The Brain on Trading

An Emotional Braking System Failure

“I left money on the table yesterday, and I’m going to take it all today!” Harry silently declared as he was watching the trade take shape on his screen, “I’ve missed out too many times – I’m going to ride this one and clean up.” Harry could feel the excitement pulsing in his veins – he could hardly contain himself.

He decided to push aside his target, knowing that this one was going up. What a rush! Harry could feel the surge of energy. He almost became giddy as he saw the numbers climb even higher. That triggered even more excitement as he thought, “I’ve hooked a big one – I’ll show them who’s a trader!”

In the blink of an eye, without explanation, the price began to drop. Harry kept waiting for the downward trend to right itself. It didn’t. Harry moved his stop because he knew in his gut that it would go back up again. It didn’t. Finally Harry pulled the trigger and accepted that he had another drawdown on his trading account. He felt frustrated.

Instead of taking some of his profit while the trade was going his way and hitting his targets (as his trading plan called for), in his irrational exuberance (some would call it greed and impulsiveness), he held all his positions hoping for a big winning trade. When it turned against him, he had no exit strategy and watched as all his profit disappeared before getting out with a loss beyond his original stop.

He had sabotaged himself yet again. Now Harry felt shame and wondered, “Maybe I don’t deserve to make a living at trading. It just doesn’t feel enough like work. Maybe that’s why I keep blowing myself up just when it’s beginning to look good.”

You Trade Your Psychology

What happened to Harry? How did he get suckered into bad trading practices? From the sidelines, it is easy to say that Harry neglected to trade his plan. This assertion misses one big point about humans (and particularly the ones who trade) – your emotions rule your mind. Out of your emotional states, comes the kind and quality of thinking that is possible for you.

In Harry’s case the state of mind that he needed to trade effectively was swept away by a fear of missing out (one of the fundamental forms of fear a trader has to learn to regulate in order to become a peak performance trader).

Once this fear triggered and accelerated and compromised his mind, his thinking became clouded and his rational evaluation process was blown out of the water.

Like many traders, Harry did not have the skill sets to keep his emotions regulated as he entered the trade. Consequently, as a guy who had diligently done his charting and was ready for the trading day, he got ambushed by unseen forces. What he was blind to about the inner workings of his mind always came back to haunt him in his trading – this is what he did not see.

His trading plan failed to include a psychological plan for managing his emotions. This was a big mistake for Harry, as it is for many traders. And until he learns how to make visible the unseen forces that hijacked his rational mind, his trading will suffer.

The problem is age-old. Since the rise of Descartes’ rationalism, people (traders included) have attempted to separate body (emotions) and mind. Today even Western medical science is concluding that this separation is impossible. The mind and the body (emotions) are woven together in life like a garment. They are inseparable. Maintaining awareness of your emotional nature as a trader, in fact, is the first step to developing a peak performance state of mind specifically for trading. Before this is explored, let’s take a look at what happened to Harry.

The Anatomy of an Emotional Hijacking

Harry experienced the trap of an undisciplined trader’s mind. As he moved into the trade, he was not attuned to what his hardwired and primitive emotional brain was biased to sense – nor did he know how to manage the impulse. He did not notice the excitement of the emotional arousal of the hunt that had been pre-programmed into him by evolution. The thrill of the hunt (and its companion – the fear of missing out) was mobilizing Harry to pursue the prey before it could get away.

The way this primitive wiring of the brain translated itself in Harry’s modern trader psychology was that he was pursuing profits (prey) with an urgency rooted in his fear of missing out again. From a resting place where a calm observant state of mind prevailed, Harry began to pursue the “hunt”, not noticing that his thinking was being compromised. (Remember, thinking is emotional state dependent.) The arousal of conquest or greed came to dominate his mind. He could no longer think rationally. Then he pursued his “prey”, consumed by the passion of taking no prisoners. His trading became an adrenaline rush at this moment – a drug.

In this emotional stupor, Harry revenge-traded and lost. This trait of Harry’s (a single minded pursuit of winning big and being the best) had served Harry well in many areas of his life. It had helped him achieve many goals in his life, particularly in his career before trading. What he was beginning to recognize was that it did not serve him well as a trader though. What is different about trading?

