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.

Sales

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.

Dad­dy daddy!

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!

So what?!

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. 

Only ana­lyt­ics

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.

THANK YOU

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.