Developing Your Emotional Intelligence for the Next Level

[Rande Howell 10]

Most traders wake up in an emotion, never having seen the tell-tale signs of how an emotion takes over perception and runs a trader's thinking. Yet, the emotion was hiding in plain site - it is the trader's blindness that led them into a decision-making ambush. Working with emotions is not optional in the life of a trader. A trader’s lack of understanding of emotions and how they work is a major obstacle in trading performance, and it will stay that way until the trader learns to deal with emotions effectively. Most traders do not notice an emotion (fear, greed, or euphoria) until it has already corrupted their mindset and hijacked their capacity to think clearly. By the time the trader notices the "feeling" of an emotion, it is too late. When you (the trader) “feel” the emotion, it is already coursing as chemistry in your body and brain and your thinking is compromised in whatever direction the emotion is taking you.

 

When this happens, there is no way to put the brakes on the emotion and return to clear thinking. The best solution at this moment is let the emotional chemistry “burn” itself out so you can come back to your senses. (You can accomplish this by getting away from trading - i.e. take a walk, go exercise, go for a run – anything that accelerates the burn of the emotional chemistry in the body). But, it does not have to be this way. Let’s take a look at emotions in trading and discover how it is possible to build a path to emotional mastery.

 

What is an Emotion?

 

First, emotions are not feelings, although feeling is an element of an emotion. Emotions are not touchy-feely – they are biological. Emotions take over psychology and thinking. They are built to provoke the body and mind into specific forms of action based on the motivation of the emotion. This is why managing them is so important in trading.

 

Fear, for instance, is built to avoid threat – both biological and psychological. The emotional brain, once provoked to fear, will manhandle the thinking mind to create explanations that support what the emotional brain believes. This is because all thinking is emotional-state-dependent. The key to successful state of mind management, therefore, is emotional state management.

 

Second, an emotion (being biological in its nature) is defined as any disruption to a standard sensorial pattern that the brain has already established. That standard sensorial pattern is often referred to as your "comfort zone". So, as you are trading, if any deviation occurs from a pre-existing homeostasis, an emotion pops up to deal with the disruption.

 

Now what does that look like in trading? The movement from evaluating set-ups to committing to an entry point is just such a disruption to standard sensorial pattern. Suddenly your cozy comfort zone is disrupted and you are committing capital to risk. For many traders, this represents threat. And, if you do not develop your EQ (emotional intelligence), it will not matter how much you KNOW about trading and risk management while in the safety of your comfort zone, your trader’s hand still freezes and you cannot pull the trigger because the emotional brain dictates how the thinking mind will think. Here, the emotional brain perceives the uncertainty of putting capital to risk as a threat and jumps to fear and hesitation.

 

Becoming emotionally intelligent is essential to the development of successful traders. Learning how an emotion operates will give the trader an edge in managing his emotions and mastering the mind that he brings to trading.

 

Elements of an Emotion

 

Emotions are composed of a number of interlocking elements. The important thing to understand about emotions is that they are biological and they take over your psychology. Learning how emotions operate is the first step to mastering them. Here are the elements of an emotion:

 

Arousal. First, there is a change in the status of a trade which triggers an emotion based on the trader’s perception of threat (fear) or opportunity (euphoria or greed). What happens next is that the body begins to ramp up for action. Breathing changes. It stops or begins to become shallow and rapid. Muscles tense, getting ready to spring into action. The heart begins to race or miss a beat. You are now experiencing the arousal of an emotion. It is building, readying the body for action. This is the place you want to catch the emotion – before it builds up a head of steam and becomes an out-of-control locomotive. As the emotion’s engine revs up, it reaches a critical mass. It flips an internal switch and it springs into action. It is no longer building up – the switch is flipped and the emotion activates the feeling component.

 

Feeling. Feeling is the subjective experience of the emotion and is where most traders notice the emotion. However, the feeling element of the emotion is also the chemistry of the emotion coursing through your body. This chemistry is what you “feel”, and this is when the emotion contaminates thinking. In the life of emotional activation, the emotion can easily take 45 minutes to an hour for the chemistry to burn out if it is no longer being stimulated – not good for the trading mind. So you will no longer be in your “right” mind for trading if you are experiencing fear or euphoria. Both fear and euphoria set the trader up for skewed thinking. The feeling element of the emotion produces a belief in the certainty of whatever direction the emotion is provoking you to go.

 

Motivation. Motivation is where the emotion is taking you. Remember, emotions are biological and are about producing action in a particular direction. Those directions are called emotional motivation and are either avoid (run, hide, freeze, submit), attack, or approach. Feeling and motivation conspire to sweep the trader’s mind away. If you have ever been reviewing your trading day and wondered what happened to your right mind in the heat of trading – this is it. Motivation provided the direction of the e-motion and the feeling provided the certainty of the belief that hijacked your thinking mind.

