Forms of fear permeate the process of trading. Every market decision bets on a fundamentally unknowable future and as such, trading implicitly includes a factor derived from the spectrum of panic to overconfidence. Moment to moment, a trader’s beliefs can ameliorate debilitating or palpable fear but as most honest traders know, price action “mis-behavior” can puncture that cocoon in something like a millisecond.

But what is fear really? And more importantly, how does a trader know when to “hold it or fold it”? Brain and psychological science adds more evidence almost every day that in its pure form, fear is a good thing. It serves as our internal warning signal. It gets our attention. Traders also know however that fear acted upon can screw up a good thing. Fear that one’s profits will vanish has killed many a potentially great trade.

Ideally traders learn to know their characteristic experiences of fear. The ability to detect bodily differences in the feelings of intuitive fear versus impulsive fear offers a reliable mental edge – an edge that will prevent giving money back and one that will lead to getting bigger in the trades that are working.

Step one on that learning curve involves admitting that despite all the advice in the trading world, you really don’t know all that much about fear. What I mean here is that given that psychological science is still working on how emotions actually work, what are the odds that the conventional trading wisdom is correct? Did you know that the Association for Psychological Science identifies affective science (the study of emotions, moods, preferences, attitudes, value and stress) as emerging? “? For example, the APS just published yesterday an article stating that “cognitive reappraisal” may NOT benefit psychological health. To wit, another article in the same issue states: (emphases mine)

“…We now know that affect is a central feature in almost all phenomena that are labeled “mental” and some that are labeled “physical”. These include all categories of mental illness, health and physical illness, resilience to stress and well-being, immune function, memory, marketing, attitude, stereotyping and prejudice, interpersonal relationships, verbal communication and negotiation strategies, judgment and decision making, financial decision making, predicting the future, work motivation, politics, aesthetics and personality.”

Particularly salient to traders is the statement in a second article called “Building a Fearless Mind“, “the results suggest that there’s a lot about behavioral fear interventions that researchers still don’t understand“. The article deals specifically with “extinction therapy” or efforts to “erase” fear memories – something all traders by definition carry around. In practicality this means traders should not feel worse or less hopeful about your trading future if the technique of attempting 20 trades without variation, in order to build confidence, fails. It’s unlikely the human brain has the capacity to do this (even if the market presented the exact same confluence of contexts 20 times in any reasonable time-frame).

One only needs to spend a day following traders on Twitter to know there is NO shortage of advice on fear and #tradingpsychology. The majority is based either on old ideas like fear comes from one brain area that can be controlled OR the solution involves the intellect overpowering the emotion. At least two two studies (in addition to the aforementioned cognitive reappraisal) have shown that using the intellect to overcome fear fails. In one, the counter-intuitive advice of specifically articulating one’s fears enabled the participants to choose the ACTION they actually desired. In the end, isn’t that what counts – the actual actions?