Monday, November 6, 2017

Avoid the Emotional Meltdown | Trading Psychology

Today’s Trading Psychology question of the day…

 “Do you have any tricks to avoiding an emotional meltdown?  Sometimes I get so angry at losing money, I get angry with myself, and that makes me lose even more money.  It feels like I’m having a meltdown and last Friday it cost me my entire week worth of profits.”

This is a great question, and honestly, I wish I didn’t know the words to this song so well.

If you’re anything like me, you’ve probably had a few times in your trading career where you let anger get the best of you…

…and it feels like there’s this “tipping point” where your mind just shuts down and you go into “crazy mode”, not following any rules, taking “revenge” on the market, trying to force the market to do what you want… almost like a child throws a temper-tantrum.

In my experience, situations like these can get so bad that you end up losing all of your gains for the past few days (maybe worse) and the worst part, you feel like absolute dog-crap when you finally pass out under your desk at the end of the day.

Even worse… if you asked me afterwards what happened… I would say… “the same thing that always happens… I just lost it.”

It’s true… it feels like we have this behavioral routine that we go through, which snowballs into the fight-or-flight syndrome, which can lead to a big emotional breakdown.

So how do we avoid this cycle of meltdowns when things don’t go our way?  Because they certainly are one of the biggest threats to our account, and our career as traders.

Can we Change?

First of all, it’s important to understand that for most of us, our individual personalities are hard-wired from birth, which means it’s almost impossible to change this as adults.

Even worse… ever since you were a child, you’ve developed these behavioral patterns, which were created from dealing with stressful experiences when you were a kid.

And… your personality will play a big role in how you handle stressful situations in your trading career, such as losing money on a trade.

So, the bottom line is, you are who you are, you’ve developed a cycle of using your emotions, and changing these emotions is extremely difficult, so let’s find a strategy to manage those times when you’re susceptible to a meltdown, and cut it off before it costs you a week’s worth of profits next time.

Here are some options…

Ignoring the Emotion:

One strategy for managing our anger emotions is to ignore them, keep them bottled-up inside, hoping they will eventually go away. 

If you’ve ever tried this strategy you know that it may keep you out of trouble for today, but tomorrow is going to be an even BIGGER meltdown, and your fuse is going to be even shorter than it was before.

I certainly don’t recommend ignoring these emotions, they aren’t going away, and it makes the situation worse the next time it happens again…. And it will happen again.

Talk Yourself Through It:

I used this strategy when I was a younger trader.  I would get angry about a loss, angry about a trade that didn’t go my way (I know…clear sign of my ignorance towards the markets, but nonetheless), and I would start to talk to myself.

“You’re ok, it’s only a loss, you’ll get the next one, chill out.”

But what ends up happening is that your mind comes back and says… “No it’s not!  You always do this you moron!”

It’s like the old cartoon of the devil on one side and the angel on the other.

The angel says, “everything will be fine Joe, just get back to following your rules again.”

Then the devil says… “Why are you even trying?  You know you can’t trade!  You better update your resume because your trading career is in the toilet!... you should have listened to your brother, you can’t be a trader, who are you kidding?”

The devil and the angel play this game back and forth in your mind… and it usually results in the devil winning the argument, and the emotional meltdown begins.

Trust me, if talking to ourselves worked, there wouldn’t be the need for psychologists in our world.

So… when it comes to anger about trading, we can’t ignore the emotion, and we can’t just talk it through in our minds…

The three most effective ways to manage your anger when you’re trading are to…
1.      Track Your Emotions
2.      Acknowledge and Accept
3.      Use a Pattern Interrupt

Track Your Emotions:

If you’re someone who struggles with letting anger/fear/greed any emotion get the best of you, the first step is to keep track of how you’re feeling throughout the trading session.

This is going to be the hardest part of the strategy, but it’s the most important.

The reason why keeping track of your emotions is so hard is because we often don’t realize how bad things are getting until they are too much to handle.

