| Fear – Fear causes the day trader to hesitate and freeze when positions should be entered and exited. Fear can also cause day traders to take losses, Doubt – Doubt causes great opportunity to be missed and causes a mind to be scattered and without firm direction. Greed – Greed will cause day traders to hold onto positions too long often causing profit to turn into loss. Hope – Hope will cloud the eyes of probability. Hope is not for day traders. |
Archives of “fear” tag
rssFEAR
No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.
Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear. The fear of loss and the fear of not having enough. There’s a difference between being greedy and being fearful of not having enough, and it’s important. Greed is defined by the excessive desire to possess wealth or goods. Synonyms include lust and gluttony. The fear of not having enough is very different, and I believe that is what drives market participants.
Trading is inherently a competitive exercise. We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less. We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock. It’s only natural. And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.
I’ve felt this many times, the fear of not having enough. And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole. Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply. Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)
Deception Theory
Deception theory often refers to the eight basic emotions communicated through facial expressions: anger, fear, sadness, joy, disgust, curiosity, surprise, acceptance. Are these emotions manifested in markets? Are they predictive? Do they change? Is the theory of deception useful for studying, understanding and predicting markets?
Madame Market
If you have the feeling that the market has a split personality, one day out to shower you with peace and blessings and the other to punish mercilessly, it can only mean that on some level you are still taking it personally.
Think of it this way – there are too many players with too many conflicting ideas about market direction for it to ever form one cohesive personality. The only exception I have witnessed to this rule is when fear clearly dominates the scene, and ironically these are times that are the easiest to trade.
The highest attainment for a traders developing psychology is to achieve what has been called “intellectual purity” – that is the state free from emotional reactiveness to market behavior; the ability to accept both reward and punishment with equanimity and understanding.
That said, we know that big players perform ‘market sweeps’ to take out stops at sitting duck levels, so we can at least attempt to protect against that. The main point though is to struggle against any dimly forming impression of the market being a single entity with a personality.
That is an illusion.
The Power of Regret
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.
The market is both carrot & stick
Over the past year of my trading life I have identified several interwoven cycles of learning. The most obvious being that knowledge and practice combine into your overall understanding. Knowledge alone (book learning) does not equate to understanding – you also need to practice in the market. The two combined give you what we generally call experience. Experience seems to be the thing that makes the difference. Someone who has experience tends to do better over someone who has no experience, in any field. If you were having brain surgery, would you rather have a surgeon doing it who has experience or no previous experience? Yeah, enough said.So over time, our understanding increases (our experience). But you may also notice that your ability to act on what you know seems to lag far behind, and this can be incredibly frustrating and puzzling. Don’t you wonder at it, every time you make the same stupid mistake over and over? Whats going on here?
The fact is that we have two brains (more actually, but lets stick to two for now) – an intellectual brain and an emotional brain. In the East, there is a common analogy of rider and horse. The horse (emotional brain) is stupid and only knows such things as fear, hunger, punishment and reward. The horse understands the difference between a carrot and a stick, but not much else. The rider struggles to make the horse go where he wants to go.
This is our problem in trading. Our emotional brain (the horse) understands fear and greed, and unfortunately these fight or flight level of instincts are stronger (and faster) than our intellectual brain; they have to be. If a mugger jumps out of the bushes you don’t have time to decide if its a mugger or your friend playing a trick on you, you just run.
In the market however, this mechanism is the cause of all our woes. The market provides both a carrot and a stick. A sudden break out (carrot) lures us into buying long, and then suddenly reverses and stops us out (stick). We are lead all over the charts in a random walk, one minute its carrot, the next minute its stick; we are the dumb money.
Who then is the smart money? Surely based on the above it is simply those individuals who can actually control the horse and act according to a trading plan. There is no conspiracy by the major institutions to steal your money from you – you simply hand it over to them or other traders (and they happen to be willing to take it). In the case of the smart money, the rider is in charge, but in the case of the dumb money the horse goes where ever his instincts take him, and the rider simply hangs on (until he falls off that is).
