The Agony and the Ecstasy

The hard part for modern humans is that even though we have one hand on a computer mouse, we still have one foot in the cave. We’re basically a skin bag of anxieties. We see threats even when a physical threat isn’t really there. The threats could even be to our ego, our identity, or the way we wish your partner saw you. It’s these impulses that make effective trading seem like an elusive goal.

Imagine the sharemarket as a spotlight that magnifies your flaws while downplaying your strengths. Fun, right? Well, let’s learn about the importance in getting control of our emotions so that we can excel in the markets.

Fight, Flight or Freeze?

Our emotions, wired for fight, flight, or freeze, govern so much of our behaviour. When faced with a threatening situation, we might either put up a fight, make a speedy exit, or simply freeze in our tracks. It's all part of this fancy thing called RST - reinforcement sensitivity theory in psychology.

Now, here's the kicker: these responses, fight, flight, and freeze, are our go-to defences, even now. They lie at the very core of our emotions. But let's be real here... when it comes to dealing with a volatile and perplexing market that seems hell-bent on throwing losses our way, these responses are pretty useless.

These three responses even apply in the animal world and pre-dispose some animals with particular tendencies to some poor health outcomes. It just goes to show that we need to wrangle our emotions, my friend, because their impact goes beyond our trading results. It's like a whole jungle of consequences out there.

From an evolutionary psychology standpoint, these emotions reside in our lizard brain, deep in the centre of our noggin. They were the survival kit for our ancestors, ensuring they stuck around long enough to pass on their genes. So, yeah, it's kind of a big deal.

But fear not! With a little self-awareness and some emotional management skills, we can navigate the treacherous waters of trading like seasoned adventurers. 

Your Primal Core

Interestingly, the most ancient part of our brain is at the very core. It reacts fast, and with astounding accuracy. Ever shut your eye before you even consciously saw that bug about to fly into your eyeball? That primal part of your brain keeps you safe, even when you don’t consciously realise that a threat exists. It’s responsible for your automatic instincts. It’s pre-verbal though, so it can’t make sense out of complexity. It’s designed to look after your base instincts.

There’s only one problem… a lot of success habits don’t spring from your automatic instincts. We have to train ourselves to behave in particular ways. We need to use our more ‘modern’ part of our brains, in particular our pre-frontal cortex, to help guide our decisions. That’s the part of your brain that tells us that you shouldn’t eat that extra piece of chocolate cake… or have a bit of fun with that handsome stranger in their car. It acts like a parent, helping you with impulse control, and making sure you don’t make a mistake that could cost you dearly in the future. Plus, because it’s located on the surface of your brain, it takes a little longer for the signals from your body to reach it, which is why building in space for conscious thought rather than making a knee jerk reaction is a really good way to go.

Sometimes in the markets you’re flying high. Everything you touch turns to gold, and you think the profits will never stop flowing into your account. You’re in flow. You love looking at the markets, and working out the best strategies. You’re in tune with your charts. 

I call this state for traders… 

The Victory.

Sometimes as a trader, you just want to punch the air you feel so good. You can picture your future and it is so close to being perfect, you could cry tears of happiness.

Oh gosh, wouldn’t it be great if we could stay in that state forever. Unfortunately, it usually doesn’t work quite like that. Often my biggest losses have occurred after my most consistent cluster of wins.

Sometimes this ‘victory state’ can throw you off kilter. 

I remember when I earned more in one trade than my final year of working in the corporate arena and it was all within a few weeks. It shook me to my core and made me wonder whether I was ‘worthy’. It got me scared that I wouldn’t be able to replicate that result, and I ended up dazed, and frankly, pretty freaked out by the whole dramatic experience.

The flip side of The Victory is…

The Struggle

This is when you’re trying to work out how to get to the money that you can practically smell, it seems so close. It can be when you’re learning about the markets, or maybe you’ve fallen out of sync with effective trading habits. It can also be after you’ve made a big profit, but then have proceeded to give every cent back to the markets. 

Many people have an inbuilt drive towards self-destruction. We all know the type of person who consistently chooses the wrong job, crashes their car or is burgled because they left the front door open. All of these symptoms could be an outward display of a deeper issue. As Ed Seykota, says: “Some people seem to like to lose, so they win by losing money”. You need to sort out your own mind-set or the market will manifest your darkest thoughts.

The good news is that there are specific actions you can take to think your way out of the struggle, and shift back into more stable territory so that you can experience Victory again.

When I first started trading in 1990, I didn’t realise that the primary goal of trading was to survive long enough so that the sharemarket could reveal its secrets to me. Money is made as a by-product of following a sound trading plan, having high levels of self-awareness and emotional maturity, as well as sticking to the principles of money management. Unless you’re psychologically fit, that is really difficult to do. If you end up losing a significant proportion of your trading capital due to greed and ignorance, you can no longer trade, so you are out of the game.

After years of trading, I've learned that mastering certain trading skills is crucial. But it's not just about skills - mindset is just as important. Trading can be tough. It can test your patience and push you to your limits. There will be moments when you doubt your own judgement and question whether you made the right decision to enter the market. It takes a lot of courage to keep going, but the rewards can be great.

What about the evidence?

But if you get your emotions under control, will you end up making more money? That’s the question we’re here to answer.

