Trader Mind. Embrace your emotions

This article written by Steve Ward was originally published in the january 2015 issue of Traders' Magazine.

Steve is one of the world’s leading experts in trading performance and psychology, having spent the last 10 years working with traders and fund managers in banks, funds, energy companies and proprietary trading groups across the globe.

“Emotions! How many times have traders been told that emotions are bad, emotions get in the way of trading, successful traders are less emotional. Yet Steve Ward explains how emotions are essential to the decision making process and how they keep our brains focused on critical information. Emotional factors in decision making can serve a purpose. In classic ‘Steve Ward’ fashion he grounds his guidance in solid neuroscientific research explanation.“ (Linda Raschke, President at LBR Group Inc, CTA, from the foreword to TraderMind, November 2014)

Can You Help Me Trade Without Emotion?

We work with a lot of traders in one-to-one coaching and workshops and one repeating request that we encounter is “Can you help me to trade without emotion?” In a recent online seminar 79 per cent of attendees indicated that they would like to be able to trade without emotion. Is this the same for you? Would you also like to be able to trade without emotion?

No trader has ever lost or made money solely based on emotion – it takes action to pull the trigger. The feeling of an emotion and the taking of an action are separate events and it is possible to feel a feeling and act differently. You can feel tired and yet get out of bed. You can feel hungry and yet not eat anything. You can have a sense of fear and yet still enter the market, or a feeling of anxiety when in the market, and still stay in a trade. Emotions bring an urge for action but we do not have to take that action. It is possible, with practise, through developing emotional awareness, and learning how to regulate more extreme emotions, combined with some commitment to your strategy, to feel an emotion and to not have to act upon it.

The Neuroscience of Emotion

Neuroscience research over recent years has resulted in some big shifts in thinking on the role that emotions play in decision making and these shifts have implications for you as a trader. Emotions have evolved as ways for your brain to make sense of the world around you, they keep your brain focused on critical information, and enable you to act on that information, to gain what you desire and avoid what you fear. You need an emotional factor in decision making to appreciate the possible outcomes of a decision. Most real life decisions cannot be based entirely on logic as the information that you have is usually incomplete or ambiguous, and that is certainly true in the markets. George Soros has stated that he relied on his emotions a lot in his investment process because of the inadequacy of knowledge in the markets.

Figure 1 shows how your brain processes information, and not only is emotion a key part of this process, it is the first part of it. You are feeling, before you are thinking.
Emotions help you to decipher whether something is a risk to be managed (fear) or an opportunity to be taken advantage of (excitement) – and that is very useful in trading. Knowledge communicated via emotions either explicitly or implicitly enables you to make fast and efficient decisions.

The New Emotions and Trading Paradigm

From the relevant neuroscience research three key guiding principles emerge that we believe are important for you to understand and act upon, if they are to enhance their decision making and performance;

1. Emotions are essential to the decision process
2. Emotions are data – they provide messages about your experience
3. Emotions cannot be controlled – but they can be regulated/managed

Because emotion is a key, and actually useful, component of your decision process your goal in trading should therefore, not be to trade without emotion as that, even if it were possible, would actually compromise the effectiveness of your decisions. Rather we would suggest that the goal is to work with your emotions, to be more in tune with them, to improve your ability to coordinate and refine your thinking and feeling processes to enhance your decision making (2).