Forex Psychology

Maybe Emotions are Actually Good for Forex Trading?

In the last 20 years, advances in brain imaging technology and other methods of analysis of neurological activity have produced important advances that allow us to better understand the complex functioning and biology of the human brain. This discipline, neuroscience, is closely related to neuroeconomics, which in the last decade has combined knowledge of the brain with biology, physiology, psychology, behavioral finance, and economic theory to improve understanding of decision-making in competitive market environments, where risks and benefits are taken.

For Colin Camerer, Professor of Behavioral Economics and Finance at the California Institute of Technology, neuroeconomics involves opening the “black box” of the brain to inform economic theory and, potentially, for a better understanding to mitigate risky behaviors such as rogue traders. Denise Shull, president and founder of ReThink Group, a New York-based firm that advises professional traders, defines it as the study of “what happens in the brain when we face risk and other decisions that are made under conditions of uncertainty.

When using brain imaging, neuroeconomics also measures heart rate, blood pressure, and facial expressions to evaluate physiological reactions. And it uses games-like tests and experiments to study decision-making, make inferences about how the brain works, and build predictive models about human behavior. These efforts are aimed at advancing and enriching our thinking about economic theory, financial decision-making, or public policy decisions.

Science has advanced in parallel with recent studies of bubbles and crises and how decision-making and risk-taking, at the micro and macro levels, contribute to these events. Andrew Lo, professor of finance and director of the Financial Engineering Laboratory at MIT’s Sloan School of Management, has focused on this area of study. Collaborating with Dmitry Repin of Boston University, Lo has conducted neuroscientific tests on professional traders, looking at how the complex interaction of rational thinking, emotions, and stress can affect risk-taking and the profitability of investments. In his 2011 article, Fear, Greed and Financial Crises: A Cognitive Neurosciences Perspective “by investigating the neuroscientific bases of knowledge and behavior we can identify keys to financial crises and improve our models and methods of dealing with them”.

And watch out because this doesn’t just stay in the financial markets but goes further: President Obama has invested $100 million last year in the Brain Research through Advancing Innovative Neurotechnologies (BRAIN) project, in order to create a map of the brain.

Brain Photos

Functional magnetic resonance imaging (fMRI) is the fundamental tool that has allowed a great boost to neuroscience in the last two decades, making it possible to obtain more information about the experiments performed.

With fMRI, scientists are able to scan brains “in action” in a safe, non-invasive way. They are able to obtain empirical data on which specific parts of the brain are active during a given activity. Though there’s still a long way to go in terms of image quality and accuracy, the technology has produced amazing images and scientific findings.

Coates’ case is striking: he currently works as a researcher at the University of Cambridge but is a former operator of the derivative tables of Goldman Sachs and Deutsche Bank so he knows both worlds well. According to Coates, the way risk is assessed has changed in the last 20 years. Thus, in the nineties “the head of the trading table asked what your position was and how you felt about it, so you could decide if a trader could handle a certain position”. But over time, Coates points out, “this approach was replaced by statistical indicators and risk managers who carried out stress tests and made instantaneous assessments of risk levels.”

However, this change has not allowed us to detect “hidden changes” – those moments that Coates calls “the time between the dog and the wolf” – when people become very risky or very averse to the risk of the normal. Coates says statistical-based methods, which do not take into account biology or neuroscience, are not able to capture the behavioral changes in traders.

In any case, what Coates’ book highlights are that neuroscience and physiology have shown that financial decision-making is not a purely cognitive activity, but that physical components also intervene. Human beings do not manage information without passion, we are not computers; on the contrary, we react to information physically, our bodies and brains move in tune.

Research also shows that much thought is normally carried out automatically and involuntarily, in contrast to controlled thinking that is voluntary, conscious, and open to introspection. Daniel Kahneman himself, a psychologist who won the 2002 Nobel Prize in economics, referred to these modes in 2011 in the title of his book Thinking Fast and Slow, that is, what some authors describe as cold and hot decision-making.

Hot decisions include hunches, instinct, or intuition, which are a way for the body to record critical information that has been received. They hardly affect consciousness, but they are essential to rational choice. Some scientists question the reliability of intuition but experts in neuroscience consider intuition a form of pattern recognition that can help traders identify patterns in complex markets and create algorithms for the exploitation of these patterns. In Coates’ words, “the common sense of a winning trader may be due in part to his ability to produce body signals and listen to them”.

