Why Your Emotions Stop You from Trading Well – and what to do about it

The following post is written by my friend Les Meehan of Right Mind Trading. Les shares some great insights into our trading emotions that I thought would be highly beneficial to the EminiMind community. Enjoy!

Introduction

There are times when you love them and times when, well, maybe you don’t but one thing is for sure – you certainly can’t escape them!

I’m referring of course to your emotions!

Many people may not realise it, or if they do perhaps care not to admit it, but your emotions are your most powerful weapon in your trading peak performance armoury – but only if you learn how to make the most of them!

How emotions work – the primitive you

The system of the brain that is involved with emotions is the limbic region – a collection of different parts of the brain such as the hippocampus, hypothalamus, and amygdala that work together to manage your emotional functioning.

It is believed that our emotional systems have been with us far longer than the more recently developed higher function areas of the brain.

Quite simply, the limbic system is part of the primitive you and is essential to your survival.

So what are emotions really and how do they work?

Now I’m going to be totally honest with you here; and I hope it doesn’t disappoint you too much.

For the first part of the above question I don’t have an answer for you.

“What!?”

Shock! Horror! A trading psychology coach who doesn’t know what an emotion is!

But I’m not worried because in fact it seems no one has a definitive answer to the question: “What is an emotion?”

This question has been pondered and researched since as early as 1884 when the pioneering psychologist William James wrote his seminal essay titled “What is an Emotion?”

Even though a specific definition of the ‘essential essence’ of what an emotion is seems just as elusivenow as it was back in 1884; there is still a lot more we do know now about the processes involved in what we can call an ‘emotional experience’ and the role emotions play in our lives.

What we do know with some certainty from the research is that an emotion is a complex psychological state that appears to have three main ‘components’ which together create each uniqueemotional experience.

These three components are:

  • The Subjective Experience
  • The Physiological Reaction
  • The Behavioural Response

Of course understanding these processes can be very powerful for traders since at its very core the trading experience for most traders is also usually an emotional experience if ever there was one!

Let’s take a peek at this three-part structure of the emotional experience and then later we’ll explore how you can apply this knowledge to help you in your trading.

1) The Subjective Experience

The first component of the emotional experience is the ‘Subjective Experience’.

Each of us has totally unique experiences all of the time, day in and day out.

No two experiences will ever be exactly the same for you and even the same event will be a different and unique experience for any otherpeople involved in it.

That’s why it’s called a ‘subjective experience’ because each person sharing the experience will respond to it in a unique way based on the thoughts, beliefs, reasoning, decisions, meanings and life baggage they bring to the assessment of that particular subjective experience.

Interestingly, due to the power of human imagination, this subjective experience doesn’t actually have to be a real-world event! You can actually simply use your own imagination to create an experience which can then act as a trigger to begin a related emotional experience.

This happens in trading a lot when you are gazing at your trading chart and start to imagine what might happen next with a trade or where you think the market will go i.e. trying to predict the future.

Just imagining your open trade becoming a loser, even when it is winning, can cause you to experience a negative emotional experience (and as we will see later this may then cause unwanted behaviours or actions).

2) The Physiological Reaction

The second component in the emotional experience is the physiological reaction.

I guess most people would agree that most emotions also come with some kind of physical reaction. For example, ‘butterflies’ in the stomach may be a sign of anxiety or sweating palms or a fast heart rate may indicate you are experiencing fear.

The physiological reactions are your body’s way of telling you that you are in an emotional experience of some kind.

Many traders know well the feelings of physical discomfort when a nice winning position is suddenly thrown into a losing position by a sharp market move.

There have been quite a few theories proposed as to whether we have the emotion first followed by the physical reactions (the Cannon-Bard Theory); or whether the physical reaction caused by an external stimulus triggers the emotion (the James-Lange Theory).

The most modern researchers seem to combine both of these ideas into a more cognitive whole (the Shacter-Singer Theory) in which the physiological reaction is thought to be experienced first followed by your brain assessing those reactions and then labelling them with what your brain considers to be the appropriate emotion.

This is based on the fact that different emotions can and do produce the same physiological reactions.

For example, if you feel your heart racing, your stomach churning, and your palms sweating is it because you are experiencing fear or is it because you are really excited about something?

Most of us would say “Well it depends what is going on at the time” and that is the point.

It’s rather like the old philosophy teaser: “What came first, the chicken or the egg?”

Whichever comes first, the emotion or the physical reaction, what is clear is that they do exist together and that they both form a major part of your emotional experience.

It is the physical reactions of the emotion that will cause you to either be in a ‘positive’ state or a ‘negative’ one; to be feeling comfortable with a trade or very uncomfortable and this will greatly influence the third component of the emotional experience: the behavioural response.

3) The Behavioural Response

The third component then of the emotional experience is the ‘Behavioural Response’.

The behavioural response of an emotion is probably the part you know best – this is your outward expression of the emotion you are experiencing.

For example, someone becomes extremely angry and their behavioural response (outward expression) is to throw things around and break stuff. Alternatively, someone becomes sad and their behavioural response is to cry uncontrollably.

On a much more subtle level, you may take a loss on a trade and the resulting emotional experience produces the behavioural response of jumping straight back into the market with an unplanned trade to try and immediately recoup your loss.

The behavioural response of others isalso what we are constantly looking for in our everyday encounters with other people. It is the ‘body language’ we hear talked about so much and our skill in interpreting other people’s behaviours is linked to the modern idea of emotional intelligence.

