[Trading Psychology] Emotion as a key element of decision making process

Hi. Today I want to share with you some thoughts on emotions decision making on the market.

The decision-making process consists of 2 components: rational (analytical) and emotional. The more experienced a trader is, the more importance he attaches to the emotional component - but in a specific sense. This does not mean that emotions dictate what to do. Very experienced traders treat their emotional state as an additional source of information, and can stand by and hear the 'gut feel' above and beyond the emotional noise.

To quote one experienced trader: 'If I am feeling the pressure in this situation it means that others in the market are also feeling it. The one who can withstand it better will win.'

In the same situation, inexperienced traders may unwaveringly believe in the high quality of decisions made on the basis of 'nose'. That's how one retail trader I know lost more than €750,000 in a few months.

The best traders use various techniques to objectify their decisions - knowing that emotions can and will get in the way of their sober assessment of the developing situation and their ability to make good decisions. According to a study of institutional traders - in the same situation less experienced traders use strategies to avoid emotions. This makes a difference and a barrier for beginner and intermediate traders. The best traders are able to withstand large, sustained pressure by entering into it consciously, while the less experienced traders will at some point succumb and run away from the same position.

Both groups of traders differ not only in their experience, but also in their strategies of dealing with emotions. Because it turns out that experience is not the only thing that matters. Research shows that traders with a lot of experience (e.g. more than 20 years) who do not use the same strategies for dealing with their emotions as the best traders do, tend to underperform.
 
The way of dealing with emotions is a clear differentiator for the best traders. It allows you to survive chaos, volatility, uncertainty and panic, it allows you to continue to enter the market when others have long given up, and it opens new doors to results.

A good book to understand this and expand on it further is the Chimp Paradox by Dr Steve Peters. Well worth a read.