Your Emotions Are Your Enemy
You have to be able to control yourself. You can't let emotions get in the way of your thoughts and actions...Warren Buffett
One of the most difficult aspects of trading in today's market is handling your emotions. For many months, we have struggled through a market and an economy that seem intent on remaining an emotional yo-yo. To say "don't get emotional" is pointless. Everyone is emotional about money. Money is the last great taboo and it associated with a myriad of emotions.
So what can you do about your emotions as they apply to trading and investing? Of all the books and papers I have read or written on Trading Psychology, there is one aspect that stands out most clearly to me. That is the challenge of living in the past, and I believe that this is one of the most significant obstacles to trading success.
Why? Because the brain remembers. The brain imprints ( through neuronal circuitry) loss or gain on the temporal lobe memory area, and generates fear or greed as a result of it. The larger the loss or the gain, the greater the neuronal imprint becomes. Large losses are manifest as fear and large gains are manifest as greed. Both are equally destructive to further success with trading.
The real culprit is long term memory. It is the memories of the large losses or large wins which stay with the unsuccessful trader and cause continual sabotage and inability to move forward.
The best traders forget about a loss the minute they take it and move on. They are confident in their system and their ability to execute it. It is not about the money for these people. It is about finding a system that will bring them more profits than losses. The best traders know how to take losses and not become depressed, angry, jealous, disgusted or defeated. They know how to take gains without gloating, boasting, cha-chinging ( and you all know how I feel about that word) or becoming outrageously happy. They only see the trade they are about to enter---not the trade that just ended. All past trades are out of sight and out of mind.
NEXT!!
MOVE ON!
If you cannot do this, you will fail because fear and greed will lead you down the wrong path
So what do fear and greed have to do with forgetting about the past?
Fear doesn't form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don't enter your next trade. Of course, Murphy's Law dictates that the trade you don't enter is the one you should have entered, which only compounds greed (and frustration). This particular problem is fueled by the expectation that every trade you enter should be profitable. If you truly believe that, then here is an important piece of information for you - not every trade will be profitable!
Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered. Finding good trades is hard enough, while finding poor trades seems to get much easier after a couple of winners. Never mistake genius for a little luck.
There is a critical difference between 'being emotional' and 'being blinded by fear and greed'. "Fear blinds us to opportunity; greed blinds us to danger - emotions cause 'perceptual distortion' where we only see the part of the picture that our beliefs allow us to see."
It's important to recognize your emotions, and more importantly, how they affect your investing and trading approach. In general, we all want to be bullish, and are eager to see any upward market movement as a rally, even when it's not. Simultaneously, after a volatile beginning for the year we are all somewhat gun-shy right now, especially in the face of mixed messages. Regardless of your current opinion, you are better served by feeling with your heart, while investing with your head. Are fear and greed driving your investment decisions right now, or are you in control of your emotions? If you're not sure, I'd recommend taking a step back and looking at the market from a different angle......an unemotional one.
TOP MENTAL TRADING EDUCATION BOOKS
Think and Grow Rich
12 Habatudes of Succesful Traders
Exceptional Traders - The Mind Game
The Disciplined Trader: Developing Winning Attitudes
The Investor's Quotient
Winner Take All: A Top Commodity Trader Tells It Like It Is
Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading.
U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
