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How to Use Our Emotions as Information

Emotion is the output of the brain's fast processing system, a rapid pattern recognition system that quickly captures whether a perceived entity or event is good or bad for us, safe or dangerous, something to embrace or something to avoid.  If we had to rely on slower, analytical thought to assess if an oncoming car was a threat, we would be in a collision by the time we reached a conclusion.  Our emotional processing enables us to act quickly, facilitating fight or flight when needed.

The price we pay for sharing emotional/fast processing with the animals is that we can act quickly and not always accurately.  The salesperson who comes across as helpful and interested may or may not have your best interest in mind; the situation that you fear may actually be the very one you need to tackle in order to grow. Emotion is necessary for navigating the world, but not sufficient.

There are traders who act impulsively--and unprofitably--on emotion and conclude that the answer to successful trading is to curb or even eliminate emotion during trading.  From this perspective, emotion is a weakness to be overcome if one is to trade rationally.  To put the matter politely, this is a limited view.  Eliminating emotion--even if it were possible--would be to remove our capacity for fast processing.  Good luck retaining a feel for markets if you're busy denying your feelings.  Imagine a parent who lashes out at a child out of anger or frustration and then concludes that he or she will solve the situation by removing all feelings from parenting.  Would they then become a good parent?

The most recent Forbes article tackles a very important topic in trading psychology:  How we can turn our weaknesses into strengths. Rather than try to overcome or eradicate our feelings, we can channel them in a way that assists our trading.

Here's one way of doing that that:

If I feel something strongly about the market before I have conducted my usual analyses, I immediately entertain the hypothesis that if I'm feeling that way, perhaps others are as well.  In other words, before I do my preparation, I'm processing the same charts, the same headlines, and the same social media chatter as everyone else.  If what I'm perceiving frightens me or makes me think a phenomenal opportunity is at hand, I want to consider the possibility that this is a consensus perception.  In that context, my feelings are not an automatic guide to action, but rather are important information to consider when conducting my pre-market preparation.

So let's say that there is a tremendous amount of bearish chatter among market participants and I'm becoming worried about the possibility of a bear market, triggered by trade wars, political conflict, and economic weakness.  Recognizing my fear and acknowledging it enables me to see if the market data I look at actually support such a view.  In recent weeks, for example, the data have not been supportive.  Indeed, a number of formerly weak market sectors and international indexes have been displaying relative strength.  Noting the disparity between my emotional/fast processing and my analyses allows me to consider the possibility that bears will be trapped on any move higher, sustaining the upside. In such a case, my emotions are a source of information, not a weakness to be battled.

Many traders turn to techniques such as meditation as "enlightened" ways to rid themselves of emotion.  It's not clear to me that this is the true purpose of meditation, certainly not in the Buddhist and western religious traditions I reviewed for my recent blog book.  Rather, the idea is to gain awareness of our feelings, while simultaneously acting as their observer. The Forbes article summarizes important research that finds that embracing our vulnerabilities actually makes us stronger, more whole.  Our emotions can derail our trading or inform it. It all depends upon our degree of mindful self-awareness.

Further Reading:

Turning Weaknesses Into Trading Strengths

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