Trading Psychology to Tame 4 Basic Emotions and Develop a “Trading Brain”

What does it take to be a successful trader? Amateur traders would say “money.” However, any skilled trader would add: “Emotional stability.”  

Psychological wellbeing is one of trader's most valuable assets.

Money, analytics, education, experience are important too. But the market will immediately take your money away if you fail to handle one of the 4 basic emotions that dominate your brain when you trade:

• Fear
• Greed
• Hope
• Shame

Understanding these emotions is important for at least 2 reasons:

– To control your behavior and not let emotions influence your trading

– To understand how these emotions drive other traders’ motives — after all, this is what drives market sentiment and moves the prices up and down.

Let’s face each of these 4 emotions and learn how to control them — before they start controlling you. 

Fear

Fear is a natural reaction to a threat. In trading, it means panic that occurs as a reaction to a threat to their profit potential. But in the modern world with complex socio-economic institutions, primitive reactions are not always useful. The essence of trading is the transfer of certain resources for profit. Therefore, any strategy, even a low-risk one, implies operating losses. 

If you do not learn to take risks for granted, there is nothing for you to do in the market. Just as you don’t get mad with changing seasons, you shouldn’t get mad with losses.

Let’s consider a cinematic example to understand the meaning of this. In Denis Villeneuve’s “Dune”, a witch comes to the alleged messiah Paul Atreides — she wants to make sure whether he is really a “chosen one” or just a frightened boy. She places a poisoned pin by his neck and orders him to put his hand into the black box. What’s in the box? Pain. To survive, Paul must overcome the instinct to pull out his hand, no matter how much it hurts. Paul’s mind must overcome his base instincts — otherwise, the game would be over for him.

Every time you open a trade, you become Paul Atreides. You must win over fear, knowing that this is your only way to stay in the money. 

When fear takes over, it makes you focus on bad news, close long positions, or open new short ones. A scared investor can’t make rational decisions based on reasonable expectations of market behavior. 

Market-wide, fear manifests itself as more people sell and intensify the overall panic. So whenever you see a bearish trend, you know there’s a bunch of panicking traders behind the screen. That said, by knowing how fear works, you can predict market moves better and have more profitable outcomes for yourself.  

Fear in trading has many faces:

• Fear of losses — the King of Fears for a trader. It can be beaten by forward-thinking: you must view losses as part of the system. A beginner trader should find a conservative low-risk strategy and follow it, backing himself with Stop-Loss and Take-Profit.
• Fear of waiting. It is closely related to the fear of losses: “If I wait for too long, I might get out of luck.” The problem is that early exit from a profitable trade leads to a loss of profit. To combat this fear, re-invoke forward-thinking: think of work as a whole system, follow the chosen strategy, and control emotions.
• Fear of investing real money. Many people stick with the demo account for months. Yes, they gain experience, but they also waste time. How to fix this? Understand that it is impossible to learn to swim on your lawn. Realize that while you are trading with funny money, someone is making real cash. Paradoxically, fear of wasting time works great against the fear of real trading. 
• Fear of big investments. A lot of newbies trade with small amounts: “If I lose, it is not a big deal.” But serious trading on the global exchange requires relatively large funds. You need this money to work normally within the low-risk strategies. If you enter a trade with a small deposit, you might get underfunded, i.e., simply not have enough money for a profitable trade. To overcome this fear, determine the amount needed to implement your strategy. Remember: if you don’t have enough money for trading within the chosen strategy, the odds of losing a small deposit are higher than a large one.
• Fear of big money is based on impostor syndrome. If a trader isn’t used to operating large amounts, a big profit seems undeserved, and the size of the reward causes stress and mistakes. You need to analyze your psychological attitudes: don’t you think that money is evil? If that’s true to you — lose it. You do deserve big money, and you are worthy of it.
• Fear of the broker. “What if the broker cheats with the commissions? Or takes my deposit and disappears?” This fear is the easiest to deal with: choose a trusted broker with a good reputation, licenses, and a long lifetime in the industry.
• Fear of challenges. You might be thinking that trading is very difficult, and your brain just can’t process all these strategies and analyses. You are not alone. The good news is that for successful trading, the right psychological attitude is more important than math. Once upon a time, you didn’t even know how to read, did you?  
• Fear of the future. Trading does not give guarantees that a “normal” job does. Many newbies are worried about how they will live if the trade does not bring the expected profit. One has to take responsibility, and this is not for everyone. Financial planning helps defeat the fear of the future. You should have a financial cushion for several months, keep personal expenses under control, and handle your profits reasonably.

Greed

Greed is one of the basic responses of the most ancient brain structures: evolutionary defense of vital assets and a motivator to acquire them. But in trading, “pigs get slaughtered” (“pigs” ironically refer to greedy players). 

