The Brain on Trading

[Rande Howell 10]

Emotional Intelligence and the Trader’s Mind

 

An Emotional Braking System Failure

 

“I left money on the table yesterday, and I’m not going to leave money on the table this time!” Harry silently declared, “I’ve missed out to 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 pushed beyond his exit point, 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 numbers began to drop. Harry kept waiting for the downward spiral to right itself. It didn’t. Harry moved the 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 draw down on his trading account. He felt frustrated because, in his irrational exuberance (some would call it greed), and he let a perfectly good trade go bad. He had sabotaged himself yet again. Now Harry felt shame and wondered, “What made me think that I could trade for a living?”

 

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) – emotions rule mind. Out of your emotional states comes the kind and quality of the thinking of which you are capable. In Harry’s case the state of mind that he needed to trade effectively was swept away by a fear of missing out. Once this fear triggered and accelerated, 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, a guy who had diligently done his charting and was ready for the trading day got ambushed by unseen forces. His trading plan did not also include a psychological plan for managing emotions. This was a big mistake for Harry and 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 life a garment. They are inseparable. Maintaining awareness of your emotional nature as a trader is, in fact, 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 just happened to Harry.

 

The Anatomy of a State of Mind 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 how to manage the impulse. He did not notice the excitement of emotional arousal of the hunt that evolution had programmed into him. 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.

 

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.

 

In this emotional stupor, Harry overtraded 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 preparation for action that happens in your body as an emotion prepares us 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 and is a great component to some peak performance states of mind – particularly ones that more physical exertion and less cognitive functioning. Foot ball 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 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. The moment that high arousal states become apparent in trading, the trading has lost his capacity to take a step back emotionally and think impartially. You can be passionate about trading, but you cannot be passionate while trading.

 

Managing Arousal

 

Until a trader learns how to manage their 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 themselves out of wanting the warm fudge just coming out of the aromatic oven. The more you try to talk yourself out of the fixation, the more you want the chocolate. The arousal has already kicked started the desire to acquire.

 

Fortunately our breathing is both automatic and volitional – this is key to emotional regulation. If let on automatic, your breathing style will accelerate the arousal of an emotion as it triggers. In Harry’s case, his fear of missing out lead to the arousal of pursuit based on greed. He both held his breath and he then would breathe rapidly and shallowly. This excited breathing style accelerated his heart to beat faster adding to the excitement. The emotion greed and its motivation to grab all the profit he could, then took over Harry’s capacity to think impartially. And out of this emotional state, his thinking became compromised which lead to his over trading. It did not have to be this way.

 

Breathing is both automatic and volitional. With training, Harry has learned how to stay in a calm, impartial state of mind, in part, by managing the kind of breathing he does throughout a trading day. Once he understood that peak performance trading requires low arousal state of mind, he began using diaphragmatic breathing to manage his emotions while trading. He has much better control of his overtrading. He does not wait to feel arousal kick in. Instead, Harry using diaphragmatic breathing to help kept 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 fear of missing out, greed, or a desire to pursue hijacking 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 breathing style, he is much less reactive in the management of his trading days. 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. And to let go of habitual historical practices that hinder his progress. His first step was becoming aware of the power that breathing has over emotional nature to influence states of mind.

 

Other steps to lead to peak performance states of mind will be explained in the coming posts. Stay tuned.

 

Rande Howell MEd, LPC

[jackb 10]

Diaphragmatic breathing may be a valid path for some to improve their trading, but its not an absolute requirement or the only way to go. That said, it wouldn't hurt to learn how to breathe properly.

 

Paul Tudor Jones is a fair trader. Yet, in watching this video, we see someone who is very high strung and someone who relishes in "making them pay" after taking a big loss. Yet, he still gets the job done.

 

I also think different trading styles tend to accommodate certain personality types.

 

Again, don't get me wrong...there's nothing wrong about infusing your body with as much O2 as possible via proper breathing techniques.

[Ingot54 13]

Diaphragmatic breathing may be a valid path for some to improve their trading, but its not an absolute requirement or the only way to go. That said, it wouldn't hurt to learn how to breathe properly.

 

Paul Tudor Jones is a fair trader. Yet, in watching this video, we see someone who is very high strung and someone who relishes in "making them pay" after taking a big loss. Yet, he still gets the job done.

 

I also think different trading styles tend to accommodate certain personality types.

 

Again, don't get me wrong...there's nothing wrong about infusing your body with as much O2 as possible via proper breathing techniques.

Jackb -sorry the video was too long at 55 minutes - was that the correct link?

 

I am unsure whether all the deep breathing in the world would make a poor trader better. Although with all that nasty CO2 around these days, it can't hurt to add an extra .00002% oxygen to the mix!

