Archives of “emotion” tag

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Why Trading is Most Difficult Job in the World

  
  Education
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How many guys do you know who can accept being wrong?

How many guys do you know who can be wrong and lose money?

How many guys do you know who can be wrong. lose money and not feel bad?

How many guys do you know who can be wrong, lose money, not feel bad and reverse their position?

How many guys do you know who can be wrong, lose money, not feel bad, and reverse their position quickly?

Don’s point is that trading requires an unusual combination of emotional resilience (the ability to tolerate being wrong) and mental flexibility (the ability to use losses as information and quickly change one’s position in the markets).
Many people have a need to be right. That makes it difficult to quickly accept losses, and it makes it especially difficult to flip one’s views. The best traders don’t have a need to be right, and in fact they readily admit that there’s many times they’re wrong.

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The Power of Regret

  
  Education
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Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   As a trading psychologist I see these all the time.

Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc.

Chasing a trade is the fear of missing out. The fear of missing out is associated with various emotions, including regret. In my work with traders and in my own trading, I’ve seen the incredible power of regret. There’s a lot of talk about fear and greed in trading, but the power of regret is often overlooked. Some of my own worst trades, and those of my clients, often have a ‘regret from missing a prior opportunity’ component. When I finally finish my book on the psychology of financial risk taking, I will include much about this overlooked but very powerful emotion.

Somewhat related to chasing a trade, is impulse trading.  They both have in common the underlying feeling of the fear of missing out.  It’s tempting for me to talk about impulse trading here, but it really deserves its own piece.

Trading Thoughts

  
  Education
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To truly become a proactive trader, you need to believe that your trade WILL go the direction you thought. This shows that you have belief in your system that finds your trade setups in the first place. If you put your trade on and the first thing you do is mark your stop or think “I hope this goes well”, then you are bound to fail as a trader. Successful traders do not hope. They do the research and use their system to find good candidates and enter the trades. It is at that point that they manage risk. They know exactly how much they have at risk and are perfectly fine if they lose that much. Why? Because it is baked into their system, and every trade does not go the way they thought.

You need to be the same way in your trading.You need to have the courage to fail, step off the curb, and enter the trade. Expect that the trade will go your way and use the power of positive thinking. Set your target, entry and your stop and then you know, at any point during the life of the trade, where you stand. If your target gets hit and you see the stock continue to go the same direction, you can’t get mad. You simply put the positive trade aside and evaluate it in a couple weeks to figure out why it continued to go beyond your target. It is at that point that perhaps you make an adjustment to your system. Perhaps you find out that it was a news item that caused the surge and then you know that it was atypical, rather than the norm, and no adjustment is needed.

In going through this thought process, you prepare yourself emotionally and as a result remove the chance of trading on emotion once in the trade. As an example, you need to be fully prepared to lose the amount invested in a single trade if your stop is triggered. If you aren’t fully prepared to take that risk, then you need to adjust the size of your trade or move on to another trade. If you prepare and emotionally accept the fact that you could be wrong, your trading becomes more mechanical and less emotional. Take some time to role-play the different scenarios and see what your reactions would be.

5 Steps for Traders

  
  Education
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  1. STAY DISCIPLINED AND ONLY TRADE YOUR METHOD. If you do not have a robust system, method, or strategy do not trade again until you have one.
  2. ONLY TAKE TRADES WITH IN THE PARAMETERS OF YOUR TRADING PLAN. Trade your plan not your emotions. If you do not have a plan that defines entries, exits, and position sizing do not trade again until you have one.
  3. YOUR FIRST LOSS IS YOUR BEST LOSS. When your planned stop is first hit just get out. In trading hoping is a very expensive emotion
  4. UNDERSTAND THE MARKET ENVIRONMENT. There are times to be short, times to be long, and times to be out. Volatility is many traders kryptonite.  If the market itself is not conducive to your strategy wait until it is.
  5. CHOOSE YOUR SPOTS CAREFULLY. Do not rush trades, wait until you get the right set up, trend, or break out you are waiting for, the market isn’t going anywhere, wait for the fat pitch.