I guess most of us will have known people who seem to have a gift for picking up the subtle emotional body language of other’s. They seem to intuitively know when you are happy, sad, or angry. These are emotionally intelligent people but of course there are also those who seem to have zero emotional intelligence and appear to not even notice someone else’s emotional state and may often appear ‘tactless’ in social settings.

Unfortunately, high emotional intelligence is far from the norm and most people, although they may have some innate skill, have not taken the time to develop their emotional intelligence above a minimal level.

For traders emotional intelligence is a crucial skill to develop and with as much or even more effort as you apply to developing your trading skills.

This is because the essential way to achieve a peak performance trading mindset is to become skilled in working with the above three components of the emotional experience.

Emotions in – logical trading out

Now we know both the limbic system and the detailed 3-part structure of our emotional experiencesare involved with emotional management, we need to consider another essential question that relates to brain function and that is:

“What happens to your brain when you are in an emotional experience and how does that impact your trading?”

We have all had many different emotional experiences (and may have a truck load of them every time we trade) and so I’m guessing most of us have experienced how being in a highly emotive state can cause other normally easy things to suddenly become more difficult or near impossible to do.

For example, when we are feeling strong emotions about something it is very difficult not to think about the cause of our emotions. For example, you may feel angry following a trade loss and then spend way too much time afterwards thinking about the loss. You replay it over and over, often imagining what you should have done differently but didn’t (and get even angrier with yourself for not doing it!)

You become fixated on the cause of your emotional experience to the exclusion of everything else.

Another common side-effect of being in a highly emotional state is a loss of focus or an inability to hold your attention on something for more than a few seconds.

This lack of focus is one of the commonest causes of mistakes because you are likely to make trading decisions that are missing essential information.

For example, being in the angry state following a loss mentioned in the previous example can easily lead you to put on a trade without paying attention to what the market is doing and whether the trade is valid or not. You simply can’t focus long enough to see what you need to see.

But guess what?! None of this is your fault! That’s right, you are not to blame because what you are experiencing is perfectly natural and is a function of your survival mechanism.

The fact is that once you are immersed in an emotional experience the parts of your brain that take over to help you survive whatever ‘subjective experience’ triggered the ‘physiological reaction’ will block access to some of your higher order brain functions such as: logic, analysis, short-term memory (you suddenly can’t remember your trade plan), decision making and more.

Most of the brain functions you need for peak performance trading suddenly become inaccessible to you. You are cut-off from the very tools you require to get back on the trading track!

Basically, when your emotions come through the back door of your mind your logical trading abilities go flying out the side window.

So what can you do about it…?

The solution – emotional self-awareness

The key to mastering your emotional experiences, and in particular the behavioural response part since this is what will ultimately determine your trading actions for good or ill, so you can achieve peak performance trading is to develop your emotional intelligence.

I mentioned in an earlier example that there are people who seem to intuitively detect the emotional states of others (BTW these people are often very good in social situations) and the reason for that is that they have developed their own emotional self-awareness.

This increased self-awareness makes it possible for them to easily ‘tune-in’ to the physiological reactions and behavioural responses of the people around them.

In simple terms: they know themselves well at the emotional level. They are self-aware.

Due to the inherent emotional nature of the trading experiences most traders go through each time they trade, having a highly developed emotional self-awareness makes it easier to understand:

  • The types of subjective experiences that will create unhelpful states
  • The specific physiological reactions connected to specific emotions
  • The specific behavioural responses that each emotion/physiological reaction tends to create

Let’s work through this with the example of a trade that moves from a loss to a profit state. This is the subjective experience – part 1 of your emotional experience.

As the trade passes it’s entry and shows a profit (maybe for the first time since being opened), you become aware of feelings of hope mixed with reliefthat finally the discomfort of losing that you had has started to diminish.

This is now a new physiological reaction and you are in a new ‘physiological state’.

The trade continues on and the profit increases together with your emotional intensity which might by now feel more like mild excitement (a new physiological state).

Without warning and completely illogically the thought pops into your mind that only a few minutes ago the trade was losing and suddenly your physiological state of excitement drops away to be replaced by feelings of anxiety as you imagine the current trade turning around in a flash and losing.

Now all you can think about, and keep playing in your mind, is seeing the trade turn around and lose so without realising it you enter the behavioural response phase connected to your fear of losing and without thinking you close out the trade and grab the little profit available.

An instant later you find yourself staring at the screen wide-eyed and in complete disbelief as the market rockets away in your trade direction and you are left wondering what on earth happened.

The previous emotional experience cycle is complete and a new one begins…!

This example is typical and shows that without self-awareness you can find yourself at the end of the emotional experience without having controlled the actions along the way.

By developing your self-awareness you will be arming yourself with a powerful set of skills that will help you to anticipate, recognise and manage these emotional experiences in a way that supports your trading rather than allowing the profit killing knee-jerk behavioural responses that are all too common.

How to increase emotional self-awareness

The first phase in developing emotional intelligence is to start with you, and the first step is to work on your self-awareness.

So how do you increase your self-awareness and start the journey to increasing your emotional intelligence?

As a first step, I would like you to become more aware of the various emotional and physiological ‘states’ you move through during your normal day – in particular those that are likely to be involved in your trading.

To support you on this I have prepared an easy to use free ‘EQ Check-In’ worksheet for you that you can download here and get started right now.

Les Meehan is a peak performance trading coach and founder of the RightMindTrading.com Academy. He can be contacted by email at les.meehan[@]rightmindtrader.com

 

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