24 Sep Emotions in trading
Emotions in trading
As I am enjoying the nice weather poolside at my hotel in Macau, I get a few thoughts. Macau, for those that don’t know, is a place that borders to Hong Kong and China and is basically considered to be the Las Vegas of Asia. Here’s where people come to find fortune on the casino floor and boy do people love gambling. I get it. It’s exciting. Possibility of winning money fast. Beautiful casinos. Extravagant hotels. Like I said, I get it. I’m not much of a gambler myself though. I like to play occasionally for small amounts and that’s it. Bear with me when I use the casino as an example for sales and ultimately to understand emotions better. I believe this understanding of emotions will help us control and direct them ‘better’ so that in the end it will lead to better trading.
Live the dream
It made me start thinking on how the casinos and the hotels are selling you the dream but then I thought a bit more about it. I came to the realization that even though the casinos and hotels are trying to sell us on the dream, we are definitely in the market to buy. Obvious demand and supply and usually the supply side gets rich. Is it this that enrages the people that are on the losing side I wonder… Because the ‘winning’ side is the side that supplies. The side that sells.
I have been in sales all my adult life. Sales to me is a natural process of two parties coming to an agreement to exchange goods or services. I view this not only in a mere business-type setting but in many other aspects of life as well. I’ll give you a few examples. When writing this blog my idea is to sell you on my, well, ideas. I want to move you to read my articles. Learn from my articles. But above all, I want to sell to you that I know what I am talking about so you will spend your time and energy on me. This probably sounds too far fetched to most people and I completely understand. My mind sometimes wanders into directions and corners that make me view things in a bit different lighting. Not sure if that’s always a good thing though.
When a kid pulls its parent’s pants and screams for attention. That to me is sales. When the kid then continues to beg for a certain toy it saw. That to me is sales. In my mind we are always selling one thing or the other to each other. When dressing nicely we are selling the idea that we are cool, hip and trendy. That we’re individualists with our own style. Better we warned. I’m no mass-production person. I wear these yellow pants with red polka-dots and oversized shoes to show I’m unique. I’m special. Or perhaps I’m a clown?! Not sure on that. Now, probably to a certain extent most would say that what I just said is just a load of BS. And that’s OK. It’s a good thing we don’t all think alike. Since this is my blog, I get to rant which ever way I want. So deal with it 🙂 HA TAKE THAT!
When the kid in my example is asking its parents to buy it a toy, it in effect is playing on the emotions of the parent. When casinos are trying to lure you with exotic and luxurious venues and entertainment I believe they are doing the same. It is this same emotion that tries to move us to go and buy that toy or try our luck. This form of sales can be as simple as in the example of that kid but obviously there are different levels of sales. There are different intentions in sales. The stereotypical shady salesman is one of them of course. Needless to say I don’t believe every salesperson is trying to pull on over on you but that’s not what I want to talk about. When we are feeling strong emotions like exitement, happiness, sadness, etc. we tend to make bad decisions. I want to talk about how these emotions affect us in our decision-making. So let’s get to it.
A decision (solely) based on emotion is by default wrong
Now, there are many articles out there that say that all decisions are based on emotions. I believe to side with that sentiment. However, when we understand this process a bit better we can then apply more logic to them. Traders know very well what an emotional ride it can be to sit behind your computer and see your positions making or losing money. When prices go your way there is a feeling of confidence, ecstatic relieve you were right, and so on. It gives you these ‘pink goggles’ and nothing can go wrong. You take more positions thinking you’re on a winning-streak and get more bold. Only to lose it all again and probably then some more. Then the dark side takes over and you fall into this pit of ‘where did I go wrong?’, ‘I was doing so well!’ Then, to make it worse, you try to make up for your losses. You overextend your rational capabilities and your positions praying that you can make up for your losses. Bad. Very bad.
What would Spock do?
For those that have been living under a rock or are simply too young, Spock is a character in Star Trek. Check him and the TV show out here. His character, being half Vulcan and half human, would battle with the emotionless side of the Vulcans and the opposite in his human side. When trading, you have to first distinguish for yourself when an emotion comes up. Red flag those moments. Start analyzing why they appeared in the first place. Was it because you just had a good week or month trading? Was it because you lost? Regardless, both emotions of happiness and being sad are wrong. The only thing that counts is analytics. Be a Vulcan.
Dismiss all thoughts of pride in gains and failure in losses. There is only analytics. Easier said than done. Where do we start? I’d start by first identifying when these moments occur. As I mentioned before, red flag these moments. Be honest with yourself. It’s not going to be easy. It will take some time. But it will get better. I say that because I have to believe it myself. I have to. Because I am not there yet myself. I will get better at it because of the simple fact that anything you decide to focus on, you will build upon. Anything. Focus on the bad? Things will get worse. Focus on the good and what do you know?! They will get better. So after you have identified these red flags what is the next step? Understand it is a red flag and try to recenter yourself back to the core fundamentals of trading. Numbers and patterns don’t care about your emotions. They are merely a representation of other people’s emotions. Don’t be one of them. Be the Vulcan. Remember, 90% of people lose money in trading. Don’t be one of them. Just look at what things really are. Stay objective. Focus on your plan. Follow through on your plan. I truly believe that at some point you will be happy with a trade even though you lost money on it. You know why? Because you did the right thing. You followed your plan. Executed it perfectly. Left your emotions out of it. And that, my friend. Is a perfect trade. Keep doing that and you will make money. When positions go against you, it’s nothing personal. It’s strictly business.
I hope this article has helped you in some way. Please let me know how you deal with emotions when trading. What steps do you take to prepare yourself? How do you cope with the ‘bad’ days? Let me know underneath or just email me.