Trading and the danger of emotions

Trading, especially if done professionally, is an activity comparable to that of any other professional, be it a lawyer, an engineer or a doctor. Imagine if all these professions were characterized by a strong whirlwind of emotions daily, it would be practically unsustainable both physically and mentally, as well as problematic for the results of the profession.

Unfortunately, trading is an activity that leads to raising levels of substances that increase our momentary well-being and that are present in our body such as adrenaline and dopamine. Obviously, the flip side is there and it is linked to the substances that our body produces under stress, such as cortisol, with physical and psychological consequences that can lead to a prolonged feeling of discomfort. Let’s now take a look at this very overlooked aspect of trading that we should all know.

Trading, what happens when you make money

It goes without saying that most of those who trade professionally now have already experienced what we are about to say. Trading, especially in a first approach, is an activity that often begins with a euphoric feeling, driven by the hefty potential gains that can be made in a "short time". A real illusion that blends perfectly with the dream of becoming rich and important.

Thus begin the first trades, operations that in retrospect will be not very rational but which at the beginning, beyond the gains and losses, will make us feel that we are on the right path to make a lot of money. This is where the first problems begin, or rather, the first emotional swings that the aspiring trader will have to face. In a nutshell, when the amateur trader makes money he is very happy, confirms his initial euphoria and begins to lose control. The first dopamine shots arrive after the first profitable trades, and the more these trades are consecutive, the more the trader will think he is already on the right track and already knows how to trade profitably. The more this period is prolonged over time, the more the backlash that the trader will suffer will be painful and in some cases decisive for leaving the profession.

In this phase, that of successful operations, the trader very slowly enters a world of false illusions. The initial feeling of euphoria is confirmed by the success of his operations and this leads him to think that he is really a winner, a cognitive bias induced by dopamine addiction. In the most serious cases this situation can lead to conditions of gambling addiction, as the emotional mechanisms are very similar to those of gambling. We can safely infer from this that as long as we experience similar emotional states, we will still be far from the emotional control that the trader must have to consider himself a professional.

Trading, what happens when you lose

Let’s imagine the previous situation, that is a long series of successfully closed trades. Sooner or later, dopamine addiction, the cognitive bias that leads to overestimating one’s skills, inevitably leads to a major loss which will have devastating repercussions both economically and emotionally. The trader realizes that has no control, is essentially lost, and realizes that what was before was purely his own illusion. In some cases it goes into total panic. This condition is very stressful because the backlash is immediate and the more the trader has had an “undeserved” success, the more stress his body will have to suffer as suddenly dopamine, which he was loaded with before, will be missing. The body now produces cortisol, the stress hormone.

According to some studies conducted on professional stock traders, it was found that those who had elevated cortisol levels were more stressed and at the same time "unscrupulous" in their actions, ie they were literally out of control. Precisely in this situation, the amateur trader experiences the damage this activity can bring. He becomes aware of it he is on the right path to improve and continue his way to become a professional, well aware that these situations (which will manifest themselves again in the future in a more or less mild form) are used to find countermeasures in his operation. As you can see, the amateur trader is a trader who ties his emotionality a lot to the professional/work one and therefore such a pace is absolutely not sustainable in the long term. But what is the solution?

The emotionality of the professional trader

It may seem like a paradox, but a professional trader will never be prey to this kind of emotion. Emotional trading is an absolute evil as it is harmful to one’s business but above all to one’s person. A professional trader does not link his emotional world with the working world.

The planning process and the strategic operational method tested over years of experience are the fruit of the defense of the emotional world. Basically the building one’s way of trading in a systematic and repetitive method acts as a "safe haven" for the trader’s emotions, that is planning one’s work is a defense against negative emotions. The professional trader is such because wants to be away from those emotions and in defense he builds his own operational methodology that allows him not to lose control because he knows that a similar situation would lead to ruin.

Basically, working on an operational level, with a method, with a strategy, is part of the useful solutions so as not to fall back into the emotional whirlwind typical of amateurs. Basically, if you want to get off this emotional swing, you have to look elsewhere, you need to plan your business according to your natural risk inclinations. Here, the amateur trader who begins to measure and quantify his risk thresholds, in an honest and truthful way, will already be able to partially define himself as a professional, or rather, he is on the right track to become one.

Original article published on Money.it Italy 2022-10-11 08:57:00.
Original title: Il trading e il pericolo delle emozioni