 

Meaning. Meaning is the self-belief concerning the trader’s adequacy, worth, mattering, or power to manage uncertainty that becomes attached to the emotion. You can declare that you believe something, but that is only cheerleading. The proof of what you really believe about your capacity to manage uncertainty will be found in your trading account. Most traders avoid looking into their self-limiting beliefs (no matter how boldly their trading account points to them) because it creates discomfort in their comfort zone or current organization of self. This lack of courage is what keeps the trader locked in his self-limiting beliefs, that negatively impact his trading account.

 

Pre-disposition. Genetic pre-disposition is simply beyond the scope of this article. We are all wired with certain potentialities – it is what we do with our potential that matters, though.

 

Freedom of Emotion, Not Freedom From Emotion

 

Emotion is unavoidable in trading. The EQ skill is learning how to use emotions to produce effective states of mind for peak-performance trading. As a trader develops his EQ, he learns to regulate reactive emotionally-based pattern. The first step is to volitionally alter the arousal element of the problem emotion through breathing and tension release. By doing this, he is able to better manage the intensity of the emotion so that it does not activate the feeling state of a reactive emotion while trading. (If that occurs, the trader’s mind is compromised.)

 

As he gains the emotional competence to regulate the emotion, he is able to get to the door of the trading mind. This is where he can use new-found courage to examine the beliefs that limits his capacity to manage the uncertainty of probability. Here is where meaning can be transformed - first, by discovering his inherent worth as a human being. This is really important. It is at this point that he can focus on his trading as a performance rather than a characterization of his being. At this point in the journey of a trader, he is re-organizing the meaning of self that is embedded into the emotional structure.

 

Here, the trader can begin to use emotion as information or data because he is no longer afraid of what he might find out about himself. He begins to see what is manifesting in his trading with far less avoidance and denial and he uses this information to design the mind that trades. No longer does he try to avoid the discomfort of reactive emotions and the self-limiting beliefs that lurk behind them. Instead, he is able to use the emotion as information that tells him where he needs to look for self-limiting patterns. He knows that emotions will lead him to what he needs to know about himself so he can grow as a trader. Fear has been transformed into reverence, vigilance, and concern. These emotional states that give rise to a peak performance state of mind are rooted in discipline, courage, patience, and impartiality.

 

For those interested. A similar article similar to this one is the cover article for June's issue of SFO magazine. Here is the link to "How to Train the Brain to Manage Fear". http://www.sfomag.com/eSFO/eSFO2012_06.aspx?page=22. And for those coming to the Dallas Traders Expo, please catch my presentation there.

[4EverMaAT 10]

The best way to do this is completely "mechanize" your trading system. With an objective trading strategy, it is easier to observe what it does and how you react to what it is doing. Trying to manage trades manually AND your emotions [edit] is tough because your emotions automatically trigger responses.

 

Of course many traders do trade with money they could not afford to lose. So observing your fears and determining what you can handle mentally will help with position sizing. I learned just as former turtle trader Curtis observed, you have to be able to watch your drawdowns and know that they are just part of the overall profit strategy. This is extremely difficult to do when any part of implementing your system, especially the exit, is arbitrary.

Edited June 6, 2012 by 4EverMaAT

[TimRacette 11]

Great post Rande. I've found that with clarity comes confidence and emotional detachment. Always enjoy reading your posts.

[Rande Howell 10]

Great post Rande. I've found that with clarity comes confidence and emotional detachment. Always enjoy reading your posts.

 

Thank you Tim. I have found that the vast majority of people, including traders, do not have an effective understanding of emotions and how they work with brain to create the trader's mind -- so the probabality of change is limited. This article is a basic primer that helps traders view emotions in a new light that allows them to work effectively with emotions. Gail Mercer of Traders Help Desk is beginning to incorporate my self development training into her methodology training with her clients. She knew that the trader's emotional mind had to be developed along side of the rational mind to create an effective trader's mind. That's a common gap in trader training. With both, the aspiring trader wins. The whole trader is developed, both mind and method. One day, I hope that this path of working with the whole trader is the standard practice of developing traders.

 

Rande Howell

[gosu 10]

* * *

Gail Mercer of Traders Help Desk is beginning to incorporate my self development training into her methodology training with her clients. She knew that the trader's emotional mind had to be developed along side of the rational mind to create an effective trader's mind. That's a common gap in trader training. With both, the aspiring trader wins. The whole trader is developed, both mind and method. One day, I hope that this path of working with the whole trader is the standard practice of developing traders.

 

Rande Howell

 

Tag team your way to profits. Nice.