Many people tend to think that one needs to remove all emotion from trading. From my experience, this is not possible. There are some very old and primal instincts that we are ingrained with that can be challenging to overcome. Removing those primal instincts – and I’m talking about Fear and Greed here – is perhaps possible, but probably not plausible. Therefore I think that learning to control emotion will not only be a lot easier, but will also not turn you into the robot that never smiles and just can’t seem to embrace the concept of dancing.
So to avoid turning into an emotionless void, while also trying to avoid making silly trading mistakes due to bad decisions made under the influence of irrational emotions, I need to teach myself to control my emotions in such a way that it is not to the detriment of my overall mental wellbeing and also to the advantage of my trading.
It may sound a little crazy, but this is a real issue. The argument that you had with your spouse or parent or child can and will influence the way in which you make decisions. The frustration you experience in traffic will overflow and accumulate with the frustration you feel because of that trade that is going against you. The impact that our everyday emotions have on our ability to make rational decisions, and thus good trading decisions, cannot be ignored.
From what I have read and understood, there are a few things one can do in order to achieve emotional control. The four A’s of emotional control, if you will. I don’t think they go in any particular order as the circumstances around the constant stream of decisions that need to be made and the emotional framework in which they need to be made are constantly changing. I do however think that the last one will always be to Act.
The basic idea is that there are 4 steps:
The first step is to Acknowledge the emotion. “I am feeling angry because I didn’t take my stop loss”, or “I am feeling confident because I banked a big winning trade”. There are a variety of them and each has a different effect of you. You need to first understand what emotion you are feeling and most importantly, what is causing it. This should help you deal with the cause of your emotions and bring you back to a rational state in order to make a good decision.
Then you could Anticipate the affects that various possible outcomes of a potential decision would have on your emotional state. “If I took this next trade and I lost my entire month’s gains if it didn’t work out, I would be very angry with myself and feel rather crushed and hopeless”, or “If I take this next trade and it also turns to gold, I will feel extremely confident and feel like nothing can ever go wrong”. This should help you deal with the effects of emotions before they are able to influence your decision making. This way you are creating a road map of your emotions and it should be easier for you to acknowledge them when they crop up.
You then need to Accept these various outcomes and try to understand how these new emotions can influence your decision making. “I am on a hot winning streak and I am feeling supremely confident”, or “I just banked a huge loss and I am feeling very scared of the market”. Again the purpose here is to bring you back to a state of rationality. By accepting the emotion you are feeling, you are taking the power away from it.
The last step would be to Act in a rational manner. You now understand your emotion, what has caused it, what could influence it and how it could change. You also accept the potential impact that this emotion could have on you. Knowing all these things should allow you to sit back and see the bigger picture, if you will, and allow you to make a decision independent of emotional influence.
I have to say here that I am no expert at this and that this concept is rather new to me too. It is something that I will be working on in the months and years to come because I believe that it can be incredibly helpful in all aspects of decision making. The purpose is not to remove emotion, but rather to understand it and counteract it if it is proving detrimental to your own best interest. Seeing as trading is essentially just that, making decisions that are in your own best interest, I believe that mastering this should be one of my highest priorities.
@TraderPetri
28 April 2015
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