In a recent review of my book The Psychology of Trading, Dave Mabe of Stock Tickr made particular mention of my contention that emotions should not be eliminated or minimized from trading. Rather, I suggested, we should develop enough self-awareness (and restraint) to become observers to our emotions and assess whether these feelings are accurate guides to action or exaggerated responses to transient market conditions.

I have personally worked with a number of traders who have made one million dollars or more (after expenses) in a year for multiple years. Of these, I would describe none as emotionally restrained. In fact, just the opposite. They tend to be highly competitive and quite emotional about losing. They channel this emotion into making themselves better, however.

I think you'd find the same to be true of elite athletes or chess champions. Michael Jordan, Muhammad Ali, Bobby Fischer--hardly non-emotional types.

Yes, we saw at the World Cup how emotions can get the better of us. The answer is not to eliminate emotion, however. It is to use emotion as information.

Let's use fear as an example.

Last week I was long ES and had a three-tick profit on the trade. I was looking for two full points. A 2000 lot lifted the offer and, for a moment, the market just sat there. No one jumped on board when the big buyer entered the fray. I felt a brief stab of fear--the feeling of "this isn't right!--and quickly took my three-tick profit. Almost immediately after, the trade was a full point under water.

Fear was my friend. It alerted me to danger. If aggressive buyers can't get the market up in the short run, it isn't going up. My feelings were accurate guides to market conditions.

But fear ultimately is a response to perceived danger. Sometimes we perceive threat when none is present. We can't really know if our emotions are trustworthy unless we can gauge the threat that they detect. That's where enhanced awareness--not just getting lost in emotion--is crucial.

Think of emotions as rapid signals that alert us to our appraisals of the environment. Sometimes those appraisals are highly accurate and guide our actions far more efficiently than explicit reasoning. That sharp pit-in-the-stomach jolt we feel when a car pulls directly in front of us on the highway just before we tap our brakes is not exactly something we want to overcome.

To eliminate emotion--even if that were possible--would be like covering the warning light on our car dashboard so we don't see it. Maybe the warning light is defective and there's no engine problem. But maybe the engine needs to be looked at. The answer is not to eliminate our warning signals.

And that's what fear is: a warning signal.

Frankly, in my experience as a psychologist to traders, a lot more traders have perished from overconfidence than from fear. A healthy respect for market risk and those multi-sigma events that can move against you--a basic fear born of the recognition that the market is always bigger than you are--is a good thing. Eliminate that and you've got a recipe for the kinds of blowups that truly end trading careers.

There's lots of room for rational fear in the present market. We have a Federal Reserve that openly acknowledges that it doesn't have all the data in hand to decide what to do about future short-term rates. We have a geopolitical situation that could easily mushroom into a regional conflict that would send oil prices skyward and equity markets tumbling. Perhaps most of all, we have too many countries--from Venezuela to Russia to China to Iran--upon whom we depend that are sick and tired of American unilateralism and only too happy to let the U.S. learn a painful lesson in interdependence.

Yes, the VIX has risen 50% in a matter of days. But, yes, it is still less than half the level we saw at the market bottoms in 1998, 2001, and 2002. A degree of fear reflecting how quickly bad situations can become worse is not only healthy; it is an accurate appraisal of market history.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Performance, is due for publication this fall (Wiley).