What science says about mindset and trading

Peer-reviewed studies on emotion, stress, sleep, planning and keeping a journal.

From the study

“…subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side … exhibited significantly worse trading performance.”

What it means: In 80 day traders followed for five weeks, those who reacted most strongly to wins and losses performed worst. Not just fear: big highs hurt too.

Lo, A. W., Repin, D. V., & Steenbarger, B. N. (2005). Fear and Greed in Financial Markets: A Clinical Study of Day-Traders. American Economic Review, 95(2), 352–359. Read the original

From the study

“We conclude that emotions and their regulation play a central role in traders' decision making.”

What it means: Interviews with traders at four London investment banks: the better performers managed their emotions before they arose, for example by preparing, rather than suppressing them afterwards.

Fenton-O'Creevy, M., Soane, E., Nicholson, N., & Willman, P. (2011). Thinking, feeling and deciding: the influence of emotions on the decision making and performance of traders. Journal of Organizational Behavior, 32(8), 1044–1061. Read the original

From the study

“We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market.”

What it means: Stress is physical: on a real trading floor, the stress hormone cortisol rose with volatile results and markets. The authors warn this can shift risk-taking.

Coates, J. M., & Herbert, J. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences, 105(16), 6167–6172. Read the original

From the study

“Our results suggest that signals from the body - the gut feelings of financial lore - contribute to success in the markets.”

What it means: Traders who sensed their own body better were more profitable and lasted longer in the markets. Noticing how you feel is a skill, not a weakness.

Kandasamy, N., Garfinkel, S. N., Page, L., Hardy, B., Critchley, H. D., Gurnell, M., & Coates, J. M. (2016). Interoceptive Ability Predicts Survival on a London Trading Floor. Scientific Reports, 6, 32986. Read the original

From the study

“These results suggest that sleep deprivation poses a dual threat to competent decision making…”

What it means: After a night without sleep, people expected more from risky gains and reacted less to losses. A short night is a reason to trade smaller, not bigger.

Venkatraman, V., Chuah, Y. M. L., Huettel, S. A., & Chee, M. W. L. (2007). Sleep deprivation elevates expectation of gains and attenuates response to losses following risky decisions. Sleep, 30(5), 603–609. Read the original

From the study

“…progress monitoring had larger effects on goal attainment when the outcomes were reported or made public, and when the information was physically recorded.”

What it means: A meta-analysis of experimental studies: keeping track of your progress helps you reach your goals, and writing it down works better than just thinking about it. That is what a journal is.

Harkin, B., Webb, T. L., Chang, B. P. I., Prestwich, A., Conner, M., Kellar, I., Benn, Y., & Sheeran, P. (2016). Does Monitoring Goal Progress Promote Goal Attainment? A Meta-Analysis of the Experimental Evidence. Psychological Bulletin, 142(2), 198–229. Read the original

From the study

“Findings from 94 independent tests showed that implementation intentions had a positive effect of medium-to-large magnitude (d = .65) on goal attainment.”

What it means: Deciding in advance 'if X happens, I do Y' clearly increases the chance you follow through. A trade plan with a trigger, stop and 'skip if' conditions is exactly such a plan.

Gollwitzer, P. M., & Sheeran, P. (2006). Implementation intentions and goal achievement: A meta-analysis of effects and processes. Advances in Experimental Social Psychology, 38, 69–119. Read the original

Quotes are verbatim from the original abstracts; an ellipsis (…) marks a shortened sentence. The explanations are our own summary. Research shows patterns in groups of people, not a guarantee for one trader.

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