Coates has also deepened the impact of natural hormones on economic agents and markets and in particular the “winning effect” on male traders. The biological evaluation of groups of traders in the City has led him to the conclusion that testosterone and cortisol are chemical messengers that point out risks and economic rewards.

Moderate testosterone levels, says Coates, prepare male traders to take moderate risks, but higher levels occur when traders make winning trades and continue to win. The resulting hormonal imbalance can lead to excessive risk-taking (i.e., the winning effect). What’s more, Coates points out that during bullish markets testosterone is likely to increase, causing risk levels to rise altogether which in turn exaggerates the rally. In contrast, cortisol, a hormone associated with stress and anxiety, can rise during a stock market crack, so traders become irrationally risk-averse. Finally, Coates takes his theory to the extreme: “episodes of irrational exuberance and pessimism that destabilize financial markets can be caused simply by hormones.”

Evidence of the Emotional Component

Another point of view is that of Denise Shull of ReThink Group. This specialist in trader psychology and experienced futures trader claims that much of what we know and have been taught about rational vs. emotional thinking is wrong. Neuroscience has shown that we perceive, judge, and decide in a totally opposite way to that proposed by the prevailing theories in the field of psychology and economics, in which above all the benefits of rational thought stand out.

In particular, Shull cites a 1992 study by Antonio Damasio and Antoine Bechara, professors of neurology and cognitive neuroscience at the College of Medicine at the University of Iowa and creators of the Iowa Gambling Task, a simulator that attempts to represent the decision-making process in real life. In this study, the patients who participated had suffered damage to the orbitofrontal cortex section of the brain, which had been confirmed by fMRI. By studying patients, they found that this area is part of a broader neural system involved in decision-making. Although these patients retained their cognitive abilities despite brain damage, they also showed a dramatic loss of emotional feeling, having begun to make destructive and wrong decisions for their lives.

One patient, for example, had lost all sense of proportion, spending hours obsessed with trivial details and ignoring more important matters. These data led to the conclusion that emotion or feeling is an integral component of the machinery of reason. Another interesting study cited by Shull is the 2007 study by Myeong-Gu Seo of the Robert Smith College of Business at the University of Maryland and Lisa Feldman Barrett of Northeastern University, on the impact of emotions on the decision-making process of buying shares. They selected 101 investors to record their feelings while making investment decisions every day for 20 consecutive business days.

Seo and Barrett found that individuals who experienced more intense feelings during operations made better decisions and made more money, just the opposite of what one would expect! The purpose of the study is that the common prescription of “ignoring your emotions” seems to be wrong for an effective regulation of feelings and their influence on decision-making. Rather, it seems to be the opposite: that people who are in the best position to identify and distinguish their feelings can better control the biases induced by those feelings and, as a result, achieve better trading results.

So, according to Shull, “in risk management what we’re trying to do is extract emotion and come up with a mathematical model, but neuroscience research shows that that takes us the wrong way. ” Moreover, in his paper The Art of Algorithmic War, Shull states that “after most of the non-scientific debate about feelings and emotions there lies the assumption that a feeling or emotion automatically becomes an action. This is simply false… In their purest form, feelings and emotions are designed to give us information. Without realizing it, Wall Street adds emotional information to analysis reports”.

The Biological Factor

Another author who has much to say in this field is Peter Bossaerts of the Caltech Laboratory for Experimental Finance. Bossaerts has applied neuroscience methods to a variety of risk-related topics, including how individuals process risk in a given situation and make risk-related mistakes.

In the tests conducted by Kerstin Preuschoff, a researcher at the Laboratory of Computational Neuroscience at the Swiss Federal Institute of Technology in Lausanne, and Steven Quartz, professor of philosophy and researcher of neuroscience at Caltech, subjects participating in the study were asked to play cards while observing the brain areas activated during risk management using fMRI. The collected data suggest that the anterior insula section of the brain, considered the seat of feelings and emotional awareness, transmits this information in a fairly precise way – essentially in the form of mathematical signals.

For Bossaerts, this means the ability to process risks is encoded in the brain in the form of an algorithm, similar to any mathematical model that quants like so much. Bossaerts has further concluded that while a person may receive new information, the brain’s “processing algorithm” for risk remains constant.

