The Psychological Battle

People were not made to trade. They were made with emotions. Emotions are wonderful in life; I’m so happy I’m an emotional being! However, emotions play havoc with trading.

The ideal trader is one who decides on a system and carries it out precisely. The ideal trader does not get discouraged after a loss or a string of losses. He feels no remorse over an opportunity barely missed. He does not become elated or smug after a gain or a string of gains. During a swift market move, when others may be panicking, he feels nothing. He just continues to follow his system. Day by day he follows his regular routine, analyzing the markets with the same interest, even after a period when his system has not been working.

But who is really like this? I don’t know many who are. We can strive to be perfect traders, but emotions will always be there. Sometimes you just have to acknowledge them and work with them. For example, during countertrend moves (e.g., a short-term rally during a bear market), I sometimes begin to feel the emotions welling up in me that must also be there in other market participants (i.e., optimism). When that happens, I try to recognize what is happening and think contrarily. For example, after the market has moved up for several days, I’ll begin feeling optimistic. At that point, I stop myself and think, “I’m feeling optimistic about stocks. I’ll bet others are feeling this way too. That means the end of this run might be near.”

Here are some other thoughts that might help in controlling your emotions as you trade. When in a position that you’re uncomfortable with (e.g., when the market is making a run against you), it may help to ask yourself, “If I weren’t in this position already, would I be entering it now?” If the answer is yes, hold tight. If the answer is no, then get out. In other words, transport yourself into an imaginary situation where you’re sitting with cash, just calmly watching the market. Would you, in that situation, be jumping into the position you’re already in?

Another thing I find helpful is deciding ahead of time what I’m going to Off hours, when I look at the data, I may get a feel for what I think the market is going to do. I’ll decide right then on a plan. Then I’ll also imagine other tacks the market/stock might take, and I’ll decide what to do if any of those scenarios play out.

Sometimes I write down my plans, sometimes not, but at least I have them firmly in mind. Having my responses preplanned allows me to trade mechanically instead of emotionally. This is especially helpful when your system is somewhat arbitrary (that is, depending on human judgment), as mine is. 

Not only does this help me trade mechanically, it also helps me do away with useless remorse over trades that went bad or over having closed a position too soon. I remind myself that I was only following the plans that were made earlier in calm forethought.

We do the best we can as traders. That’s all we can do.

Happy Trading!!!

Cheers.