Taking Back Your Edge From the Jaws of Fear: What You Need to Know About Emotions and Trading
By: Rande Howell
In the course of their evolution, every trader (if they are honest with themselves) has experienced disabling fear. How it happened – and why it continues to happen – often remain a mystery to the trader. Before the trader knows it, all reason has been hijacked and fear takes its toll on the trader’s state of mind, his capacity to trade effectively, and finally his trading account.
To the trader, it often appears that the fear came out of nowhere. Otherwise the trader’s problem with fear (or its cousin, greed) would be easily resolved. If not addressed, the fear stays in place and constricts the trader’s capacity to trade effectively. However there is an emotional process involved (common to all emotional states) that, with training, could have been successfully interrupted. Unfortunately, the trader is not aware of this process of emotional hijacking. The emotion has already seized him and he finds himself in hesitation, distraction, revenge trading, or impulsivity. And he begins to doubt that he is cut out for trading.
The good news is that there is a defined process to an emotional hijacking. Any emotional process has a signature that is associated with it. There would have been tell tale signs of the emotional hijacking, and a way to disrupt it, if the trader had known what to look for and had developed the awareness to be mindful of how fear triggers, accelerates, and overwhelms the calm disciplined mind required to trade effectively. You cannot get rid of emotions, but you can be trained to better understand them and manage them. It is out of this training that effective trading springs.
Jim has been trading for seven years. He has learned his methodology and was trading well until about two years ago. Since then his trading has been problematic. Fear began to surge as he traded and he found himself hesitating while evaluating set ups until emotional pressure built up. He would then jump into a trade impulsively. This flip-flop behavior continued until Jim decided to move back to paper trading – so he could refocus his trading and get his edge back. Of course, in paper trading, risk is removed from the equation of his edge.
Jim explains, “The challenge is that I haven’t been able to simulate the same emotional feelings when paper trading as when I’m trading live. I can’t seem to build up the fear I experience when live trading. But, you know, something weird happened when I recently went to a casino with my wife. I sat down at a slot machine next to her and slipped in $20. I thought I was just entertaining myself since I don’t gamble. After a couple of minutes of playing the machine I could feel the exact same feelings I get when I’m evaluating set ups. My heart rate started to increase, my palms started to sweat and I could actually feel small beads of sweat slowly dripping down from my armpits! There I was, triggered back to my trading room looking at set ups and trying to pull the trigger. I was frozen. This is the exact same emotional feelings I’ve been plagued by in my trading the past few months.
When I first started trading (7 years ago) I was never like this. Then about 2 years ago I lost a chunk of my capital and was basically wiped out until I was able to build my trading account up again. And I’ve had a couple of much smaller losses in the last 6 months also. I started going down hill after that. Now I doubt myself. I don’t understand why I can’t get my trading edge back. I see a connection between the experience I had at the slot machine and what’s happening in my trading – but I don’t understand it.
Threat, Brain, and Mind Meet in the Trading Room
Jim has just experienced a conditioned response that has generalized from one domain of experience to a broader context. He had been trading successfully for a number of years until he experienced a sudden loss of significant capital while trading two years ago. It is this sudden loss and the pain in the memory of that loss that Jim’s brain is programmed to avoid. To the survival brain, this sudden loss of capital represented a threat to the existence of the trader. And the brain’s mandate is to build a pattern of avoidance to the pain that became associated with this loss of capital. This part of the trader’s brain does not discern between loss of life and loss of capital. To it, any and all emotional painful losses constitute a threat to life.
Then the brain develops a fear response to the actual threat – the significant loss of capital – as a way to avoid loss in the future. This is the basis of traumatic memory and adaptation as part of a conditioned response. At this point the problem is as much a biological problem as it is a psychological problem. And they have to be handled together. It is the same process that a child experiences when he learns to never touch a hot stove top again… after traumatic pain. And for Jim the sudden loss of significant capital was traumatic to him. Imagine him having to tell his wife about the loss and the negative impact on his ability to survive in the world of no money. This is the set up for an automatic, reactive stress response.
