Trading with Emotions

veluri1967

Well-Known Member
#1
Extracted from the book "Why 95% of traders loose money" for the benefit of members.

TRADING WITH EMOTIONS

Lets break down the timeline of emotions that you are taken through as a
trader.

In the Beginning: Happiness

Nothing feels greater than successfully getting into a market in the right
direction. Whether its long or short, once you have picked a side and you
see the market follow suit, you begin to feel smart. Trading is easy, and
you begin to wonder what you were thinking. Heck, you didnt even need
to buy the program.

It is often said that the worst thing that can happen to a new trader is
to have successful trades in the beginning. This sets up unrealistic expectations for themselves and the market. It paves the way for future disappointment and frustration.

When I have dealt one on one with new traders and they have succeeded
early on, their sense of euphoria quickly converts to arrogance, and they slide into the second phase.

Next stage in the next post.
 

veluri1967

Well-Known Member
#2
Next Comes: Greed

Now that they have this trading thing licked, they begin to count how
much money they can make off of this trade. They were pretty smart in
picking the trade in the first place; they should be handsomely rewarded,
right?

So a trade that was humbly believed could make a few hundred dollars
at the initiation of the trade is now counted on to make thousands, possibly
tens of thousands.

The fantasies roll in one after the other. They could quit their
jobheck, they could pay off their mortgage, buy a brand new car, and
live a life of ease. They start believing the hype that this is how the rich
made all of their money, and they wonder why no one ever told them
before.

Mind you, the first trade is still on, the profits are solely on paper, and
they have not collected one red cent, but every last dime has already been
spent from this trade and the next dozen trades.

Then something happens.

The market stops going in their direction.

At first its a small pullback.

Okay, maybe you wont buy a Porsche; youll stick to a Mercedes.

Then something else happens.

The market pulls back more. Then it starts to collapse.

Dreams of making thousands dissipate, and you wish you could get out
of the trade with the few hundred you originally were hoping for.

Thats when the third phase kicks in.
 

veluri1967

Well-Known Member
#3
Followed Up by: Fear

Then it sets in. You really dont know what you are doing. You go grab your
books and videos; you scramble around in your memory for everything
they taught you in the seminar. You are looking for a way out.

Is your stop too tight, is it too far away?

What if this is just a temporary pullbacka shake outhow long can
you hold on; what if this the real deal?

How could you have done this to yourself?

How could you have turned a winning trade into a loser?

Then the market hits your stop, and you are out of the market.

You give back your profits and you lose some of your principal, and
more importantly, you see your fantasies die right in front of your eyes.

The fourth emotion falls in place.
 

veluri1967

Well-Known Member
#4
Which Leads to: Sorrow

Like the death of a beloved pet, you feel a sting in your chest as you watch
your fantasies get walloped by the markets. You curse the seminar, the guy
who told you about the seminar, and the alleged guru who was telling you
his great secrets of trading.

You start second-guessing yourself, and you cant believe you lost
money. You think about all of the things you could have done with money
instead of chasing rabbit holes and pipe dreams. You wonder how you can
tell your wife or family about what happened.

You decide you need to study a little more and find out exactly what
you missed. As the acceptance of the loss sets in, you look at the screen
one last time, just to see what the trade might be doing now.

Wouldnt you know it!

The market has turned around after all. It was a shakeout and your
stop was just too close.

Thats when the fifth phase kicks in.
 

columbus

Well-Known Member
#5
Extracted from the book "Why 95% of traders loose money" for the benefit of members.

TRADING WITH EMOTIONS

Lets break down the timeline of emotions that you are taken through as a
trader.
Typically first 30 minutes and last 30 minutes in the markets are run
by EMOTIONS but not on any fundamentals.Funny enough ,these periods
are termed more JUICY (more pofits in quick time.) I do not advocate
trading these periods though they are juicy.
 

veluri1967

Well-Known Member
#6
Next You Have: Frustration

What did you do wrong? You followed the program to the letter. You got
in when they said, and you bought a stop at the right distance to protect
yourself. What happened?

The market recovers your losses and gets back to where your original
profits were and then some.

Had you just stayed in, your dreams would have been realized. You
cant figure out what you did wrong, but you know that there is money in
these markets. Maybe you just didnt understand how they told you to place
the stops; maybe you misread or misinterpreted how to trade.

Next time, you wont use a stop. Next time, you will do things differently.
Youll hold on to the loss a little longer and wait until the market
turns around. Next time, you wont watch the market so closely. Youll just
let your trade work itself out. But right now, you cant let the market get
away from you anymore.

So you jump right back into the market again. You know how youll do
things differently now.

Wow! The market is going your direction again. Happiness tries to set
in again. You picked the right market at the right time, and you didnt let
the market get away from you.

Then it happens.

The market drops. Not a little bit like last time, but all the way down
in one day. You lose everything by attempting the same trade twice.

Thats when the final phase kicks in.
 

veluri1967

Well-Known Member
#7
Finally: Defeat

You will never figure trading out. What were you thinking? Youve wasted
money on a seminar, and you blew out your accountfor what? Some fantasies,some pipe dreams, all based on some guy who probably makes all
of his money just lecturing.

You are just going to give up trading for right now. Youll wait until you
understand a little more or youve perfected your paper trading. Then you
will try it againyoull get it right.

Then one day a flyer comes in the mail. Its a new system, a better
system, with a different guy, claiming even better results.

Maybe, just maybe, you can learn something new and the cycle starts
all over again.

Anyone whos ever traded has cycled through these emotions when
they lose money. The problem occurs when you dont learn from the cycle.
Instead of looking internally at how the trader was reacting to the various
emotions that were surfacing, it was a constant look back at what they
didnt learn from the program or how the program failed them.