Peak Performance and States of Arousal

In this discussion we are focusing on the component of an emotion called arousal. Arousal is the preparation for action that happens in your body as an emotion prepares you for action. Powerful levels of adrenaline and cortisol are pumped into Harry’s body as he becomes excited by the trade. That excitement, as the arousal increases, becomes fixated on the object of pursuit – bringing down the home run trade.

This is called a “high” arousal state and is a great component to some peak performance states of mind – particularly ones that require more physical exertion and less cognitive functioning. Football would be a good example of where peak performance demands high levels of arousal and reliance on instinct that has been trained into the athlete. A coach does not want his players “thinking” on the football field – he wants them reacting to habitual training. Trading is the exact opposite.

A peak performance trading state of mind requires low arousal. Impartiality, discernment, dispassion, and calm states of mind are the emotional components sought after for trading success. This is because cognitive functioning is what is necessary for trading peak performance, rather than physical exertion and reaction.

The moment that high arousal states become apparent in trading, the trader loses his capacity to take a step back emotionally and think impartially – he will then react to instinct (trouble). And this high level of emotional arousal will take the trader out of the peak performance state of mind required for trading – calm assertive impartiality. You can be passionate about trading, but you cannot be passionate while trading.

Managing Arousal

Until a trader learns how to manage (not ignore) his emotional arousal levels, trying to use the mind to manage emotions often creates more (not less) stress and fixation. As an example, imagine a chocoholic attempting to talk himself out of wanting the warm brownies just coming out of the aromatic oven. The more he tries to talk himself out of the fixation, the more he wants the chocolate. The arousal has already kick-started the desire to acquire…your mind is already compromised.

How can you intervene and interrupt this process? Fortunately your breathing is both automatic and volitional – this is key to emotional regulation. If left on automatic, your breathing style will accelerate the arousal of an emotion as it triggers. In Harry’s case, his fear of missing out led to the arousal of pursuit based on greed. He held his breath and then would breathe rapidly and shallowly. This excited breathing style accelerated his heart to beat faster, adding to the excitement.

The emotion of greed and its motivation to grab all the profit possible for the trade (losing sight of the rational risk management called for by his trading plan), then took over Harry’s capacity to think impartially. And out of this emotional state his thinking became compromised which led to his revenge trading. (It did not have to be this way.)

Rare in our biology’s hardwired adaptive responses, breathing can become volitional as a way to manage emotional states. With training, Harry learned how to stay in a calm, impartial state of mind; in part, by managing his breathing style throughout a trading day. Once he understood that peak performance trading requires a low arousal state of mind, he began using diaphragmatic breathing to manage his emotions while trading.

Now he has much better control of his reactive trading. He does not wait to feel the arousal kick in. Instead Harry uses diaphragmatic breathing to help keep the arousal of his emotions in check.

The moment he senses the triggering of arousal, he volitionally uses his breathing to cut off the gasoline supply to the fire of the aroused emotion. Rather than allowing his fear of missing out, greed, or the “desire to pursue” to hijack his mental faculties, he now is consciously able to calm the excitatory process of the emotional brain.

Having learned how to manage the levels of adrenaline and cortisol in his body by managing his breathing style, he is much less reactive in his trading. Harry now maintains a calm, impartial, and disciplined state of mind from which to trade.

In the process, Harry has learned how to change himself. His focus is on developing the skills and tools that allow him to trade at peak performance levels… let go of habitual historical practices that hinder his progress. His first step towards a solid psychological plan for trading was becoming aware of the power that breathing has over his emotional nature that influence his states of mind.

The First Step in a Journey

Harry learned an essential skill in regulating his emotional nature. It was the beginning of a journey into re-inventing himself as a peak performance trader. What he recognized was that it is essential to develop the psychological characteristics of a peak performance trader, which required that he reorganize his personal psychology. Working with his emotions was simply the first powerful step to creating peak performance trading – a trader’s state of mind.

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