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Emotions in Context

When you put your money on the line, it's hard to avoid getting a little emotional. Beginning traders may be especially prone to experience a roller-coaster ride of emotions, feeling euphoric after a winning streak, yet disappointed after a string of losses.

How well do you handle emotions? Winning traders control their emotions. They don't let their emotions control them. But emotions don't happen in a vacuum. How emotional you feel depends on the context in which you experience emotions. For example, market conditions matter. When the markets seemed to go up in the late 1990s with no end on the horizon, it was easier to stay calm. But after the bubble burst in 2000, many traders learned how hard trading can become. Take the story of a young trader named Bozo. I spoke with him about once a year for three years. His emotional life changed over time, depending on market conditions and his experience with the markets.

At one point in time, stock prices increased with little resistance. Back then, Bozo saw himself as a relatively unemotional trader. He said, "It takes a lot to shake me up. Even if I do have one of those bad days, it just doesn't hurt that bad because I know that I'll probably make it up." It was easy to stay unemotional back then, but after a while things changed.

I asked Bozo about his emotional life a year later after the market had fallen: "The days that I lose a lot are the days that I am too greedy. Maybe I'll have one bad trade in the morning, then I'll be down, and it is frustrating. And then I'll just want to climb my way out. My worst days always start out like that. Then I'll just dig my hole a little deeper all day long. Those are my worst days. That will usually carry over until at least one more day. By then, though, I realize what I did wrong the day before. I take smaller positions at first and just try to get myself a little bit in the positive. I'm fine if I just end up making four or five hundred bucks that day because I'm just slowly climbing my way out of the hole I dug the day before. I'm not out to recapture my losses in one day." With regard to the previous year, Bozo observed, "I get more frustrated than I used to, obviously just because it didn't used to matter so much when I was making money because I knew that I could make it back."

Bozo continued to be introspective about his emotions. One year later, in 2002, when the markets were relatively flat, I asked him what he observed. "To make me realize whether or not I was emotional, I had to go through hard times with trading. I think it's crazy how the market can take you from a high to a low, and back to a high and then back to a low. You think you've got it all worked out, and then six months later, you're thinking of finding a new job. What I realized is that when I'm doing okay, I'm totally unemotional when it comes to trading, like when a new trading strategy has been working. I just sit there and have a good time. Even if I have a bad trade, it doesn't bother me. But when I was having trouble, like earlier this year and late last year, when I was only able to keep my head barely above water, it was really frustrating. I guess that's when you learn more about how emotional you are when it comes to the market. I'm not the kind of guy who is going to throw my keyboard around, but it definitely has a psychological impact on the rest of my day."

Experienced traders say that trading the markets reveals your true nature. You learn how you react to stress and how you react to failure. Over time, Bozo learned more about his emotional life. He went from thinking he was unemotional to thinking that his emotional life was more complicated and depended on his experience and current market conditions. When asked to summarize his emotional experience, Bozo said, "Obviously, when you're doing better, it's much easier to relax and trade. I now see that I can't say I'm always an unemotional trader. It all depends on how I'm doing. I've heard that if you were to see most successful traders who have been trading for 20 years, you couldn't tell if they had a good day or a bad day. They are supposedly that unemotional. You read that all the time. But I have a hard time believing it. Let's see how they would feel after eight months of losses."

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Wednesday, 18 October 2017

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.