Observing emotions to trade well

While trading I watch my emotional state of mind more than the price action. This has helped me trade better

here are some of the emtions I feel from time to time and what they mean to me in context of trading

1) hesitation to pull the tigger - something is not right - don't take the bet

2) anger - start of revenge trading - stop ASAP

3) uncomfortable while watching or not watching the price - non aligned with the market, trading with too much size - reduce size or quit

4) ignoring the little voice and gut feeling - trust the inner voice and take action

5) trading on hope - quit asap

6) thinking after hours or during market hours of money you can make = greed, impatience to make money - focus on how much you can lose

7) stress = wrong side of the market

8) feeling joy = right side of the market

 

Sumeet666,

I have a few suggestions. While many of your actions may seem good on the surface, what you are really doing is undermining your setups by not following them as your trading plan states. By masking the underlying problem by stating you are focusing on your emotions, you are not fixing the root problem causing these emotions in the first place. What is really causing these emotions is most likely a lack of confidence in your setups, not having any specific setups and a trading plan, or worse, not following your rules.

You should be very even keeled during the day with no highs and lows (granted, easier said than done). Every trade should feel the same in the beginning as you don’t know which ones will be successful before hand so until the trade is over, no sense worrying about the outcome as you have no control over any one trade so you really have no reason to get emotional about it. If a setup comes along, you take it. Period. Your success comes by exploiting whatever edge your positive expectancy setup delivers over many trades, not by an emotional feeling you get before or during a trade. Let’s look at few individually. This is my translation of what you are really saying (I may be wrong but this is my impression).

1. I hesitate to pull the trigger because I don’t have faith in my setup or systems and/or because I haven’t done the research to know they are successful. I am not saying it is never ok to not take a trade setup, but you should have rules in place outlining these situations AHEAD of time. If you don’t take it for no particular reason, over time, you will come out behind IMHO. You plan and the math shows it is in your best interest to take the setup as is, so do it. Why sabotage your chance of success? I never understood why this is so hard for people.
2. There is never any reason to be angry. You follow a setup. It works, great. It doesn’t, fine. My testing says it will over time so my job is to follow the setup and implement it as many times as I get a chance too. No one is picking on your orders. You just made a bad trade. Get over it. That is a large part of trading handling the fact you will be wrong a lot and having the maturity to realize every loss puts you closer to another win, statistically speaking. This is a cost of doing business (if you followed your plan that is).
3. Again, these are all problems brought upon oneself by not having a well defined trading plan outlining proper position sizing based on your strategies, account balance and tolerance for risk. You shouldn’t be uncomfortable in a trade or it is a sure sign you are way too big.
4. This is a tough one as it can be valuable as you gain more experience. But as a new trader, this is more from a lack of trust in your systems than a true sense of what is going on. If you track these trades (you are tracking your trades in the beginning aren’t you?) you will find your gut may just be indigestion and costing you money (almost assuredly IMHO). You will have to test this over time.
5. Again, if you are hoping for good things, get out of your trade NOW. Hope holds no place in trading and if you have it, it is a symptom caused by another problem (lack of faith in a plan/setup, lack of a plan/setup or lack of the ability to do what is in your best interest if the math proves it is a good setup). There are many things this can be but I can’t think of one off the top of my head that is good.
6. This is another one most can empathize with, as unless you are a true robot, it is hard to detach the money from your trading, especially in the beginning. But it is an essential quality to have and you must gain it or you can’t be successful long term. Try to think in terms of points and not dollars. When you are in a trade and you are up or get a big windfall by a surprise move and start thinking about a new car, TV, a bass boat, or whatever, it is a sure sign to take a lot of money off the table. Lock in the majority of profits and let a little bit run if you must (see your trading plan as this should be spelled out in ADVANCE). Don’t hesitate here or your windfall will quickly evaporate and then you will remember it and let it bother you a long time. Don’t say you weren’t warned here.
7. Your should never be on the wrong side of the market (depending on your plan/setup parameters or if you are a countertrend trader for instance). If you are you either have a bad setup or bad timing but it shouldn’t cause you stress. When in doubt, get out. You can always reenter but the name of this game is account preservation. Watch the downside and limit it and the rest is easy (ok easier).
8. This one screams you are a gambler, not a trader. A trade should not invoke feeling of joy if ahead and feelings of despair if behind. It is just a trade. You will have many, many thousands over your career (if you last). Save that for Vegas. Remember, even keel. Just another trade. Nothing more and nothing less.


