How to Stay Cool, Calm and Collected while Trading

Articles on Trader Psychology by Rande Howell, Trader Psychologist




I know what to do when I don’t need to do it.  But when I get caught up in the storm of making decisions while trading, I fall into self-doubt and urgency just when I need to be rational.  For some reason, my mind that knows what to do flies out the door and is replaced by its evil twin which doesn’t know what to do when it needs to do it.  If I could solve this problem, my trading would be on a completely different level.  I’m so close, but this problem keeps whacking me on the head just when victory seems within my grasp.  JG

Why Does Knowledge Fail When the Money is Real?

People believe that acquiring lots of academic knowledge about trading (all those books you own and “sure-fire” courses you’ve taken) and working hard will make you a winner in trading.  Aspiring traders chase knowledge from book to book, from teacher to teacher, and theory to theory seeking the “right” knowledge that will take them over the edge.  And they work hard at working hard.  They work particular hard at hiding from their fear behind data, data, and more data.

Yet, for all their knowledge gained, what happens in the heat of the moment?  Paralysis by analysis.  For the vast majority of traders, they fall apart emotionally and end up trading from a mind consumed by either fear, aggression, or over-confidence.  No matter how extensive the knowledge or how hard the trader is working to win, he/she has neglected the impact of emotions on his or her capacity to trade effectively.

Without emotional intelligence all that knowledge and hard work goes down the drain.  The problem is that traders ignore the impact that emotions have on their being able to stay in the moment with a clear mind.  It’s like having an incredibly excellent Formula 1 racing car, but having a driver (who doesn’t know what he is doing) driving it in a competitive race.  A waste of a perfectly good racing machine.  In much the same way, traders waste their knowledge of trading and their hard work because they don’t know how to use that knowledge under the pressures of trading.

Emotions and the Mind on Trading

The capacity to perform under pressure has everything to do with emotion.  As a trader, you are dealing with emotions whether you like it or not.  Most traders set themselves up for losing long before they actually take a loss.  They enter the ring with fear already tugging at their mind.  First they try to ignore it by focusing on information and data – lots and lots of data.  But that doesn’t work. Then they try to resist it.  And the more they resist the more the fear persists.  They even try to visualize achieving success and conquering their fear, but the fear grows into self-doubt that begins to contaminate their decision-making mind.   Their trading mind then crumbles and their trading performance is comprised.  What started out as a small snowball turned into an emotional avalanche.  That’s the end result of trying to hide emotions behind data.

The trader is missing out on an understanding of emotion that can help them manage their mind during the turbulence of a trading performance.  So, first, let’s start with a basic question:  What is an emotion?

An emotion is not what you think it is.  It can provide you with vital information if you have developed the capacity to work with emotions. An emotion is a biological action potential that coordinates activity between an organism and its environment.  It is not a feeling, although it has a feeling component.  It is not psychological, but it takes over the mind of the stressed out trader.  What I want you to notice is that the emotion, starting on a biological level, is coordinating action – through the body and emergent mind – in response to environmental  factors so that the prime directive of self-preservation of the organism (that is you, the trader) is maintained. 

Emotions evolved in a dangerous world.  By definition, they are built for short-term survival with no thought of tomorrow (long-term benefit).   Emotions were also present, doing their job, long before there was a mind or a psychological being to consider.  When the mind and psychology begin to develop eons after the development of emotions, they (the mind and psychology) grew from and were inter-tangled with the emotional brain.  This is particularly relevant in trading where the probability of potential is the problem to be solved by a brain designed for short-term survival…and emotions experienced in trading are all about short-term survival.

In fact, so interconnected are the emotional brain and the new brain that all thinking is emotional-state-dependent. You, as a trader who wants to improve his/her performance during trading, need to read that last sentence several times until you feel the shock waves hit you.  You do not have a rational mind.  You have a rationalizing mind.  Your thinking mind (left brain) simply produces an explanation for what the emotional brain (right brain) has already decided.  Emotion and thinking are interdependent and cannot be separated, as most humans believe.  This has everything to do with your performance while trading with capital at risk.

And here’s the last thing you need to know about emotions.  An emotion triggers into activity every time there is a disruption to a standard sensorial pattern that the brain (the adaptive organism that it is) has already established.  Notice that we have not talked much about psychology here.  Instead we have talked about the biology that gives rise to your psychology.  Biology and psychology cannot be neatly separated either.  A particular psychology and mind emerges from the emotional brain’s interaction with the environment.

The Trading Mind on Emotions

What does all this neuro-biology turned into psychology look like in trading?   You experience this self-preservation motivated by the instinctual survival of the emotional brain every time you trade.  And especially every time you choke under pressure or get all pumped up and either over-trade or revenge trade.  Think about the last time you experienced Paralysis by Analysis (fear or anxiety gripping the mind and using analysis and data overload to avoid the threat posed by risking capital). 

How about the last time you got out early in a trade and later recognized that you left too much money on the table.  Again you experienced fear that seized your mind and pushes its agenda of short-term survival (take the money before it’s taken away) rather than allowing the logical probability of letting the trade run to target.

On the flip side, think about the over-confidence (yes, that’s an emotion) and euphoria that leads to chasing trades and over-trading.  Notice that these are all emotionally driven decisions that hijack rational thinking.  Until you are able to slow down the emotion and redirect it, things are not going to change.  The familiar patterns are already there.  It just requires the presence of stress in order to grow to the point that your rational mind is compromised.  And that happens on a daily basis in trading.

