Emotions pt.2


Hope is a feeling of expectation and desire and these are your enemy. Expectation is the strong belief that something will happen, but rarely can one predict which way the graph will go. Sometimes the trader will look at a graph and will say to themselves that the graph has to go in a certain direction simply based upon a gut reaction. Consequently, he abandons his model and loses the trade. It is even worse if his gut reaction is proved correct, because then his gut reaction becomes his model… and he will lose all his money.

Hope can also be instigated by desperation. Perhaps someone borrows money to speculate, or has a debt and needs to pay it off. They put the money in a trade desperately hoping that money will come from it. The only reason to ever put money on a trade is that the graph is following a model that is known to work. One should be very careful that there are no underlying senses of need to earn money stimulated by circumstances in life when approaching trading for any reason because need leads to gambling based upon hope. One should only feel the expectation of a positive outcome when following a good trading model.

Impatience is the inability to tolerate delay and this can be different to boredom. Boredom comes after a long period of waiting, but impatience can come from only a short period of waiting. In a trader’s model, there tends to be two critical aspects at the beginning; the indicators that suggest that you should think about trading and the actual entry point. Impatience can take place if the indicators are starting to come together, but as of yet do not actually provide an entry point. This can lead to a rush into a trade too early, leading to loss. Another aspect of impatience can come in exiting a trade. Sometimes the correct signals have not come into place to exit and the trader leaves too early because they do not want to wait.

Pride is an excessively high opinion of oneself and is a great evil that leads to many problems. Some people when they enter trading have visions of driving a BMW, wearing a pin stripe suit and generally having an air of greatness about them. There can be an assumption that simply doing trading will lead to earning money and greatness, that the graph will do as it is supposed to. Pride leads to self-elevation above one’s true position. The worst aspect is that the proud person assumes that they are lord over the graphs. The result is a rejection of risk management and a general confidence that the graph will do they want it to. When it doesn’t, anger ensues followed by revenge. The reality is that the speculator is a servant and the graph, the master, can crush him with one blow. It is important to be able to learn from mistakes and admit that you were wrong.

Regret is the feeling of repentance or sorrow and the trader experiences this for two reasons; first when the trade goes against them. The result is that the speculator feels that he has made a mistake and next time that mistake won’t happen. This leads speculators to change their model to accomodate for the previous failure. The second reason for feeling regret is the perception that you have got out of a trade too early. Sometimes the graph can move 200 pips in a session. Consequently if someone exits the trade at say 30 pips, this leads them later to feel regret that they didn’t get the full 200 pips. The result is that the trader says to himself that next time they are going to go the full way.

Regret is an enemy because it causes people to challenge their model. A model is not based upon one trade, rather it is a statistical paradigm based upon the general outcome of many, many trades. Consequently, if you have a good model and occasionally it fails, one should not feel regret. Many people treat trading like an exam; if they do not get the maximum number of pips out of a movement in the graph, then they have somehow failed. This is not good logic. The aim of a trader is to earn pips, not get the maximum number of pips and as a result they should be happy with following a model that works. The only regret that a trader should feel is regret at not following a profitable trading model.

Revenge is the retaliation for injury or wrong, it’s root is pride. There is nothing worse than at the moment that you put your money into a trade, the graph goes in completely the opposite direction! It makes a person feel that the market has somehow betrayed them and it must be punished. And how should the market be punished? Obviously by putting money into the said market and showing it who’s boss! This will obviously lead to disaster because revenge tends to lead a person to break their trading model and normally with tragic consequences.

Urgency is the feeling that something requires immediate action and it is common that as soon as a person has learnt the basics of currency trading, there can be a very strong sense that one should immediately enter into buying and selling. This urgency is partly created by the exciting prospect of earning money. The reality is that currency trading is very difficult and one should resist the desire to start trading too quickly. See Game Theory.

Working Man Complex
When considering adopting currency trading as a full-time job (rather than some form of mindless diversion), this triggers specific responses, particularly in the male mind. First, a man feels the need to do a job. I know many men who do jobs not because they need to do them, but because they have a deep inner urge to be doing something. This deep urge is problematic in trading because a person can be sitting at their computer and not feel that they are actually working until they get into a trade. This can lead to speculative bets that end up going in the wrong direction. It is better to to say to yourself that when you sit at the computer and are looking at the graphs, you are working and it is totally irrelevant whether one enters into a trade.

A second feature of Working Man Complex is that the male feels that he needs to be productive in his job, with the implication that it leads to earning money. There are many jobs where men suffer as a result of this emotion. Biochemists that work in research go through thousands of chemical processes to make a complex chemical and they can end up depressed due to the feeling that they have not been productive. In a similar way, church ministers can suffer from depression because there is no direct link between their job and productivity. It is even worse for currency traders because not only can you be sitting in front of a computer for days (apparently doing nothing) but at the end of it, you can actually lose money. This can drive a person to the brink of insanity. Consequently, one needs to make sure that one has a good trading model and can always see the big picture so as to maintain a patient attitude.

Emotions are not good in trading. It is important to try and keep them under check when about to enter the market. The most important point is that speculators should have a trading model that works and they should follow it to the letter. There should never be an abandoning of risk management stimulated by the variety of feelings that attack a person during the actual trading event.

Good Emotions in Trading
Having placed a rather negative picture of emotions, the fact is that we are all emotional beings and as a result, we need to ask, what state should our emotions be in when trading? The answer is that there should be a general feeling of well-being. The person who generally feels well lacks any particular underlying bias to react irrationally during a trade. It is not good for a depressed person to trade because they will speculate at inappropriate moments and will get more depressed. If a person is loaded with debts and is feeling stressed, he will rush into trades and lose more. A person who has the general feeling of well-being will only suffer from emotions that are common to all people like regret, impatience, fear, excitement etc.