Emotions In Trading -Anirudh Sethi

For many traders emotional trading is a problem and it stops them from being consistent in the market. We see what causes emotional trading in this article and I share six steps to greatly help reduce it, or stop it entirely.

Emotions in trading have always been one of the main causes of losses, and at the same time − the main driving force for all types of money. Remember the classic idea: buyers push the price up because of greed, and sellers sell because of fear of losses?

It still works perfectly in any market.

Popular training materials on market trading almost do not pay attention to managing emotions. This is understandable: any broker is the first participant in the trading process, which is vitally interested in having you leave your deposit to the market.

That is why most newcomers, especially those who passed the super-fast and super effective training in various brokerage kitchens, remain psychologically unprepared for trading. And even good technical training will not help such players save their money.

Assessing and reacting to market risk is one of the most important things you’ll have to do as a trader. Sadly, human being as a whole are so mediocre at this task, investors and traders reliably make decisions that economists consider “irrational.”

So obviously these are commonly more referred to as emotional trading.

 

Six Steps to Help You Stop Emotional Trading

Financial markets are a by-product of modern era and, in the grand scheme of things, our brains have evolved over millions of years for survival out in the open. They haven’t had the time to get good at making sound and perfectly rational financial decisions.

We have brain processes; an emotional one and a logical one that are constantly competing against one another for our future expression in the market. And normally, for the trader that has little to no market experience, who trades money they can’t afford to lose, or who has a short fuse overall, the stage is set for an incident.

But also more seasoned traders tend to make emotional trading decisions that they consider stupid in hindsight. Perhaps less often than inexperienced traders do, and with minor consequences, but those errors do happen.

Many a times, although we know with the logical part of our brain that we will get better results if we follow our trading rules, so many of us do exactly the opposite, despite clear knowledge of what we should do.

We remove stops, we cut winners short, we go in with too big of a size… I mean, we’re clearly

not purely rational beings ― and we can’t be because that would make us robots, not humans.

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Detecting Your Unconscious Mental Fractals

  1. Find a voice recorder and record your stream of consciousness through the sequence of two to three trades or decisions.
  2. Do this in sequence
    • Write down five to ten memories from before you were 18 years old.
    • From that list, pick three that stand out from the rest. Maybe they still have an emotional charge, maybe you even think of them every once in a while.
    • For these three memories, write the story of what happened, in the form of a kind of news report on who, what, where, why, and when.
    • Take these stories and look at them from a different point of view. Ask what the other people in the story were feeling or what it seemed like they were feeling.
    • Last, write down how the situation made you feel in the moment and what you told yourself about the situation.
    • Then set the writing and the recordings aside for a few days or weeks. Just let both simmer in the back of your mind.
  3. Keep a bedside notebook and jot down your thoughts and feelings from your dreams right away. What matters is the sequence of feelings and emotions in the dream; or, in other words, those feelings that you wake up with in reaction to the events in the dream.
  4. Now summarize the following using the data of your memories
    • What do I expect for myself?
    • How do I expect things to turn out?
    • How do I seem to feel about myself?
    • What kind of labels do I talk about myself with?
    • What fears come up?
    • How do I react to others?
    • How do I react to being told something other than what I want to hear?
  5. Go back to your trading recordings and summarize what feelings came up during your decision-making moments. We are looking for the themes and feelings that repeat themselves across market and decision sequences. Compare his information with what you discovered in the previous steps. What seems similar? If it doesn’t immediately click, let it rattle around in the back of your brain for a few weeks.

Hold Your Position Until the Trend is Invalidated, Do Not Let Go of Your Position. Be Willing to Experience Your Anxieties

  • Maintaining a commitment is particularly important when it comes up for a test.
  • Somewhere along the line of keeping your commitment you may get a feeling that you don’t like.
  • If you are willing to experience the feeling, it can transform into an AHA that supports your commitment.
  • If you are unwilling to experience the feeling, you might abandon your commitment to try to make the feeling go away. That only results in having to feel the feeling after all.
  • The more you are willing to experience the feeling of bumping into walls, the less you have to bump into walls.
  • Trading requires skill at reading the markets and at managing your own anxieties.
  • People have a Conscious Mind and Fred. Fred wants to communicate feelings to CM so CM can experience them and gain experience and share it with Fred so Fred can learn how to react. This is how we manufacture wisdom. When we don’t like our feelings we tie them in k-nots and do not experience them. This interrupts the wisdom manufacture process, and draws drama into our lives.
  • K-nots, protect us from truth and keep our lives in drama. To untie k-nots, fully experience whatever appears in the moment.
  • When you keep your eye on the prize and are willing to experience all the feelings that arise, the prize soon becomes yours.