Courage and Trading
According to Plutarch, “Courage stands halfway between cowardice and rashness…” Clearly, we don’t want to be reckless; and clearly, we don’t want to be hesitant and timid. What we need is a balance. As we go about our trading moderating our greed and our fear to a combination of healthy desire and clear minded caution, we use courage to go forward.
Courage doesn’t mean closing your eyes, holding your nose, and jumping into the deep end. It does mean moving forward with clean and clear perception as well as steadfastness of purpose.
You don’t need courage if you’re totally confident and unafraid. Courage, according to John Wayne, is being scared to death and saddling up anyway. Because people tend to fear the unknown, and the unknown is all that is certain about any given trade, we need to employ courage. Since trading is always new, since anything can happen and it often does, since the wildness lies in wait, we need to overcome uncertainty and fear so that we can appropriately enter, exit, and remain in trades.
When asked what he meant by “guts”, Ernest Hemingway told Dorothy Parker in an interview “grace under pressure”. Trading is all about grace and gracefulness under pressure.
The good news is that courage is like any muscle. It grows and becomes stronger the more you use it. Often as I trade I’m unaware of utilizing courage. I know I’m extremely alert. I may even be excited. I’m not aware of any fear until something starts to go wrong. However, that alertness and excitement is a product of adrenalin running. Excitement or fear comes from the interpretation you give to the adrenalin high. The more you act as if you’re unafraid, the less afraid you become. It all gets easier. Act the part and become the part. Make it your goal to trade with increasing grace under pressure.
The difference between excitement and fear depends of what you are imagining.
Are you imagining loss or are you imagining profit? Of course, you always have to keep the alternative in mind as trading is all about balancing the alternatives, profit with loss. But you don’t have to put loss into the foreground of your mind, because you never would put on a trade unless profit was the probable outcome. Direct your imagination towards profit, and suspend all thoughts of loss–once you’ve put your stops in.
“Don’t cry before you’re hurt.” says a proverb. I would add, don’t mourn a loss before you experience it. Don’t even mourn it after you take it, get on with the next trade, and the next, and the next. Anticipate profit. That’s what you’re there to experience. Ah yes, and as another proverb states: “Fortune favors the brave.”
Trade To Win, Not To Lose!
When athletes are consumed by not losing rather than by winning, the game is over, often before it has even started. The same precept applies to trading. As crazy as it sounds, most traders aren’t making the money they could be — and the reason, I’d argue, is the fear of losing it. Traders are far too worried about giving money back. This paralyzing phobia can transform talented, elite professionals into disappointing underperformers.
How many times have you been up in a trade and started to think about the money? Your head tells you to bank it quickly and then play it safe. After all, you made your mark for the day, or even the week, so your job is complete. That’s not the mark of a trader; that’s the mark of an accountant.
Trading is an occupation based on fleeting moments of opportunity. (more…)
Positive awareness trumps negative self talk
The language you use as a trader can provide either positive reinforcement through honest self awareness or negative results through demeaning self talk. In other words, when discussing your trading with others or in your journal become aware of how you view yourself. Do you see yourself as an amateur, a whipping post, a loser? Do you blame an indicator or the market or an advisor for your failures and lack of discipline? When you are with others do you brag about your winners and hide your losers? All of this talk is based on fear: fear of being wrong, fear of what others might think of you and your decisions; fear of the market; fear of being afraid. When you practice positive self awareness you create a fertile learning environment that allows you to grow and progress as a BETTER trader, not focus on BECOMING a GOOD trader (implying that you are a bad one). When I work with individuals I often hear the following: “If I would just do this I would become a good trader” or “If I had your discipline I would be a able to make money.” These statements are grounded in a sense of doubt and fear. Instead, these statements should be replaced with “I am becoming a BETTER trader because I know the market cannot hurt me” AND “I am becoming a BETTER trader the more I stick with my rules.” See the difference between the two? One is focused on the joy of progress; the other on the fear of not being good enough. Are you focused on progress or failure? Listen to yourself and you will quickly figure it out. It is EASY to get down on yourself and much HARDER to remain positive in the face of adversity.
My Trading Resolutions for next 3 months
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
Think for myself