As a trader, every time you open your platform you must handle emotional winds that encircle the trade environment. In fact, you could arguably say that despite the average trader’s desire and intention of avoiding the Trade Winds of emotional upheaval, he/she will all too often fall prey to the destruction and mayhem that out-of-control emotions can cause. Even for those who are disciplined, meaning that they manage much of the turmoil associated with trade winds, emotions are always lurking under the surface ready to turn a potentially profitable trade into a loser.
Here’s something interesting, there are many credible and serious trade instructors who say that for traders to be good they must be emotionless. This is not a credible statement as emotions are facts of life and, whether we want them or not, they are with us till the end. Emotions like fear, greed, anger and anxiety, if aggravated by conditions in the trade, can cause even well-heeled traders to abandon all logic and fall into an emotional cauldron that turns decision making into a vicious game of whack-a-mole driven by the distress of errant emotions and the attempt to purge them – all connected to pleasure and pain.
Pleasure and pain are major emotional reactions to experiences surrounding situations or conditions that invoke process upheaval; such as, confusion and rule violations that trigger chaotic attempts to regulate the price and the feelings associated with trying to control something that is impossible to force. The other aspect of pleasure and pain is that both are used as focal points for information that is encoded and saved in long term memory to be recalled in another situation at another time. However, they are not remembered with the same intensity or fullness. Pain is remembered much more than pleasure. Pain is associated with survival. Those things that cause havoc, disruption, and distress are identified as very important and promote the survival of that individual.
Another way of looking at what we do and how we do it (both of which are profoundly connected to the process of moving toward goals) is through IQ, EQ, and YQ. These references, IQ – Intelligence Quotient, EQ – Emotional Quotient, and YQ – Purpose (or Why) Quotient, represent a source for achieving one’s aims. (Why refers to a trader’s compelling reason that encompasses the driving force for taking action).
The Results Formula
It all begins with the equation T + E + B = R or otherwise called the Results Formula which grew out of CBT (Cognitive Behavioral Therapy), the gold standard of mental health treatment that outstrips most treatment modalities in terms of efficacy.
In this instance the T = thoughts or any cognitive process or expression. There are several components of a thought or cognitive expression; some are: images, core beliefs, biases, values and attitudes. Most of these thought components speak for themselves; however, core beliefs have more impact since they are either empowering which do not require correction, or they are limiting, irrational or negative beliefs born out of one or more painful experiences, usually at an early age. They form the foundation of system failures that evoke behavioral breakdowns and awful results. These core disempowering beliefs are mostly unconscious and they immediately trigger an emotion.
This leads us to the E, which stands for emotion, in our formula. When triggered, emotion can begin to intensify as conscious and unconscious doom & gloom thoughts related to loss throw gasoline on the emotional fire. Then an urge begins to enter into the consciousness of the trader. This urge is directly connected to behavior.
The B or behavior in the formula is usually associated with something that the trader believes will reduce the advent of the loss…like moving a stop or exiting the trade prematurely, definite rule violations. However, let’s be clear, even though the concept of loss is intricately associated with fear of loss, it is not the loss that is driving this train. The urge is caused by the discomfort, distress and disruptive pain related to the original event – which for the trader is often seeing price moving toward the stop.
In the trader’s mind this means that he/she is going to lose. Losing is a deeply held concept that relates directly to core beliefs. One such core belief that just about everyone on the planet has but is probably not aware of is, I must always win. As a core belief, it is easily activated in any form of competition, like a board game or a trade. It can create anxiety as soon as the trader opens the platform.
Here is another example. When, for instance, an event (like the price action inching toward the trader’s stop-loss limit) is perceived as threatening, an interpretation ensues brought on by the trader’s attempts to attribute a meaning to the event. Now, meaning is an extremely important human function that provides the next structural move of the trader; and when a meaning has been identified it controls what is perceived and how it is perceived. For instance, the trader thinking the possibility of being stopped out is bad in the trading example, which provides the impetus to mitigate the situation by moving their stop. It is akin to having a lever and a fulcrum, with the lever as the meaning providing the strength and momentum of the behavior which is the fulcrum or response that provides the effect.
Now, if the anxiety were fueled only by the thoughts of loss and not the associated pain, then the trader would be impervious to what the loss means and would be more interested in protecting her capital. Protecting capital is the first rule of trading according to Warren Buffet, who says, “The 1st rule of trading is, don’t lose money; the 2nd rule is don’t forget rule number 1.” To the serious trader this is a compelling reason for allowing the stop-loss to do its job.
At this juncture we have established that the behavior of the trader is contingent upon and connected to what they are telling themselves or rather a core belief which, in this instance, is I must always win. This core belief has created a red herring (the potential loss) and has dismissed to a degree the impact of the pain.
This is a MAJOR point, one which many traders miss to their dismay. In other words, what they need to work on diligently and deliberately is the management of the pain not the impending loss. In fact, the lost leader here is the realization that the trader’s power lies in their ability to manage the pain at every turn in the trade because this is where the impetus, the urge, and the subsequent behavior or rule violation are all outgrowths of and intimately connected to the pain that they’re experiencing.