In this weekend's article, I want to explore our psychology and how humans are wired to handle emotions—both positive and negative. During my session in the futures room, we discussed excitement (or FOMO) versus fear, and how these primal responses affect our trading decisions.
The Evolutionary Cost of Fear
To understand this better, think about our collective ancestry. When humans were primarily hunters and gatherers, hearing a sound in the thicket might signal a lion, bear, or other threat. Our instinct? Immediate flight. Even if the fear wasn't founded—if it was just wind or a squirrel—running away cost us very little. The fear response carried low risk with the ultimate reward: staying alive. We weren't punished for being overly cautious.
The flip side? Excessive excitement or FOMO carried much higher risk for our ancestors. They were rewarded for conserving energy and pursuing only sure opportunities rather than chasing uncertain ones.
When Ancient Wiring Meets Modern Markets
The world has changed, but our emotions haven't. We still get excited and want to chase big opportunities. We still experience fight, flight, or freeze responses to perceived threats. The difference? The costs are now much higher for emotional reactions.
Friday's market provided a perfect example. We saw massive 3- and 4-standard-deviation moves following President Trump's announcement of punitive tariffs on China. Traders who reacted emotionally paid the price:
- Fearful adjustments to stop losses
- Panic elimination of stops due to volatility concerns
- FOMO-driven chasing into trades
All of these responses resulted in getting chopped up by wide spreads and violent price swings. When fear drives our decisions, we break our trading rules and abandon our risk management. Whether there's actually a bear in the woods or not, the emotional response will cost you money and rarely helps. We must avoid the emotional reactions of fight, freeze, or flee.
The Three Fear Responses in Trading
- Fight = Revenge Trading
This is the most dangerous response. When you trade repeatedly after getting stopped out—trying to "prove the market wrong" or recover losses—you're fighting the market out of fear. This emotional reaction rarely ends well.
- Freeze = Paralysis
Doing nothing might feel safe, but you still need to manage your position and adjust stops and targets according to your rules. "Wait and see" when fear is rising usually becomes "wait and lose."
- Flight = Running Away
While slightly safer than fighting, fleeing still costs you opportunities. Often, the trade that stopped you out signals a reversal that could put you back in the green. Don't abandon your position—follow your plan.
Finding Opportunity in Volatility
Today's 2- and 3-standard-deviation moves were fast and violent, but the tape also offered opportunities to profit multiple times more than the triggered stop losses. The key is managing emotions like you manage trades—never letting emotion override logic.
Your Weekend Action Plan
Take a deep breath and remember: the markets will trigger emotions. That's unavoidable. Our job is to control those emotions and manage our money effectively.
Go into the weekend calm, knowing that Monday brings a new trading day full of opportunities you don't need to chase and price movements you don't need to fear.
Blake Young
Senior Market Strategist, TheoTRADE