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The importance of controlling emotions when trading and investing

By January 19, 2011February 2nd, 2024Active Investor Psychology secrets, Uncategorized

Financial markets have ups and downs, sometimes extreme, which cause market participants to experience emotional roller coaster rides in line with the market’s price swings. In recent years, as information that affects financial market prices has become rapidly and readily available, the volatility of the ups and downs has increased, along with the emotional swings of market traders and investors.

I’m sure that you have heard that successful trading starts with having an investment plan that includes a strategy (ies) or systemised approach (es) with which to engage the market. A plan is certainly a necessary first step but a plan alone will highly unlikely not achieve the investing outcomes that you desire. Even the best constructed plan will experience outcomes that you will not like. This is where the emotions of trading affect each of us as investors. Our emotions almost force us to deviate away from our pre-determined plan. As you’ll see in a moment, unless you learn to control your emotional reactions, you can and will make decisions that will be seen as logical but are in reality otherwise not.

Importance of controlling emotions

Firstly, you need to understand why you need to control your emotional reactions. Whilst positive emotions, like euphoria and over-joy, can negatively affect your trading, the negative emotions are the ones to watch out for. Have you heard of the saying “Angry makes you stupid”? Being angry is one emotion that potentially can hijack the way you approach your trading decisions. There are countless others such as frustration, being grief ridden, envy, trauma, stress, rage, paranoia, hatefulness, betrayal and revenge that effect your state of mind and inevitably the decisions you make in the heat of the market. Scientifically this state is known as an “amygdala hijack.” When one experiences an amygdala hijack, the amygdala bypasses the neocortex (the thinking part of the brain) and there is little or no ability to rely on intelligence, logic or reasoning. The effect is that mental energy is drawn exclusively into the hijack. The immediate result of a hijack is a decrease in working memory. Adrenaline is released and will be present and effective for around 18 minutes, and other hormones are released into the bloodstream that will take 3-4 hours to clear, their express purpose is to deal with physical threat through the well documented “fight or flight” response. Whilst in this mode human beings make illogical and irrational decisions.

The unfortunate element of an “amygdala hijack” state of mind is that you will not know you are in one until after the fact and after the damage is done. You will only become aware you were in an amygdala hijack state of mind when you come to question the irrational decisions you have made and unless you have the understanding covered in this text you will never even know or understand why you made such poor decisions.

How to avoid “amygdala hijacks”

Being aware of how you need to think and feel and how you “should” act is simple and logical enough in theory. Actually practicing it in the heat of market conditions is very difficult to accomplish for the great majority of active investors.

To be successful in the market over the long term you need to acquire certain mental skills. You need to add new beliefs into your subconscious mind, beliefs that automatically determine your perceptions, expectations, behaviour and emotional state with respect to engaging the markets. You also need to “turn off” beliefs that can potentially sabotage your endeavours in the market.

This is a transitionary process that requires desire to change and focus to step into and complete the process. The transitional process is another whole topic on its own.

Embarking on such a process will improve ones emotional responses to unexpected market outcomes and hence greatly improve ones ability to execute ones plan and thereby improve ones investing performance.

The mental skills aim: Consistency and Objectivity

Achieve consistency and objectivity and you will learn to control your emotional responses and hence either avoid “amygdala hijacks” or learn to recover rapidly from them and hence improve your trading performance.

The first step to achieving consistency and objectivity is to employ a strategy or systemised investing process which will remove the need to make subjective judgements because a properly complied strategy will be consistent and objective to the criteria that comprises the strategy. Your skills goal should be to remain consistent to the rules of your strategy.

The suggestion that acquiring consistency and objectivity as essential prerequisites for sustained profitable trading is certainly not a revelation. Experienced traders and investors such as Mark Douglas, John Murphy, Martin Pring, Stan Weinstein, Joe Krutsinger, Jack Schwager, Jake Bernstein and Larry Williams have all written about it.

Let’s define these two mental skills:

  • The dictionary definition of consistency is: “constant to the same thoughts and actions” or “conforming to a regular pattern or style, unchanging”.
  • The definition of objectivity is: “uninfluenced by personal emotion, prejudice, opinions or surmise” or “having real existence outside of mind, not subjective”.

These take us into a world that is often vastly different from the one that most of us generally occupy. How often are our decisions and actions changed or swayed by other circumstances, interference, opinion or negative emotional responses? Even for the most composed and tranquil of us, someone seen as the hypothetical ‘model of consistency’, it’s not easy to maintain the same approach to all things 100% of the time, especially in our increasingly fast-paced world with technology bombarding us with opinions, views and alternatives.

Acquiring these skills is a pre-requisite to achieving any financial outcomes that you have established. This means that no matter how focused you are on any goals that you have set, it is highly unlikely that you will achieve them until you have acquired the necessary ability to consistently complete error-free trading processes and error-free execution unaffected by emotional outbursts that take us into an amygdala hijack state of mind.

And here is a vital point: while consistency and objectivity can be measured as a result of the physical actions that you take, they are actually mental skills which manifest themselves as outcomes through your execution of trades.

In conclusion, I strongly suggest that every trader or investor embarks on a process to improve their mental skills to always avoid an extreme emotional response and “amygdala hijack” because ‘angry truly does make you stupid.’


  • Peter says:

    Thanks Gary for another great article. And what an article! I was fascintaqed by your discussion of the amygdala hijack (sounds like the princess amidala in star wars attack of the clones.

    I have learnt over time and am still learning that consistency and sticking to your plan NO MATTER HOW YOU FEEL OR WHAT YOU THINK is the key. Since I have done this more consistently I no longer make many irrational decisions and find that I am no longer second-guessing the market.

    It certainly makes for a lot less stress. I am re-reading Mark Douglas atm. I also find something new and interesting in his work.

    Thank you for your continued efforts and generosity in sharing your knowledge. I always look forward to reading your articles and appreciate how you advance the need for a system (any system) that stops emotions from corroding one’s trading plan. Keep up the great work.


  • Patrick Sergio says:

    Gary your timely encouragment to be consistent and objective is always appreciated.



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