The truth is the emotional control gets easier as you gain more experience. Why? Because you realize every thing you do is in your best interest to minimize risk and losses, and increase profits. One last tip. Don’t keep a daily P & L in the beginning and if you do, pay it very little attention. You should be tracking your weekly or monthly P & L though as that should be much more consistent. Anything can happen in a day. Take some pressure off yourself.

Best of luck

BM

 

Good post BM. Number 8 is one that I have a bit of a disagreement with you over.

I think it is really important to have emotions but not in the sense of winning=happy or losing=angry. Winning is winning and losing is losing... it's part of this business. However where I think we should let our emotions loose is when we have followed our system / trade properly or incorrectly.

I'm happy when I have taken a loss but followed my trade properly i.e. stuck to my stop loss. I'm annoyed when I have made a profit but didn't follow my system i.e. didn't wait long enough for entry or got out too early. I think these emotions are not misplaced and will actually help you have more conviction in your system or trades.

We are not robots and never will be. We have emotions but use them to benefit you rather then hold you back.

I think this passage from "Reminiscences of a Stock Operator" where he talks about misplaced emotion will highlight my point

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day and you lose more than you should had you not listened to hope to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does."

 

I have a bumper sticker that is near my computer. It has a picture of Yoda saying, "Do or do not. There is no try."

Just a reminder to follow my own rules, even when I am afraid to. As has been said many times here, the ones on which one is most afraid to pull the trigger turn out to be the big winners.

The word try, in our language, serves as an excuse.

When I was in practice, I used to discuss quitting with smokers. I noticed after a few years that the few who said "I am going to quit" were the ones who did quit. The many who said "I am trying to quit" were never the successful quitters. It jived well with something I read in a journal years ago, which said that there are two steps to quitting smoking. 1. Make up your mind. 2. You're done.

 

When I feel this way, I am looking to get out, price usually near the extreme.

 

"1) hesitation to pull the tigger - something is not right - don't take the bet"

If you have a method that you have researched well, and know is a good system, then you should not really be hesitating. Just start with small size and get used to it, then once you see profitable results, the hesitation will begin to disappear.

Hesitation is usually caused by not having enough confidence in your method or strategy. Insufficient confidence is caused by not knowing if your strategy works. Not knowing if your strategy works is caused by not doing enough research, backtesting, and live testing on small size. So - research your method more, test it more, trade it small to see how it works. Only once you see it works consistently will you get true confidence and then see hesitation disappear.

'2) anger - start of revenge trading - stop ASAP'

Stop - but only long enough to clear your mind. If it takes a day to clear your mind, then stop for a day. But with practise, you will recover your composure quicker. Nowadays I rarely get angry at the market, I usually detect negative emotions in a few seconds, and shut them off, remind myself the market is just an impersonal system, like the ocean or like deep space, and it is silly to feel emotions because of its indifferent actions and behaviour.

Also, consider why you are getting angry. Are losing trades not a natural part of any trading method? Isn't it necessary to have some losers, if you want to have winners? So why be angry at them? Remember a profitable method will work over hundreds, or thousands of trades. You will take thousands or tens of thousands of trades over a trading career - any one losing trade, so long as you manage risk, is not important. What is important is to trade well, stick to a good method, and profit in the long-run. Just like a poker player should not get angry when he loses to the opponent getting a lucky draw on the last card, so a trader should not get angry because of one losing trade. As long as you stuck to your stop loss, and exited once the trade went bad, then you should feel happy that you stuck to your plan, not angry.