That is, Bossaert claims to have discovered mathematical measurements in an essentially emotional area of the brain so that the processing of emotions in the human being is not something that is done raw, but something that is reported in a reasoned way.”


It is clear that the application of neuroscience to trading opens up a whole new field of research to explore. While the applicability of neuroscience findings to trading is still in its infancy, it is not out of the question that in the future we will be able to reprogram ourselves to trade or act in a certain way to prevent our stress from affecting our performance or even take medications that modify the production of certain hormones to control imbalances in our character that affect trading.

Forex Psychology

How To Make Forex Trading Comfortable?

Comfort in trading has several aspects, one is when we have a good trading practice, a system, or a strategy, yet we cannot find time for it to fully get effective. This is caused when our trading developed when we were just studying, for example, we had more time to devote to trading. After a while our lives could change, what once was comfortable now is a chore or we simply have more pressing matters. Certainly, traders found in this position are not professionals, trading is just a hobby or some other form of secondary income for them. It is rare to see professional traders move away from their careers if they are successful. Some things are out of our control and change our lifestyle, however, the title question does not relate to these traders. Part-time or hobby trading can still be profitable but how to make it comfortable just depends on each trader’s personality and lifestyle. 

If you value your time and do not monitor your trades yet still have a very good trading methodology, one solution could be to change your target timeframe. Starting from H4 and up really makes a difference in how much screen time you spend each day. Unfortunately, if your strategy was based on a lower timeframe, high-paced trading like scalping then it probably will not work on higher timeframes. Better try to create an Expert Advisor for it. If your developed trading style tolerates other timeframes, you may still need to have some adjustments before the transition. The daily timeframe, for example, does not require more than 30 minutes of management time, it is usually done once the day session about to end. Whatsmore, you do not even have to monitor what is going on during the day. This trading style is one of the most comfortable provided you have a strategy that is also adaptive. 

There is one more solution for cases like this, a more popular one, although established traders might be skeptical about it. It is an automated trading solution. Automation is not always possible, especially if your trading method is relying on subjective price action decisions no robot could replicate. Pure technical trading strategies that rely on indicators and exact thresholds will not have any problems making them automated. On the other hand, complex strategies may be very expensive to automate. Now, if you do not have coding skills you will need to decide if employing a coder is worth the effort. Also, consider you will probably have additional costs establishing a VPS, any additional work for the updates to the code, and unforeseen errors. Scalping and other high-frequency trading are often automated, for obvious reasons. 

How we can make trading more comfortable is probably asked once we cannot keep up with trading emotionally and even physically. And these situations are very closely related to our trading performance, responsibility, and high-frequency trading. This is a more common problem and another aspect of uncomfortable trading. Let’s say you have your first profitable strategy, you have perfected it and made consistent progress. Now it is time to put it to work with real funds. It is completely different psychologically right? Because you care and stress about the outcome unless you like that kind of excitement, you are out of your comfortable trading zone you have enjoyed while demo trading. There are so many ways to overcome this, the simple solution is to just keep it up without messing with your strategy and in time you will be back in the zone. Be confident you have something that works first, or you will take double hits when you start losing.

Another way is to have attention distractors. Have something to do to keep you busy while the trade runs. Create obligations that keep you away, like sports or classes. Depending on how “cold” under pressure you are it will become a routine practice, the money just becomes numbers. Interestingly, some traders completely cover the balance and P/L line even though they are experts. As a trader, you will have to face these issues and there is no way around it. According to experts, when they switch to a high amount of capital they were out of comfort zone, when they received even more money from others, it is another level of pressure. So, even if you overcome this stress once, it could come back again. 

Trading is a battle with your emotions and the markets will play with them. It will drive you away from trading if you do not have a strong anchor. Now, even the best of strategies will not work if you constantly get emotional about decisions you made and are about to make. When you start out, know your expectations about a particular strategy will get you disappointed. You will need to work for some time before you get some results out of your demo trading. Get used to failing, start over, and fail again process. Just take failures with a good attitude, think about what went wrong, analyze, test new things and rules. It will be just a matter of time when you stumble on a winning method. 

Getting out of your reasonable thinking and into the wild emotional decision making is when you do not have strong trading anchors: you do not have a developed plan, how much you risk per trade, routine, or not a clearly defined strategy. Trading without these is not only uncomfortable but also is not going to get you anywhere. There is a simple solution to this, do not trade with real money, even the one you can afford to lose before you have a defined approach to what you are going to do in every situation. Markets are chaotic, going in blindly is a great way to lose. Have a strict plan with optimal risk allowance to endure some losses before good trades come in.

