Harnessing your Trading Emotions
Anyone that trades for a living and remain consistent will tell you that trades don’t happen on your screens they happen in your mind. There is a huge difference between a loser and a big loss or the difference between a winner and massive win. Most traders practiced or novice will tell you or at least try to relay how important mentality can be to your trades. Let’s break that down a little and establish some key points that may be able to help dissect the cons and pros of the emotions that we experience as we trade. When I speak about emotions I’m not talking about “feelings” as they are used commonly to mean the same thing but, are actually different. Emotions are physical, in that they can be measured by blood flow, brain activity, facial expressions and body language. Feelings, on the other hand, are more associated with memories. We are not here to learn about the way the mind works obviously but, as it applies to our trading we should be learned on the facts.
We are all aware of the devastation that can be caused by not being able to manage a trade. Any trade mismanagement sprouts from mental conflict, mental struggles come from distrust in a setup or strategy, suspicion with your strategy comes from historical failure either monetary or mentally. Here is where the emotions lay dormant until past defeats revive the errors. So, what are these most commonly seen emotions?
We have FEAR, GREED, HOPE, REGRET, FOMO. The list can probably go on for a bit but we all know these few very well and have most likely experienced them in some way or the other. We don’t start trading with knowledge about trading emotions or have trading emotions built into our system. We develop these trading emotions over time due to loses or gains. Let’s dig even deeper into the psyche of trading emotions and how we develop them before we try to relieve ourselves of them. How can you try to resolve a problem if you don’t know how the problem started in the first place?
Do we all remember how scared we were to take a trade at the beginning? Do you remember how you tried to size incorrectly? Do you remember how you put those stops where you needed them to be? The answer is probably no. The reason why the answer is NO is that we didn’t have any emotional ties at the very beginning. This is how most traders lose money. Not that their trades are bad but because they don’t have any fear. They do have greed on the other hand. So how can we have one without the other? Fear has not been introduced into our system as yet. We are still very reactive and driven by a desire to make money. We are not concerned with the risks and or the belief that we can actually lose money because it hasn’t happened yet. The truth is, the beginner trader has the best emotional togetherness than experienced traders but don’t know how to harness that lack of dread. This may seem confusing because we are aware of the emotion and cannot remember what it feels like to not be fearful. Most traders understand fear now due to losses. So, we can say that FEAR is a bad emotion and should be eliminated from the strategy. This would be much easier said than done. Mainstream would tell you to get rid of “trading emotions”, the vast majority won’t be able to actually help you to first corner the issue and use it in a positive way. Let’s talk about FEAR itself and how it applies to you and your trading. Do you fear taking trades? Do you worry about a trade not working because it’s become a normal occurrence? Do you feel like it has taken over your trades and grown into its own entity? Some of these may respond to you and your particular situation and some of it may not be where you are. I think we all have FEAR. I think its okay. I think it’s normal to be anxious when your money is put to work. I think FEAR could be a helpful emotion. I think, if used properly FEAR can actually help you. It can keep you from making bad decisions. It can keep your positions grounded and take away the “fear of losing” by using “fear of losing” to build your risk management skills. Use what hurts you the most, losing money. Use fear to train yourself by putting rules into place. If you’re worried about losing money on a trade then why not be using that emotion to your benefit? You can, in turn, USE FEAR to your advantage. If you’re scared then use stops, use a position size that won’t hurt your account, trade a chart that doesn’t cause you to panic. Don’t aggressively trade a chart that you know shouldn’t be traded. Don’t put yourself in a situation where it causes your mind to go into panic mode. Most bad things happen in panic mode. Now, when you look at a trade and have fear, instead of deflection think protection. Instead of saying “I’m going to lose” say “I’m going to shield myself”. Simple words and mind control can be the difference between you taking a position feeling terrified verses feeling safe. You can begin to see a huge difference in your trading by establishing mental twists to common issues.
