Emotions and the Management of Uncertainty

“Traders neglect their emotional nature concerning money and risk at their own peril. Because they do not honor their emotional nature that they bring into trading, they continually trade with half a brain and their lack-luster performances demonstrate the consequences of this course of action.” J. Rande Howell

Money as a Touchstone to Emotion and Belief

When it comes to money, and losing money in particular, traders are very emotional beings. Every trader experiences the roller coaster ride that winning, losing, and confusion triggers. Due to their social conditioning, traders may notice the emotion only in hindsight, but it is there, nonetheless, altering performance. Because of a lack of understanding of the connection between emotions and thinking quality, many traders do not recognize emotions as they trigger, develop, and suck the mind into a losing vortex. They become aware of negative emotions like fear, revenge, or lust (the euphoria of over trading) only after their trading mind has been hijacked from the rational state they were in just moments before. The problem is that the damage is already done by this time – their trading account has taken another drawdown.

Consequently, they see their trading performances in their mind’s rear view mirror – not in the here and now of actual experience. And they rarely can perform successfully in the moment. In hindsight, during a review or while they are talking trading to others, they can see their failure to follow their plan, but only after the fact. Mismanagement of emotion is written all over the failure of performance under pressure. But, like a red herring, traders do not see their emotional nature controlling their mind that performs. This is where the vast number of traders stay stuck.

And here is the trap. Certainly they do not talk to others about the emotions that are at the core of their performance problems. Talking about “feelings” (particularly bad ones) is just not acceptable behavior in this testosterone-driven world. After all, what would people think? Yet, it is one of the differences you see between mature (and profitable) traders and traders who are still trying to make it. The mature traders will talk about what is really going on in their head (because they know that is where the real action is) related to emotion, performance, and their beliefs about money. Being attuned to the emotional side of trading is an enormous advantage because it gives the mature trader the opportunity to work with his emotional nature constructively. The consequence is that the mature trader develops emotional resilience in the face of uncertainty, rather than being prone to emotional hijackings of their trader’s mind at critical moments.

Being blind to your emotional nature in trading is akin to boxing with one arm tied behind your back. You definitely are not bringing your “A” game to the contest and are at a disadvantage in the competition between the players in the market place. In the same way that no one in his right mind would ever box a worthy opponent from a compromised position, no trader should trade when they have not developed their emotional intelligence (EQ) for trading.

Recognizing the Presence of an Emotion

How do you start developing your EQ for trading? First, by coming to a very different understanding of emotions and their relationship to thought. Every emotion, positive or negative, has a particular signature that helps define the presence of that emotion. Traders with high Emotional Intelligence train themselves to notice the symptoms of the emotion’s presence and are pro-active in working with the belief at the core of the emotional triggering. Traders with low Emotional Intelligence have never trained themselves to be sensitive enough to pick up on the subtle presence of the emotion before it becomes a run-away freight train. Even when they are swamped by the emotion (think of fear, revenge, and lust) they are not aware of the presence of the emotion. So they are blindsided by a habitual emotional hijacking that has happened many times before. It is this lack of emotional intelligence that keeps the trader making the same errors over and over again. The brain has used emotion to solve a problem for short term survival and it has turned the solution into patterned reaction to a stressor. It will keep firing that way until the trader learns to work with the emotions and beliefs that generated the patterned response in the first place. This is the heavy emotional lifting that aspiring traders avoid doing.

Traders talk about the pressure in the heat of the moment, but they do not recognize that the “pressure” is the emotion that is about ready to explode. By not discerning that the pressure IS the emotion in action, they are not forearmed to deal with the approaching emotional outbreak. The “pressure” you feel means that the chemistry of the emotion is pulsing through your blood and brain and ALREADY is altering your capacity to think rationally. Recognizing the pressure is a starting point in recognizing the presence of the emotion. Now let’s back up to understand what is creating this pressure so we can learn how to release it and manage it better.

Before you experienced the pressure of the emotion, it was building up in your body the way an army builds up before a surprise attack. In the trader’s case, there is a revving up of emotional energy in the body in preparation for urgent action. You will experience this build-up as tension in your muscle groups in your face, jaw, neck, back, gut, and/or chest. Your breathing style will also change. You will be holding your breath or taking short, shallow, and rapid breaths. Then you can hear or feel your heart accelerating or pounding. This is the arousal of the emotion, as it is readying itself to become a runaway locomotive.