Research indicates that developing the ability to regulate your emotions and think clearly can significantly increase your trading profitability. So, it's not just about mastering the technical skills of trading, but also developing a strong mindset that can handle the ups and downs of the market. With this mindset, you'll be better equipped to make sound decisions and stay focused on your long-term trading goals.

By the way, it’s fine to feel strong emotions. Actually, this is correlated with better trading decisions. However the problem hits when we stay in those extreme emotions. To put it simply, according to researchers, if you can calm the heck down, then you’re more likely to be successful as a trader.

Emotional regulation is key to becoming a successful trader. Healthy traders use reappraisal psychology, usually quite innately. This involves cognitively reframing an event to reduce the negative emotions you feel. It’s a part of emotional regulation – the big ‘ER’ in psychology. Emotional regulation is your ability to manage or respond to an emotional experience. The other way you can handle things is to suppress your emotions and imagine that your loss or gain didn’t really happen. This does not work. To quote the research - “reappraisal has an observable impact on decisions, especially after losses, and could be used to train investors to improve decision-making performance.” 

The study concludes that if you can learn to put your losses emotionally in their proper place and downregulate negative emotions, you’re more likely to be profitable. The researchers call it ‘maximising the expected value in a stock trading context’ – but tomato / tomatoe… same thing.

Learning how to regulate our emotions has an impact on our risk-taking behaviour. Overall, emotion regulation was followed by less risky decisions in the research. If we can be aware of the risks instead of stumbling forward blindly, we have a chance of staying in the arena long enough to stay successful in the markets.

Plus, it might even help if you become more aware of your own bodily signals. I don’t know about you, but have you ever felt your heart flutter and your belly flip flop when you’ve made a big profit or loss? I certainly have. The good news is that this is a positive sign. 

Become Aware of your Body

As strange as this sounds, being really aware of our own bodies may have a direct impact on our profitability as traders. To quote from a research paper that looked at London-based traders and their performance in the markets, “traders are better able to perceive their own heartbeats than matched controls from the non-trading population. Moreover, the interoceptive ability of traders predicted their relative profitability, and strikingly, how long they survived in the financial markets.”

Just for the record, interoception is our own perception of the state of our body eg hunger pangs and heart rate. Whereas introspection is the inward reflection on your thoughts and feelings. Both are important for traders.

A study called: ‘Thinking, feeling and deciding: The influence of emotions on the decision making and performance of traders’ is particularly telling. It says: “Effective emotion regulation seems to be a critical success factor in trading, for our findings suggest that the strategies for emotion regulation adopted by expert, higher performing traders are qualitatively different from those of lower performing traders”.  

So, if we’re following the research - If you can learn to be more aware of your own bodily functions, how you react to stress and aspects such as breathlessness and racing heart – you are more likely to be a trading success. It makes sense that if we can improve our ability to detect and understand our own physiological responses, we can improve our trading outcomes. This concept is not new - my yoga instructor has been preaching it for years, and it's also a technique used by top athletic coaches to get the best results from their athletes. By training our awareness of our bodies, we can train our minds and ultimately improve our trading performance.

So to translate – if you can develop self-awareness about how you’re feeling, and sit with your own thoughts when things are going wrong and think about your losses… really think about them without interruption, the pain will be worthwhile. You need to think about where you can improve without just distracting yourself, or chasing the next shiny object, looking at your phone or opening Facebook. It’s only then that you’re more likely to be a high-performance trader.

Even if you haven’t started trading yet, it’s essential that you start work on your mind. 

Traders when they begin often ask “How hard can this be?” Sometimes they tell me what a success they’re about to become with such overt confidence, I have to turn away from then in case I laugh in their face. They tell me - “I know how to spot a trend, now I’m going to trade, quit my job, and retire. It won’t take long. I think you’re making it out to be harder than it really is.” (OK… maybe I’m not laughing at them now… maybe I just want to slap them across the face).

After more than three decades of trading, I can tell you that the markets still aren’t through revealing their secrets to me. The more you can educate yourself by developing your mind and your success habits the more likely you’ll find profits in the markets.

Trading is gained in inches. They're in every micro-decision that you make. They're in every tiny act of discipline, in every frivolous thing we say 'no' to. Every distraction you dodge, every shiny thing you refuse to chase. As traders, we fight for that inch. We kick and scratch and claw for that inch. We stand strong, because we know that this inch, THIS inch is going to make the difference between winning and losing. Between living our best life, and a life of mediocrity. 

That's what being a trader is. 

Moving forward, inch by inch. Refusing to give ground. Refusing to give in to your 'feelings' because we know that our 'feelings' lie. Our feelings tell us we're not ready. Our feelings make us back down instead of pushing forward.

A traders tend to be quite hard on ourselves. We demand more from ourselves than a boss would ever dare demand, and we tend to beat ourselves up whenever our grasp falls short. We set arbitrary deadlines for ourselves, and we work mightily to meet them. We strive to keep our lives in balance and aim for excellence.

Still…. I ask you, if you're not being hard on yourself and demanding substantial achievement, then what's the point. If you don't learn to discipline yourself… to manage your own emotions in pursuit of your own trading goals and life desires - then I guarantee there will be someone willing to discipline you so they can achieve what they value most in life.