How to Maintain Emotional Control During a Surging Market

Articles on Trader Psychology by Rande Howell, Trader Psychologist




Keeping the Trading Mind Poised for Disciplined and Clear Thinking

   “It’s up and down.  Up and down.  One minute I’m on top of the world; the next minute I’m gripped by fear.  It’s like that cartoon where two people are riding in a roller coaster car.  As they climb to highs and fall to lows, each one feels the mania of exhilaration then the agony of defeat.  That’s what it’s been like for me the last couple of months.  Keeping my sanity during the ride is challenging.”

   Have you felt the surge of the markets during this power climb?  Can you feel your pulse accelerate as you witness its pull and feel the rush of adrenaline in anticipation of epic opportunity?  In particular, have you felt the crazy rise of Bitcoin? How has it affected the mind you bring to trading?  Have you felt that there was an urgency brewing to take advantage of this moment?

   Have you pounced on the opportunity, ready to ride the wave, expecting to take advantage of this powerful wave of growth?  Or have you opted out, believing that the bubble is bound to bust?  No matter which way you have been swayed, it is easy for the excitement and/or danger of this market to trigger you emotionally.  And by affecting you emotionally in this charged moment, the quality of the trading mind that you bring to the management of this uncertainty is also impacted. 

   And, therein, lies the problem for the trader/active investor.  Everybody seems to be rushing in now, ready to grab the money while the “getting’ is good”.  The excitement is brewing at an ever maddening pace.  The big problem for the trader or active investor is to keep his/her head together rather than being sucked into the vortex of irrational exuberance.  That is the danger for the trader/investor.  If he can keep his emotions managed, then the opportunity of living in this surging market can be performed with a stable state of mind – advantage to the trader/active investor. 

   But if he is seduced by the dream of making a whole bunch of money (as an outcome) fast, then the opportunity of living in this moment of a surging market is executed from a mind consumed by euphoria – advantage to the traders/investors who bet against him.  Or if the surging market is approached with a mind rooted in fear of potential loss (the bubble has to burst!), the trader simply stays on the sidelines and watches – and dreams of what could have been.

   How do your emotions affect the opportunity in this moment of historically surging markets?  Let’s find out why it is so important to manage the emotions that engage the surging roller coaster ride of this market.

Emotions Shape the Mind You Bring to Interpret the Markets

   Emotions have far more impact on thinking than the vast majority of traders or active investors recognize.  In the emerging field of Emotional Intelligence, what is now recognized is that all thinking is emotional state dependent.  That means that the way you think about the markets, the way you perceive the markets, and the way you interpret the markets is dependent on the emotions that have sway over your brain as you engage the markets.  There is not a time you don’t have emotions affecting your capacity to think and assess – it’s just a matter of which emotions.  As a trader are you aware of, and managing, the emotions that give rise to thinking and cognition?  Rarely are traders/active investors capable of doing this without deep experience and training.

   In fact, you do not have emotions – they have you.  Literally, your Thinking Brain grew out of your Emotional Brain in the distant past.  And, as a consequence, there is an intricate network of fibers (neural pathways) leading from the Emotional Brain into the Neo-cortex – that is why emotion has so much sway over thinking and perception.  But unfortunately, there are few communication pathways back from the Thinking Brain into the Emotional Brain.  That’s why you have so little control over your performances when you are under stress. Also, by not understanding your emotional nature and its impact on cognition and perception, you are left at a distinct disadvantage when trying to contain or manage emotions.

   The big pill for the trader/active investor to swallow is that you are not a rational being that can be influenced by emotion.  Rather, you are an emotional being that has the capacity to think from the emotional state of reason.  This is why it is enormously important to manage the emotions that give rise to thinking and perception, particularly in a surging market. Now let’s take a look at the prevalent emotions in a surging market to see what you need to be on guard against as you negotiate the uncertainty, risk, and reward of this historical surging market.

The Emotions of a Surging Market

   The key to managing uncertainty with capital at risk is to maintain a mindset that is rooted in the emotions of discipline, patience, and impartiality.  These emotions create a mindset that manages uncertainty for long term advantage rather than for short term survival.  This is exactly what is needed for a surging market, where temptation and fear become big motivating factors. But this is easier said than done.  There are certain emotions that act like dangerous contagions in surging markets for which traders need to be prepared. 

   The first is euphoria, or what was called “irrational exuberance” by Alan Greenspan.  Euphoria is an emotional state that “makes you” believe that the good times are going to roll on forever.  The problem with euphoria is that it feels good.  And who does not want to feel good?  The problem is the “feeling good” is the feeling element of euphoria, which means that the chemistry (all that reward center dopamine) is influencing the way you think and perceive.  You are no longer thinking long term from an emotional base of discipline, patience, and impartiality.  Instead, when under the influence of euphoria’s dopamine rush, you are thinking and judging from a short term perspective that minimizes the perception of risk. 

   Everything is reward (that’s dopamine’s effect on perception) as far as the mind can see, and risk is pushed aside.  And the mindset becomes over-confident rather than humbly confident.  The behavior is that, under the influence of euphoria and an over-confident mind, traders take risks that they never would have when in a sane mind.   The problem is that euphoria (or feeling good) shifts the mind from a long term perspective to a short term perspective where risk is ignored or minimized.

