TRADING IS HARD 'COZ IT IS AN EMOTIONAL GAME

"The most important thing to know about this game is to know thyself. And if you can do that, the second most important thing is that you can’t take the game personally. You have to separate yourself from the investments you own." ~ Adam Smith, The Money Game 

  • In science, cause and effect enjoy a dependable and repeatable relationship, so that it's possible to say with confidence, "if a then b". But while there are some principles that operate in the world of finance and business, the resulting truth is very different from that in science. The reason for this is the involvement of people. People's decisions have great influence on economic, business and market cycles. In fact, economies, business and markets consist of nothing but transactions between people. And people don't make their decisions scientifically.

  • The point is that people do have feelings, and as such they aren't bound by inviolable laws. They'll always bring Emotions and foibles to their economic and investing decisions.

  • No matter how strong a man’s will power may be, he is Influenced, consciously or unconsciously, by what he hears or sees, and his actions or executions are interfered with accordingly. Human nature is to go with what feels good, to look for social proof and to act out of fear and greed in times of stress.

  • Most investors are driven by Emotions that run the gamut from Extreme Pessimism to Jubilant Optimism. These Emotions can drive stock prices to the extremes of overvaluation and undervaluation. How can the man who stands over the ticker day by day determine a big move before it starts? He cannot. The ticker will fool him once or twice each day whole it is getting ready.

  • Stocks ususally exaggerate the rate of increase and decrease in most economic statistics because human traits can sometimes get out of control. On the way up stocks can get way overpriced as caution is ignored, and on the way down fear inspires quick reactionary responses.   

  • Human emotion inevitably causes the asset prices to be transported to levels that are extreme and unsustainable: either vertiginous highs or overly pessimistic lows. 

  • Because psychological factors are involved, this will continuously happen as we move forward and that is what creates the cyclical nature of the stock market.

  • The longer the market goes one way or the other the greater buying or selling in the last stage, because Hope or Fear increases as the market advances or declines, and it is Hope and Fear, Not Sound Judgment, that most people trade on.  

  • Fear blinds us to opportunity; Greed blinds us to danger - emotions cause "perceptual distortion" where we only see the part of the picture that our beliefs allow us to see.

  • People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.

  • People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don't want to feel like a loser.  In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.

  • In order to invest successfully, it is necessary to be familiar with the workings of the human minds, as well as the principles of human behavior. Your time will be best spent studying the theories and principles of human psychology. It is from this understanding that lasting success as an investor or speculator can be achieved.

  • For a trader to succeed, he must study human nature and do the opposite of what he finds the general public does. It is but human nature to hope that the trade will go his way.

  • If you understand the role of emotion, you probably can teach yourself to be less emotional. It has been well said that the greatest study of mankind is man. The key skill is to be Aware of How our Personality lets us down when we are under pressure. Habitual behaviors will already be set in our life before we come to trading and investing. The markets will simply magnify them

  • To know yourself. Make sure you come up with a trading strategy that is in tune with your personality and your risk preferences. For instance, if you thrive in fast-paced movements and if you’re comfortable with managing many open positions at once, then you could look into scalp trading techniques. On the other hand, if you get easily stressed with quick price movements and would rather just check your charts every now and then, swing trading might be better for you. Lifestyle considerations must also be taken into account when coming up with a trading strategy so as to not set yourself up for stress or failure. If you are planning on trading part-time while holding on to your day job, then you could look into trading techniques that won’t require you to be in front of your trading platform all the time.

  • Quite too often, human emotion interferes with proper trade execution, as the fear of losing can lead you to set stop losses that are too tight or to lock in profits too early and miss out on larger moves. Meanwhile, greed or overconfidence can tempt you to set profit targets that are too ambitious or to overtrade. What’s important in your learning process and trade journaling is that you note down your motivations for setting your stops or targets or for making trade adjustments midway so that you are able to identify behavioural patterns that you might need to correct.

  • Another factor that can interfere with trade execution is Indifference, particularly when you are in a long losing streak and you feel numb to consecutive losses. This can be damaging to your trading psychology and may be a sign that you need to take some time off instead of forcing your trades. When you spot this kind of thought pattern in your losing trades, you should remind yourself to take it easy or take a step back from trading for a while.

  • The Ego is Not your friend as a trader. The Ego wants to be Right, it wants to Predict, and it wants to know Secrets. The Ego makes it much more difficult to trade well by avoiding the Cognitive Biases that hinder profits.

  • Understand yourself. This simply means to be consciously aware of the underlying feelings that act as obstacles for you. Awareness in itself is very powerful, and it builds its own momentum. When you become aware of certain feelings like the need to be right and fear of failure, and you watch them from a detached and non-judgmental point of view as they arise while you’re trading, you take them from the unconscious to the conscious level. Now they’re not running the show on automatic and leading you to conditioned repeatable patterns of destructive behavior. The key is to catch the feelings as they arise without trying to stop them. Just feel them and don’t judge them. If you let yourself feel them and even verbalize them to yourself, their power over you greatly diminishes. Now you’ve made them conscious and you’re no longer their slave.

  • Traders have a wrong concept that they’ve been told which tells them to shut off their

    emotions. That is, to trade with no emotion. You must realize that this is not possible. As long as you’re a human being, you’ll have emotions and in and of themselves they’re neither good nor bad. Even so called negative emotions are neutral. The key is to not let your emotions unconsciously drive your behavior. That’s what trading with no emotion should really be taken to mean. It’s not that you don’t feel emotions. It’s that your conscious awareness of them and non-judgmental detachment from them allow you to trade well despite them. This is important to understand. If you try to suppress and deny them, they will unconsciously drive your behavior in a negative way.

  • As traders, our storm is composed of forces that are all mental or psychological in nature – but just as forceful and destructive. These forces take the form of:

    • a profound lack of understanding of the fundamental dynamics of price movement, 

    • a number of dangerous misconceptions and erroneous assumptions about what works or how to be "consistently" successful at trading; the fear of losing, being wrong, missing out and leaving money on the table;

    • any number of self-sabotaging beliefs about how much money we deserve; and

    • the energy behind the feeling of omnipotence as a result of flipping into a state of euphoria.​

  • All of the above mental forces, acting individually or in combination with one another have the potential to affect our perception of market information and our resulting behavior in ways that will:

    • prevent us from being objective or able to trade with a care-free state of mind;

    • make us susceptible to a number of potentially dangerous illusions about the level of risk associated with any particular individual trade; and

    • cause us to make a plethora of common execution and money management errors, over and over again.​

  • Learning the appropriate skill sets to deal with these various psychological forces is not the major obstacle preventing us from producing a consistent income. The real challenge is – coming to the realization that they have to be dealt with in the first place.​

  • If you want to be a great trader, you must conquer your Ego and develop Humility.

    • Humility allows you to accept the Future as something that is Unknowable.​

    • Humility will keep you from trying to make Predictions.

    • Humility will keep you from taking it personally when a trade goes against you and you exit with a loss.

    • Humility will let you embrace trading that is based on simple concepts because you won't have a need to know Secrets so that you can feel special.