What are emotions in trading? Where do they come from?We have two channels with which we perceive the world. The first (customarily attributed to the left hemisphere) is the analytical channel - the stream of thought, we usually think is rational. The second (customarily attributed to the right hemisphere of the brain) is the emotional channel. We perceive what is happening around us emotionally.
We can better understand the role of both channels when we turn to simple evolutionary biology. Thinking allows us to understand the world: to seize opportunities and avoid threats. Emotions and feelings tell us what is an opportunity and what is a threat. In other words, emotions give meaning to the events we perceive. In the vast majority of people (that's evolutionary biology again), the emotional channel is stronger. People who are completely emotionless are considered cold or even impaired.
Strong emotions usually turn off the rational channel, because the primary function of emotions is to identify a threat, "turn off" thinking, redirect blood from less important organs (including the brain) to the muscles, initiate a hormonal response: prepare the body to fight or flee. The same way emotions work in trading.
What is emotional trading, emotional investing?
The problem begins when the emotional channel begins to strongly dominate the thinking channel. This is when actions occur that traders later say "I don't know how I could have done that". This is how the rational channel sums up thinking and acting under the influence of emotions. But... it just works that way.
Strong emotions usually turn off the rational channel, because the primary function of emotions is to identify a threat. Strong emotions are triggered by a strong threat. The emotional reaction triggers a hormonal response which cuts off thinking, pumps blood to the muscles, injects cortisol and adrenaline (we become stronger, tougher and more resistant to pain).
It's a survival mechanism - our body prepares to fight the threat or run away. Here you don't need to think, you need to be strong, fast, fit and resistant to pain. Thanks to this, as a species we have survived and dominated the planet.
The problem arises when we have this reaction in front of the computer and strong emotions cut off our thinking, while we need a sober judgment of the market situation (a good rational channel) because we are not preparing to fight a tiger or a bear just to re-analyze a position in the market when something unusual has happened.
How the best traders control emotions in trading
The best traders have both channels functioning well even in the most difficult situations. This means that even under the influence of strong or even very strong emotions in trading, the best traders are able to make good decisions.
The best traders are helped in controlling their emotions in trading by several important things:
experience
proper preparation
ability to manage emotional reactions in trading
Most of the best traders are able to act efficiently despite their emotions, and even treat them in some cases as a source of information about what other market participants are feeling, e.g. during a market panic. A trader may feel strong emotions in trading, e.g. fear, but will still correctly execute many entries in a row in a market panic.
Here, traders who work alone are easier - they can cut themselves off from emotional news, TV and just don't read incoming news. Traders who work in trading rooms find it more difficult, because the atmosphere of panic is shared by everyone.
How to control emotions in trading?
The best tools to control such situations have special forces. Soldiers there are systematically put in life-threatening situations and they have to act soberly and precisely.
The training that the best troops undergo includes breath regulation, process management (I'll explain in passing) and, of course, preparation in real life, simulation and visualization for whatever may happen during a mission.
For a trader, there are situations that are critical, just as for soldiers - a few wrong emotional decisions can wipe out capital built up over many months.
That's why - breath work, good preparation, awareness of risks and knowing how the stress response works (and inhibiting it) are techniques worth learning. The best traders work on their mental resilience using, among other things, military methods of working with stress (I write more about this in my Top Investor training here, I also describe the exercises used there).
And one more thing - special forces soldiers have a much stronger psyche (mental toughness in other words), as do the best traders. And this is also worth working on.
What emotional challenges do you have? Let me know in the comments. I will prepare options for solutions.
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