   The second is greed.  You see all this money being made.  And you want to take as much as you can before the moment is gone.  And you believe you have to act with urgency before somebody else gets what should be yours.  “Take it while the getting is good” – that’s greed.  Notice that greed is outcome-focused, rather than process or performance oriented.  Rationally, you may know that you cannot control outcome, only performance. Yet as a primitive survival emotion, greed has a short term focus and has an enormous influence on reason.  Greed will have you believing you can control outcome – but only if you act now.  Greed pushes a long term perspective aside (needed for effective management of risk and uncertainty) and replaces it with a short term focus on the feeling of power and reward.  There is the urgent need to act now rather than acting from a long term perspective rooted in discipline, patience, and impartiality.

   The third emotion to be on the lookout for is lust.  If you have ever over-traded, you know the feeling state of the emotion of lust.  Jumping in and chasing profits is a thrill.  It is often described as mania.  You just cannot stop yourself. Your mind is consumed by lust (not just the feeling good overconfidence of euphoria).  If you have ever thought, after you have burned through a bundle of capital, “What just happened?  What happened to me?  What was I thinking?” – you have fallen into lust while trading.  In a surging market the impulsiveness of lust is easily triggered.  It is easy to get sucked into the mania of a surging market.

   The fourth emotion to be mindful of is the fear of missing out (FOMO).  You see all this opportunity pass you by.  And with each tick, you feel more urgency to jump into this bull market.  The fear is that the opportunity of this surging market will pass you by and you will be left on the sidelines with nothing to show for it.  The FOMO (the fear of being left behind) leads to the urgency to act without the due diligence of your rules.  Instead of planning your trade and trading your plan, you make exceptions to hurry up the process before the train pulls out without you.

   The final emotion that we will cover is the fear of loss.  Many traders are watching this surging market and are afraid to get in because they fear the market will correct itself just as they get in.  It is this anticipation of bad things happening to them in the near term future that paralyzes their capacity to take advantage of the opportunities that are also present at the very same time that risk happens to be present.  It is the fear of potential loss that keeps them from acting.

How Does a Trader Keep a Level Head?

   Once a trader recognizes the impact that emotions have on perception and performance, the first job of the trader/active investor in a surging market is to calm his emotional circuitry down.  Without calming his emotions down, he/she is liable to having his or her trading mind swept away by one, or a combination, of the emotions described in this article.  But to calm the emotion down, you have to notice the emotion BEFORE it builds up a head of steam and hijacks your mind.

   How do you notice an emotion?  Because emotions are biological in their nature (they take over your psychology), they have a dependable signature that allows you to observe them.  I train my clients to watch for evidence of emerging emotions by paying attention to their breathing, their muscle tension, and their heart rate as primary indicators of the presence of an emotion.  Emotions have a specific signature that combines breathing style, muscle tension, and heart rate.  As you trigger the excitatory arousal of an emotion, your breathing changes, you develop specific muscle tension in your body, and your heart rate accelerates.

   Once the excitement of euphoria, over-confidence, greed, and/or lust emerges, the body (and then the mind) change, because the body and the mind are preparing to chase opportunity.  Breathing stops or becomes shallow.  Muscles tense, getting ready to spring the body into action.  Heart rate accelerates, pumping blood and stress hormones into the system as it prepares for imminent action.  If this is allowed to happen, the capacity to maintain a disciplined, patient, and impartial mind is compromised.  And you no longer have a trading mind that can make sound decisions because the reasoning centers of the brain have been taken offline.  Everything is focused on the aggression of chasing opportunity (i.e. in caveman days – of chasing prey).

   Because these emotional states give rise to dopamine, you feel confident, powerful, and correct in your convictions - with little or no evidence.  The emotion simply takes over and the mind needed for performance and risk management is pushed aside.  This is why it is so important to observe the emotion before it takes over the creation of the mind you bring to performance.

   In learning how to observe emotions (even the ones you think you would like to feel), you can alter them by emotional state regulation.  Using bellows breathing and muscle relaxation in the environment of trading, you can control the intensity of the emotion so that it does not alter your trading mind.  It takes work, but if you do not do so, you will stay stuck in the repeated impulsive hijackings of the trading mind that are so common in bull and surging markets.  If you are going to become a proficient and consistently profitable trader, it is simply a skill that you must acquire.

Beyond First Aid – Building the Mind for Trading

   Developing a knowledge base in Emotional Intelligence and learning to regulate emotions is really the start of trader self-development.  The real key is to become an emotionally intelligent trader, learning how to use emotions to your advantage.  You will always be facing uncertainty and risk in trading and active trading.  Therefore, without a commitment to re-training, you will always be triggering the fight/flight response of the autonomic nervous system – unless you retrain your default survival programming.  There is no freedom FROM the triggering of emotions in responses to the challenges of uncertainty, opportunity, and risk.  But there is freedom OF emotion by learning and what emotions emerge to form the trading mind and practicing the calming of these emotions. 

   This is the key to keeping and then designing the mind that you bring to the management of uncertainty, opportunity, and risk.  As you feel the surging of the markets, you experience old, primitive responses that are based on survival – not long term success.  As a human being who trades or actively invests, an enormous opportunity is open to you.  You can change the way your biology, brain, and mind respond to the uncertainty, opportunity, and risk of the surging market.  It creates a whole new ball game about engaging the markets in such time.  Instead of being sucked into the old narrative built for survival in another time and place – you can become the designer of your mind that engages such powerful moments in a surging market.

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