Thursday, October 04, 2007

Emotional Balance in Trading

I'm writing this from the Annual Meeting of the Australian Technical Analysts Association. (Isn't wireless broadband great?). My presentations to the group are coming up within the hour. It's a great opportunity to share ideas with 240 traders motivated to learn about trading and the psychology of trading.

One of the things I try to accomplish in such presentations is to challenge traders' assumptions. One of the most common assumptions is that emotional balance is important to trading performance. If you don't have proper emotional balance, the reasoning goes, you'll fall prey to all sorts of behavioral finance biases.

But what is emotional balance? Most traders assume that emotional balance means a low level of emotionality. Cool and calm is perceived as the trading ideal.

The problem is that, among the traders I've worked with, I have seen very little correlation between reduced emotionality and trading results. Many of the most successful traders I've known are passionately competitive, and that leads to passionate emotions.

A point I'll be emphasizing to the group of traders here in Brisbane is that emotional balance is not the absence of emotion, but the relative balance between positive and negative emotional experience. A well-balanced trader is one who may experience considerable stress at times, but who also experiences considerable gratification.

Research on the psychology of expertise finds that elite performers are driven to hone their craft by their intrinsic enjoyment associated with the exercise of talents and skills. They so love performing that work feels like play. It is positive emotion--the intrinsic joy of the activity itself--that fuels the intensive exposure to market patterns that creates learning and development.

Normal learning is motivated by duty and responsibility; super-charged learning hinges upon the intrinsic love of one's activity.

How often do you experience in your trading:

* Joy/Happiness?
* Contentment/Calm?
* Energy/Excitement?

Very often, it is not the excess of negative emotion, but the relative absence of positive emotion that leaves traders with poor emotional balance and diminished trading performance. For that reason, there is nothing more important to developing traders than to find markets, strategies, and time frames that make maximum use of their skills and interests. Those are the trading methods most likely to generate emotional fulfillment, and such fulfillment is most likely to accelerate learning and growth.


Link to a Questionnaire of Emotional Experience and What the Results Mean

More on the Results