Trading Emotions

The most common emotions discussed by traders are greed and fear. In fact, some maintain that the only emotion that they contend with is fear: fear of suffering a loss, and fear of missing out on an opportunity. The actual array of emotions is far more complex than that. How many of the following do you recognize?

Early man probably experienced an adrenaline rush while hunting: stalking his prey or a member of an opposing tribe. Nowadays we are more likely to experience excitement when dealt a straight flush in a game of poker; or when our latest trade starts trending upwards on big volume.

Recognize Tiger Woods’ fist pump when he holes a 20 meter putt? Or the roar of the crowd when the home side scores a touchdown? Or when your trade has jumped almost 100 per cent inside 2 weeks.

[B]Fear of Losing Out[/B]
The crowd behavior at a closing down sale: “Grab as much as you can”.
Or buyers when stocks are gapping up in a strong bull market: “I don’t care what the price is, just get me in”.

[B]Fear of Failure[/B]
The trepidation a weekend golfer feels when standing in a deep sand bunker; or the uncertainty and indecision you face when placing a trade after a string of losses.

[B]Fear of Impending Threat[/B]
When you see a police car in your rear-view mirror; or when the dentist says: “This isn’t going to hurt much.” Or when your stock posts three large red candles.

[B]Denial[/B] (not a river in Egypt)
When price gaps down through your stop level: "This is not happening to me – there must be some mistake."
Victor Sporandeo describes this well: When we confuse our wishes with reality. Denial is forlorn hope; a refusal to accept the situation:
* “This is just a temporary aberration – everything else is still going up.”
* “I am sure that the stock will bounce at $4.20 – I’ll move my stop down to below there.”
* “The fundamentals are still good – I’ll hold for the long run.”

The attack response triggered when someone cuts you off on the highway; or steals your parking space; or when a trade just won’t go your way:
* “I’ve been cheated.”
* “Brokers are a bunch of thieves.”
* “It’s the government’s fault - they should protect us.”

Inward-directed aggression. Irritability. Negative self-talk: “You idiot – how could you have missed that.”

An inability to concentrate or make decisions. You review more than twenty different indicators, many of which you have not used in the past two years, in an attempt to arrive at a decision – while price ticks inexorably downwards.

What Hamilton referred to as the abandonment of hope: “I don’t care what the price is, just get me out.”

Feelings of loss, sadness, worthlessness or helplessness. Loss of confidence.

Resolution of the whole process. Recognition of past mistakes. Acceptance that you have to incur losses if you want to make profits. The inner calm that comes from having “let go”. A feeling of having gained from the experience. An expectation that you will do better the next time. Confidence restored.

Each of the above emotional states is triggered by a different chemical cocktail released by your endocrine system. Most severely impact on your ability to make rational decisions while trading. Later pages will discuss strategies for managing your emotions in order to enhance your trading.