The trading pundits say that to be a successful trader, you must control your emotions. The general consensus seems to be that on the road to trading profitability, your emotions are your biggest enemy. The advice these experts give is to become more disciplined, to put all emotion aside.
The problem is none of the trading experts can tell you how to get rid of emotions. That's because the experts are all missing a basic concept about emotions: emotions are not the enemy; emotions are information. Most of the time, say 95%, the information is about you...not about the market. But you treat is as though it is about the market. Big mistake. Really big mistake.
Why do we misinterpret this emotional data? Ambiguity. The thing about the market is its ambiguity: We don't know what the market is going to do next. Sure, we have indicators and systems that help predict market movement, but none of these can tell us with certainty what the market is going to do each and every time. When we are faced with this ambiguity, we feel uncomfortable and unsure. Not knowing what is going to happen next makes us feel out of control -- this is the perfect scenario for our emotions to run wild.
Whatever is going on inside of us gets projected on the market. If you feel scared because your last trade was a loser, you may hesitate to get in the next trade even though your system clearly says to enter. What’s changed? The trade set-up hasn’t changed; the risk to reward ratio hasn’t changed; the percentage of wins hasn’t changed, the market is the same old market. But you missed a great trade because your feelings changed. We have all made the mistake of acting as though what we are feeling is a reflection of what’s going on in the market.
There is a lot of talk about the two emotions of fear and greed, but it is really a lot more complicated than that. We can feel inadequate (I'll never learn how to do this); angry at the market (I'll show you I can trade, I'll double my lots); angry at self (How could I be so stupid? I moved my stop again.); despair (I just can't take another loss, what is my wife going to say?); elated (I'm so hot today I can trade anything!), and so on. In all of these examples, the emotion is information about the trader, not about the market.
So, the first step to becoming a more profitable trader is to get the emotions you are feeling up to a consciousness level where you can deal with them. One of the best ways to do this is to talk out loud. Whenever you are aware of being anxious, angry, hesitant etc., say what you are feeling. Speak out loud what you are saying to yourself internally... about the market, about your ability to trade, about the money, about what others are going to think, and so on. Remember that all feelings are acceptable; it's what you do with them that is the important part.
What you are now saying out loud is the raw data, the information you need, to change your behavior patterns. Ask first "What is the emotion I'm feeling?" Then ask, "What am I saying to myself that makes me feel that way?" Next, ask "Is it true?"
Just going through this process will put you in a different emotional state, one in which you have more conscious control over your actions. You’ll come to recognize that you emotions are more about you than about the market.
Now you’ll want to ask, "Is the strategy I'm using to handle my emotions working to make me profitable?" In other words, when I feel this way, how does it play out in my trading?
What about the other 5%? That’s for another post….
Best Wishes for Profitable Trading, Dr. Josie
Struggling with in your trading? If you have a question about the psychology of trading and how it affects your equity curve, send me an email to josieshepard@me.com
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