Let’s move to the next emotion, GREED. Now you’re wondering “how can he show this being positive”? This one is actually much easier than FEAR. Let us understand GREED as it applies to your trading. A greedy person is someone that wants more. Someone that wants more than is given or allowed. A chart will only give a certain amount. Did you know that? I see many traders that don’t remember this simple truth. A chart can only go so far. A trade if it’s a day trade or a position trade will only allow for so much before it shows resistance or sellers. We live in a “microwave world” and traders expects the same from their trades. Traders expect to enter into a trade and instantly be green, they expect to be instantly making money. GREED, in my opinion, is an emotion that is integrated into us all. As babies we want more milk, as adults we want more money, at an old age we want more life. Point A to B should have been changed to point A to Z many years ago. This way humans would learn to understand humility and patience. I’m not saying GREED is a bad emotion, not at all. We all want more, we strive for more. We seek knowledge for more wisdom. We seek change in efforts to propel ourselves. GREED is vital to survival. GREED makes us hungry, gives us desire to excel. Without GREED we would be boring, simple-minded individuals that settle for normalcy. I was NOT introduced to this world to be normal. I will not be herded into complacency but, I will stand out and be GREEDY. I will always work my best to obtain greatness. You see traders that hold a position longer than you did and wonder why? It’s GREED. It’s the push for more, it’s the conviction that they will be more profitable. Traders that push for more will sometimes get more. Here’s the kicker; NOT ALL TRADES WILL GIVE YOU MORE. Which trades will give you more? Well, that’s another technical webinar. GREED can be used to your advantage to teach you one of the most important lessons of trading; PATIENCE. Traders don’t want to be patient, they don’t want to be GREEDY for the right things. They want to be GREEDY for the wrong things. GREED and FEAR together bring risk management and patience to the table.
Let’s talk a little about HOPE. When executed incorrectly this emotion will keep you into a failed setup longer than you should be in. Let’s understand why a chart moves in a formation and then we can try to establish why going against that formation usually results in a failed trade. As humans, we are linked to thinking similarly. We are grouped in thinking and mannerisms. A group thinking projects a direction. A direction projects a trend. A trending chart will usually result in a continuous direction. Going against the trend sometimes inadvertently by not using stops etc. results in further pain. HOPE steps into play. The HOPE keeps you in a position even when there is no fundamental or technical reason to be grounded anymore. HOPE is the loser emotion. I have learned this the hard way so I’m speaking for myself when I say that HOPE is the emotion of a failure waiting to happen. HOPE is not an emotion that has any good usage. HOPE has no place in your strategy and should be taken away. How can you eliminate this plague of an emotion for trading? Use the risk management that FEAR created to eradicate yourself from this brutal trading emotion. How many time have you said “I hope this trade work”, “I hope today I can get rid of this bag”, “I hope the chart goes back green for me”? We DO NOT need HOPE in our day to day trading routine and this one I have no soft spot for. Eliminate HOPE with stops. Let your program do for you what you cannot do for yourself. Stops are great!!
REGRET? What is this? Don’t live in regret. Don’t trade with regrets. When traders think about regrets they think about that big trade you missed out on. How many of you regret selling too early? We all have sold early so, we all have the regret excuse if we want to use it. We will never gain traction to grow if we keep reminding ourselves of past data. We will never be able to move forward if we keep looking backward. Keep this in mind; “the windshield is much bigger than the rearview mirror so that you can focus on what’s in front of you not behind you.” When you have REGRET you also open the door for HOPE to come back in. Your mind is sacred, keep it locked. Keep it clean from noise and distractions. We can be the biggest distractions to ourselves and we tend to rather blame others but, in fact, we are our worst enemies. We can also regret the money we’ve lost. Oh yeah, that little thing that hurts you when you think about it at nights. It’s nothing you can clean up or change and worrying about that cannot and will not bring it back. The market is a very unforgiving beast so try to be friends with it and you will be much better off. Never REGRET trying! Never fault yourself for trying your best, or did you? Did you take the right steps? Did you learn the right way? REGRET not adhering to rules in efforts to make yourself better. We won’t only have good trades. We will have many charts that will fail us. How can you not live with REGRET then? Make that money and always remember what’s your job!!
FOMO is it really an emotion? It is commonly associated with trading emotions but I can show you how to harness this one also. Use your FOMO to strengthen your discipline!
Emotions are lower level responses occurring in the subcortical regions of the brain, the amygdala, and the ventromedial prefrontal cortices, creating biochemical reactions in your body altering your physical state.
Feelings originate in the neocortical regions of the brain, are mental associations and reactions to emotions, and are subjective being influenced by personal experience, beliefs, and memories.