I would suggest you print-off a few dozen copies of a blank thermometer (such as this one), and keep it on your desk in front of you.

Each trading session, take out a red marker, and keep track of your emotions during the day, the higher your level of anger, the higher you mark the paper, very simple.

The goal of this is to create a visual representation of your anger levels on this paper, so you can identify those times when you’re susceptible for another meltdown.

Acknowledge and Accept

Now that you have a tracking mechanism, the next step is “acknowledge and accept” the situation when you find yourself in the upper third of that thermometer.

In other words, the first time you find yourself marking a line on the thermometer in the upper third, you’re going say out loud… “I’m angry about that loss I just took.” (or whatever the reason is)

I know this sounds like a gimmick, but it’s important that you say OUT LOUD, the exact reason why you’re angry… so we aren’t ignoring it, and we aren’t going to start a losing conversation in your head.

Now… take out your trading journal… and make a note of the mistake you made that resulted in a loss. 

And remember, not every loss is a mistake, the best traders in the world take losses 20% of the time, don’t forget that.

Now we’re getting somewhere here…
·        We’re tracking our emotions with a silly thermometer (ridiculous, I know)
·        We’re acknowledging & accepting (out load) that our anger levels are getting high, and the reason for our anger
·        We’re making a note in our journal as to WHY we got angry, so we can make changes to avoid those issues next time.

Pattern Interrupt (Break the Cycle):

Now that we have our anger emotion backed into a dark corner… the next step is to break the cycle that sends us into that meltdown state of mind.

Most people operate with very specific emotional pattern, behavioral cycles that we seem to always go through.  If you have a child, you know exactly what I mean, you can literally see the temper tantrum coming before it happens.

The goal with the “pattern interrupt” is to break this cycle so you don’t end up going into meltdown mode again.

For me, this means getting up out of my chair and leaving my office. 

I go for a walk to the end of my street and back, maybe twice if it’s really bad, and if I get back to my desk, and if I still can’t mark my anger below the upper third of my thermometer, I’m done trading for the day, bottom line.

I would also recommend adding some music and breathing techniques when you to for a walk, so grab your iPod, focus on your breathing, don’t let the devil and the angel get into an argument while you’re walking, and focus on breaking the cycle.

Believe it or not, I personally used this strategy to overcome some serious emotional hurdles earlier in my trading career, and I use this same strategy when I notice my emotions getting in the way of other things in my trading (or my personal life).

For example, this lesson was how to avoid the emotional meltdown that comes from anger and frustration, but you could also use this for being over-confident.

Let’s say you have a bad habit of following your winners with a series of losers.  That’s usually caused by over-confidence, or as I call it “superman syndrome”.

If you struggle with giving back your losses because of the same type of behavioral cycle that I’ve described here… you have a strategy to overcome it.
·        Print-off the thermometer
·        Track your emotions (hardest part)
·        Acknowledge & Accept
·        Update your journal
·        Pattern Interrupt (break the cycle)

If you use this strategy correctly, there isn’t a single personality flaw that you can’t resolve with some dedication and hard-work.

Hopefully this lesson saves you from the stress of this situation, and a bunch of money by helping you avoid that ever-so-common emotional meltdown that even the best traders battle once in a while.

Guys… I hope you found value in today’s trading psychology lesson…

…and I would love to hear from you about additional topics that you’re struggling with as traders.

Do me a favor…drop me a comment below this video with any topics you’d like to see me cover in my trading psychology video…

…make sure to give me a thumbs-up if you found value, and share it with a friend who can benefit from this information as well.

It doesn’t matter what market we trade, or the strategy we use, even the best traders battle with their emotions when there’s money on the line.

And don’t forget, you can find me every morning @ 8:00am EST in my trade room with all of our members here at, I have a great free trial on the homepage of our website, I publish my Nightly Newsletter every evening on my blog before 8:00pm EST, and I’m excited to see you again soon on my next trading psychology lesson.

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