Trading is an incredibly psychological game. Some suggest it’s 90% psychological. Whatever the figure is, if you fail to address the psychology of trading, you are putting yourself at a severe disadvantage and potentially missing out on a trading edge.

A critical challenge most traders face at some point is losing control of their emotions, going on tilt and trading aggressively. Taking a dumb trade or having to deal with a bad beat can cause a trader to lose trading discipline and become reckless.

In part 1 of Dumb Trades, Bad Beats and Going “On Tilt”, I addressed some of the consequences of a raging chimp and trading scenarios where it might happen. In part 2, I want to explore some of the things which you can do to get your chimp on a leash and help you to avoid making emotional trading mistakes.

Emotional Balance, Trading Preparation, Absolute Focus, Autopilots & Safety Belts

The thing is, I’m fairly confident that some folks who are reading this will want a silver bullet for the problem. But unfortunately I’ve none to give. There are a number of components to an emotionally stable chimp and they take some effort to really integrate deep into a trader’s psyche. Individually, each idea is useful. But as part of an overall system, they can act to increase the confidence and emotional capital (and emotional capacity) of a trader which in turn, can help to manage an agitated chimp. They comprise of: –

• Creating a happy chimp environment (read: avoiding situations where you might lose control)
• Helping a chimp to calm down quickly
• Creating a fail-safe way of interrupting a raging chimp

Trading Preparation

Making sure that you have created a proper trading plan and done your pre-market trading preparation each day prior to getting into the market is something that I’m sure most would agree is a useful exercise. If you have a plan to lean on, you know that sometimes you will take losing trades – but if you have no plan at all, you have no point of reference for your trades and it’s much easier to get distracted from your objectives. If you are always improvising, it’s not only difficult to understand your results in order to find trading consistency, but it’s also very easy to place too much blame on yourself for a losing trade.

Failing to prepare properly and subsequently missing winners/taking losses as a result, can really make your chimp angry. Plan and prepare – even if you’re not totally certain of what you are doing, it will give your chimp some solace and a point of reference from which to improve your methodology.

Emotional Balance

The “trading mindset” is often talked about and there are a number of facets to it. A big part of it is how you approach and feel about risk. It’s important to teach your chimp that taking a loss is not a threat and actually protects it so it may live to fight another day. It’s also an imperative to reinforce that your goal is to execute your plan effectively and not to make money on a single trade. Profits are a by-product of good trading. As pedantic as this might sound, it’s designed to release you from the attachment to trading outcomes. Most people realise that losing trades are inevitable, but having the market extract money from your account equity is not always easy to accept in the heat of battle. It’s also an important concept to grasp that taking multiple losing trades in a row, over time, becomes inevitable.

Training your chimp and maintaining emotional control when things don’t go smoothly, isn’t an easy thing. If you are aware of the problems and understand the root causes, there are ways to tackle them. In the moment awareness is the first step to breaking the emotional cycle. Once we have some understanding (which can be gleaned by some journalling and careful self-analysis) it’s about rehearsing/visualizing these scenarios, repeating affirmations and deliberate practise. You must also realise that your chimp has a voice and the emotions which it gives you do not have to be acted upon. Centering yourself before you trade can help too.

In addition to working on your trader mindset to help your chimp, it’s also essential to gain emotional balance outside of trading hours in your personal life. Remember that emotional control is a resource which can be depleted and so if you have disruptions going on at home, there’s a strong likelihood they will spill over into your trading. You must try to stabilize your chimp in every way you possibly can outside of trading – this is a performance endeavour and emotional balance is critical if you want to be consistent in the long haul.

Absolute Focus

A lot of mistakes happen when a trader isn’t fully focused – kids running around the house, a funny YouTube video or even day-dreaming can all contribute to a lack of focus. That and being a little bit fuzzy-headed after a late night! Being in a good, focused frame of mind gives you the best chance of recognizing and taking your setups error free.

The obvious remedy for this is to create a distraction-free environment in which to trade – often easier said than done, but if you address potential issues then at least you can minimize them. Trading routine also helps you to ensure that you are consistently doing the correct things (which also gives you point of reference from which you can appropriately assess performance). It also makes it easier for friends and family to know when to not interrupt you! Finally, meditation can help in many ways, one of which is to increase your ability to focus on tasks.

Autopilots

A huge part of the problem is that people already know what they should be doing, but because they aren’t addressing the psychological aspects from their chimp’s perspective, it has no trouble overpowering them when it starts to get angry. “You can’t arm-wrestle your Chimp” as Dr. Steve Peters puts it in his book “The Chimp Paradox”.

But if we can create positive beliefs (or autopilots) which the chimp is okay with, when it’s losing control it’ll turn to these to help guide its actions. Clearly a negative belief (or gremlin) about getting ticked out at the high of day is that the market often takes your money before turning around and moving to your original target. So if in your heightened emotional chimp state, the market is at a current extreme and you think it might push through a little and then reverse, you probably won’t want to take your stop – let’s face it, if this happened, you’d be out of pocket and feeling pretty stupid/robbed when it reaches your target.

Whilst that’s fair enough on the face of it, the belief is formed from the experience of trades where this has happened rather than the probably far more numerous stop outs which would have lost you more money had you not promptly exited. Creating the belief that your stop is where it is for a good reason and that you can’t know whether the market will turn or not in one instance, can help your chimp to accept taking a loss on a trade far more easily.

There are many other potentially useful autopilots you can chisel into your psyche. The belief in journalling and the habit of filling it out after every trade (or more) can help you to maintain an awareness of physical and emotional state, whilst also serving to disrupt any snowballing emotions. A trading journal can be used to record and understand what the precise effects are of your raging chimp going on the market offensive. Tracking exactly how much it costs you can be a powerful motivation to change.

Traders also tend to be better at either balanced or imbalanced markets, not both – so it’s import to identify a potential transition between the two quickly and accurately. Recognising when things have changed and backing off can avoid a significant amount of trading stress. Finally, become a great loser – great losers are usually great competitors too – when they do lose, they find it easier to accept defeat graciously in the knowledge that they did all they could.

Safety Belts

So what do you do if everything goes to s*~#? There are only two things which you can and you should do as the account holder. First of all is that you should have a server side daily loss limit and position limits. This means that your account will go into liquidate-only mode when you hit your daily loss limit and you can only trade a maximum agreed per instrument contracts per trade. Although you can still hold onto the losing trade which takes you through your daily loss limit and you can always ring your broker up to tell them to “turn those machines back on” you’ll still have a trading safety belt to force you to reassess what’s just happened. Ultimately, the critical thing to do is to maintain a maximum account balance so that if you get into really deep trouble, you can’t blow all of your account equity in one sitting trading silly position sizes.

Whilst you may or may not agree with some of these points, I’m sure you’ll recognise that trading emotionally, on tilt, with a raging chimp, can be a huge problem. Unfortunately, there’s really no such thing as an emotion-free trading technique. However, if you do the right things and build up your emotional trading capital, it’s possible to lower the frequency of which these dark moments occur and when they do, lessen their impact.

Any thoughts or comments you might have are quite welcome.