But if you understand emotions, you can start using them to your advantage in the management of probability.   The key is to understand the components of an emotion.  This will show you where you need to develop strategies and skills so emotions in trading no longer blindside you.  Instead, with skill and understanding, you can learn how to manage the emotion that shows up in a moment of performance.  This is do-able.

The Components of an Emotion

Once a trader has a better understanding of what an emotion is, he or she recognizes that emotions are not optional.  Instead traders need to learn how to manage emotions to ensure consistent peak performance while trading. 

An emotion is composed of five distinct components.  By learning how to work each component, the trader can train him- or herself to manage and master the emotions that have blocked growth as a trader.  These components are:

Arousal – This is the element of the emotion that you feel revving up.  Because emotions are biological in nature, they also have a biological signature.  Knowing this biological signature allows you to use it to spot emotions before they compromise your thinking mind.  In the primary trading emotions of fear, anger, and euphoria the build-up of the emotion in the body, preparing it for action, will increase your pulse rate.  The increased pulse rate is literally the emotion getting the body ready for action.  Not only does the heart rate increase, but the breathing style also changes.  Suddenly the breathing changes as you (the trader) are prepared for fight/flight.  Air is either pulled into the top part of the lung or you begin breathing rapidly, using only the top part of your lung.  All energy is siphoned off from thinking functions in preparation for attacking or avoiding danger.

Once you learn that the heart rate and the breath rate are part of the emotion that accelerate your mind and body for imminent action, you can learn to catch yourself and interrupt this process.  In my work, traders learn to control the intensity of the arousal by managing the way they are breathing – moving to diaphragmatic breathing.  This “bellows breathing” calms the body and emotion down.  

The second aspect of Arousal is body tension.  As the body prepares for fight/flight action, your muscles will tense.  You will notice this tension in your face, neck, shoulders, chest, gut, and legs in particular.  Both the breath and tension are part of the arousal of the emotion.  Training yourself to relax your muscles and manage your breathing can go a long way towards managing the intensity of an emotion.  No trader should trade without Emotional Regulation training.

Feeling – This is the subjective experience of the emotion as it gains strength.  You may feel a ball or knot in your stomach.  You may feel flush.  You may feel heavy. You may feel on top of the world.  What you are experiencing actually is the chemistry of the emotion in the body and the brain.  Once you feel the emotion, it is too late to manage it by breathing and tension reduction. 

At this point the energy of the emotion needs to either run its course or you need to intentionally burn out the chemistry of the emotion.  At this point, many traders take walks, take a run, exercise, or take a break as best practices for dealing with an emotion at this stage.  Once you feel the emotion, more active management (beyond breathing and muscle relaxation) has to be employed.  Why?  Because when you feel the emotion, it is influencing the way you perceive and think.  You are literally under the influence of the emotion.  And until it is burned from your system, you no longer have a mind that can think clearly.  You are in an emotional fog and you need to burn it off.  Until then, you should not trade.  You need to get your right mind back before engaging the uncertainty of trading, or you will simply compound the problem.

Motivation – What is the emotion telling you to do?  That’s emotional motivation.  All emotions direct the body and mind into action.  Fear tells you to avoid.  Anger tells you to attack.  Euphoria (over-confidence) tells you to act without evaluation of the downside.  It is in learning to manage what emotions show up in the moment to manage the possibilities of uncertainty that a trader finds his psychological edge.  This is called approach motivation.  The approach emotion is telling you to be alert, focused, and ready for whatever the market is showing you.

Belief – These are the biases and assumptions that you hold about your capacity to deal with uncertainty.  These are called performance beliefs. They are at the very core of your relationship with uncertainty.  They are not the beliefs you declare you have about managing uncertainty.  They are the beliefs that are revealed in your performances while managing uncertainty and probability with capital at risk.  Those performances are measured by the health of your trading account and by how you deal with fluctuations in your P&L statement. 

Very few people are born with beliefs that allow them to engage uncertainty while risking capital from a centered and calm mind.  Both your biology and (most likely) your psychology are organized around very different assumptions.  Until you are able to re-organize your beliefs about performing in the midst of uncertainty, the promise of consistently profitable trading will elude you. You have to be willing to be willing to change. 

Temperament -- This is your genetic predisposition toward mood.  Because it is genetic in its nature, this is an aspect of the emotions of trading that is really not changeable.  Consequently, I do not address it in my training.

The Process of Self Development

Understanding the nature of the emotions you have been dealing with while trading is a huge first step.  There is no freedom FROM emotion, but there is freedom OF emotion.  Once you see the way emotions actually work to create your trading mind, the next step is emotional training.  First, learn to manage the arousal of the emotion.  Then learn to change the beliefs that you are projecting onto the markets every day without your conscious knowledge.  This is where you harness the power of emotion and mind to effectively engage the uncertainty of trading from a powerful new perspective – moving from instinctual reactiveness to proactive emotional management.

The trader has to take the responsibility to become the designer of the emotions and mind that he or she brings to the performance of trading.  This is the step that eludes aspiring traders.  They keep waiting for things to change outside of themselves.  The change has to come from the inside out.  The mind you brought, with its focus on controlling outcome, is not prepared for the challenges of trading.  But within you lies the capacity to re-program the brain/mind for probability management (instead of survival management).  The tools are there.  You have to be ready and willing to pick them up and use them to change the mind.  Change the mind from a focus on winning in the moment to a focus on process in the moment.  The potential is there.  The question is:  Are you ready and willing to claim the potential of your performance?

Back to blog