Mastering Fear

What You Need to Know About the Impact Fear Has on Your Trading

Poised to pull the trigger on the trade, Carl held his breath and hesitated. A current of uncertainty swept him away into second guessing his decisions. Spontaneously thoughts began to rapid fire in his head, “Should I really take this one, what if I’m wrong, what if I lose again?” His confidence was melting like snow in a desert and was being replaced by his fear of losing – again. “Should I push through my fear or should I back off this trade?” he asked, trying to gather his wits. To no avail he gazed into his screen and tried to summon all the psychological tricks he had learned. But all he could hear was the continuing battle going on in his mind. And this was not the first time. It was déjà-vu all over again. Reaching for his antacid to calm the knot in his stomach, Carl realized that he found himself in this situation all too many times.

The First Step to Your Successful Inner Game of Trading:
The Biology of Fear and Its Impact on the Psychology of Trading

What’s going on here? Carl is a conscientious trader. He uses a proven process and has his daily plan in place. Unfortunately he does not know how to effectively deal with the impact of his emotions on his personal psychology. Nor does he have an understanding of how emotions, particularly fear, impact perception and performance. Since 90% of trading is a balance between a trader’s emotions and his thinking, understanding the impact of emotions is an essential part of achieving success in the inner game of trading.

The complicating problem here is that Carl (like most traders) does not know how to effectively regulate his emotions and consequently, does not know how to produce a peak performance state of mind specifically for trading. And this blind spot is the difference between success and failure (profit or loss) in trading. And until Carl learns how to deal with his emotional nature, his fear, self doubt, greed, and impulsiveness will dominate his thinking and performance.

Thinking is Emotional State Dependent

Why can’t Carl, or any trader (including you), just push his emotions aside? It is because our bodies, our brain, and our emotions are woven together and are inseparable. If you are breathing, you are experiencing emotion. And they dominate the way we think and perceive – whether we acknowledge them or not. Deeply rooted in human evolution, emotions (including fear and greed) create our capacity to survive. To become a successful trader, managing your emotional nature is far more profitable than attempting to ignore or be consumed by your emotions.

Taking it a step further, all thinking is emotional-state dependent. Emotions are biological (not of the mind) – and they overwhelm thinking and states of mind. The way we think and reason comes from the emotional state or mood in which we live. Thinking does not create emotions on a biological level. Rather, emotion determines our thinking and our perception of the world. Therefore, only to our detriment can we push emotions aside.

Can you see why learning to managing the biology of fear is so important to successful trading? As an example of this principle, take a look at our friend Carl’s situation. Everything seemed okay until Carl was ready to pull the trigger on a trade – the moment where money entered the game. Suddenly uncertainty and fear clouded his judgment and his thinking got consumed by self doubt. The truth is that Carl had pushed his fear away from his awareness until the moment of commitment. Then it flooded forth and ambushed him.

Not having the skill sets in place to deal with his fear, his emotional arousal generated his self doubt and indecision. Depending on personal history and adaptation, other traders in this situation could have resorted to impulsiveness and grandiosity instead. In either case the emotional ground from which behavior arises is fear of loss. Often traders jump impulsively into a trade decision to remove themselves (temporarily) from uncertainty. Others get consumed by a sense of grandiosity (false courage) to escape the fear of uncertainty.

Pushed by the emotion, all these personalized adaptations to fear tend to divert us from trading our plan and sticking to methodology. Until we learn to regulate the fear our brain associates with uncertainty, our desire for a calm, dispassionate, impartial emotional state (essential for effective trading) is hijacked by our lack of skills to deal with fear of loss.

The Trader’s Brain on Fear

The brain is organized around fear – the most primal of survival emotions. To the brain any threat is a threat to life, whether it is a saber tooth tiger flashing his 6 inch canines at you or your fear of losing money. It is one and the same to the survival brain. It does not distinguish between biological fear (the saber tooth tiger) and psychological discomfort (the fear of losing money). Once the threat activates the emotion, fear sweeps away your capacity to think rationally and impartially – which is absolutely vital for trading effectively. Once triggered, the chemistry of fear is coursing in your body in .003 seconds while your ability to react to the emotion takes more than .5 seconds. For effective trading, this is too late.

The trader, like Carl in the example, then finds himself in fear-based thinking (obsessive thoughts of self doubt, focusing on negative outcome, trying to make up for losses, and an urge to avoid the stressor). And until Carl, or any trader, learns how to effectively deal with and separate the biology and psychology of fear, he will not be able to produce long term success in trading.

The Trader’s Brain Turns Avoidance of Fear Into a Self-Fulfilling Prophesy

This is where well intended psychological techniques, without being grounded in emotional intelligence, fail. The biology of fear simply overwhelms the thinking process and creates a biological pattern based on the avoidance of fear. This is what has happened to our friend Carl. He has triggered a biologically wired pattern of avoidance based on fear. Until you can manage the fear, thinking is simply hijacked by the primal power of the emotion. Thinking is not king, emotion is.

