Episode 463: How to Become a Rational Thinker and Conquer Trading Emotions

Hello Traders Podcast listeners! Welcome to Episode 463. In today’s episode Rob shares a listener text question from a trader named Dave. Dave is asking how to maintain even keel emotions while trading. Rob shares 10 practices that will make a huge difference.


1) Get a cat and turn over all trading responsibilities to the feline. There is no chance the cat is going to give a crap about Twitter’s earnings, or the Australian Vegemite Index.

Because this is impractical, here are some other ideas.

2) Start the practice of meditation. If you are unfamiliar with meditation, I have one book and one app to recommend:

The Miracle of Mindfulness

Calm App for iPhone

Calm App for Android

Meditation will help you focus on the present moment. This is powerful stuff. When you are fully immersed in what you are doing, well, it’s like having a superpower. This is not about avoiding your emotions.

It has everything to do with identifying that, for instance, you are worried about your current trade. You observe the worry. You watch it pop up to the surface, like the bubble of air on the surface of a river. Then you watch the bubble pop, disappear, and move along. If another bubble arises, you watch that one too.

Meditation taught me to allow emotions, rather than fight them. Allowing an emotion meant that I didn’t judge myself for feeling upset about a trade. I observed the “upsetness.” Then I let it move along. I didn’t linger on emotions, neither did I avoid them. It’s powerful stuff because it’s the essence of coming to peace with who we really are, in the quiet moments.

3) Learn to walk away from harsh judgment. We wind ourselves up in a ball of emotion about trading sometimes because we feel that the outcome of our trades carries so much weight.

We imagine that someone external to us (perhaps invisible, maybe even dead) will judge us for the outcome of the trade.

I am not going to say that you need to forgive yourself. I want to go beyond that. To say that you might need forgiveness suggests that trading involves lots of questions of right or wrong.

I’d rather talk about simply becoming a rational individual. You can get more benefit, faster, if you simply become a more rational person than from almost anything else. (By the way, the fastest way to improve is to reduce your trade size).

So this is not about forgetting your mistakes. It’s important to rationally consider things you do wrong, but then move on and make strong, determined decisions about how you are going to act differently the next time around.

4) Realize acting differently next time around has everything to do with the way you run your brain. This means that you adopt a mindset of thinking rationally. I don’t have time in this post to give you a full overview of rational thinking, but here is a book that will help you do it:

Thinking Fast and Slow

Rational thinking is (by my definition) the art of doing this:

For any event or activity that you do, you assign a probability of certain outcomes to it. For a trade, you honestly consider the circumstances surrounding the trade and then you assign a mental (rough, estimated) probability to it. I’ll give you two examples:

a) You open The Twitter and Baron Von Gunther Educationburg IV recommends buying Canadian Dollars because he overheard something on the trading floor of Goldberg Stacks, Incorporated. You take a big trade because Baron Von Gunther Educationburg IV looks like a smart dude, and he’s sort of handsome. And has a lot of followers.

A rational look at this situation says: You are swayed by the number of followers. You are swayed by the authority behind using the name Goldberg Stacks, a famous investment bank. You love Canadian hockey so your bias is even increased. The opportunity is easily accessible so you favor it over a trade idea that might take more time to uncover. These are all immediate biases, irrational thinking mistakes that we all make. If you look at the situation honestly, this isn’t a very good trade idea. The probability that you are going to make money is slim. The probability that you’ll get emotional about it is high.

b) You wake up at 3am and read recent earnings reports of biotech firms. You look for firms in stage 2 or 3 trials of drugs. You look for the words “going forward we have reason to believe our earnings are going to beat estimates,” rather than, “we are dampening expectations.” You only take a trade if the company’s stock dropped and gives you a good price. You commit a very small amount to your first trade. So now you have done a lot of honest thinking about the opportunities. This kind of thinking is more rational. It’s not fully rational (we rarely are). But the probability that you can confidently stay in this trade if it goes wrong is higher. The probability that you can work your way out of this trade if it goes wrong is high. The probability that you are going to pee your pants about this trade … well it’s low, as long as you don’t have trouble controlling your pee. In which case you might look back at some of those biotech stocks.

What I am saying is that it’s a good idea to train your brain to identify the ways that we take demented shortcuts to arriving at conclusions. My friend Terry Larsen used to say, “I get all my exercise by jumping to conclusions.” And that’s true for many of us. It’s important to train our brains to stall the temptation to do that irrational exercise.

5) Take cold baths, do cardio exercise, exhaust yourself, and eat less sugar. One way to become more rational and less emotional about your trading is to strengthen your physical body. I will spend more time on this subject another time. But if you do just one of the things on that list, you’re going to be standing on more solid emotional ground.

Let me know how you deal with emotions in trading. I’d love to hear from you. You can text me at 304-281-8332, and you can use WhatsApp if you live outside the U.S.

Have the best day ever


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One comment on “Episode 463: How to Become a Rational Thinker and Conquer Trading Emotions

  1. Manuel Abramovich says:

    I love your show and listen regularly. THANKS A LOT.
    I have a comment….I tend to “follow” experienced traders, because I believe that having a mentor is a better way to trade this markets (I trade only currencies), but when things goes wrong, many times they blame the actual market condition. I think that´s a mistake, because you should be aware of the market condition “before” entering the market.
    I mean you can’t blame Euro/Usd to not follow a particular direction if the instrument is not in trend…and we all know that the euro is in range….

    What I want to say is, I hate terms like “choppy” market and I believe there is nothing like that in the market… you just have up / down or sideways market….it´s all about the time frame.
    Is that correct?

    Manuel Abramovich

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