Trader Emotions

Price is moved by traders. Traders are moved by feelings and emotions. Our job is to read these emotions on the chart. When traders are under stress their behavior becomes much more predictable, allowing us to profit from their mistakes.

06_16-00

“I cannot Accept the Losses”

I cannot accept the losses

One of the biggest problems of any trader is accepting this essential part of trading business.

So how do you feel and behave when you believe this about yourself?

  1. Scared – “I cannot pull the trigger because it could end up being a loss!”
  2. Powerless – “It seems there is nothing I can do to remove the possibility of losing”
  3. Hesitated – “Something must be wrong with this trade, let’s wait another day, the Market just does not feel right”
  4. Annoyed/Frustrated – “I am trying as hard as I can, and yet here is another loss!”
  5. Angry – “Damn this Market and its stupid rules!”
  6. Reckless – “I am sure this trade is right, I will not let the Market play against me and stop me out with another spike, I will just put this trade on without a stop loss…”
  7. Inconsistent – “My trading system is just not working, I must change the rules to avoid such stupid trade in the future”
  8. Depressed – “It is all hopeless – how can I ever win if I keep allowing these losses?”
  9. Disgusted – “I swear I’ll never trade as long as I live!”
  10. Foolish/Embarrased – “I was so sure about this trade, I kept telling everyone how much money I’ll make in this one!”

Notice when you allow your brain to enter into any of these patterns of thinking. Take a look through the list, see what applies to you personally.

It is a great thing if we are able to catch ourselves breaking predefined trading rules, such as our Risk Management or Entry rules. However, it is our thinking patterns that lead to breaking the rules or to any other problems in our trading. Consider for a moment, have you ever caught yourself thinking any of the above thoughts?

Being aware of our thinking is much harder than being aware of the fact that we did not put a stop loss in a trade. If you learn catching the moment when you talk yourself into not putting the stop loss you will start working with the cause of the problem, not the effect.

So let’s reverse the original statement:

I can easily accept the losses

Now, this may not be true for you at the moment, but try to imagine how you would feel, behave and trade if this thought would be your reality.

  1. I am confident – the losses do not frighten me.
  2. I am comfortable with my trading system – I accept all parts of it
  3. I am at peace with anything the Market will do – I allow it to behave in any way it needs to.
  4. I am grateful for every opportunity to place a trade – whatever the outcome of that trade might be.
  5. I find all the circumstances helpful – any outcome is completely acceptable to me and therefore I am making myself available to learn from it.
  6. I am looking forward to getting a loss – it is the greatest signal the Market could possible offer to me.

Consider the last point – isn’t it really the greatest feedback the Market could ever possibly offer to you? The Market is not against you, it is simply there to teach. It is clearly telling you, from its perspective, that your view of the circumstances was not correct at the moment when you placed the trade. What did you believe about the current market situation just before you pulled the trigger? Take that belief, reverse it and you have the corrected point of view, available to you with Market’s help.

I you are serious about working with your beliefs, consider trying this method – Katie Byron’s “The Work”.

Relax

The Market can do nothing to hurt you, nothing can cause any damage to your reality, so why is it that we find it hard to just relax? How much easier our job would be if we would follow the Market, instead of following our thoughts about the Market?

The reality of the Market can never do anything that would cause you stress. Only your interpretation of the Market – your thoughts about it – cause emotions and prevent you from being detached.

Yes, it is important to have a trading system – a framework inside of which you view the Market. A trading system will cause you to interpret Market’s actions, so it must be constructed in a way that avoids all inner conflict. However, if you are unaware of your thinking, even the best trading system will fail because you will not be able to follow it precisely. You will never notice when faulty thinking enters your mind and causes you to choose incorrect interpretation of the information Market puts in front of you.

Until we learn to just relax and listen to what’s going on inside, there is no point to try building a trading system. The conflict our unconscious mind tries to hide will be projected into our trading and ensure our failure.

Feeling stuck

Trading is probably one of the most difficult endeavors one can choose in life. The amount of knowledge to learn is overwhelming, the amount of information to read, process and understand in real time is pushing our limits as human beings. It can be really draining emotionally, exhausting physically. You do not get any reward from doing what you do other than monetary – and it can take much time before these monetary rewards are starting to come your way.

There is no one to support you either when you are trading privately. There is no value that you are generating for the society, unless you do so with the money you earn on the market.

Given all that, it is only normal that on many occasions you will be stuck. You will feel like quitting, depressed and frustrated. What do you do in these situations to help you move on?

First let’s see why these black stripes happen in our trading career. Interestingly enough, they are not necessarily caused by big losses that one might experience. I think we are most vulnerable to such emotional drawdowns during our learning phase. It can take years of regular trading education, including practicing the concepts on a demo or a small real account before the trader starts seeing the light in the end of the tunnel. During this time there are many challenges that we must deal with.

  1. Income generation. The chances are that any starting traders will not be able to make money consistently for more than a year – and that is a very optimistic estimate, given that there is right learning information available. It is very difficult to work another job while studying and practicing the markets.
  2. The overwhelming amount of information. Depending on your goals, you might want to implement a simple trading system and do it consistently every single day, not bothering to learn much more about the markets. This approach never worked for me, and was actually preventing me from moving forward with my trading, as I was hoping to “make it” with very simple methods, refusing to learn more.
  3. Operating under complete uncertainty.
  4. Having to do the same steps every day consistently that can be difficult physically (our brain is just like a muscle, and will get tired from too much mental work).
  5. Not having a clear work process. This is a huge one. Even if you are ready to put in all the hours required, ready to show up consistently every single day to analyze the market and find the entries according to your trading system, you will be frustrated more often than not unless you have a clear Daily plan, Journaling method, Analysis and Entry rules.

My own approach to all these issues changed greatly over the years, and only very recently I was able to work positively with them.

Five years ago I would get excited about some new trading idea, work for a week or two like crazy on it, fail to get immediate results and proceed to become extremely frustrated, abandoning all trading for many weeks. It is obvious that such attitude was preventing me from reaching any consistent success.

Two years ago I would start trading a small live account or a demo daily. I would do all the necessary analysis, put on the trades and do some notes in the journal. I would not have a systematic approach in doing it however. More often then not I would finish 2-4 weeks period with reasonable profits, but would burn out completely in the process. The result was abandoning the trading again.

Just recently I started trading consistently, analyzing the market every single day, researching different trading opportunities and putting the trades on. Despite all the technical knowledge that I accumulated over the years I am still making many mistakes and moving forward only by analyzing and working through these mistakes. I record and analyze every single trade that I place, writing a journal entry when opening the trade and another one when closing it.

Only by working through one mistake after another, one failed trade after another, I am building a consistent trading system.

The main factor that gives me confidence moving on every single day, placing the trade, not quitting, is market psychology that I’ve been learning over the past two years. My technical understanding of the markets did not change much, but my attitude has changed dramatically. Every time I see a stop loss being hit I am completely calm and accepting. Every loss I get is just another lesson. Thanks to building a very rigid money management system I am completely comfortable with the price I am paying for these daily lessons. This is when real trading education happens – after all the theory and analyzing the markets on the history.