Turning Fear and Aggression into Performance Assets in Your Trading

Articles on Trader Psychology by Rande Howell, Trader Psychologist




Almost all traders have experienced the debilitating effects of fear causing them to hesitate of freeze at stressful times.  Most have seen how unbridled aggression can turn into destructive over-trading and revenge trading.  The problem is not the actual biological arousal of fear and/or aggression.  These emotions automatically trigger when the brain encounters uncertainty.  Rather, it is the way your biology is wired to respond to the vulnerability that arises out of encounters with uncertainty.

The problem is the way you train (or don’t train) yourself to respond to uncertainty.  In particular, it has everything to do with the way you manage the emotions of fear and aggression when the brain recognizes it is no longer in control of outcome.  You need the increased concentration, focus, and alertness that come with the emotional arousal of these survival emotions.  But due to not understanding how emotions and cognition work together as a unit, the trader mismanages the challenges of the situation and the emotions surge into the fight/flight response of the sympathetic nervous system. 

Suddenly the energy of the emotion, so useful at a managed level, becomes destructive to trading performance.  If you are to build a long, successful career in trading, you are going to need to learn how to manage emotions so that they can deliver the kind of mind needed for peak performance trading.  This is the Emotional Intelligence aspect of trading that struggling traders simply do not “get”.  They keep trying to control emotions by sheer will or denial even though they keep getting feedback in the form of a hijacked trading mind that emotions cannot be controlled.  Yes, it is true that emotions cannot be controlled, but they can be managed to produce the mind that engages uncertainty.

Understanding the Emotional Response to Uncertainty

Uncertainty often was a dangerous thing for our caveman ancestors.  The nice safe sanitized environment that that you now live in would be alien to our caveman ancestors.  Back then, there were real biological threats possible at every turn.  Encounters with bears, saber-toothed tigers, and even other dangerous people were common in those days.  And it is within this environment that our brain developed. 

The need to control environment and outcome to maintain safety was real.  So over countless generations, evolution wired into the human genome powerful survival mechanisms and skills to aid in the chances of the caveman’s survival.  The fight/flight response of the sympathetic nervous system was one of those traits that became part of the human survival repertoire.  To the survival brain of our caveman ancestor, there was no distinction between biological threat and psychological discomfort, for they were one and the same.     

Today our emotional caveman brain, so focused on survival, unhinges the thinking brain of the modern human trying to make a go of trading.  The modern human attempting to be a trader may talk the game of rational thinking applied to probability management.  But underneath the talk of being rational is a caveman in a life or death struggle to survive.  Under stress (when it is not managed effectively), your caveman emotional brain loses its rational cool in a flash and acts on survival instinct.  Logic is simply missing in action.

If you have ever experienced the frozen finger of hesitation or the aggressive pursuit of a trade that might get away, you have experienced your inner caveman acting to save himself (or herself) from the perception of a dangerous and uncertain situation.  This is where management of a powerful survival drive, rather than trying to control an instinctual part of your human condition, becomes imperative.  The question is:  How do you do that?

Understanding the Stress Response for Your Advantage

First, what is stress?  Here it is defined as your organism’s (you know – the trader who is trading) response to the challenges of living.  Those challenges imply encounters with uncertainties – those are the challenges of life.  The trader is experiencing these challenges as risking capital within an environment of uncertain outcomes.  This is where it gets interesting for the evolving trader.

The emotional survival brain of your inner caveman is biased to interpret the situation of risking capital (life) where he is no longer in control of outcome (uncertain no matter what your rational mind is trying to tell you) as danger.  This encounter with uncertainty and risk produces vulnerability in the mind of your emotional caveman brain.  It is encountering a stressor in its environment that has to be dealt with.

After an instinctual emotional appraisal of danger caused by that sensation of vulnerability, your heart rate accelerates.   The sympathetic nervous system is automatically triggered and the stress hormones of adrenaline and cortisol are dumped into your bloodstream and your brain’s neuro-transmitters crank up alertness, focus, and a readiness for action.  This is good for the trader.  When managing uncertainty where there is real risk at stake, the trader wants an alert, focused mind that is ready to take action. 

The brain is engaged at the point and is on high alert.  What happens next is where the trader has to develop the Emotional Intelligence to manage how this stress is managed.   Is the stress used to produce a peak performance mind ready to manage probabilities?  Or does the trader try to control the emotional response and thereby activate the fight/flight response (where he loses emotional control of his response to uncertainty and risk)?  This is the magical moment.

