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Emotions and Trading


Would the fictional character Rambo have made the ultimate trader? A man totally focused on his mission; a man who acted almost entirely without emotion?

What about the fictional character called Mr. Spock of the movie "Star Trek?" Mr. Spock looked at events logically and objectively, and followed a rational plan when approaching the solution to a problem.

In many ways, either of those fictional characters would appear to have had what it takes to become the ideal trader. The ideal trader would carefully formulate a comprehensive trading plan. He would have found the market and time frame under which the market conditions were ideal for the way he wanted to trade; conditions that would suggest his plan would produce a profit, and then, and only then, would he execute it.

The problem is that none of us is a fictional character. We are human, with all of our human weaknesses. Although at times I wonder, I realize that traders are also human. Yes, those of us who decide to be market participants are human, and we don't always behave rationally. Indeed, we tend to be driven by fear, hope, and greed, and because of that, forecasting market behavior is a lot more difficult than we might ever have imagined. In the real world, humans are emotional. Emotions rule everything in the markets. The decision you must make, however, is whether you are going to control your emotions in order to trade decisively, or let your emotions rule you.

The wise trader is realistic as well as logical. It doesn't do you any good to become overly disappointed when your strategy produces a loss, or overly euphoric when you hit upon a winning streak. Extreme pleasant and unpleasant emotions can be very distracting. If you are angry, frustrated, or worried, you won't be able to focus on trading consistently. Your attention will be elsewhere, and those negative emotions will drain you of the limited psychological energy you have to devote to trading. It is vital to keep negative or unpleasant emotions at arms length. At the other extreme, it isn't wise to feel too happy or too euphoric. Extreme pleasant emotions are usually the flip side of extreme unpleasant emotions. That is, it is usually those same traders who experience extreme unpleasant emotions when faced with setbacks who also experience extreme positive, euphoric emotions when suddenly faced with a string of wins. At moderate levels, pleasant emotions are motivating, but at the extreme they may be associated with impulsive decisions, such as increasing your position size, overtrading for no good reason, or abandoning your control of risk.

It is almost impossible to be emotionless. Humans are emotional by nature. It is difficult to experience absolutely no emotion. In all likelihood, the closest we could get to an emotionally neutral state is indifference or boredom. Some experienced traders say that it may be useful to feel indifference or boredom if that is what it takes to stick with a trading plan and trade with discipline. But there is an obvious disadvantage: when you are bored, you don't want to keep going. You will get tired easily and just want to quit. So what is the best way to cultivate an optimal emotional state? We know that negative emotions, such as fear, anger, and disappointment can be distracting. And we know that euphoria often leads to overconfidence and trading mistakes. We also know that indifference and boredom can often have drawbacks. One possibility is to cultivate emotions that are only moderately positive, emotions that aren't euphoric and prone toward overconfidence.

Never underestimate the power of emotions. Extreme optimism or pessimism can interfere with your goals, but by approaching problems strategically with a realistic sense of optimism, you'll be a more consistent and profitable trader.

Yeh!!!The reason of their failure in forex trading is emotions and lack of a trading system. The traders who hesitate to take a trade usually do not have any trading system or their system do not give them exact signals to act upon them. Emotions can influence your trading decisions, unless you have a strategy planned in advance, and stick to it, no matter what you think you're seeing at the moment. The keys to success in investing trading are system, analysis and perseverance.
Kinda hard to visualize Rambo crouching behind a monitor setting his stop losses but Spock..well he could manage my money anytime ;-)

<Would the fictional character Rambo have made the ultimate trader? A man totally focused on his mission; a man who acted almost entirely without emotion?

What about the fictional character called Mr. Spock of the movie "Star Trek?" Mr. Spock looked at events logically and objectively, and followed a rational plan when approaching the solution to a problem. >
I'm with you on that one neath.
So prices go up and down because the bulk of people get a certain emotion out of a certain event. So the predictable part of turmoil in the middle east is that future supply may be affected but the unknown aspect of it is that any given trader does not actually know how emotional everybody else is going to get and therefore price may not always reflect the gravity of the matter at hand.

Does that make sense to anyone?
Well since the fictional character Rambo does not have any emotions, would he want to make money in the first place? Isn't making money and living a happy life part of our emotions?

I think its more like finding the balance between the left and right side of your brain rather than just using one side.

Any idea?
I think if alot of people had the same determination and drive to succeed as that Rocky had, then there would be a lot, lot more successful people in the world. Never give up if something goes wrong, just learn from it and use it to do things better in the future!
In this day and age where HFTs took over, there is no psychology book that would enable you to cope with the markets. Either you have it...or quit.
The longer term you can think, the easier it is to deal with the emotions of trading because you accept the inevitable short term losses as part of the journey towards the large gains. The biggest mistake most traders make is selling when they get scared that a stocks dropping, which is why we have stop losses and have to master our emotions.

There's a very good post which although specifically focused on binary options trading outlines the realities of those bad days and how to put things into perspective when you come into losses.

When all else fails, be grateful for what you have - not obsessed over what you don't. Stress is caused by there being a gap between where you are now and where you want to be. The surest way to eliminate stress is to be content with the current situation.
Hey,
Have you seen this? Any info?
http://bit.ly/1QeGGpM
For some time now I am trying to understand how human brain works, to understand myself and my choices when I am trading.