Psychology Emotions, Decisions and Discipline

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.

Managing Your Emotional State

Beyond understanding and awareness comes managing or regulating, and it is good to have some simple techniques and strategies that you can use to regulate your emotional state. Fundamentally, the two best ways of moment to moment emotional regulation are through managing your thinking – what you think affects how you feel – and by managing your physiology. Recognising the impact of thoughts on emotions and behaviour is a key principle of cognitive behavioural coaching and developing awareness of your thoughts and how they are impacting how you are feeling and behaving is a good part of the checking in process.

How is what I am thinking now affecting how I feel?

If I get a specific feeling to an event, what am I thinking that creates that feeling?

What would be a more useful thought to have?

You can actively manage your thinking by developing this kind of thought awareness, perhaps combined with keeping a cognitive (thinking) journal that can be very useful for tracking your thinking patterns (both useful and limiting) and then also be able to choose more performance enhancing thoughts in real time.

I am also a big fan of physiological techniques for managing emotions, the reason being if you have a particular mood or emotion then it can be difficult to access quality thoughts whilst in that state, but by changing your physiology and driving your emotions from that perspective, as you change state your thoughts and behaviours will also evolve towards more performance enhancing ones.

To finish off this article, here is a quick physiologically based centring technique that you can use that is great for preparing to trade, managing your emotions at tricky times such as when you start to get the urge to cut a profit or run a loss without strategic reason, when you sense an emotion like anxiety or stress arising and you want to counteract it, or at any time when you just want to get centred, balanced and composed to harness positive emotion and drive positive trading behaviour.

It is a 15 second breathing technique taken from ‘10 Minute Toughness’ by Jason Selk and it goes like this.

Step 1 – take a big deep in-breath lasting 6 seconds, filling up from your diaphragm (belly) and then filling your lungs from the bottom-up

Step 2 – hold the breath for 2 seconds and let the oxygen flood your body and brain

Step 3 – breathe out slowly for 7 seconds – this is the body’s natural relaxation response and is very powerful; it can be useful to say a word like ‘relax’ or ‘calm’ to yourself as you breathe out to help create an anchor/trigger so that in the future after lots of practise you can simply say your word and get the associated feelings of relaxation with it

In a Nutshell

Trading performance is state dependent; how you feel affects your decision making and discipline. The goal is not to trade without emotion, but to harness the right emotions – your ideal trading states (ITS). The first step is to identify your ITS, then to increase your emotional awareness (Check-In) and then to develop your ability to manage your emotional states through managing your thinking and your physiology.

Steve Can be contacted at
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I should just not say anything and walk away, but what irritates me is that many will waste time with this. If you’re into cognitive psychology and even behavioural finance, sure, it’s 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 you’re trading well, your psychology is just fine and dandy. Getting the latter ‘right’ first won’t cause the former.

I’m not knocking (or rating) the article content or structure. It’s well written.
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 (y)