Emotions and Trading

By | May 6, 2020 3:55 pm

As traders, we use charts, data, and logic to analyze the market and develop a strategy or trade plan, but in the heat of the moment, emotion can often take center stage and drive the decision to enter or exit a trade.

We’ve all experienced the downside of emotions –panicking and closing out a trade at the worst possible moment; being too greedy and taking on an excessive amount of risk; or just watching our overall emotional state fluctuate with the markets.

For most people, awareness – of thoughts and emotions – is a completely unfamiliar aspect of experience. They live their lives doing all kinds of things, not even recognizing that there is an underlying emotion that might be driving it all. They can’t think of themselves as being separate from their emotions, or their thoughts, and it’s very sad.

As long as we’re not open to feeling and seeing our emotions, we live very defensively – we cannot guide our actions with objective reasoning, thus tempering the primitive area of the brain that is always trying to protect us from imminent dangers, even when there are none.

No matter how thorough our analysis, there will always be uncertainty about market direction and whether a trade will work or not. Trading is very unique, perhaps unlike any other profession, in that a trader must make time sensitive decisions in an environment that contains ambiguous information where one’s judgment is continually called into question. Add the fact that money is involved, and you can see how emotion impacts trading.

Traders who are not performing at their desired level often have unmanaged emotions that negatively impact their trading.  We all have emotions, its part of being human, but when we let our emotions dictate our behavior as a trader, it often results in an action that is not in our best interest. Emotions act as a filter on our perception and have a direct influence on behavior. Not only that, but recent advances in neuroscience research utilizing brain-scanning technology shows that thoughts, perceptions, and even memories are neurologically linked to emotional reactions. We can not eliminate emotions, but we can learn to manage them.

In my work with traders I often see individuals who are not trading the market as much as they are trading their emotions in relation to the market or to their P&L.  As long as we have a pulse and are alive, we will have emotions. We can’t eliminate emotions, but we can learn to manage them, which helps us to act in our own best interest despite internal conflicts.

One of the most common complaints from traders, either new or experienced, is that their emotions go through a roller coaster when they are involved in the markets. There can be a variety of very powerful emotions that mess with their heads, like greed, exuberance, fear and the fear of missing out. Moreover, these emotions can affect someone even if they have a solid trading plan, excellent discipline and years of experience. Every full-time trader, no matter how successful, can tell you about days where they come home and feel like they’ve had the stuffing knocked out of them.

Unfortunately, many traders have trouble recognizing the problem, or if they do recognize the problem they look in the wrong direction for the solution. Because trading requires analysis, many traders assume that poor trading performance reflects a lack of analysis or market knowledge.  While that may be the case for some, for many traders it is not. If you understand how to look at market generated information and market structure and have a trading strategy and plan with an edge but you are still not profitable, consider the possibility you are trading your emotions in relation to your P&L instead of trading the market.

If we are not mindful right at the moment we put a trade on, during that trade, and finally, after the trade has been exited, thoughts appear, easily trigger emotional responses and the behavior that usually follows.

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