When it comes to trading, the general consensus is that we should be able to control our emotions in order to succeed. We shouldn’t be greedy, fearful, impatient or easily disappointed because we may not trade objectively. Therefore, the only thing that seems reasonable is to try hard in order to eliminate emotions.
Anyone who has traded knows that this easier said than done. You may have read that the key to not letting emotions ruin your trading performance is to take care of the practical sides of trading such as having a trading and money management plan, education on technical and fundamentals, demo practice etc.
You may have also heard that you should strive for emotional control because the highest percentage of trading success boils down to psychology. However, even if you have a good trading and money management plan, you may have failed to follow it and instead let your emotions drive your trading. This has happened not because you are not aware of the impact that emotions exercise on trading, neither because you didn’t want to control your emotions. You just couldn’t control them. It’s somehow impossible to pose an internal discipline on ourselves so as not to feel; this doesn’t only apply to trading but to every situation in life.
So although we know that we are not supposed to get overwhelmed by anxiety or anger, we do. Is it because we are not strong enough or disciplined enough? It’s actually neither. The answer lies in a fact that is contrary to common sense, but newer psychological approaches (such as Acceptance & Commitment Therapy) constantly validate it: We are fighting a battle that cannot be won. And paradoxically, the more we are unwilling to feel the difficult emotions of trading, the more we will have them and the more they will drive our actions. The struggle for emotional control is futile. Attempting to control or avoid emotions can often be more damaging than beneficial.
But how is that the struggle for emotional control can be detrimental to trading performance?
When we experience fear & anxiety, we want to stop feeling those emotions. It is not only uncomfortable but it jeopardizes our trading objectivity. In order to control these feelings, we may close/reduce our position or engage in other risk aversion strategies. Risk aversion comes not from feeling anxious but from trying to stop feeling anxious. This strategy may have a short-term benefit such as a sense of relief, a small profit or breaking even but it doesn’t usually serve the long-term goals we may have as investors.
Another example is regret when we miss an opportunity or take a risk we shouldn’t have taken, we may feel regretful. But as with fear and anxiety, we want to get rid of the discomfort that regret causes us. Wanting to avoid any more regret in consequent trades, we may choose to exit a winning trade sooner or stop a losing trade far too late.
Even when something exciting happens in the market like, for example, a big move, we may find it difficult to withhold the discomfort that is experienced from not jumping in a trade. We may be telling ourselves that we are going to lose the opportunity for profit and get anxious and uncomfortable about not trading. In order to end the unpleasant emotions associated with the thought “I‘ll miss out”, we may choose to open a risky, unplanned trade.
In all situations, our first instinct is to try and eliminate, get rid of or avoid the uncomfortable emotion. But because we are wired in such a way that emotional control is impossible, sooner or later we will end up feeling disappointed in our inability to trade emotionlessly. Our infeasible struggle to control emotions will possibly cause us more uncomfortable emotions.
Control and the struggle for elimination of stressful thoughts are also problematic
Our emotions are closely intertwined with the thoughts we make. Unhelpful thoughts cause uncomfortable emotions. We may therefore often tell ourselves that we shouldn’t think negatively about previous losses or about past mistakes. We may tell ourselves that positive thinking will be helpful so we should just try and practice it. But it’s difficult to just program your mind to not think of negative possibilities, isn’t it?
A typical example that shows the impossibility of thought suppression and control is when we are asked not to think of X.
“Do not think of a white rabbit. Don’t think of a white rabbit happily running about a green field with other rabbits. That’s all you have to do for the next minute or so. Just try not to think about the rabbit”.
Most people get images or thoughts of the rabbit during this exercise or try hard to think of other thoughts so they “cover” the rabbit thought. But besides impossible, trying to suppress and control thoughts is exhausting.
Emotions cannot harm us or our trading
Only the way we respond to them can cause problems. If we view them as dangerous, harmful and threatening we will try to avoid them and eliminate them at any cost. As it is explained above, the struggle for elimination and avoidance can backfire and strengthen the very emotion we try to fight, causing us to make trading errors. If we have only tried the elimination strategy so far and we know that it doesn’t work, then it’s about time for a radically different approach.
Becoming a mindful trader
Mindfulness has been defined as “paying attention to the present moment, on purpose and non-judgmentally”. It may be a difficult notion to grasp for someone who hears it for the first time. In order to understand mindfulness, we must get to know the way that our mind works. Most of the times we are not aware of our thoughts or of how our thoughts invade our experience. Have you ever been on a bus or a taxi and then realised that you were unable to remember the journey? Or gone from one room of the house to another looking for something and then forgetting what it was? There are so many examples of distraction and getting lost in thoughts and emotions; the trouble is that most of the times we do not even realize that such thing has happened. Our thoughts are sneaking in with the skillfulness of an experienced intruder. We are on automatic pilot, the basic culprit in sacrificing the present because we are unknowingly sunk in the past or the future. Mindfulness is the antidote to mindlessness and the workings of the automatic pilot.
Becoming a mindful trader means:
- Observing our thoughts and emotions as they come non-judgmentally (e.g. “I shouldn’t be feeling this” is a judgement)
- Be willing to allow unpleasant emotions arise without fighting them
- Check if emotions carry a message that will help us trade better or some valuable piece of information
- Learn to view thoughts, memories and emotions as passing mental events that are not necessarily real
- Practice not believing or acting on what unhelpful emotions & thoughts are telling us to do (e.g. “I am disappointed I missed this trade yesterday, should grab any opportunities today”. Your thoughts tell you that it is important is to grab any opportunity. The emotion that drives this argument is a disappointment. Do you need to obey to this order? If it serves your trading goals, you may do it, but if it doesn’t, can you observe how’s your mind trying to sell you this idea and then just let it pass?
- Be on the present moment, on what happens in front of our screen now, rather on what happened or what may happen
There is no point in trying to eliminate what’s part of human nature-emotions. We just need to be focused on the now, and observe how our mind wanders incessantly in the past and the future, hooking us with various arguments that divert our attention from what really matters: trading according to our values and goals.