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April 1, 2014

Stress Factor

Today's traders must manage their emotions in order to reach peak performance.

By Rande Howell

Risk taking, bringing with it the emotional highs of success and the emotional lows of failure, is an inherent but misunderstood part of the trading environment. Too often, because of their lack of understanding of emotion, traders do not recognize until it is too late that their trading mind-sets have been compromised.

So the question remains: Can a trader better manage the mind that calculates and executes that risk for more consistent reward? On a more operational level, after a string of successes and growing confidence, how does a trader not get sucked into overconfidence, euphoria or exuberance and start minimizing risk to his or her detriment? Or, after some significant losses, how does a trader manage the emotional pressure to perform profitably before things get worse? [IMGCAp(1)]

At the root of better long-term performance is a better understanding of emotion and its impact on the mind that trades. First, emotions are not optional. The emotional right brain and the rational left brain work cohesively together to interpret market information and make decisions. The emotional brain makes a decision, and your thinking brain produces an explanation that supports that decision in the heat of the moment. This is the glitch that is often overlooked, to a trader's detriment. And there is no better place to look to see this partnership in action than risk taking.

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Once a trader discovers that all thinking is emotional-state-dependent and that he or she is an emotional being rather than a rational being, the mindful management of emotions while trading becomes an indispensable skill for developing a peak-performance mind. It is the emotionally balanced mind that maximizes the potential of risk taking in the face of uncertainty.

 

A NEW UNDERSTANDING OF EMOTION

Building a more effective mind for the management of uncertainty begins with better knowledge of emotions. First, emotions are not psychological. They are biological, and they take over thinking. In fact, thinking (the behavior of neurons) is emotional-state-dependent; this means that the quality of perception you are capable of is dependent upon the current emotional state of your brain. Perception and analysis present very different potentials when seen through the lens of distress or euphoria than when viewed through the lens of disciplined impartiality.

Anyone who has made decisions under the pressure of the moment will have experienced this. When under pressure and in a cloud of distress, a trader thinks from the emotional state of fear ("distress" in the language of stress management), giving rise to the worry-based thinking of second-guessing his decisions and acting for short-term protection. Yet, once the trader calms down, the decisions are reviewed from a state of mind rooted in a rational emotional state. From the vantage point of this emotional state, his thinking is completely different, and he now finds no reason to change the course of his decisions.