There is nothing in the world quite like trading. This is the one game that humans are designed to lose, based on emotion alone. The two most common emotions in the market are Fear & Greed, spoken by the old wall street proverb:
“Financial Markets are driven by two powerful emotions -- fear & greed.”
The emotion of fear is usually characterized as an inconvenient, stressful state, triggered by impending peril and awareness of hazard.
Fear is a dangerous emotion that can allow you to turn a small loss into a devastating one. Fear provokes a trader to ask, “How bad can it get?” When a stock is going against you, your natural inclination is to ‘give it a bit more room’ maybe it’ll turn around -- nobody wants to take a loss! By giving it more room, you are not abiding to your original game plan where you’ve already quantified your risk and picked a spot that tells you you’re wrong when the price heads to that area. You are officially rotting with the stock. This often leads to a short lifespan for young traders.
Conversely, fear can also affect your winners negatively! When a stock is going in your favor, you are exuberant and you want to take the money off the table immediately, in FEAR of giving back those profits. The first time the stock down ticks you will want to sell it and solidify your win. Remember, great trading is characterized by big winners and small losers. This is one of the costliest mistakes traders make without ever realizing they’re making a mistake --- leaving too much money on the table in their winners.
For this reason, we teach “paying for the trade” by selling a small portion of your stock into the first pop so you can handle the pullbacks. We see it all the time, we have a great buy in a momentum name and it runs $2, only to quickly pull back $1.50. Your emotions are an absolute roller coaster if you just ride out your position. By paying for the trade, you’ve booked some profits and have a content outlook for the rest of it. This way, if the trade pulls back, you can handle the gyrations knowing that no matter what happens, you can’t lose money in the trade. Paying for the trade is just as much an emotional tactic as is financially sound decision making.
The other side of this equation is the greed aspect. A famous Wall St. saying goes, “Pigs get slaughtered”. Greed is defined as an irresistible craving to possess more of something (money, material goods) than one actually needs.
According to several academics, greed is a lot like love in that it has the power to create a chemical rush through the brain that forces us to put aside our common sense and self-control and thus provoke changes in our brains and body.
Greed is the feeling when your stock is raging, you just had a great buy, and this stock looks like it’s going to $1000. We see it all the time in the chat room when everyone gets excited about a stock and doesn’t want to take any profit because it looks like it is only going higher. We call this a “High-five sell signal”. This is one way to combat the greed. When you want to high-five your buddy or pound your chest about a stock --- it likely means it’s time to take some stock off the table. Of course, when you’re fist pumping, what does the stock do? It turns around and retraces -- as healthy stocks do. This is when we see people’s emotions change -- “What the fuck XYZ is CRASHING!” No it’s not, it just got a little too ahead of itself. If you take some profit into that first move, it will be much easier to hold your position back for a retracement, which ultimately leads to greater gains in the long term. What -- you thought you could just make money without any pain?! Remember, the best traders have no attachment to the trade. It’s just another trade.
While fear and greed are greatly publicized, the worst emotion that traders abuse is HOPE. I’ve seen more traders lose their career over hope than anything else. Hope is the greatest mistake generator there is. Some mistakes caused from hope are lack of discipline, not adhering to your game plan, risking beyond your means, improperly assessing the probability of a trade.
Let’s say you take a couple quick losses back to back. What do your human emotions have you inclined to do? Make it all back! This is where hope comes in. You are much more likely to not properly assess a trade setup under these circumstances. You are very likely to begin over trading or taking bigger risks, not because you think the setup is A+, but because you HOPE to make it all back to even. This will result in compounding losses. You took those 2 quick losses off the open and all of a sudden an hour later you have 6 losses, have lost triple what you normally risk, and your mental capital is SEVERELY drained. This is when you start beating yourself up, “How could I be so ____ stupid!” (I’m sure you can fill in the blank :)
One of the most difficult parts about trading is that afterwards, everything is very black and white. You can pinpoint exactly where you made the mistake that caused a loss. Hindsight is always 20/20 and this is how you correct mistakes, but dwelling on the mistakes is further draining the mental capital. This is why detachment is so important, it will keep you clear headed in your decision making.
We equate ‘hope’ in trading to ‘tilt’ in poker. Tilt is defined as a state of mental or emotional confusion or frustration in which a player adopts a less than optimal strategy, usually resulting in the player becoming over-aggressive. Deep down you know you’re making a financial mistake, but for some reason you proceed anyway. It is impossible to be your best trading-self when operating under these circumstances.
The winners -- the best of the best -- have developed a specific mindset that is the key to their success. Their unique set of attitudes allows them to remain disciplined, focused & most importantly confident in spite of uncertain conditions. As a result of this mindset, they’re no longer susceptible to the common emotional errors that plague the average trader.
Just as people can learn the proper technique of swinging a golf club or shooting a three pointer, their consistency, or lack of it, will without a doubt come from their attitude.
Do you have balls?
Share a time when you fell victim to fear? What did you learn from it?
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Share a time when you fell victim to greed? What did you learn from it?
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Share a time when you got caught up trading due to hope? What did you learn from it?
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