It is at this point in the unpacking of an emotion that the trader begins to feel the pressure. Suddenly the emotion is no longer just revving up. It is leaving the train station. This is when you “feel” the pressure. What you are actually experiencing is the transition of an emotion from arousing (getting ready for action) to becoming a feeling. The feelingis the particular chemistry of the emotion beginning to course through your bloodstream and brain. This is the moment that your thinking is becoming compromised. Fear begets cortisol that produces avoidant thinking. Adrenaline and testosterone produce the anger associated with revenge trading. Testosterone and dopamine produce the euphoria behind over-trading and sabotage. Emotional Feeling – it is something you want to be aware of and work with, not ignore. By ignoring it, traders get compromised in their capacity to stay emotionally sober during the pressures of trading.

Emotions and the Management of Uncertainty

Now that you have a better understanding of the connection between emotion and thinking, let’s apply that new knowledge to money and loss. First, let’s look at the brain’s prime directive – to keep you alive by avoiding threat. When our ancient brain (the mammalian or emotional brain) perceives threat, it is biased to perceive it as a threat to biological existence – or death. It does not have the capacity to distinguish between a biological threat(saber toothed tiger coming at you) and psychological discomfort(the experience of the ambiguity found in uncertainty). If the emotional brain interprets data coming in from the body’s sensorial systems as threatening, it will either trigger to avoid the threat (i.e. not getting into the trade or getting out early) or attack the threat (i.e. revenge trade to get back what it lost before it is too late). And, moreover, it is biased to recognize pattern and (through pattern recognition) to trigger in an attempt to control outcome.

One last thing. The emotional brain makes a decision and the thinking brain produces an explanation to support that emotional decision – no matter what. That is why, in the heat of the moment, your fear-based mind produces multiple explanations that keep you out of trades. This is also why, in the heat of the moment after taking some losses and experiencing anger, it seems to make sense to keep attacking the source of the perceived threats (the markets) until you get back what you have lost. The thinking mind is simply following what the emotional brain has decided. Rational thought does not exist in the environment where fear, anger, or lust (greed) are the predominant emotions. This is what the emotionally intelligent trader has learned how to conquer by retraining his or her emotional response to stressors.

Money comes to have a deeply emotional basis for your beliefs about your capacity to manage uncertainty. Money becomes entwined in our beliefs about our adequacy, our sense of mattering, our self-worth, and our sense of power. Money becomes a symbol of our capacity to prevail or control outcome. This is a terrible situation to take into the performance of trading, where outcome cannot be controlled. Unfortunately, many of the beliefs traders claim they have about trading and money are untested myths. They hold the myth as the truth of their beliefs, but their trading account tells a different – and far more compelling story.

The health of the trading account becomes the myth buster. All the hope and bravado (a lot of testosterone also) come face to face with the very different reality found in trading – rather than the misguided myths you bring to the management of uncertainty. When money becomes the measure of self-worth, and loss of money becomes a symbol of less worth and powerlessness, trading becomes either a way of truly coming face to face with your performance beliefs or it becomes a source of endless misery.

What I ask of you is to really examine your beliefs about the management of uncertainty and your need to control outcome. Examine them through the light of your trading account. It will not lie or try to deceive you. It will show in black and white the effectiveness of your beliefs and myths. This is the time and place to examine what your REAL beliefs are. Strip away the myths you’ve picked up through your history or by reading books (and parroting them back in your trading diary), and look closely at them. And recognize that they are only assumptions that help you to see a simulation of the markets. You will never know the markets. You will only know a virtual simulation of the markets that your brain has put together through experience, emotion, and sensorial systems. And your trading account is giving you valuable information back about how effective your particular virtual simulation really is. If you are listening, your trading account will help you to truly evaluate your core beliefs about your capacity to manage uncertainty and separate them from the myths you like to tell yourself that you believe. This opens up the possibility of re-constructing the core emotional beliefs that shape the mind you bring to trading.

This is the challenge of trading. And the way you approach this challenge defines the future you create in the performance of your trading.

To learn more from Rande, be sure to check out some of his other articles at TradersStateofMind.com.