My Trading Resolutions for next 3 months

  
  Education
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  • Think for myself
  • Stay focused on the reasons why I bought a stock and sell when those reasons are no longer compelling
  • Don’t let successful trades turn into losses
  • Be ruled less by emotion and fear and more by logic and knowledge
  • Read some good books on trading
  • To avoid being whipsawed, I will give myself more room for the trade to work
  • Follow my own rules
  • Be easier on myself when I screw up and don’t let my ego inflate when I’m right
  • Don’t force trades – there will always be another opportunity
  • Honor thy stops!
  • Stop chasing hot and popular stocks
  • Do my own research
  • Keep learning
  • Learn to be less nervous and take more risks
  • Remember that lost opportunity is better than lost capital
  • Trade less – don’t overtrade
  • To try and limit the number of opinions I allow to affect my trading. Paralysis by analysis has hurt me
  • Avoid any trade where I use the word “hope” in my reasoning process
  • To follow my logical, well-conceived, long-term game plan, without making irrational changes due to short-term market conditions
  • Tune out the daily noise and useless banter
  • Reduce the number of positions currently held
  • Have more faith in my own abilities
  • In trading, learn to be fearless
  • Don’t be too greedy
  • Slow down!
  • Incorporate the use of smart trailing stops
  • Use ETFs to properly diversify
  • Remove my ego from my trading decisions
  • Avoid getting easily frustrated or impatient
  • Control and limit my losses
  • Focus on making the next trade, instead of the last one
  • I will not average down into losing positions
  • Create more careful and detailed records with a commitment to review them regularly
  • Learn to incorporate a systematic screening method like you
  • Use emotions (both personal and market) to my own advantage
  • Know my exits before making any trade
  • Don’t be swayed by the latest and greatest strategy I hear about
  • Keep it simple. Complex strategies are no better
  • Avoid crowded trades
  • Take time to look for reasons NOT to buy
  • Let profits run longer. take losses quicker
  • Trade what I see, not what I want to see
  • Be more proactive and react faster to situations I find
  • Make bigger, but less frequent trades
  • Stay patient
  • Focus on value of companies and not on the temporary market emotions
  • Be more nimble
  • Keep better notes
  • Adopt an opportunistic versus a rigid bull or bear bias toward the market
  • Enjoy the game more
  • To quit counting the value of my account on a daily basis
  • Stop looking for the holy grail
  • Figure out what trade related information to consume on a daily basis and keep what is useful and leave out that which is not
  • Avoid information overload by limiting what I read
  • Don’t read stock blogs
  • Turn off the TV and dedicate more of my time to become a better trader
  • Set up a lazy portfolio
  • Focus on proper asset allocation
  • Never forget that “when you are through learning you are through”
  • Recognize mistakes early, exit, and move on
  • Take partial profits routinely, but keep money on high-performing stocks
  • Follow my system
  • To screen & scan my watchlist in a consistent manner each and every time
  • Take routine breaks away from the market to refresh and gain more perspective
  • Add more fundamental research to my technical research
  • Concentrate on finding just one really good idea per year like Warren Buffett
  • Stop searching for shortcuts or quick fixes – take baby steps
  • Read at least 3 more trading books in next 3 months
  • Focus, focus, focus – ignore all outside distractions
  • When a strategy works, have the courage to follow it through, when it does not work, to have the wisdom to stop trading
  • Find and exploit long-range sector themes
  • Open my ears and keep my mouth shut
  • Never panic
  • Be humble

The 10 Scariest Things in Trading

  
  Education
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I was reading this article and started thinking about the ten scariest things in trading: The Top Ten Things That Make Horror Movies Scary. 

1. Fear of Death.  This is the ultimate fear, both existentially and psychologically. It isn’t really a horror movie if people don’t get killed.

In Trading: fear of depletion of assets.

2. The Dark. From our earliest childhood we are afraid of the dark – not the dark itself, but what it hides. It makes horror movies even scarier to watch them in a darkened theater, or a dark living room, right?

In Trading: not knowing enough news

3. Creepy, Crawly Things. Snakes, spiders, rats, and other crawling things are scary in and of themselves, but when they touch the skin, in the dark, it amplifies this common phobia.

In Trading: monthly expenses

4. Scary Places. Horror movies are full of scary places – graveyards, old houses, overgrown forests, dungeons, attics, basements. These are dark places, where evil things can hide.

