred Counselling.

If you want to get it all of your chest Primal Scream Therapy.

Good luck and enjoy this trip because it is a trip!
 

rdstagg

Active member
207 3
Very good.
I particularly like the fact that he acknowledges that it is nigh on impossible to detach yourself from your emotions.
The goal of the average trader is to accept those emotions but NOT to react to them.
He/She simply RESPONDS by taking a trading action.
 

Anonymous

Established member
604 3
Is that black and white photo of the author meant to create that emothional atmosphere like those in Stephen King novels?
 

Salty Gibbon

Experienced member
1,535 6
Excellent article.

I realised from a fairly early stage that controlling my emotions and impulsive urges was the key to my own personal trading success.

I found that the best way to not get too emotional was to trade with very small size at the beginning and increase size very slowly in line with profit growth. Since profits are fairly inconsistent when one is learning, this can be a pretty long-winded and tedious process. However, it does tend to ensure that losses are kept small and it allows one to gain confidence as one learns and goes along, without any of the emotional earthquakes I have often read about.

People who trade 1,000 share size in Nasdaq stocks from day 1 ( and I am sure there are plenty of them ) are likely to lose emotional control quickly, panic and lose their shirt.

A slow and measured approach keeps you in the game and keeps you emotionally intact and has made me consistently profitable.
 

Splitlink

Legendary member
10,850 1,232
Salty Gibbon said:
Excellent article.

I realised from a fairly early stage that controlling my emotions and impulsive urges was the key to my own personal trading success.

I found that the best way to not get too emotional was to trade with very small size at the beginning and increase size very slowly in line with profit growth. Since profits are fairly inconsistent when one is learning, this can be a pretty long-winded and tedious process. However, it does tend to ensure that losses are kept small and it allows one to gain confidence as one learns and goes along, without any of the emotional earthquakes I have often read about.

People who trade 1,000 share size in Nasdaq stocks from day 1 ( and I am sure there are plenty of them ) are likely to lose emotional control quickly, panic and lose their shirt.

A slow and measured approach keeps you in the game and keeps you emotionally intact and has made me consistently profitable.
Good post. Yes, the only way to stay in the game is to trade small in the beginning and build up.
There is, simply, no point in risking too much if your track record is not good- you are just gambling and you'll lose, eventually.

Split
 

fudgestain

Well-known member
254 9
I can agree that, yes, you have to have or learn the 'Do it' capability.
But quite frankly unless you know your market and have mastered it, then all the strong willed 'Do it' capability will not make you a fortune.

Bottom line: if you don't learn, assemble, test and validate your predictive trading model and so reach the Holy Grail, you ain't going anywhere?
:)
 

Splitlink

Legendary member
10,850 1,232
fudgestain said:
I can agree that, yes, you have to have or learn the 'Do it' capability.
But quite frankly unless you know your market and have mastered it, then all the strong willed 'Do it' capability will not make you a fortune.

Bottom line: if you don't learn, assemble, test and validate your predictive trading model and so reach the Holy Grail, you ain't going anywhere?
:)
I don't think that there is much to learn about the mechanics of trading. It is a statistical play. What makes a profit seven times out of ten-or even less over a given period- is the way to go. Where we are weak is in the act of self discipline, chopping and changing because we think that we were wrong before and now we are on the right track, never giving the system that we have chosen the chance to prove itself before trying something else. This is a human trait that has to be overcome and, until it is, one must trade as small as possible- it's worth it in the long run.

Split
 

fudgestain

Well-known member
254 9
Splitlink said:
I don't think that there is much to learn about the mechanics of trading. It is a statistical play. What makes a profit seven times out of ten-or even less over a given period- is the way to go. Where we are weak is in the act of self discipline, chopping and changing because we think that we were wrong before and now we are on the right track, never giving the system that we have chosen the chance to prove itself before trying something else. This is a human trait that has to be overcome and, until it is, one must trade as small as possible- it's worth it in the long run.
Split
This confines you to the absolute certainty of never making your fortune from the market and never wanting to find out speaks for itself.

Sure the 'Do it' capability is needed but its just something to practice and acquire if you don't already have it.

Jacking around is not a sufficient answer. You have to clean up the market daily. A player who intends to win has to get very serious about the 'How' instead of wasting day after day dancing about the place with some psycho-babble as his or her only guide.
:)
 

Splitlink

Legendary member
10,850 1,232
fudgestain said:
This confines you to the absolute certainty of never making your fortune from the market and never wanting to find out speaks for itself.

Sure the 'Do it' capability is needed but its just something to practice and acquire if you don't already have it.

Jacking around is not a sufficient answer. You have to clean up the market daily. A player who intends to win has to get very serious about the 'How' instead of wasting day after day dancing about the place with some psycho-babble as his or her only guide.
:)
Nice work if you can get it! Survival in the market comes before making one's fortune and very few can clean up daily in it.

I agree that there is a lot of psycho-babble said and a lot of sage nodding of heads in agreement when people with Greek sounding usernames make profound,but unintelligable, statements, but doing what one has set out to do without being deviated by other ideas is difficult and very important.

Wish I could be emotionless, cold and hard but I'm not, yet!

Split
 

fudgestain

Well-known member
254 9
Splitlink said:
.. I agree that there is a lot of psycho-babble said and a lot of sage nodding of heads in agreement when people with Greek sounding usernames make profound,but unintelligable, statements, but doing what one has set out to do without being deviated by other ideas is difficult and very important.

Wish I could be emotionless, cold and hard but I'm not, yet!

Split
Hell, you're human. I've got to applaud your sentiments this time.
:)