The point here is that the brain wires patterns of perception based on emotion. These patterns become so familiar to us that we do not see them. Yet, they are there – producing a self-fulfilling prophesy that dominates how we create the world in which we live. And once the brain creates the pattern, the pattern starts creating us. In Carl’s case, his fear now dominates his thinking and his expectations of the future. Out of this state of mind come his negative expectations of the future, his focus on the negative, his self doubt, and his growing impulse to avoid further stressful thinking – a vicious cycle.

Managing this aspect of our biology that deeply influences our emotions, perception, and our trading is the first step to long term success in trading.

So, How Do You Stop Fear From Taking Over Your Thinking?

In a successful psychological plan for trading, the trader will establish a sense of calm authority before he begins to trade. He does this by first managing his fear before it can contaminate his thinking. If you imagine fear as a freight train, the first thing you want to do is to stop it from getting a full head of steam. If it gets beyond that, the best thing to do is to simply stop trading until the emotion has run its course through your body, brain, and mind.

However, it is better to learn to interrupt fear’s capacity to cloud your thinking before it causes problems in your trading. Fortunately, because fear is biological in its nature, it will have an individualized physical signature for each trader – which the trader can use to begin to manage his emotional state. That signature is composed of several components including (a) a breathing style that supports fear and its escalation and (b) specific muscle tension. It is these two areas on which we will focus.

A Little Experiment

The following is a very simplified process that can be developed into a skill set. It is only for illustration and not intended to be a trick or tip that will change your trading on a short term basis. Think of a time when you were trading when you experienced fear, stress, anxiety, or self doubt. Really focus on the memory. Build it up for a moment so that you can feel the tension in your body build. Feel your mind begin to race. Build it up more. Notice what happens to your breathing. Now, while it is still fresh in your memory, write down how you were breathing and where the tension was concentrated in your body. Also write down your predictions of the future (or prediction of trading outcome) while in this state of fear. All of these combined are your individualized fear signature. Now let’s learn how to disrupt it for more effective trading.

Most people find that they either hold their breath or breathe rapidly when they are in fear states. This is part of the biology of the emotion and is a barometer of the emotional state you are thinking from. These breathing styles maintain and accelerate the emotion’s momentum. Also notice where you experience tension in your body. The neck and shoulders, gut, and chest are common – particularly while holding your breath. The breathing and tension are parts of the physiology of fear. Also it is vital that you notice the connection between your emotional state and the kind of thinking you had (your predictions of trading outcome) while in the state of fear.

This is where you can disrupt the fear and can manufacture a calm state of mind instead. The first objective to a successful inner game of trading is to disrupt fear-based states of mind and replace them with a calm state of mind. Out of a calm state of mind you can think and perceive the market impartially – rather than having your thinking clouded by fear.

Let’s take the experiment a little further so you can see the difference in perception between fear states and calm states of mind. This time you will use diaphragmatic breathing as you bring the memory up. In this style of breathing, you will first pull air into your belly or abdomen and then let the air expand to your upper chest. To make it easier to learn, you can imagine that you have a bellows in your belly and that you are pulling air down your windpipe into your abdomen and allowing it to expand into your upper chest.

Practice breathing diaphragmatically a few times and then bring the stressful memory back into your mind. Keep focusing on the memory and notice how easy it would be for the memory to influence your breathing. But continue pulling air into your abdomen and then letting it expand into your upper chest. Stay focused on your breathing so that the memory does not activate the fearful breathing style. Continue doing this for a few more moments.

What do you notice about your ability to manage the emotional state and the resulting thoughts? Most people experience emotional regulation of the fear. They can feel the fear, but it never sweeps them away. And after a few minutes, they are able to establish a calm state of mind. It is this calm state of mind that you are looking for.

From this calm state of mind, your perception of the market changes. Which is more effective – observing market data from a fearful state of mind or a state of calm? Notice how your decision process changes as you are able to interrupt negative fear-states and the thinking that comes from them. And notice that as you are able to establish and maintain calm states of mind, you are better equipped to think from an impartial and objective state of mind. Which is better for your trading?

Moving beyond the First Step

This aspect of emotional regulation is only one part of a successful psychological plan for trading. The calm state of mind is like a launching pad. Once you establish skills to regulate the biology of an emotion, the door is opened to much more. New skill sets become possible for your growing success out of this first step. Successful trading is a journey – and biologically being able to interrupt fear-states from sabotaging your trading plan is an essential part of that journey.

This new skill, once developed, opens the door to increased realization of your trading (and human) potential. It will not work by itself. What it represents is a way for you to recognize fear dwelling within you (before it sabotages your efforts) and to mechanically disrupt fear’s hold on your thinking. Once you learn this skill set, you can begin to learn how to call up emotional states (calm impartiality and courage) as part of your inner resources that move your trading psychology beyond fear – and into peak performance.

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