Emotions And Trading

Dr. Purushothaman
January 13, 2014


There is often talk around the power of ones thoughts and how these need to be The stereotype of the perfect trader (market timer) has many of the same traits as Mr. Spock on "Star Trek." Mr. Spock looks at events logically and objectively, and follows a rational plan when creating a solution to a problem.
In some ways, Mr. Spock would appear to be the ideal trader.
He would carefully formulate a detailed trading strategy, find the market conditions that suggest his strategy will produce a profit, and then and only then, would he execute it.
But, in the end, it is important to realize that Mr. Spock is a fictional character. And even if he were real, he is a Vulcan; he isn't human.
Traders are humans, however. In addition, market participants are humans, and they don't always behave rationally. Indeed, they tend to be driven by fear, hope, and greed, and thus, forecasting market behavior has proven much more difficult than space travel.
In the real world, humans are emotional. Emotions rule everything in the markets. The decision you must make, however, is whether you are going to control your emotions in order to trade decisively and profitably, or let your emotions rule you.
Realistic And Logical
The successful market timer is realistic as well as logical.
It doesn't do you any good to become overly disappointed when have a loss or overly euphoric when you have a big gain.
Extreme pleasant and unpleasant emotions can be very distracting. If you are angry, frustrated, or worried, you won't be able to focus on sticking to the timing strategy. Your attention will be elsewhere, and those negative emotions can cause you to make incorrect, and usually costly, trading decisions.
It is essential to keep negative, or unpleasant, emotions at bay.
At the other extreme, it isn't wise to feel too elated or euphoric. Extremely pleasant emotions are usually the flip side of extremely unpleasant emotions. That is, it is usually those timers who experience extremely unpleasant emotions when faced with setbacks who also experience extremely positive, euphoric emotions when suddenly faced with a huge gain.
At moderate levels, pleasant emotions are motivating, but at the extreme, they may be associated with impulsive decisions, such as exiting a position for no good reason or abandoning risk control strategies.
Emotional By Nature
That said, it is almost impossible to be emotionless. Humans are emotional by nature. It is difficult to experience absolutely no emotion. In all likelihood, the closest we could get to an emotionally neutral state is indifference.
So what is the best way to cultivate an optimal emotional state? We know that negative emotions, such as fear, anger, and disappointment can be harmful. And we know that euphoria often leads to over confidence and timing errors.
One possibility is to cultivate emotions that are only moderately positive, emotions that aren't euphoric and prone toward over confidence.
Rather than react to setbacks with frustration or fear, one can approach the setback with a sense of realistic optimism. Losses are part of the game. There is no way around them. Market timers should focus on the goal of generating successful gains over the long term, not the daily or even weekly ups and downs of the markets.
Never underestimate the power of emotions. Extreme optimism or pessimism can interfere with your goals, but by approaching problems with a realistic sense of optimism, you will stay the course, stick to the trading strategy, and generate excellent timing profits over the years.

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