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.

Emotions are an obstacle that is very difficult to pass, especially at the beginning of the stage.