As traders, we use charts, data, and logic to analyze the market and develop a strategy or trade plan, but in the heat of the moment, emotion can often take center stage and drive the decision to enter or exit a trade. There’s a good reason. No matter how thorough our analysis, there will always be uncertainty about market direction and whether a trade will work or not. Trading is very unique, perhaps unlike any other profession, in that a trader must make time sensitive decisions in an environment that contains ambiguous information where one’s judgment is continually called into question. Add the fact that money is involved, and you can see how emotion impacts trading.

As both a psychologist and a trader I’m very familiar with emotions that surround trading.  Traders who are not performing at their desired level often have unmanaged emotions that negatively impact their trading.  We all have emotions, its part of being human, but when we let our emotions dictate our behavior as a trader, it often results in an action that is not in our best interest. Emotions act as a filter on our perception and have a direct influence on behavior. Not only that, but recent advances in neuroscience research utilizing brain-scanning technology shows that thoughts, perceptions, and even memories are neurologically linked to emotional reactions. We can not eliminate emotions, but we can learn to manage them.

In my work with traders I often see individuals who are not trading the market as much as they are trading their emotions in relation to the market or to their P&L.  As long as we have a pulse and are alive, we will have emotions. We can’t eliminate emotions, but we can learn to manage them, which helps us to act in our own best interest despite internal conflicts.

Unfortunately, many traders have trouble recognizing the problem, or if they do recognize the problem they look in the wrong direction for the solution. Because trading requires analysis, many traders assume that poor trading performance reflects a lack of analysis or market knowledge.  While that may be the case for some, for many traders it is not. If you understand how to look at market generated information and market structure and have a trading strategy and plan with an edge but you are still not profitable, consider the possibility you are trading your emotions in relation to your P&L instead of trading the market.

The first step in managing emotions is to identify what the emotions are. Emotion analytics involves a process of tracking one’s emotions, and is used by some very sophisticated traders.  Emotion analytics can occur in many different formats including but not limited to charting emotions like a price chart, recording emotions in a journal or audio or video tape while trading, or using a biofeedback device. What do you think would happen if you tracked your internal state as closely as you track the market? You would not only see patterns in the market, but you would see patterns of internal states that correspond to your performance as well as corresponding to market patterns.