Lessons from the spanish flu:

Learning from history

 Here are a selection of interesting pieces I have come across in learning lessons from the ‘Spanish’ flu of 1918.  Now the two pandemics are different. Our COVID19 pandemic primarily targets older people, while the Spanish flu hit those in the 20-30’s age bracket. The Spanish flu claimed over 45 million, but almost certainly never started in Spain!
What is the value of a single life (answer $10 million?) Check out this article for an interesting piece commenting on some research by Harvard University economist Robert Barro who argues that social distancing in 1918 did not work to reduce deaths because it did not last long enough. Barro argues that 12 weeks of social distancing works much better than 4-6 weeks.
What was the general approach taken during the Spanish flu of 1918? Check out this BBC article for a discussion of different approaches to the outbreak.
Pandemics come in waves – This National Geographic piece picks up the fact that pandemics tend to move in waves. A key takeaway is that we are unlikely to see a ‘one and done’ reaction. It is more likely to see a few waves of infections until we have a successful vaccine. Take a look at the Spanish flu waves seen in 1918/1919 in the chart below:
Learning from history  
This an interesting Guardian piece: It seems that epidemics follow a similar pattern: They are ignored or dismissed until they are impossible to turn a blind eye too. That was very similar to the path of this pandemic.

US-China trade war. War of words heating up – a reminder of where tariffs are

US President Trump and others in his administration have once again been ramping up anti-China rhetoric.

Which has brought the trade war back into focus. Currently we are at a ‘phase 1’ agreement (of many more to come potentially, phase 1 barely scratched the surface). With Trump’s blaming China, for pretty much anything and everything it seems, it raises the prospect of little progress ahead on trade issues. And with the US election to come in November its likely Trump will continue to aim belligerence at China.
Via the Peterson Institute for International Economics (PIIE) a representation of where tariffs are, in summary:
US President Trump and others in his administration have once again been ramping up anti-China rhetoric.
Keep on eye out for progress, though I do not expect any. Escalation of the trade war is a negative for ‘risk’ (we saw this last week with a drop in, for example, the AUD) as Trump’s bellicose comments gained market attention once again.

This is the biggest jobless claims report in a long time

Initial jobless claims top the economic calendar

Initial jobless claims top the economic calendar
The weekly initial jobless claims report at the bottom of the hour is for the week ending March 14 so it’s before the real coronavirus crunch, which is a week or two away.
Last week was 211K and the ‘consensus’ this week is 220K but that’s far lower than what the market is expecting. State unemployment claims in some places are up 5x to 10x.
Last week I was warning about this and when I wrote that ‘The coming wave of unemployment claims is going to be unprecedented‘ there were comments like this:
Where are you guys coming up with this stuff… I was out last night eating and food places are full stores are full… you are acting like this is the end of the world…this is being blow up to be way way more that what it is… which is nothing more than a cold with a twist on it that has not even gone above last year flu session. This is completely stupid what the news media is doing.
Now it’s conventional wisdom.
What we haven’t figured out is if the bureaucracy can handle and process the level of claims to actually get people the money. That’s more important right now than a $1 trillion piece of legislation the White House is proposing to get people money at the end of April.

WHO chief Tedros: Using the word ‘pandemic’ carelessly has no benefit

Says it could amplify unjustified fear and stigma, paralysing systems

Tedros
  • Calling it a ‘pandemic’ may also signal that we can no longer contain the virus, which is not true

He won’t be making many friends with the remarks above but I don’t think he is completely wrong. The last thing the world needs is to engage in full-blown panic and to turn on governments for not treating this seriously enough.

But the fact is that no country wants to be the first one to let this virus turn into an uncontrollable disease. Let’s face it, even though it had originated from China, they are arguably the only ones to be able to combat the virus on such a large scale.
At the same time, this is a good social experiment to explore how much human greed has affected our day-to-day lives in this world; if the virus wins that is.
Humanity can easily survive and contain the virus outbreak if we all put healthcare over the economy – even for just a little while. But the hard truth is that money is really what makes the world go round. And it always will be.

The USDCHF slides to the lowest level since September 2018

Cracks below the 2019 low at 0.96457

The USDCHF has fell to the lowest level since September 2018.  The price today has moved below the August low at 0.96589 and the low from December 31 at 0.96457. The currency continues to strengthen after the US put Switzerland on the watchlist as a currency manipulator in trading yesterday.
Cracks below the 2019 low at 0.96457
If the price is able to stay below the 0.9645 to 0.96589 area, the sellers remain firm control and we can expect further slide to the downside.  Looking at the daily chart the 61.8% retracement of the move up from the 2018 low to the 2019 high comes in at 0.95869. That would be a lower target going forward.