The New Discovery That Has Massive Implications For Us As Traders
Emotions in trading may lead to bad choices. Find out how to protect you from yourself
The latest discovery from brain science suggest that an insult can literally be just as painful as physical injury. Apparently our body does not distinguish between the two and the very same section of the brain lights up whether we’ve been hit by a car or are insulted at a party by our best friend.
That new discovery has massive implications for us as traders. Scientists now believe that in order to perform well and live healthily we need to protect our psyche as much we do our body. After all no one seriously tells you to “walk it off” when you break a leg, yet we are constantly told to shake off emotional pain like it’s a minor nuisance.
When it comes to impact, nothing packs more painful emotions than rejection. Believe me. I know. In another life I used to go in to meeting after meeting with the latest great bond or complex derivative in the city. I would try to sell it to disinterested institutional investors and I was more often rejected than not. Scientists view it as a remnant of our tribal past when ostracism from the group literally meant death on the Savannah. Indeed, to this day, loneliness is the single biggest non-physical killer of human beings. That’s not a new discovery.
Of course in trading nothing says rejection like a stop out. That is basically the market’s way of slapping you silly. It triggers all those horrible fears of being voted off the island as your money dwindles and you can no longer be “part of the group”. But you need to get your emotions in check to trade.
What’s even worse is that these emotional pangs of pain cause us to lash out wildly at the world. Just like you have almost a reflexive need to punch a wall after you hit a bedpost bruising your leg, so too when you are emotionally hurt you have a need to “hit” the market. In all those cases of course you go from bad to worse. In addition to a sore leg you now have busted knuckles and probably even more losses in your Betfair or Matchbook account.
So what’s to be done?
Psychologists don’t have any great answers, except to tell you to be much more mindful of your emotional state and treat your emotional health just as seriously as your physical well being. One trick that seems to work is to distract yourself with a completely different task whenever you feel emotional pain. Scientists have discovered that even 2 minutes on a non related activity like doing the dishes can really calm the psyche and mitigate the worst effects to emotional pain.
Personally, I leave the dishes to the dishwasher and like to finely slice vegetables. Really, really fast. I’m as good as Gordon Ramsay. Really. The side effect is that at MOM Towers here in Malta we usually have fresh vegetable soups most days with a new discovery of flavours occasionally.
Distraction is a valuable tool in trading as well. Certainly it’s worthwhile to step away from the screen, do 20 push ups and maybe go buy yourself a cup of coffee before engaging with the market again. But who are we kidding? Stops usually come during the last couple of minutes in the market and even a kitchen fire couldn’t drag us away from our screens during high volatility action.
That’s why distraction is not enough. Emotions can run high. To protect yourself emotionally from the daily cruelties of the market we need abstraction as well. We have to stop thinking about trading as money. We have to even stop thinking about it in terms of percent return. We just need to focus on ticks. Each trade is a tick won or a tick lost. Don’t focus on anything else. Your job is just to make ticks, like assembling bricks for a building. Sometimes bricks crack, but you just keep building the wall.
Many years back I stopped manually trading on Betfair. I made a discovery. At the same time I also set a friend up using his account and the same automated strategy I use today on my account but with one major difference. It literally trades the smallest possible size.
My friend wasn’t bothered about this account for a number of reasons but he funded it with £1K and to this day has NEVER made a withdrawal. No interest = no emotions.
In this account my friend never cares about money or return or even being stopped out – because frankly it is ridiculously minuscule compared to the levels most traders use. But here is the interesting thing. Once in a while I’ll ask him to check his account and we are usually pleasantly surprised at how it’s grown. That’s of course because I never trade it. I created an abstract layer and built a tool to protect me from myself. For him.
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