How Crypto Traders Can Master Their Emotional Brain

Humans are animals.

Humans have been on this earth for well over 100,000 years evolving from living in caves to building structures that scrape the sky. Yet, despite these advancements, human primal instincts still remain deeply embedded in everyone’s brains. These instincts are personified as emotions, which are tools that once kept every human alive in a world full of danger. 

While the range and depth of human emotion has been a core factor in dominating other species, it can also work against humans in certain professions like trading. 

The Four Horsemen of the Emotional Apocalypse

Human emotions are complex and are influenced by upbringing, personal experiences, and genetics. But there are a handful of emotions that traders universally experience and are among the most detrimental to success in the markets, including: fear, greed, FOMO, and revenge. 

Fear is one of the most powerful emotions that we experience. It clouds judgment, provokes anger, and, most importantly, harms anyone’s ability to make logical decisions. When fear takes hold, it activates the brain’s limbic system, triggering a response commonly known as “fight or flight.” This mechanism momentarily reduces cognitive abilities and disconnects a person from their logical brain. 

In trading, fear can have a damaging impact on performance through: 

• Analysis paralysis 
• Avoiding trades 
• Incorrectly sizing positions 
• Exiting trades prematurely 

Greed is an emotion that influences people in different ways. In the context of trading, it is the pursuit of more profits. Centuries ago, greed may have pushed humans to achieve great things, but it is now more of a liability than an asset in trading. Greed distorts a trader’s judgment and narrows their focus to maximize profit usually at the expense of sound risk management. This desire for more can lead traders to take trades they would typically avoid driven by impulse rather than logic. 

Common ways greed can harm trading accounts include: 

• Adding excessive risk to winning positions 
• Doubling down on losing trades 
• Holding positions beyond a planned stop-loss or take-profit level 
• Over-trading 

FOMO often leads traders to make decisions driven by a herd mentality in the form of social media hype and envy.  This psychological effect can cause otherwise rational people to act by impulse, prioritizing outside metrics over thorough market analysis. Unlike other emotions, FOMO is mainly triggered by external factors such as social media, breaking news, or increased market volatility. FOMO runs deep in human psychology stemming from a desire to move with the herd, a survival mechanism from ancient times that now works against traders in modern markets. 

FOMO can disrupt profitable trading by: 

• Making impulsive decisions 
• Deviating from a planned strategy 
• Neglecting risk management 
• Over-leveraging 

Revenge trading, also referred to as “tilt” in poker, is an emotional reaction to a significant loss. But the lasting damage is not the initial loss. Instead, it comes after the first loss when a trader attempts to recover through riskier, impulsive trades. What starts as an isolated loss quickly spirals into a liquidation. It’s natural to want to recover lost money, but allowing these emotions to override trading rules is a one-way street to blowing an account. 

Revenge trading sabotages traders by: 

• Disregarding risk management 
• Ignoring our strategy 
• Compounding losses through impulse 
• Liquidation or margin calls 

How Traders Manage Emotions

A common mistake many traders make when trying to overcome emotional roadblocks is attempting to eliminate emotions entirely. Emotions are an intrinsic part of being human, and trying to suppress them altogether is simply not possible. Instead, the focus should be on managing emotions effectively. This can be accomplished through various approaches, including creating a trading system, journaling, meditation, and philosophy. 

Creating a Trading System 

When anyone trades without a framework to define pre-entry variables, trading can become an emotionally fueled gambling session. Devising a well-structured trading system allows anyone to approach the markets more consistently while reducing the influence of emotions on their decisions. A trading strategy should include: 

• Trading rules 
• Trade management 
• Position sizing 
• Trading setups 

Journaling

Journaling is an essential tool for growth and success as a trader. While there are many ways to structure a journal, emotional tracking should be prioritized. To journal effectively, traders should keep two separate journals, one dedicated to statistics and another focused on emotions. The emotional journal should record: 

• Emotions before entering a trade 
• Emotions experienced during the trade 
• Emotions felt after the trade 
• The specific influence emotions had on trading decisions 

As a trader builds a record of their trades, obvious patterns will emerge. They’ll gain an understanding of their emotional triggers, the specific feelings they provoke, and the ways these triggers affect their personal performance. 

Meditation and Mindfulness

A trading plan is great, but the constant stream of thoughts running through a trader’s mind can force them to deviate from a plan. This inner dialogue can dampen focus, disrupt decision-making, and affect trading performance. Fortunately, traders don’t always have to be at the mercy of their thoughts. By integrating daily meditation and mindfulness exercises into their routine, a trader can gain benefits such as: 

• Staying calm under pressure 
• Enhanced focus and attention 
• Greater awareness of feelings and emotions 
• Strengthened emotional discipline 

Meditation and mindfulness will help build a deeper understanding of ego, emotions, and desires, which will ultimately help to form the discipline necessary for profitable trading. 

Philosophy

Among the various methods for managing emotions, Stoicism is one of the most impactful, and is one that this author personally uses. This ancient Greek philosophy focuses on developing wisdom, self-discipline, and emotional resilience, qualities that are absolutely necessary for executing in volatile markets. A great resource for understanding Stoicism is “Meditations” by Marcus Aurelius. The book offers many lessons that are highly applicable to emotional management in trading, such as: 

• Releasing ego 
• Moving on from the past 
• Detaching from outcomes 
• Maintaining a long-term perspective 
• Embracing discomfort 
• Building resilience 

While Stoicism alone will not guarantee success in trading, it allows anyone to operate during periods of market’s volatility through rational decision making instead of emotional ones. 

Cooler Heads Will Prevail

In discretionary trading, the difference between good and great traders often lies in emotional control. Yet, this doesn’t mean that top performing traders are immune to emotions. Instead, they’ve mastered the ability to prevent their emotions from influencing their decisions and, ultimately, their pnl. To excel in trading, a trader must learn to control their emotional impulses and allow their logical mind to lead.