 

In my petty view, I suspect by the time traders realise that they are doing some heavy breathing/hyperventilation, they are already in too deep, and their breathing problems are only a symptom of the problem - not the cause.

 

As someone who has made the study and application of physiology a part of my profession for the past 27 years, I can tell you people do not hyperventilate when things are going sweetly - only after they are in the can!

 

To the layman, this might be one of those:

"Oh! I know! That's why I'm failing - I'm not perfusing correctly!"

 

But that line works only if you have an interest in breatharinism, or selling something to the masses who have no clue what you are trying to peddle. Of course a trader who is unused to taking a loss will freak out and experience diaphoresis (sweating) and breath-tightening etc as the sympathetic nervous system responds to stress.

 

On the other hand, the parasympathetic nervous system works to calm the stress response of the body to a perceived threat.

 

But what has this to do with trading??

 

Nothing - it is a beat up to capitalise on populist teaching - dazzling the uninitiated with medical and physiological science ... that if a trader is failing, it can't be his fault.

 

Having said that, I agree with you that this is "not an absolute requirement or the only way to go." And while there may be a role in understanding parasympathetic responses to a perceived threat, and majoring on those strategies as a coping mechanism, this is not a universal panacaea for all traders who aren't kicking butt in the markets.

 

Traders need to go into these kinds of theories with eyes wide open - regardless of who it is saying so.

 

Beware the vested interest!

[jackb 10]

Jackb -sorry the video was too long at 55 minutes - was that the correct link?

 

I am unsure whether all the deep breathing in the world would make a poor trader better. Although with all that nasty CO2 around these days, it can't hurt to add an extra .00002% oxygen to the mix!

 

In my petty view, I suspect by the time traders realise that they are doing some heavy breathing/hyperventilation, they are already in too deep, and their breathing problems are only a symptom of the problem - not the cause.

 

As someone who has made the study and application of physiology a part of my profession for the past 27 years, I can tell you people do not hyperventilate when things are going sweetly - only after they are in the can!

 

To the layman, this might be one of those:

"Oh! I know! That's why I'm failing - I'm not perfusing correctly!"

 

But that line works only if you have an interest in breatharinism, or selling something to the masses who have no clue what you are trying to peddle. Of course a trader who is unused to taking a loss will freak out and experience diaphoresis (sweating) and breath-tightening etc as the sympathetic nervous system responds to stress.

 

On the other hand, the parasympathetic nervous system works to calm the stress response of the body to a perceived threat.

 

But what has this to do with trading??

 

Nothing - it is a beat up to capitalise on populist teaching - dazzling the uninitiated with medical and physiological science ... that if a trader is failing, it can't be his fault.

 

Having said that, I agree with you that this is "not an absolute requirement or the only way to go." And while there may be a role in understanding parasympathetic responses to a perceived threat, and majoring on those strategies as a coping mechanism, this is not a universal panacaea for all traders who aren't kicking butt in the markets.

 

Traders need to go into these kinds of theories with eyes wide open - regardless of who it is saying so.

 

Beware the vested interest!

 

Yes, the video is feature presentation. It's time well spent for serious traders. And it's rather encouraging being able to see that one need not be perfect (which the video makes perfectly clear) to be a success. You'll note several instances in which PTJ violates commonly held wisdom.

 

As for the diplomacy with my first post, it shouldn't be confused for anything more. I agree with and share your point of perspective.

 

The other debatable issue I forget to mention in my first post, was that of Harry being "greedy". I don't think you can achieve success as a trader if you completely shun being greedy. The real difficulty lies in knowing when to invoke that mentality. Of course, its never done recklessly and only on very select occasions.

[zdo 20]

... It's time well spent for serious traders. And it's rather encouraging being able to see that one need not be perfect (which the video makes perfectly clear) to be a success. You'll note several instances in which PTJ violates commonly held wisdom. ...

 

 

I can't say categorically that "It's time well spent for serious traders". It wasn't for me when I watched it long ago.

But

re: “one need not be perfect (which the video makes perfectly clear) to be a success. You'll note several instances in which PTJ violates commonly held wisdom.”

Excellent point! I was just skimming

http://www.traderslaboratory.com/forums/trading/10279-number-one-trading-rule-you-live.html

and have got to report, I routinely ‘break’ almost half those rules and still do just fine. ‘Revenge trading’ is another one of the rules I love to break – only I experience it and call it “playing from behind” and I consider being able to play well from behind as important in short time frame trading as in any other ‘professional’ performance game and (with certain systems/ edges and situations only!!!!!!) don’t hesitate to aggressively add more size, not to mention probably get more 'greedy' too – breaking three of those 'rules' at once!

(Btw Many of those “number one trading rules” in that thread are actually extremely system specific, but are presented as if they apply to all types of systems.

Edited July 11, 2011 by zdo