March 17th 2008
How To Overcome Emotional Trading
It gets stated ad nauseam that successful traders control their emotions. Greed and fear cannot enter the decision making process. The reason why traders have trading plans is to mitigate the input of emotions into trading decisions. But I’m not a robot. I’m not a computer that mindlessly buys and sells based on some algorithm.
For a discretionary trader, like myself, the ability to separate emotion from my decisions is a challenge. On the one hand, I have a rule based system that evaluates potential trades and governs my entries and exits, yet I must incorporate the human brain that looks for aesthetically pleasing chart patterns and reminds me of the cool toys I could buy if I exit a winner early instead of following my plan.
Here’s my suggestion for overcoming the emotional trader phase:
Associate trading capital to inventory. If you associate trading capital to some kind of illiquid inventory for your business, the less you will see it as something that could easily have been spent on toys, vacations, or whatever else you may want to do at the moment. I don’t even call money, “money” anymore. I call it trading capital. It takes the picture of a medium of exchange and replaces it with a bulldozer. I’m serious. When I hear “capital” used in a business context, I think of capital expenditures. Those large outlays that businesses make when times are good. For some reason I think of a Catepillar-brand bulldozer. Weird, I know, but it works!
Change how you measure trading success. Ultimately it does come down to how much you have in your bank account, but the daily fluctuations can be so erratic and dramatic that you’re better off associating trading success with the quality of how well you execute your plan. Being focused on following my plan doesn’t stress me out, instead it empowers me to push forward. I get a good feeling at the end of the day when I followed my plan to the letter because I know it works over the long term. One of the worst feelings I have is when my trading plan isn’t followed and I had a great day. I have no idea if what I did to do so well will work in the future. If faced with the same trading situation, should I bend my plan and do it again? I don’t like to answer those questions and feel that kind of pain.
As I stated previously, the ultimate gauge of trading success is the growth of your bank account. The only way to do this is to control your emotions. The only way to do that is to stop thinking like the investment public. Your trading capital is a tool, it can’t be exchanged for anything else and your job performance is graded by how well you follow your trading plan.
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8 Comments »
Links by TraderBubs.com on 17 Mar 2008 at 8:10 am #
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thewild1 on 17 Mar 2008 at 1:36 pm #
it is especially important to overcome emotional trading in times like these
Jonathan on 17 Mar 2008 at 5:43 pm #
@thewild1 Can’t agree with you more.
Options Strategery on 18 Mar 2008 at 11:54 am #
I like the inventory analogy but keep in mind that some mom and pop shops get too attached to inventory. As a result, they avoid sales and get killed by the national chains. To beat the big guys, you gotta think like them. It’s money but pretend it is not your money (i.e. 2/20).
Jonathan on 18 Mar 2008 at 6:31 pm #
Good point. Besides at my household money is strictly JIT. As soon as it comes in, its out again(i.e spent)
eddie on 19 Mar 2008 at 10:07 pm #
Hello . Ive been reading your blog now for a good month and would like to say thanks. I was trying to get into some puts on the DIA yesterday before the bell but thought I cuould get a chance today on little more strength. Oh well. But I have a few qeustion for you I hope you can answer.
1) I was reading the market ticker entry today that you refereced– What exactly is deleveraging by a hedge fund. I ve heard that there is worldwide deleraging going on. What eactley does this mean. Is it that they have to sell the assets they bought with borrowed money to give it back to the big banks because the investments are losing and dont want to be debtors to the bank. Im guessing this is a margin call. And beyond this, cant that money being paid back to the banks be used again to prop up eqwuities. So isnt it the same money only by a different investor? BUt i read in another article that this moeny used for or from house mortgages, will just implode into nothing, becuase it was money that was magically made up by wall street. That is there is no money on the sideline, when the deleveraging is over, the money that was created by house appreciation will be destroye?
2) I also read that if there is an explosion at one of the bond insurers it will create a cascade effect of exposing the “wrapped investments” at the investment banks. This will cause cascading cross defaults in other places. What does this mean and How exactley does this work? ANd what is a capital ratio violation?
3) How did the fed screw BSC. I kind of get how it helped jpm, but what if anything did the fed do to hurt bsc. And if the did why would they do it? Plus how and who decided bsc was only worth $2. Jim cramer makes it sould like JPM is just that astute. Others make it sound like the fed and JPM are crooked. I know it a lot but im on a mission to learn. My trading hs been profitable but I want to learn the overall picture better. Thanks. Eddie B.
Jonathan on 22 Mar 2008 at 5:05 am #
Wow eddie. Those are some great questions. Unfortunately I don’t think I can give you the answers.
As far as the buyout of BSC goes. It’s the American taxpayer that is getting screwed on the one. Our tax dollars are paying for a buyout with questionable longterm economic benefit. The stong/smart/industrious/disciplined should survive and the weak/stupid/lazy/undisciplined should perish. It’s what makes capitalism great. And everyone abides by those rules unless you have enough money to influence the decision makers.
I love the markets because it’s survival of the fittest at its best. But I’m not so crazy about wall street or the fed with the blatant pandering and unethical use of tax payer dollars. Perhaps someone can enlighten me why a buyout of BSC is good for the economy.
Lazy Breakouts | A Trade A Day on 09 Apr 2008 at 2:38 am #
[…] acceleration are all critical. If the stock isn’t moving I don’t make money. If our trading capital is inventory, we need to turn it […]