Be angry not at the market for losing trades, but at yourself when you break your rules, or trade without a plan, or don't prepare properly, or you were being lazy. Then, use your anger to motivate you to stick to your rules, trade your system, prepare well, and work hard. You should be more angry at yourself for a huge winning trade when you did not prepare properly, or got lazy, or made a mistake and got lucky; and not angry at all at a huge loser, where you did everything right, but some bad luck happened (e.g. president assassinated; or you short a stock and it gets taken over). Focus on the process of trading correctly, and long-term results; not so much on the result of one trade.

'3) uncomfortable while watching or not watching the price - non aligned with the market, trading with too much size - reduce size or quit'

Discomfort is a sign of taking too much risk, or not being confident that the trade is the right one. So I mostly agree with this. First step is reduce size, until you feel comfortable. If you still don't feel comfortable even after reducing to the smallest position, then exit the trade.

4) ignoring the little voice and gut feeling - trust the inner voice and take action

Yes - just remember to place a stop, in case you are wrong. Also, be careful not to confuse intuition (a good thing, if you have experience) with impulsive trading (a bad thing - unplanned, random trades, that don't fit into your system or method).

5) trading on hope - quit asap

That's a bit drastic. Instead, just exit the position, review your trading plan and rules, pause until you regain your composure, then start trading small and work up to normal size again.

6) thinking after hours or during market hours of money you can make = greed, impatience to make money - focus on how much you can lose

I agree. The way to decide correct trading size, and risk to take, is to look at how much you can lose, not how much you can win. Assume that each trade you enter will go against you and hit your stop, losing the money. If you are still happy to take the trade and take this risk, then your risk assessment and position size is probably correct. If you would be upset by losing that amount on this trade, then you are trading too big - get smaller. The ideal size is where it's enough to matter if you win on the trade, but not so much that you would be upset if you lose on the trade.

7) stress = wrong side of the market

Usually yes. Or too much size. You can be right on the direction, but if you trade too much size, you can get stressed by pullbacks and noise, and exit a good position because you can't handle the swings. Always trade small enough that the noise doesn't bother you. But don't trade so small that even the serious moves don't bother you.

8) feeling joy = right side of the market

Often this means you are getting cocky, and the market is about to reverse hard. I have found that if you ever get euphoric about your trade, or your trading in general, it is best to review your positions, and usually reduce size, put on some options hedges, or just get flat entirely.

IMO if a trade is working good, then you just feel relaxed and comfortable. If you are properly prepared, then you know your exit plan e.g. "The market has gone down 10 points, it is now having a little bounce. If it bounces more than 5 points, I am wrong and I should exit. If it bounces less than 5 points, I am probably right and should stay in the position - and even short some more if it goes to new lows. If it stays in a range for more than 1 hour, then the momentum has gone and I should exit.". You have a plan for what to do if you are wrong, and what to do if you are right, and what to do if nothing happens. So you have all options covered -no reason for stress or concern; no reason to feel great either; just feeling relaxed because you have done all the work, and are ready for all conditions. Like a boxer who has trained hard, studied his opponent, and knows if he fights correctly for every second of the fight, he will probably win - but there is always slight chance of a knockout, he knows this and accepts it, and if it happens he will study the fight with his coach, train hard again, come back, and fight to win the next time. It's all part of the game, win lose or draw, what matters is that you do the right things consistently, and minimise mistakes, and constantly work on your skills and try to improve each day.

 

I agree with your post, except some of this part.

Sometimes feelings can provide setups by themselves. They can also enhance conviction and edge in pre-existing setups. Destructive, harmful, and irrelevant feelings should be cast out and dismissed, but there are constructive and useful feelings in trading, which can provide a substantial advantage. Ignoring this latter type will result in trading far below one's potential.

 

Thanks BM and GC for taking time out and replying in such detail.

I am not a beginner, infact I have been trading for the last 4 yrs. The first 1 year I had no idea what I was doing and did what most beginners do...reading books, listening to the "experts" on CNBC, using indicator this and indicator that, making random entries, not having any idea when to open or close positions. I blew a $30,000 account in the process.

I came to a conclusion that I needed a method to trade. I asked myself what kind of a trader would I want to be - a mechanical trader with a hands off system or a discretionary and intuitive trader. And what type of trader - a scalper, day trader or swing trader. I decided to be a discretionary swing trader as this suited my personality best. Then I decided what to trade - stocks, futures or options? I decided to trade only index futures as it gave me the flexibility me to trade both long and short side of the market for a longer duration. And trading only 1 instrument allowed me to become very familiar with the movement of that instrument.

