Controlling your emotions – that’s all successful trading boils down to…
“Fight greed. Overcome fears of pulling the trigger on trades. Adjust your position size until you sleep easy at night…”
They are all great pieces of advice. But have you ever stopped to think how emotional responses get triggered in the first place?
Delve into the workings of your brain and you discover it all revolves around some startlingly simple processes.
Really get to know your stuff and you’ll find there are ways of ‘beating’ the system – you can actually start to control how your brain responds to certain situations.
This is how stage hypnotists pull off mind control to the delight of their audience. And how hypnotherapists help people knock nasty habits on the head.
So did you ever see the Derren Brown TV programme where he went to the greyhound races?
He asked a lady to put a bet on a dog at one of the on course bookies.
When it lost, he had the lady go up to bookies’ window and say: “This is a winning ticket; this is the ticket you are looking for.”
And he banged on the counter with his hand – a distraction that was critical to the trick’s success in some way I guess.
Lo and behold, the bookies clerk paid out on the losing ticket!
When asked why she had done it she was at a complete loss for words – couldn’t even begin to explain. She was even convinced her computer had told her the bet was a winner!
Now how about that for power? Imagine being able to phone up your broker and perform Jedi mind tricks that turn losing trades into winners:
“This is a winning trade. This is the exit price you are looking for.”
It’d be great to fantasize about for a while. But it wouldn’t take long for your little ruse to be uncovered.
Plus, it would be TOTALLY unethical of course!
So why not work on controlling your own mind instead, it’s completely ethical and that’s where the long term benefit lies anyway, right?
Let me tell you some things I’ve learned recently about how the brain processes incoming data.
You’ll see how stress responses are created in your body. How THAT can have a negative effect on your decision making when it comes to trading. And I’ll also give you an idea of how you can start overriding the natural reactions that don’t serve you well.
How your trading brain works
Your brain responds to stimulus. When it comes to trading we’re dealing with external stimuli (things that happen outside your mind and body). And your brain filters each individual event as either threatening or non-threatening.
So imagine logging in to your account to check progress on a trade…
Things are going in your favour. The trade has almost reached your target and you move your stop loss to lock-in a good chunk of profit.
This is processed as a non-threatening situation. You are rewarded with feelings of calm and well being. Feel-good chemicals called serotonin and dopamine are released into your nervous system.
Now imagine the opposite situation…
The trade is moving against you. And you see blood red numbers in the profit/loss column of your account. It shows damage being done to your trading bankroll.
It can be difficult to control your natural response to this type of stimulus. You brain can process it as a highly-threatening situation even though on a logical level you know losses are simply part of the game.
Your sympathetic nervous system starts firing up – it’s what gives you the ‘fight or flight’ response. `snd then it’s crunch time…
Reach the point of ‘fight or flight’ and you risk trashing your carefully tested strategy.
Fighting the market with revenge trades is a common response to this situation. As is bailing out of the trade (running away) before things get any worse, even though your strategy clearly says you should stay in.
Yes, your in-built survival mechanism actually starts to work against you. And this is the point at which traders can go off the rails.
But there’s a small window of opportunity that’ll let you control your state of mind before your fight or flight response launches.
And don’t worry if you miss it, there’s still something you can do to keep things in order.
Let me tell you how to do it…
5 steps to managing tricky trading emotions
1) Spot your incoming stress sign
Start paying attention to recurring physical feelings that let you know your fight or flight mechanism is igniting.
It might be a tightness in the throat, tension in the chest, a swirling sensation in the stomach. It’s different for everyone. But there will be a sure sign an emotional response is on the way.
2) Put the brakes on now (if possible)
So you’ve noticed your recurring physical sign. And you can tell your fight or flight mechanism is about to kick in.
You now have a very short window of time to acknowledge it break the state.
It takes a bit of practice but visualisation techniques like cinema of the mind can be used here (you just need to act quickly enough).
Do the job well and you’ll quickly correct your response. You’ll stop the full blown emotional response in its tracks.
3) Remove the ability to do damage
If you didn’t catch things in time at step 2 (and it does take a bit of practice) you’ll now need to let the sympathetic nervous response take its course.
Your body will flood with fight or flight chemicals and there’s little you can do until your nervous system has flushed itself clean.
This doesn’t mean it should affect your trading decisions though!
You simply need to remove yourself from the trading screen for a while (take away the risk of emotional actions damaging the integrity of your strategy).
Go for a walk, take it out on a punch bag in the garage, go and chop some logs in the garden…
Just keep yourself out of mischief for about 20 minutes – that’s how long it’ll take your nervous system to reset itself. (A physical activity really does work best.)
4) Analyse what triggers your ‘fight or flight’ response
So once your nervous system returns to normal you can start analysing exactly what triggers the fight or flight response in you.
It’ll be related to fear at some level, and not necessarily a fear of losing money. It can be something more deep-seated like a fear of ‘being wrong’.
And once you know exactly what you’re dealing with you can start to improve things…
5) Practice engineering more appropriate responses
A technique called ‘reframing’ can be helpful here. Instead of looking at losing trades as an assault on your skills you can reposition them as investments made in future profits. This can help neutralise the fear of being wrong.
And consider this: it’s probably the most useful trading exercise I ever used myself…
Aim to take a string of DELIBERATE losses in quick succession and then reward yourself for doing so. It can quickly blunt any sensitivity to taking losses.
Rehearse performing the responses you feel are most appropriate and most helpful – with actual money at stake for added realism – and you can reap the benefits for years.
There’s nothing shameful or negative about experiencing difficult emotions when trading. It’s how you handle it that makes all the difference!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 7th September
09:30 GBP Manufacturing Production
14:15 GBP BoE Carney Speaks
14:15 GBP Inflation report hearings
Thursday 8th September
00:50 JPY GDP
12:45 EUR Interest Rate Decision & Deposit Facility Rate
13:30 EUR Draghi Speaks
16:00 USD Crude Oil Inventories
Friday 9th September
– no big reports
Monday 12th September
– no big reports
Tuesday 13th September
09:30 GBP Consumer Price Index
10:00 EUR German ZEW Economic Sentiment
It’ll be interesting to see what comes out of the ECB on Thursday.
Keep an eye on the clock around lunchtime: the interest rate decision and comments from Draghi shortly after could create a bit of volatility.
Trade safe and catch you soon.