Understanding our emotions when trading

We repeatedly say that psychology is by far the most important aspect of trading in the markets. The best market timers are able to control their natural emotions and make calm, calculated decisions about when to buy or sell. There are a huge array of emotions that different investors may go through but the bottom line is these are not all conquering, you can control them like anyone else.

Firstly, let’s look at the emotion of ‘fight or flight’. In the trading arena, this is the emotion that could stop you from taking a new trade through fear that it might become a loser. The way winning market timers overcome this emotion is by having a detailed strategy. Strategies are not affected by emotions and also have defined risk parameters. When you know that your strategy works over time, it gives you the confidence to take new trades. Even if you lose on a trade, you know that your strategy will deliver you more winners than losers over time. The other benefit of having a specific strategy is that it can actually be exciting. You never know when the next big winner is going to come along, but when it does, you know your strategy will take full advantage of it.

Secondly, let’s look at anger and frustration. These are another two emotions that can influence your trading decisions. We are likely to become angry when things don’t work out the way we originally hoped. Maybe we are angry at ourselves for not sticking to our strategy rules, or for simply acting too impulsively. Maybe we didn’t stick to money management guidelines and exposed too much capital to that trade or maybe we are angry because some unexpected external event affected our trade such as a bad economic report or other. Whatever way you slice it, anger tells us we are not in control. Often, frustration and disappointment arise when we make these errors listed above and we acknowledge what we have done is our own mistake. We know we now have to start again and this can be frustrating. However, this process is all part of the learning curve of attending the university of trading.

Finally, accepting that we cannot possibly know what is going to happen around the corner and that markets will behave in a way that goes against our prevailing thought at times, will enable us to become great traders. If you can accept that the market can and will go against your timing strategy at times, but that this is all just part of the probabilities of trading, you will be less affected by it. When you are at this stage whereby you are unaffected by what the market does, you will have controlled your emotions enough to make trading appear effortless…