I then stopped reading books, listening to the so called experts and focused on reading the price action without any indicator, as price action gives me all the information I need. I still had 2 yrs of living expenses so I quit my full time job, took a part time job which allowed me to trade and work after the market hrs.

For 3 years I continued to learn to read price action but mostly lost money due to my inexperience. I also monitored my emotions very closely and realized that I can actually use them in my trading. Most people talk of eliminating emotions from trading, but to me emotions provided valuable clues about the market. Emotional control does not mean that one can choose emotions rather it means controlling the reactions to the emotions.

I have reached a stage where I can read the price action fairly well. I can easily identify if the market is going up or down or just moving side ways. My trading plan is as simple as: Buy when the market is going up, sell when the market is going down and do nothing when the market is choppy. I don't use hard stops but define my risk and profit potential before taking any trade. I have also cultivated the discipline to exit if price hits my stop loss.

The points that I had posted were actually notes to myself and I should have elaborated on them

1. Hesitation to pull trigger - I am not someone who freezes, unable to pull the trigger. Infact I have no problems in pulling the trigger. But there are times when I feel a slight discomfort in pulling the trigger a small voice in my head tells me to wait. I have discovered whenever I ignore that voice and pull the trigger in almost all the cases it results in loss. Hence the note to myself to not pull the trigger if I am not 100% comfortable.

2. Anger - I had often observed in the past that revenge trading began with anger as a reaction to a losing tade and then I would go on a tilt and lose money trying to recover my losses. Now if I feel even the slightest hint of anger I don't take another trade but walk away and only come back when I am totally calm. This has helped me totally eliminate revenge trading.

3.Discomfort is a sign of taking too much risk, if after reducing size, I still don't feel comfortable then I exit the trade.

4. Hope. If my only reason for being in a trade is hoping that the market will change direction in my favor that's a sure sign to exit the trade.

5. Feeling joy - by that I did not mean happiness or euphoria, "Joy" is an entirely different feeling from happiness or euphoria . Its a state of inner calm and peace. Happiness is caused by external factors, joy comes from within. If I sense a feeling of inner calm it tells me I am on the right side of the market and I let the position run.

I have easily put in more than several thousands hrs of screen time. The last 6 months I traded mostly 1 contract, sometimes 2. I had 2 losing months out of six. Overall I was in profit. I feel I am now ready to do this full time, quit my part time job and scale up.

I ask this of the profitable traders here, is my assessment orrect, should I take the plunge?

 

Sumee666,

You are on the right track…

And none of us are going to be able to adequately answer your question – it’s got to come from within

This will be the determining factor – whether or not you make it…


I had a few thoughts typed up – but after reading this last post I'm not sure if they will help – but here they are anyway….


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Been thinking about your posts, and thought I would share a couple of “lessons learned”….

Losing is part of trading…, you must risk money to make money – there is no other way

You place a trade – pick your stop loss price – then let come what may…. And should it turn into a loser – simply accept it and move on….

But if you find yourself losing one dime more than what you initially signed up for on any given trade – know this….


You are simply fighting yourself….

It’s not the market…, it’s not other traders.., it’s not because you need a better set up, or more indicators… and it not because the planets aligned and did some weird shit…


It is you… simply fighting you….



Aside;

Unless price is giving you a clear signal that the trade you have on is going to fail – never exit early… I can’t tell you the number of times price has come within a cent or two of my stop – then ripped the other way for a significant profit
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On another note;

There are trades I get in…, and I’m sure you will too at some point – that if I lose – I know the next trade I place will be profitable

Now I never know how much of a winner…., but it will be a winner


How do I know this; because if price is not doing this… then it has to be doing that…


Once you can identify these – exploit the crap out of them

RN

 

if the complete loss of ones trading margin will not bankrupt one -
financially, emotionally, psychologically, spiritually
and one has a Dependable trading system/method
emotions are not then part of ones trading scenario