Analyze the market with good tools/mechanisms and stick with them until you are sure they do not work. Then try new things until your complete trading strategy has all elements aligned – your money management, plan, toolset, and you are ready to go live. Some experts advise going live with the money you are ready to lose, just so you can stay in your comfort zone. Others want you to be ready to put in an uncomfortable amount. The reason is, of course, to get you used to the responsibility and the stress. Your strategy should not put your account in danger since it is based on long term endurance, however, you will make better progress in becoming comfortable with any amount as there are fewer surprises markets can throw at you. 

A simple recipe for getting comfortable does not exist, there is no drink or a remedy to run away from this. Whatever you do, great performing strategy or not, you will face your dose of stress. However, there is a difference in how you face it. You can have faith in your system as a channel for stress. That faith is as strong as the amount of work you put in and long term results. Without this foundation, you are simply going to be uncomfortable all the time for various reasons, and this probably is not just about trading, but how you approach other problems as well.

Forex Psychology

Taking the Emotions Out Of Trading

Emotions can be some of the most powerful things that you can experience in life, they are what some would describe as the things that make us who we are and what makes us human. As they are a large part of us, it is often strange when people say that you need to be able to remove your emotions when trading, but they are a part of us, so that can’t be an easy thing to do.

Let’s get one thing straight to begin with, when we are talking about taking your emotions out of trading, we are not meaning that you need to sit there like a roto and to have no emotions or feelings while you trade, that is not feasible and not possible, what we are talking about is all about your decision-making process and the trades that you make, keeping your emotions out of those decisions so no rash actions are made.

There are a number of different emotions that can be very dangerous to your trading, these are things that you should be avoiding at all costs as they could potentially destroy your strategy and any risk management that you have put in place. The first of those is greed and the second is overconfidence. Greed often comes from losses, make a loss or two in a row and you want to win it back, it can also come from wins, you have a win and then want more so you decide to increase your risks and trade larger sizes. Overconfidence has a very similar effect, you have made a few good trades and so you think that you have the secret key, anything you do will win and so you increase the risk, the trade sizes and then no longer pay attention to your strategy and just trade what you think, I am sure you can work out the end results of trading in this style.

So how do we get rid of those two very powerful yet devastating emotions, the fact is that you won’t be able to, you will always have some of those feelings and you may always want to earn more, but what is important is that you are able to get around them, having your trading plan there in front of you each time that you trade will allow you to remind yourself that you need to stick to it, you need to stick to the risk management plan that you have created in order to keep your accounts safe. If you have ever gone against it and made a loss, keep that in your mind and keep a reminder of it near your trading platform, this way you can remind yourself about what can go wrong should you go against your plan.

Creating a routine for yourself can help create the idea of a system for you to follow, having these rules and requirements for the things that you do when trading will help you to be more autonomous, doing what is required and not having to think about things too much. Removing this aspect of thinking out of your trading will give you less chance to develop ideas or to develop stronger emotions towards the trading that you are doing. It also helps you to stay focused and to avoid certain distractions that would otherwise take your attention away from your trading.

One of the things that emotions can cause is a bias towards certain conditions in the markets or ideas that the market will move a certain way. While getting to these conclusions through analysis is positive, emotions can often cause you to believe that they will happen regardless of what the analysis says, sometimes even when the analysis is saying the opposite. This is where you need to ensure that any decisions and trades that you make are based on the facts and the analysis that is available, not on what you think will happen, doing it this way and getting something right can lead to overconfidence and we have already discussed why that is a bad emotion to have.

Staying committed and dedicated to your trading plan is another way to avoid letting your emotions get the better of your trading. You need to stick with it, sometimes it can be hard, especially when things are not going the right way, but you created that plan for a reason and you created it because you know it can work. So you need to be able to stick with it through the good and bad times, only this way can you be sure that you will be able to keep it profitable.

Keeping your emotions out of trading is not easy, in fact, it is one of the hardest things to do when trading, you will want to jump with joy with a win and throw your computer out the window with a loss, but if you are able to control the emotions, stick to your plan, you will be able to be far more successful at trading than if you were to et those pesky emotions get the better of you.