Fear, greed and the eleventh minute after a loss

Most trading psychology advice is about staying calm. That is fine as far as it goes, but it is worth knowing that the link between emotion and results has actually been measured — in real traders, with real money, on a trading floor rather than in a laboratory.

The studies

In 2002 Andrew Lo and Dmitry Repin, at MIT, wired ten professional currency and derivatives traders to physiological sensors during live trading (*”The Psychophysiology of Real-Time Financial Risk Processing”*, Journal of Cognitive Neuroscience). They measured skin conductance, heart rate and other signals while the markets moved. Every trader, however experienced, showed a measurable physical response to significant market events. The less experienced traders showed stronger responses. Nobody was calm in the sense the advice usually means; the experienced ones simply reacted less.

In 2005 Lo, Repin and the trading psychologist Brett Steenbarger followed 80 day-traders through a five-week training programme, surveying their emotional state every day (*”Fear and Greed in Financial Markets: A Clinical Study of Day-Traders”*, American Economic Review). The finding: the traders whose emotional reactions to gains and losses were most intense had significantly worse trading performance. It was not that feeling nothing was best — the authors were careful about that — but that being strongly moved by each individual result was associated with worse decisions.

The eleventh minute

Where does that show up in practice? Almost always in the same place: the minutes after a loss.

A clean loss produces the physical response Lo and Repin measured. The response does not switch off when the position closes; it fades over minutes. During that window, the next setup looks better than it is, the size feels smaller than it is, and the reasons for waiting feel weaker than they are. Traders describe it as wanting to “get it back”. Steenbarger’s subjects, the ones with the strongest reactions, were the ones most likely to act during the window.

The trade taken in that window has a name in the TradifyFX journal — the Revenge tag — and a previous post covers how to catch it. This post is about the window itself.

Working with it rather than against it

You cannot decide not to have a physiological response. You can decide what is allowed to happen during one.

Put a gap between a loss and the next order. In a replay session this is a rule you write into the setup before you start: after any losing trade, no new entry for a set stretch of simulated time. Replay lets you fast-forward through the gap, so it costs nothing, and the discipline score records whether you kept it.

Tag while the feeling is fresh. The trader dock beside the chart lets you tag a trade the moment it closes. Ten minutes later you will remember the trade as more reasonable than it was.

Look at intensity, not just outcome. After a week of sessions, open the Journal and read the notes on your worst three trades and your best three. If the language in the notes is more heated on the losers, you have your own version of the 2005 finding.

The replay advantage

Lo and Repin’s experienced traders reacted less because they had seen it before. That is the whole case for replay: a trader who has closed five hundred losing trades on real market history, in simulated money, has done the exposure work that would otherwise take years and cost a great deal. The response does not disappear. It becomes familiar, and familiar things are easier to sit through.