Yesterday when I tweeted that Bloomberg books had finally received from me the outline they have been waiting months for, another market bird tweeted back "must have been hard to come up with someting new in the overcrowded space of psychology and markets." I actually spontaneously laughed out loud - as nothing could be further from the truth.

The entire world of risk decisions is up for review right now. It appears that most of what we thought we knew (or assume to be true) isn't. So indeed there is a ton of material!

For example, did you know some of the best neuroscientists in the world (Huettel, Duke) will tell you that we don't really know exactly how we make a decision? Did you know that despite the success of Dan Ariely's Predictbly Irrational or Lehrer's How We Decide that no one knows for sure even what the ingredients are or how they get combined into the soup of entering a trade?

Before you say "well then Denise, we are doomed aren't we?" Let me lay out what we do know. 

#1) Without emotion, there are no decisions. (If emotional nuclei are destroyed, we can't even decide what to wear). See Damasio for starters.

#2) Feelings precede and succeed thought. In other words, all analysis is infused with feelings. 

#3) In a vaccum, feelings are self-protective. 

Think about that one. In and of itself, fear over the possibility of losing money is perfectly rational. Likewise, anger over having lost money is also perfectly rational. I mean wouldn't it be irrational to want to lose money or to be happy over having lost it? 

But we are supposed to trade the probabilities you say. We are supposed to know that over time if we have a reasonable strategy and set of tactics that we will make money. Isn't that knowledge enough to overcome the fear or frustration? Well another thing we know is NO, it is not. Colin Camerer and his colleagues Lowenstein and Prelec wrote is a summary article in 2005 (these guys are top neuroeconomists and game theorists) that "It is not enough to know what should be done, one must also feel it." 

Therein lies a gold mine of new trading psychology insights. (No offense my twitter friend. You would have no way of knowing this listening to the vast majority of out-dated trading psychology advice out there).

Net net - the clue to consistently successful trading is to learn how to use your feelings to your advantage. They can serve as an excellent risk management tool and once you get the hang of that, they can also be a valuable pattern recognition tool. 

But what about stopping the losing streaks, trading fits and market demons? In short, each of those psychological events occurs as a direct result of the misunderstanding and therefore mismanagement of a decision system that uses as its foundation feelings. The other day a coaching client forwarded to me a quote from Dr. Jack Panskeep. Panskeep is most definitely considered a world authority on emotion (note: herein I use feelings and emotions as synonyms). He is quoted in a book called In the Realm of Hungry Ghosts as saying  "Free choice... emerges from the capacity to think about emotions".

Regardless if you follow the excellent fundamental or technical commentary here on Greenfaucet, realize that your assessment, decision and action will indeed have a substantive emotional factor involved. The trick of successful consistent trading is to know what that is at all times. It pays to be equally aware of your emotions as you are of your chart or fundamental factors - in reality, it probably pays moreso to be more aware of what you are feeling at any given moment. 

Yet another study (Seo & Barrett, 2007) concluded that those who were most emotional and knew what their emotions were, produced the best trading performances via the ability to see and then circumvent their biases. 

Therein lies the first clue of advanced trading psychology - maintaining emotional awareness equal in quantity/quality as market data awareness - gives you a risk management tool that averts those afternoons when you give back two weeks of profits. That same awareness compels you to walk away when the frustration of being stopped out at the top tick ensues. Having walked away, you avoid acting out the frustration in a trading fit that turns to a losing streak. 

Having avoided a trading fit turned losing streak skewers the trading demons. How much P&L will be protected if those two days a month never happen? Everyone looks back and says "Oh man, if I had just seen XYZ, or if I have just..." and they get clobbered for coulda, woulda, shoulda - but it is true. A few bad trades avoided each month changes all the numbers at the end of the year. 

Oh yes, there is still plenty to be said to get the word out. To be continued.