In Trading: instruments or markets that one had very bad experiences with.


5. Disfigurement. Many horror movies feature grotesquely disfigured antagonists (think Frankenstein’s monster, the Phantom of the Opera, zombies). Studies in early development have found that young infants will react with fear to asymmetrical or disordered faces. (more…)

Overconfidence

  
  Education
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The perfectionist may never be really convinced that a certain market setup is right to enter into a position and the overconfident trader may neglect certain signals that the setup is not worth trading on.

A trader may become overconfident after a few successful trades. It’s very hard to fight the ‘I am the market God’-emotion. Making a number of consecutive successful trades is not necessarily a sign you have figured out how the markets work, the same way a losing streak is not a sign you’re a bad trader.

After a huge success it’s tempting to trade a larger size or accept more risk. The general idea is that simply because of the huge profit in the previous trade, more size and/or risk is acceptable in the next. But when you think about it, a realized profit is part of your account now, it’s no different than money made on earlier trades, it is money you worked hard for. There can be good reasons to increase trading size or risk, but that should be part of a plan, not just an impulsive decision based on a feeling of being ‘invulnerable’.

Ask yourself, which feeling is worse: losing yesterday’s profit, or losing the profit made 10 days ago? If that feels different, the first one being less worse, then it may be wise to stop trading for a few days after a good trade. During those days, the profit will slowly change from being ‘an extra’ to being ‘part of your trading account’. In other words, you get used to it and handle it with more care.

Overconfidence can also come from a (strong) conviction that the market has to go a certain direction based on a personal opinion about the economy, politics, the FED, interest rate, unemployment numbers etc etc. This kind of confidence has been discussed before. The remedy is simple: don’t trade the news.

Control Your Emotion or Other People Will Control You

  
  Education
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Many people are controlled by fear. Fear of losing an opportunity causes you to act in haste. Fear of losing your paper profit causes you to sell out too early. And fear of losing everything causes you to sell right at the bottom. Although selling right at the bottom is caused more by frustration than anything else, fear also plays a part. How do we overcome these kind of fears? Knowledge is the best weapon. When you know, people cannot scare, frighten or intimidate you. They can’t con you in anyway. Knowledge is your first key to success.
Hope causes you to hold on to a falling stock. Sometimes your hope is rewarded; your stock turns around and you make a profit. Unfortunately, hope often becomes hopeless. Experience tells me that it is much better to keep an uptrend stock and let go a falling one. This strategy is vital, simply because a trend in motion is likely to continue. Hope also causes people to buy into excessively high PE stocks. I prefer what is good today and better tomorrow.  (more…)

HOPE

  
  Education
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While it may sound innocent enough, hope can be the great profit-killer for traders and investors alike. Hope is a dangerous emotion because it can cause irrational thinking. Hope is the reason some traders add to losing positions — because they are convinced they are correct and hope the market will eventually vindicate them. Unfortunately, the market does not operate under these rules. When you’re trading a stock based on technical analysis, the market is always right.

Before every trade you make, you must make a pact with yourself to sell the stock if it fails to do what you anticipated. If hope sneaks into the picture, prepare yourself for larger losses.

FEAR

  
  Education
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How to prevent Fear in trading ?

you have decide to trade a particular system. you get an entry signal, and put on the trade. You put in your protective stop, and you know what will be your signal or target for exit. There is nothing more to you need to do or worry about. The market will do the rest for you. You are along for the ride, and you know when to get out. So there is nothing to be fearful about …

“There is hardly anything productive about worry or fear when you cant do anything about the circumstances” by Buzz Aldrin

Fear is an emotion. It is created by us and therefore we can uncreated it. Fear is created when we think that our trade will lose a lot of money or things that will prevent our trade from losing. The keyword is think which is thoughts in our mind. When you keep on thinking of the thoughts of losing money and fearful of it. STOP!! Take a deep breath to break your connection. Then ask yourself, “Is this probable?” Continue to challenge the thought by asking, “What are the probabilities right now?” Then choose to take control of your thoughts and think term of the current probabilities.
Fear will lead you to disaster if you do not know how to release it. Another way to release fear is to have a shower to calm down yourself. (more…)

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