So a cycle develops: Every time something goes wrong, the solution
is to find a newer program, a newer system, a better holy grail. The problem
with this is that your own identity and desires get lost in the noise.

Every program, seminar, video, or book should simply be an arrow in your
knowledge base, to be applied to the money management, technical analysis,
and risk management techniques and strategies that you are already
comfortable with.

Nothing should ever be looked at as a holy grail, including the ideas in
this book.

The goal is to help you develop the same mind-set and approach
to your trading that the professionals do and to teach you how to properly
integrate new ideas into your framework.
 

veluri1967

Well-Known Member
#8
WHAT THE OTHER 5% ARE DOING

Some people are afraid of success; others fear failure. Either way, the expression of the behavior is the samenot doing what is necessary and
known in order to achieve success.

If you purchase a program that doesnt help you select trades and have
clearly defined entry and exit points, its incomplete. If you purchase a program that doesnt clearly separate risk management tools from money management tools, its incomplete. If you dont have a clear way to create a
trading plan from the core ideas presented to you in the program, then its
incomplete.

It is constantly said that 95% of traders lose money when it comes to
trading. That means that 5% of the traders are collecting all of the profits.

What are they doing differently?

There are four areas of a trade that have to be managed correctly in
order for a trader to feel satisfied in his trading, whether he wins or loses.
You have to know why you are selecting a trade, how to enter a trade, how
to properly monitor the trade you are in, and, finally, how to exit the trade
to the best of your ability.

If your decision-making process is faulty in any one of these key areas,
you will start to cycle through the six emotions and become discouraged
in your abilities as a trader.

Trade well friends
 

veluri1967

Well-Known Member
#10
Selecting Trades Properly

This is where so many traders go wrong. From the outset they dont know
what type of trader that they want to be. The guru is a day trader or an
option-only trader, so you should be, too. If the guru is trading a $50,000
account or recommends a $10,000 account, you should immediately
follow suit.

Wrong!

You must trade to your strengths, interests, seed capital, time constraints,
and abilities. Look at the experience of the program creator and
realistically look at yourself.

If you cant stomach day trading, dont do it.

If position trading is too stressful for you, dont do it.

Whatever the case,
avoid putting on trades that simply dont match who you are as a person.
If you are looking to stretch your boundaries into new trading arenas,
first use a demo account and apply, to the best of your ability, the same
conditions that you would experience if you were actually trading that way.
As we know, ideal conditions never set the rulethey prove exception.
A little self-knowledge can go a long way to diminishing or eliminating
improper trades from your lifestyle.

Entering Trades Properly

This leads us into how to enter a trade. In order to make a trade successful,
you have to know how you are going to get out and what you have at risk.
By fixating on the profits, you set yourself up for failure. The reality of
trading is that profits take care of themselves. If you have picked a good
trade and the market is going in the right direction, there is little you can
actively do to make that trade any better.

However, the question in the back of your mind should always revolve
around: What if I am wrong? By entering a trade with that question on
your mind, you can figure out if the trade is worth taking at all. Successful
trade entry is based solely on what you will do to exit. Often, this has to take into account what risk management tools you
will use in order to make the trade successful.

Monitoring the Trade

If you are a position trader, why are you watching the market hour by hour?
If you are a swing trader, why are you looking at end-of-day results? These
are genuine questions I have had to ask clients over the years. The key
reasons fall back on one of two answers.

They dont want to put a stop order in the market because they are
afraid their stops will be run, so they keep mental stops and sit at their
screen to get out fast; or they just like to watch the market. They are
actually letting every tick on the screen influence how they act or, more
importantly, how they will react to the market.

Whatever the reason of how and why a trader monitors the market, the
core reason is fear. They dont trust the judgment that they have used to get
into the trade, and they really dont know how to protect themselves from
losses besides either ignoring the market completely or watching tick by
tick to anticipate what will happen next in the market.

Successful monitoring has to also have a back-up plan. Much like
chess, you need to be three, five, maybe even seven moves ahead of your
opponent. There is only one way to succeed in a trade: The market has to
move in your direction. But there are at least two ways to lose: the market
moves against you or the market does nothing.

If you prepare for these contingencies, your monitoring becomes a
function of your preparation, not a crutch to rescue a trade that bad.

Exiting the Trade

Who determines how you get out of a trade, you or the market?

If its you, then maybe your actions are reactionary or you simply dont
have enough capital to be trading the markets that you are in. This is exactly
why you have to know yourself when you execute a trade.

How you got in the market should be the exact reason why you get out
of the market, if the markets fundamentally shift supply and demand in the
opposite direction of your initial position.

When the market shifts, you should have targets in place to capture
profits you have made or to protect your principal. These dont necessarily
need to be monetary targets; they could be overbought/oversold indicators,
Bollinger bands, and so on. The key point is that you have a
reason for why you do what you do, coupled with a back-up plan that
helps you reenter the market without being whipsawed or chasing the
markets.

The exact way you get out of a trade will have a direct impact on how
you get back into the market. It will determine if you can even get back in
or if its too late, or if you can double up on your contracts, or if its time to
find a new market altogether.

The exit, profits, and losses, should all be carefully prepared far in advance
of ever putting your first dollar on the trade. This is the only way to
prepare for an exit of a tradeleave a little room for unpleasant surprises.
 

Similar threads

Broker Special Offers

Zerodha – Open Paperless Account

Open online account with Zerodha. Free delivery trading and Max Rs 20 for Intraday, F&O, Currency and Commodity Trading. Intraday High leverage with MIS, CO and BO.

Name:Phone:
Email:City:
State:
Are you a day trader?