Emotional Pendulum & The Compass To Your Trading Success

We are only as strong as the weakest link in our performance. That is why whilst we should focus on our strengths we also need to learn how to manage our weaknesses.

One of my traders from the Prop Trader Training had the experience that after a run of profitable trades the point would come when he would let a loss run too long and wipe out all the profits from the winning run.

The answer to this is found in the concept of the Emotional Pendulum, which comes from the work of David Pellin, a Canadian psychotherapist from the 1960s, and Peter Fleming, who carries on Pellin's work at the Pellin Institute in the UK.

When it comes to the spectrum of emotional stability there are three extreme points on the scale: Low Negative, Neutral Centred and High Positive.

Swings of the Pendulum

David Pellin made the observation that the motion of emotion is like the swing of a pendulum. A pendulum swings back and forth from high to low until it eventually rests in the centre, still and calm, until some outside event sets it off to swing across the whole spectrum once again.

Most traders tend to experience the whole spectrum from low negative to high positive but never get to rest in neutral centre. Unless they learn to manage those swings, their trading results stay as inconsistent as the swings of the pendulum.

High positive relates to extreme levels of excitement, enthusiasm and happiness, a state commonly experienced after a winning run. Low negative relates to any feeling that resembles anger, sadness or even depression, a state commonly experienced after a string of losses. When you are in a state of neutrally centred you are being fully present, focused and in a highly conscious state. That is the place from where you are able to make great trading decisions and therefore big profits consistently like clockwork.

In the case of the prop trader, he had a great winning run, most probably started believing that he had finally made it, dreaming of the millions of dollars he would generate with trading. And as Donald Trump says, that is the moment when you take your eye off the ball, you fall in love with the numbers on your bank balance, and suddenly your analysis starts to get sloppy and you start getting loose on your risk management because preserving the nice numbers on your statistics suddenly becomes the focus instead of flawless execution.

Why it so

The Impact of Highs

In her book Molecules of Emotion, Candace Pert explains that we have receptors in our brain called opiate receptors that create the signal for being high when taking drugs or drinking alcohol. And these are exactly the same receptors for our emotions.

What that means is that science is telling us that when you are experiencing an emotional state, you are in fact intoxicated. When you are high as a kite, do you become more focused, concentrated and conscious, or less? Less, of course. Alcohol is a filtering system, so typically you see things differently than the sober people around you. It is kind of looking at a chart in hindsight and wondering why on earth you took that trade, even though at the time it looked so promising.

Think about it. Have you ever gotten completely drunk and done something stupid, then sobered up and thought: what did I do? Or have you ever been so excited that you blurted something out, and afterwards thought: I cannot believe I said that? The same occurs in trading. Have you ever entered a trade on impulse and immediately thought: oh no, what did I do that for?

After a string of successful trades the un-self-aware trader is swinging high compulsively, often feeling invincible and barely able to be interrupted. I call this state Super(wo)man Syndrome.

The energy rush towards the compulsive high takes away your ability to be logical, calm and diligent. Your focus shifts back to wanting more of the good feeling, getting attached to the nice numbers on your trading stats, and so you shift away from focusing on flawless execution of your trading system. You start rushing, short-cutting the process, intoxicated by that feel-good feeling of the last win.

When you are being highly positive, your brain will block out 50% of your reality to remain positive, excited and happy. Your objectivity is clouded. You only see great trade setups but the Super(wo)man filter does not let through the warning signs that the great setup might fail because the focus has shifted from diligent execution to feeding the addiction for that feel-good sensation.

And that is the reason why after a string of winners traders often get a really bad trade. Consequently after the exaltation of the high they skid to the opposite side of the spectrum, feeling sad and depressed.

Swing to the Lows

The negative low area of the pendulum is the result of emotional depletion triggered by already evident low self-image, or physical depletion and exhaustion, because having concentrated over a long period of time, willpower gets eroded. The low is then usually intensified by subsequent trading losses and frustration.

In the negative low your emotions are turning inwards, twisting and turning on each other, becoming convoluted, with the mental sabotage that you are alone with these emotions and that solutions are not possible. Many stay stuck in the negative low focusing on the imperfectability of oneself, the impossibility of ever achieving their dream and becoming a successful trader.

In the low, you can only be aware of yourself as a failure or a victim. In the low, your mind convinces you that this is the truth. If your low is sufficiently deep, you can turn a genuine trading loss into a sincere belief that you have serious problems with self-sabotage, or that you are simply not cut out to be a trader.

Similarly, if you have a string of losses, you do not like it and that leads to not wanting to feel that unpleasant feeling. So you try to force your way out by taking second-rate trading setups which in the end just leads to more losses, and quickly you once again feel stuck in a vicious circle.

The Power of Neutral Centre

Now the sadness filter is filtering out all the positive things in your trading reality in order to maintain that perspective. You cannot remember past good trading results, you do not see the progress you have made over the years and you feel you will never make it. All you can see is your dreams floating away and with every losing trade you pick, you essentially become a losing trade magnet.

This all only happens when you are operating from either end of the emotional pendulum. Moving back into a neutral calm mind, perhaps you can now see that the market conditions have changed, or that all you need to do is refocus on a flawless execution of your strategy, and that losses are just part of the business expense and that even the best traders have a bad day.

When you are in neutral centred, you have all of these amazing things happening to you. There is no more self-talk going on, there is just watching the charts and quiet observation, no frowning, no biting lips, no grinding teeth, just purpose, grace and ease.

Your true strength as a trader lies in your awareness of where you are on the scale of your emotional pendulum after each trade and then quickly readjusting before taking the next trade. The good news is anyone can learn to avoid those extreme highs and lows around which your trading accounts and egos get hurt.

Within the neutral centredness of calm lies your incredible ability to recuperate, adapt and keep going in the face of surprising change.

Mindful Consciousness in Trading

Traders who are already progressed with their self-awareness or mindfulness work actually report that they have fleeting thoughts such as: I should stop now, or this does not feel right, but they did not listen to them. And then, sure enough, it all turns to ruin.

Have you ever seen a great trade setup and were so pessimistic that you thought it would never work, so you did not take it, and then that was the trade of the day? And then the next trade sets up and because you missed out the last time you jump in, and the trade once again turns to ruin. And now the vicious circle has begun. You stop following your strategy, try to force things, and everything gets worse as you start doubting yourself once again.

I promote mindful consciousness in trading, because the more mindful and conscious you become the faster you are able to move back to the neutral centre calm state and the more profits you will generate.