Destructive Emotions

Greed Greedy investors tend to be over- condent and want to make as much money as they can in a short period of time. They want big prots and they want them now. The desire to make money, however, is in many instances unrealistic. If, for example, I gave you a small vegetable patch and told you to feed your family from it, you would probably think about it logically and deduce that you had insufcient resources at your disposal to achieve the aim. Contrast this with the amount of people I speak to who want to invest $5,000 in a commodity account, and earn a living from it and retire from their job. The chance of achieving their desire is almost nil, but over condence and desire overcome logic and objective thinking.

Fear All people fear losing money, worrisome news in relation to their investments and savings stimulates more fear. Fear then spreads; a fearful man’s psychology is contagious. If people around us are fearful, so are we. If we have suffered fear in the past, we retain all our past experiences in our subconscious mind. Finally we have the fear of losing. Also, if we see other people making money, we want to be in on the action as well.

Hope This is dened as the expectation of something desired. However, investment decision making should not be based purely on desire, but on a rational assessment of the facts. When a trader loses he hopes that things will get better when he really should be being objective.

If you read the great traders, you will constantly see them refer to Hope and Fear and their destructive power.

“Hope and fear: I have written about this often in my books, and I feel I cannot repeat it too often. The average man or woman buys commodities because they hope they will go up or because somebody advises them they will go up. This is the most dangerous thing to do, never trade on hope. Hope wrecks more people than anything else. Face the facts and when you trade, trade on facts, eliminating hope.”

“Fear causes many losses. People sell out because they fear commodities are going lower, but they often wait until the decline has run its course and sell near the bottom … never make a trade on fear.”
W.D. Gann

“The successful trader has to ght … two deep-seated instincts, 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 prot may become a big prot. It is absolutely wrong to gamble in stocks the way the average man does.”

“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear.”
Jesse Livermore

After greed the average speculator, to achieve his desire, falls victim to both hope and fear and ultimately loses his money

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Emotions at Work

“When dealing with people, let us remember that we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bursting with prejudices and motivated by price and vanity.”

Dale Carnegie

Intelligence, knowledge and talent have to be applied. Any person who is successful knows that application requires discipline, self-control and condence in one’s abilities. Bjorn Borg was a great tennis player, he had talent. However, what always gave him the edge when playing was his mental control, which earned him the nickname “Iceman”. He combined talent and discipline to achieve his success and you must do the same.

We are all put in situations where, after they have occurred, we look back and feel that if only our emotional control had been better. You are going for a job interview and role-play Th a friend beforehand. You come over as assertive and condent. In the interview itself, however, the condence goes. You practise a best man’s speech, it ows well and sounds great; however, on the day, delivery suffers as you feel nervous and shy.

All the above we can associate with. The fact of the matter is, when the pressure is on, our actions are inuenced by our emotions. The more important the scenarios, the greater the inuence will be.

Trading is no different. As soon as money is committed, logic can go out of the window and basic emotions take over. Consider the difference between paper trading and trading real time. Whilst paper trading, you earn very good prots, you are condent and optimistic. You see a very lucrative business opportunity, so you now decide to open an account and trade for real.

On studying your charts you see an opportunity, a perfect double bottom and prices low in historical terms, now is the time to buy. You ring your broker to place the trade; however, the overwhelming condence of paper trading has now deserted you. Perhaps you had better double-check the formation. After much deliberation you decide to phone the broker and the trade enters the market. For the next two days prices rise dramatically, your prots grow; you feel great, what an easy way to make a living. The next day prices drop and your prots are cut in half. You feel uncertain; perhaps you should take the prot now before it gets away. You decide to wait. The next day prices fall further and close below your mental stop loss. Your system is telling you that you should be cut. However, you only have a small loss and it should turn around and you will soon be back in prot. The next day, to your horror, prices have collapsed and the majority of your equity is now lost. Your reaction is now one of anger, why didn’t you bank the prot when you had it! The market’s move is totally illogical, you feel anger, pain and frustration, you are now totally disillusioned and fed up, and all you want to do is exit the trade.

Welcome to the real world of trading!

“Seeing is believing, but feeling is the truth.”
Thomas Fuller

The above is a hypothetical yet common example of how traders who have made money on paper suddenly crumble under the strain of real trading. Many people deride paper trading and say it is of little use. However, providing you know the pitfalls in advance, it is a great way to mentally prepare yourself for the day you have to trade real money.

“The mainstay of training her is condence. That’s why we show them how to let a tank run over them - it gets their condence up.”
Ofcer in Charge US Special Operations Command

Of course nothing will take the place of the real trading arena; however, practicing the basics on paper is a very useful exercise. To ridicule paper trading is similar to saying soldiers should not go on manoeuvres because the bullets are not for real! In conclusion, paper trading is useful if we adopt the right attitude to it, (i.e. we make it as realistic as possible and we don’t cheat).

Going back to our hypothetical example,it is clear that the trader was making investment decisions based upon his emotions rather than logic. No matter how good the trading system was that he used, he would still fail due to his lack of discipline and self-control. This is not to imply that you can trade any system with discipline and be successful; however, a disciplined trader with a mediocre trading system has the edge on the best trading system in the world if its operator lacks discipline.

To develop discipline you need to acquire total condence in your abilities, i.e. acquire self-control. You can do this by acquiring knowledge, practicing on paper and real time trading experience. Nothing replaces real time trading, but preparation in terms of understanding the markets and how you should relate to them will give you a distinct edge in the quest for the big
prots.

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