How to best view the emotions you feel while trading

Author: Giles Coghlan | Category: Education

Learning the role emotions play in your trading

How are you trading at the moment? Or, more specifically, how are your emotions affecting your trading at the moment? Take a moment to ask, 'How do I feel when I am trading well as opposed to how I feel when I am trading badly?' Trading is a very emotional pursuit. In fact, you may have reached the conclusion that you need to remove the emotions entirely from your trading. This idea is the birth of the automatic trading robots. The thinking was that the emotions of a trader are getting in their way and if we can just entirely eradicate that from the trading process then trading will become easy. Now, this may well be the case for automated high frequency trading reacting quicker than humans, but many traders will have their own story of trading robots they have bought. The 'whatever you call it' turbo or Max robinator FX 2099. You may well have your own experience of that sure fire robot you bought back in 2010. All you had to do was sit on the beach and drink the cocktails bought to you. The dream probably lasted all of 3 weeks. My dream lasted until about day two.  The problem of course is that pure logic has it's weaknesses. In fact there are times when it is just stupid to be purely logical.

The latest findings from neuroscience is that we should combine both our reason and our emotions

Neuroscience sheds some light on the role emotions play in our decision making

Now neuroscience is a relatively new science. The brain has been relatively poorly studied and it is only in the last twenty years or so that the science has really developed. The most up to date thinking is that as information comes into us through our senses that is evaluated by the amygdala part of our brain. The information is then given an emotional marker or label by the amygdala. Now, once an emotion is tagged to the event, the information goes up to the Cortex. So, in effect, we are only evaluating what we have already had a feeling about first. We feel first and think second. This is obvious to us when we consider the type of advertising that works. To sell a product a company engages our emotions and feelings and gets us thinking and feeling first. Adverts don't give us a list of pro's and con's about a product because we don't think in a way that is entirely detached from our emotions. Instead the adverts give us a feel, the music, the images etc and that is what prompts us to buy and then to think about the sale. The bottom line is that we feel, before we think.

So, you see the issue?  We can't trade without emotion. It is a foolish approach for us to try. So, what purpose do our emotions have. Ok, emotions actually give us information by making us feel before we  think. That helps us respond quickly. So, if your feeling fear you will respond quickly to avoid the threat or danger. That feeling can speed up the whole process of reasoning. Emotions also help us to focus on what is important. We are drawn to respond to the greatest threats or dangers through our feelings.  Furthermore, emotions also help us to have confidence and competence. A competent trader is a confident trader and, usually, a profitable trader.

Emotions are key in decision making

Accept that all your emotions are very important in making decisions. Now, extremely strong emotions can hinder our trading, for sure. They need addressing. However, emotions are not your enemy. They are your friends. So start to think of emotions as your allies and not your enemies. Use the emotions you are feeling as you would a data feed. So, if you are feeling fear in a trade what does that mean? Perhaps you are over leveraged and the fear is warning you that you are in danger. Are you feeling confident? Perhaps that is telling you that your analysis is correct.  Maybe you lack confidence in your trading? Perhaps that is telling you that you don't have enough experience yet and you need to learn more. Listen to your feelings, and don't ignore them. See them as your assistant, rather than your enemy.

Conclusion

Emotions are there to help us, rather than hinder us. We have all heard about EQ - or emotional intelligence, and that is tapping into that emotional part of us. It is being able to reason emotionally.  Now, emotions can be out of control and they can be totally indulged. For example, if you feel angry it wouldn't always be appropriate to act on that anger. However, reasoning emotionally and being aware of your emotions is much more in tune with the way we actually think. Perhaps you are needing to learn to stop trying to suppress and ignore your emotions and to start listening to them. Perhaps they are trying to tell you something that you have been ignoring.


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