The inability to control the desire to get rich quickly leads to typical mistakes: 

• Staying in a losing trade longer than it’s healthy for you
• Trying to “catch your luck”
• Viewing financial news too optimistically
• Ignoring bad news
• Overlooking  obvious signs of risk

Same as fear, greed is annihilated only by having a trading plan based on rational thinking. 

Fear of missing out (FOMO) is a twin brother of greed but in a narrower sense. For traders, it turns into an obsessive fear of missing out on profit, not gaining new experience, and missing a chance. The FOMO signs are:

– “hypnotizing” charts for hours

– pulling out your smartphone at each market notification beep

– obsessive checking on the economic news feed

– inability to focus on other things

The risk of getting FOMO is not related to your IQ. Phobia is an irrational fear. The first step to overcoming fear is embracing it. The second step is taking the following actions:

• “Digital Diet”: cleaning news feeds, setting limits on news reading. To do this, it is important to realize that at least 90% of the “important information” that you track is garbage.
• Setting up alerts: leave only the most important events.
• Separate work and personal life. For example, you can have two smartphones: for work and for play.

Hope

In general, hope is a positive emotion: it helps us withstand the most difficult periods of life, including downstrikes, black swans, etc. But unreasonable hope is rather associated with greed and fear of loss. A person begins to passionately desire some event to happen, gets superstitious and gamblesome. Hope becomes a driving force in decision-making: the market might be going against them, but they continue to wait — “I’ll get lucky!“

It’s crucial to remember that the only driving force in decision-making is a cold mind and your trading strategy. You don’t need to fight hope — after all, everyone goes to the market hoping for a good outcome — but your wishful thinking should never dominate your analytical thinking. 

Shame

Shame provokes a desire to win back and pushes the trader out on very thin ice. What is a trader ashamed of? Failures, wrong decisions, missed opportunities. Like fear and greed, shame increases the cortisol (the stress hormone) level, making the trader lose control and fail even harder.

Interestingly, in many cases, embarrassment is not even justified — for example, when traders deal with losses implied in their strategy from the beginning. Or when shame comes from the outside: parents, friends, or spouses who disapprove of trading. 

Whatever the case is, trading psychology books say that the only way to fight this paralyzing feeling is to embrace failure. Did you know that Silicon Valley investors prefer to fund entrepreneurs with a track record of failed startups? In the big tech world, getting used to failure and bouncing back from it is worth more than pure success. A mistake is not a drama, but an experience, and those who don’t make mistakes don’t ever make any progress. 

Beware: extreme emotions

Sometimes fear, greed, hope, shame, and other emotions blend together and intensify to the extreme psychological states: tilt and trance.

Tilt is a poker term meaning an emotional breakdown similar to temporary insanity. Its danger is in turning off internal control mechanisms — often, a person does not even remember what they did in this state. Derealization may also be the case: it feels like someone else was acting instead of you. There may be a feeling of emptiness in the head, a hot flush, or a chilling vacuum.

Trance is less intense yet an even more dangerous state because it’s long-term. In a trance, a trader loses their will and mind. They turn into a zombie: can’t tear themselves away from the monitor with charts, open deal after deal and cannot stop — even after losing the entire deposit. 

Both tilt and trance are extremely dangerous. The following categories are at risk:

• Traders in a bad mental state destabilized by the long-lasting stress
• Those who accumulate negative emotions and don’t know how to relax. Outwardly, they seem calm, but inside, they are ticking bombs.
• Those who trade very intensively, quickly enter into many transactions and don’t take enough time to think them over.
• Exhausted traders that make more and more mistakes, and due to fatigue, the control mechanisms get turned off.
• The “star-struck” traders who previously gained super profits.

If you notice any of these signs, act immediately.

Trading psychology tips on handling intense emotions 

1. Never enter the market in a bad emotional state: when you’re tired, anxious, or exhausted. If you do feel this way, take a break or even a vacation. 
2. Take a break after a super profit or a major loss.
3. Never trade for rematch or revenge.
4. Limit your trading hours per day. The longer you stay in the virtual world of the exchange, the stronger the fatigue, leading to a loss of self-control. If you are prone to overworking, set a timer. 
5. Don’t play for fun. An exception can be made for a demo account.
6. Don’t exceed the daily amount of trades allowed by your trading system. Work strictly within the limits of risks.
7. And finally — if tilt or trance did happen to you and lead to sad consequences — embrace your failure and let it go. Be a kind judge. Forgive yourself.

Conclusion

An unpredictable, volatile market is inevitably associated with stress. Therefore, successful traders pay attention not only to the charts but also to their psychological state. 

Fear, greed, unreasonable hope, or shame are very dangerous in trading because they increase cortisol levels and switch the mind off — with dire consequences. Therefore, understanding these emotions is important to maintain your own mental health and understand the market behavior as a whole. After all, traders on the other side of the screen are just humans prone to the same feelings.