Ride Out Emotions for Greater Success

Mar 25, 2007: 10:13 AM CST

Have you ever been caught in a trade and your emotions are overtaking you, causing you to make a decision based on your feelings? Was it a good decision after the fact?

Typically, if we trade specifically on emotion (greed makes us buy too late, and fear keeps us in too long… or prevents us from entering at all), then our results tend to be average at best and below average at worst. Often, the best trades are the ones that few people are willing to take and “go against the grain” of what appears comfortable.

People tend to play out their emotions in the market, and seek what is certain or comfortable. Unfortunately, seeking certainty takes time, and often causes us to miss low-risk entries into trades. There is no certainty in the market, only greater probabilities.

Recall the most recent market declines (in March 2007 and August 2007). It would have been profitable to buy after the decline when most people were in panic (as they watched their positions lose money and they heard the TV analysts predict a recession). How many people can trade against the TV news comfortably? Consequently, this also would mean paring positions and tempering bullishness when others are decidedly bullish.

The same can be said in trading on an intraday basis. Often, great entries come when a stock/future is declining, and you must take the opposite side in anticipation of a reversal (based on whatever technical decision you make). Needless to say, what is comfortable is not always what is profitable. Furthermore, we realize that almost every trader does what is ‘comfortable’ and those who can handle the negative emotions and uncertainty take money from those who are comfortable.

So how can you deal with fear and being uncomfortable before taking a trade or while in a trade?

Time your emotions, document them, and know that they shall pass.

Do not fight your emotions or deny their existence or seek to eliminate them. They can be powerful indicators if used properly, and they will pass if you allow them to run their course. Fear exists to warn us that danger is likely and that we must be careful. Understand this emotion, along with its purpose and time how long you feel its effects, but do not give in to its demands (do not hold on to a losing trade. Overcome your fear to put on a position).

If you are feeling greed and just cannot wait to jump into a runaway stock, time your greed and see what happens when you ride out your greed and trade based on your system. Is the trade part of your system? If not, wait just a bit and see what happens to the stock. Often, the stock will reverse and trap those that gave into their greed and you will be better for using your system, rather than greed, to enter trades.

Use a stopwatch! Document how you personally react to your emotions. Know that, over time, you can observe how the emotions occur for less time each time they are consciously acknowledged. You will always feel emotion while trading, and that keeps you alive and keeps the game fun and helps you to know you are achieving something worthwhile.

When you time your emotion (in seconds or minutes), you acknowledge it and – if you document it – you might find that the length of time you experience the emotion decreases each subsequent time it is felt. While easier said than done, this is a necessary practice to decrease the effect of emotions on you and increase the reliance on your system, which usually results in greater profits over time.

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1 Comment

One Response to “Ride Out Emotions for Greater Success”

  1. Stock Research Says:

    I just found your blog and really like this post. I was originally introduced to the stopwatch idea that you mention by a college professor and it does work. great idea to bring it into trading.