The brain then builds an avoidant neural pattern as a solution to this problem. It becomes embedded in the pattern making and pattern recognition machinery of the brain. This is the conditioned response and pattern recognition that the brain orchestrates. And Jim does not help his cause. After the traumatic loss of capital and its fear response, Jim attempts to ignore his fear based on emotional pain and to push through the deeply embedded fear response to threat by sheer brut force – not a good idea. This only exaggerates the strength of the embedded pattern. As he keeps exposing himself to perceived threat, the survival brain generalizes the fear response from the specific environment where the pain actually occurred to any stimuli that risked capital. This is how he triggered to the fear response in the casino while risking only $20. In his mindlessness, he saw this as a form of entertainment. That is not how his survival brain was conditioned to react when risking capital and incurring emotional pain.
Significant pain has been hardwired to be associated with risk now – and will hijack state of mind if not disrupted. Not knowing how else to deal with it because he does not understand how the emotional brain and the psychological mind are intertwined, the triggering to fear becomes so great that Jim has to retreat back to paper trading in an attempt to “refocus” his mind. Unfortunately the brain was never designed to distinguish between biological fear and management of uncertainty. And Jim, like many traders, is clueless about how to deal with it. Until Jim incurred a traumatic capital loss, he never activated the level of primal fear that overwhelms the rational mind. But much like a person develops an irrational fear of all dogs after being bitten by one dangerous dog, now Jim’s mind has developed a self limiting fear of loss that taints the edge he used to have in trading. This is where neural-circuitry meets mind.
Calming the Raging Sea of Emotion
Before he gets to change his newly minted fear of loss which now corrupts the trading edge he used to have, Jim is going to have to learn to manage the arousal of the emotion of fear and its avoidance response to threat. Fortunately he has a clue as to how to do this.
In the casino he actually becomes witness to the arousal of his fear. This is a part of the emotion of fear that you can be trained to disrupt as part of emotional regulation. The arousal occurs before the emotion of fear takes over the mind of the trader. Here is Jim’s description of the arousal of the emotion of fear: “After a couple of minutes of playing the machine I could feel the exact same feelings I get when I evaluate set ups. My heart rate started to increase, my palms started to sweat and I could actually feel small beads of sweat slowly dripping down from my armpits!”
What he does not mention is that his breathing becomes shallow and rapid. The breathing actually started before the rest of the fear’s arousal. This is important because breathing can be used to regulate the arousal of an emotion – not control it, but manage it from overwhelming the trader’s mind. This is because breathing is the tool that can cool the body’s excitatory escalation of the fear reaction to perceived threat. Remember that his large capital loss got associated with loss of life in his primitive emotional brain. Because fear will have a breathing signature that is part of the emotion, breathing can also be used to manage and disrupt the power of the fear response.
By developing bellows breathing as part of managing his fear, Jim is able to calm his fear down. It is still there, but it is now workable and a very different mindset is now possible for him. It is through the calming affect of breathing and relaxation that Jim begins to work with this traumatically constructed self limiting belief embedded into his fear of loss. Now he can do the emotional labor required to deconstruct self limiting beliefs that have gripped his trading in the last 2 years and reclaim his belief in his trading edge. Emotional regulation is not the Holy Grail that changes self limiting patterns and beliefs. What breath training will do give you a tool that allows you to calm the fury of an emotional hijacking down so that you can begin to develop the psychology of peak performance. Before fear is tamed and re-understood, it will block your potential as a trader.
The Take Away
The purpose of this article is to show you how fear creates predictable patterns that govern a trader’s emotional nature (and hence his performances). And by understanding it, the trader learns how to manage the fear response. He now has begun to develop valuable tools and skills to change his relationship to fear and uncertainty. Learning this is an important step toward mastering your emotions and the inner game of trading. You have to equip yourself to build a peak performance state of mind. The first step in this process is emotional state management. Only then do get access to the mind. And it is in the mind that your self limiting beliefs and patterns dwell. This is also where many traders fail because they do not have the tool and skills to work with their emotional storms and hijackings. Effective trading is the pay off. Developing the skills and tools is the emotional labor you will need to invest in to achieve this aim.