Dorn: When Trading, How do You Manage Your Emotions?
Gold Trader, Financial Psychiatrist, Trader, Author
You have to be able to control yourself. You can't let emotions get in the way of your thoughts and actions... Warren Buffett
One of the most difficult aspects of trading is emotional management. For many months, we have struggled through market and economies that are news-driven, volatile, and filled with uncertainty. For many, it’s been a real emotional roller coaster. . To say "don't get emotional" is pointless because everyone has emotions around money.
What can you do about your emotions as they apply to trading and investing? Of all the books and papers I have read or written on trading psychology, there is one aspect that stands out most clearly to me. This is the condition of living in the past. I believe that this is one of the most significant obstacles to trading success.
Why? Because the brain remembers. The brain imprints loss or gain in a “memory” area called the temporal lobe, and generates fear or greed as a result of it. The larger the loss or the gain, the greater the neuronal imprint becomes. Losses are imprinted as fear and gains are imprinted as greed. Both are equally destructive to further success with trading.
The real culprit is memory. It is the memory of losses or gains that stay with the unsuccessful trader, causing continual mental sabotage and inability to move forward.
The best traders forget about a loss the minute they take it and move on. They are confident in their system and their ability to execute it. It is not about the money for these people. It is about finding a system that will bring them more profits than losses. The best traders know how to take losses and not become depressed, angry, jealous, disgusted or defeated. They know how to take gains without gloating, boasting, or becoming euphoric. They see only the trade they are about to enter---not the trade that just ended or the one that might be coming in the future. All past trades are out of sight and out of mind. All future trades are an illusion.
This is a really difficult thing to do, but it must be done in order to move forward. If you are unable to detach from the past and the future, you will continue to be a victim of fear and greed.
Fear doesn't form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the next trade. Often, the fear is so consuming, that you don't enter your next trade. Of course, Murphy's Law dictates that the trade you don't enter is the one you should have entered, which only compounds the existing emotional anguish.
Greed creates the opposite problem. With a couple of consecutive winning trades, the ego enlarges and invincible feelings overcome logic. This will ultimately lead you to trades that you normally would not have entered. Finding good trades is hard enough, while finding poor trades seems to get much easier after a couple of winners. Emotions cause 'perceptual distortion' where we only see the part of the picture that our beliefs allow us to see.
The instruction is to know who you are in this present moment. You are the problem and you are the solution. Living in the past or the future does nothing but stir up emotions that impact adversely your trading and other aspects of your life. It is said that fear blinds one to opportunity and greed blinds one to danger. Make every effort to be fully present and you may be surprised at the outcome. It’s the best way to defeat the enemy within you.
The ability to be in the present moment is a major component of mental wellness…Abraham Maslow
Janice Dorn, M.D., Ph.D. is a trader and trading coach. She has written over 2000 articles on Trading Psychology. Her website is: TheTradingDoctor.com.