Trading 6 basic emotions

I know the image shows a range of emoticons wider than six. Indeed you can meet them all in one day doing trading, and eventually you will face them during your entire career if you have a regular job (whatever "regular" means to you...).

One of the greater differences between doing trading for a living or having a living based on a traditional career is precisely the turmoil of emotions you have to deal with.

Basically you acknowledge the emotions so you can tame them.

As the self-help blah, blah, blah will tell you “you can fell the feeling but not become the emotion”, or some impactful cutie quote like this. But in trading, there’s no space for this crap.

We know human beings are run by emotions. Any trader is a human being therefore he or she will never act as an algorithm. Nevertheless, each trader must make the effort to recognise the emotions that can impact the decision-making process, identify the triggers that can start those reactions, and adopt some kind of discipline that will keep feelings away from the business.

That is why accepting and dealing with emotions is as?important as understanding financial markets and technical analysis.

The picture above describes a broad spectrum of emotions that can assault you while trading, like an adrenaline rush, sometimes in a few minutes when you enter a volatile market, risking too much money, with a bad timing and no stop loss limit. I won’t run all those emotions because there are basically 6 that you must be able to isolate, with the same easiness you recognise the early symptoms of a mild flu or heartburn:

FEAR?

Fear is one of the most frequently talked about emotions in trading. It manifests itself in many forms, namely the fear of losing money or the fear of admitting being wrong. For either reason a trader might feel tempted to hold a position that is losing money because he/she refuses to believe the trend will continue against his/her beliefs. Contrariwise, a trader might close a deal too soon when he starts making a profit because he/she is not secure the trend will keep running in his/her favor. This fear is a form of insecurity and can only be overcome through experience.

GREED

A moderate zest of greed can spice you up when it induces ambition. But the truth is traders normally abuse this ingredient, producing a lot of indigestible trading decisions. Traders under greed influence don’t make sound risk and money management decisions. Additionally, greed also reinforces a certain gambling mindset that has nothing to do with trading as a business.

HOPE

Hope is sometimes a state of illusion that clouds your judgment, normally leading you to overestimate the chances of success. Keep faith out of the business because trading is not a religion. You either are right when you open a deal or you are wrong, and this is how plain and simple as it goes.

EXCITEMENT / ANXIETY

If you feel aroused by a trade probably you are doing something you shouldn’t. Trading is a job like any other, it’s not a radical sport or an exhilarating activity. Of course it is great if you enjoy trading and are enthusiastic about it (I certainly am), but if that contentment turns into some kind of ecstasy maybe you are breaking the basic risk management rules that keep you in a comfort zone. Adrenaline is addictive and it can kill you.

BOREDOM

Somedays you don’t trade. It’s not very motivating to have days off when you don’t want them (especially when you come from C-level responsibilities that kept you working 12 hours a day). But the truth is that in trading, somedays you just have to adopt the “sit on your hands strategy”, either because the markets you follow are choppy, either because important news are about to come out (like last week with the FED and the ECB informing their decision on interest rates). The unavoidable boredom brings dullness, causing you to lose focus and miss trade entries.?

FRUSTRATION

Frustration is often the cause of trading mistakes that result from any of the previously mentioned emotions. Losing money causes frustration and believe me, if you keep a track record of your deals and have the courage to analyze why you failed, you’ll conclude that 99% of the times you lost money because of your behavior. You’ll probably confirm that you got the technical analysis right, in some cases you might have had a bad timing, in others a bad definition of take profit and stop loss targets, but in all situations, your emotions, your impulsiveness, your recklessness or your indecisiveness were ultimately the main reasons why you lost money. Frustration reinforces all the bad negative behavior patterns and intensifies the biggest problems a trader has to deal in his day-to-day life: himself/herself.

Just now that all these emotions are natural. You are not alone.