When we think about trader education, most people’s attention goes towards learning to use technical analysis or fundamentals, choosing sources of information and making sense of them with intent to identify potentially profitable positions. The media report changes in the markets and in some of the fundamentals that influence them.
The trading psychology of traders rarely get a mention, yet these have an enormous impact on individual traders’ results. Emotions influence our capacities to take in information, process it and make functional decisions and the feedback for a trader is instant. We are not proposing that an alert, embodied, flow state will guarantee results by itself, but in combination with a good trading system and plan, it will contribute to effective decision making and hence, profits.
To foster an understanding of the scale of problems many traders experience with trading emotions, we will outline below the different stages of a trade and events that can happen to induce emotional difficulty for traders.
Stage 1 – Commencing a trade.
When novice traders place a trade, there is often a mix of emotions. Excitement may be experienced about the potential for profit; fear about the potential for loss. Hesitation is often experienced if the trader is unsure about trading or about the position. These things can all happen at once or in sequence.
Psychological research has identified this common thought process. Once a decision is made, whatever the subsequent result, people look for evidence that they have made the “right” decision after they have made it. Their perception of the probability of the identified outcome increases after the decision has been made.
Once a trade is taken, novice traders often experience the decision as being the correct one.
Stage 2 – Option 1 – The trade goes into profit
When a trade goes in the correct direction, novice traders experience a flush of excitement and joy. They were right and they begin hallucinating what they can or will do with the money they will make from the trade. They begin hoping and wishing for it to go higher. The higher and faster it goes up the more excitement they feel.
Stage 2 – Option 2 – The trade goes into loss
Hopes are turned to dust as a great idea is smashed by an uncaring market. The emotions generated by this event can range from mild annoyance at the trade not going right, to fearful anxiety, to a complete inability to think.
Stage 3 – It’s time to get out.
At the time to get out, traders can be experiencing a mix of emotions. If the trade went well they can extremely joyful. If they got out at a massive loss, they can be filled with panic and intense regret at staying in for so long. Often traders can feel that the market is against them personally. Doubt and self-reproach are common when exiting at a large loss.
Stage 4 – Post trade emotions.
The post trade emotions can vary depending on the outcome of the trade. They can vary from wild exuberance and ongoing joy if exiting at a large profit, to devastation and recrimination if exiting at a large loss.
Regret is a very common post trade trading emotion. Traders often regret getting out if the stock goes on to higher prices. Alternatively, they can regret not getting out earlier if an exit signal was presented and not taken immediately.
The technical merits of the trade are rarely considered in the aftermath, nor how well the trade was executed. Yet these are essential considerations that support long term trading survival and success.
You probably recognized some of these experiences from your own trading history. At times it may have seemed that you were the only one in the experience. However, everyone who has traded will have had some of these experiences.
Key Understandings
Since different emotions arise at different parts of a trade, it’s possible to predict the likelihood of their occurrence. The emotions that take place at different parts of a trade are occurring at that stage because, without being conscious of it, you have identified something important that is out of place. The natural response is strong sensation around the midline of the body, which may be called excitement when the anomaly is pleasing, or anxiety, regret etc when the anomaly is displeasing.
For example, the emotion of regret for doing something that cost you money serves a purpose of letting you know not to do it again. The emotion of excitement for making a very good trade serves the purpose of rewarding you to do the behavior again.
In Summary:
* Trading Emotions are functional and they serve a purpose.
* Trading Emotions have repeatable structures and patterns.
* They are communications from your unconscious mind to protect and serve you.
* Knowing the patterns enables you to have choice about which emotions to have at what time.
How to use this information.
Knowledge leads to choice and functional action. Knowing about yourself and how you respond to your environment allows you to engage the environment and respond to it as you choose, instead of repeating actions the way you were programmed from the past.
When you appreciate that you may experience different emotions at different stages of a trade, you will be able to notice when they are beginning and not allow them to cloud your judgment.
Noticing your emotions can also serve as a trigger to focus you back on the technical aspects of your trade.
After you exit a trade, it can be helpful to reflect on what emotions you were experiencing while entering or exiting the trade. This can assist you in preventing loss making trades in the future.
When you know your emotions can affect your trading, you can learn to use them deliberately, to help you become a better trader and make your trading more profitable.
Improving your trading can be assisted greatly by understanding your own emotional patterns and learning effective ways to improve or vary your emotional responses.
More about us
Trading State Pty Ltd is a company committed to assisting traders to deal with the emotional aspects of trading and to improve their trading performance. We offer training courses and coaching in state management and emotional flexibility for traders.
If you think you have had problems with the emotions of trading, you are not alone.
Together we have over 30 years experience in assisting traders to achieve better performance in their trading and in trading ourselves.
Whatever issue you have with your trading experience, we can assist you. For more information about us and previous articles on our blog visit our website. http://www.tradingstate.com.au
© Trading State Pty Ltd. All rights reserved 2010