Up until this moment your brain’s stress response has worked as it is supposed to do.  Due to your encounter with uncertainty, your brain has produced a high alert state that allows you to think and discern whether the stimulus is a danger that is threatening you or something that is to be approached with curiosity and concern.  Typically a primitive part of your limbic system called the thalamus evaluates the stressor and determines whether sensorial information is sent to the thinking brain for assessment (you remain patient and rational) or it takes a shortcut and sends a danger signal to the amygdala telling it to rev up the body in preparation for a fight/flight response to the stressor.

Initially the trader is evaluating the trade from a focused, alert mind that is concerned about the situation and has the capacity to make rational decisions in the face of uncertainty.  But without training, the brain interprets the stressor as dangerous and threatening.  And the initial primed mind is overwhelmed by the fight/flight response of the sympathetic nervous system.  The body has charged itself up to fight (aggression) or to flee from (fear) the risk associated with the uncertainty.  The trader’s cranked up body has hijacked the focused mind and has over-responded to his/her needs.  Something very good has become very bad because the brain was never taught to discern between biological threat and psychological challenge.  The biological threat (cave man responding to a close encounter with a saber toothed tiger) represented by the risk contained in uncertainty has shifted from curiosity and concern (needed for the psychological challenge of risking capital with uncertain outcome) to fear and/or aggression.

So the automatic assessments that are at the core of the autonomic nervous system have to be re-trained if the trader is going to learn how to use emotion to create an effective trading mind.  That trading mind might must be able to intentionally discern the difference between biological threat (which is going to trigger the fight/flight response of the sympathetic portion of the autonomic nervous system) and psychological discomfort.  Psychological discomfort will trigger the stress response to produce a mind that is effective for managing challenging circumstances from a patient, focused, alert, and disciplined mind.  Emotional arousal does happen in this scenario.  But the emotional arousal leads to an optimal performance mind because the stressor is not being evaluated as a biological threat.  It is being evaluated with the heightened alertness of concern as an emotion rather than fear.

Using Your Mind to Train Your Brain

After the fact, it is easy for the trader to see the error of his or her ways.  But being an armchair quarterback is not helpful.  In evaluating your response to the stressors of trading, a fearless inventory has to be taken.  The speed of trading from action to consequence is lightning fast.  Traders find out quickly the consequences of hijacked thinking on the balance in their trading accounts.  Mustering the conviction to change behaviors that do not work is the challenge for the trader.

Two different neural pathways have been described in this article.  In each the trader is confronted by the same stressor.  In one, the trader’s brain/mind responds to the stressor by becoming more focused, alert, prepared, and disciplined to manage the risk of capital with uncertain outcome.  The trader has trained his brain and mind to stay within a range of emotional arousal that allows him to manage uncertainty from a point of view of concern.  Heart rate did increase, preparing the mind to work at an optimal level.  The sympathetic nervous system did kick in to a degree.  The mind became alert, but the body stayed relaxed.  This is what I refer to as Traders State of Mind.  And it is optimal for managing the challenges of uncertainty, risk, and probability.

The other route was also triggered by the same stressor – facing uncertainty with capital at risk.  The difference is the sympathetic nervous system’s response to the stressor shoots past the stress levels where an optimal mind is an option.  It, in its automatic appraisal, saw only biological threat.  The trader had no way of dampening the emotional triggering at this point.  He or she overshot optimum stress that could have allowed him or her to deal effectively with the probabilities of managing uncertainty – the unknown.  Psychological challenge (where concern is needed) and biological threat (where fear and aggression is needed) were undistinguished.

The trader in both cases is the same.  The difference is time and training.  In the preferred route, the trader learned how to cool the triggering of the fight/flight response so that it did not hijack the concerned needed to manage psychological challenges at optimum levels.  Once he learned how to emotionally regulate the emotional response to stressors so that the fight/flight response was not automatically triggered, he learned how to use his emotions to create a mind that engaged uncertainty not as biological threat, but as challenge.  He came to realize that there is no freedom from emotion, but there is freedom of emotion.  No longer was he trying to control his emotions and outcome.  He now understood that was an ineffective myth. 

By learning how to feel the emotions and let them be real, he also learned that he could regulate their intensity and call forward other emotions in his human repertoire to build a mind that was set to embrace the challenges of uncertainty.  In essence he was able to use the stress response to his advantage.  He knew the optimal levels of arousal between concern and fear and was able to maintain emotional sobriety as he engaged the challenges of trading.

Emotions are used, not ignored.  As you learn to work with them, you also learn how to master the self that engages the risk of uncertainty.  This is the step that requires conviction and courage to implement.  And it is the distance that separates the consistently profitable traders from the multitudes of struggling traders who refuse to harness their emotional nature for optimal performance.  The road to failure is wide and you have a lot of other failed traders with whom to console yourself.  The path to the optimal mind for trading is narrow and few will find it.  Not because it is difficult to see.  But because change from the inside out is required.  This is where the road splits.
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