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Emotions

As a human being there is a component working in you called your soul that is comprised of the following elements: Your intellect, your emotions, your memory, your imagination, and your will. These elements work together to determine who you are and how you will behave in the market -- actually, in anything and everything you undertake to do. These elements work together and definitely overlap at times. This week we are going to look at "Emotions" to see how this element can defeat you as a trader.

I cannot count how many times I have encountered traders who in my opinion were smarter, better, and more knowledgeable about trading than I am, who seemingly were unable to win in the markets. I was puzzled by this for a long time. From the point of view of intellect, they were able to make excellent and logical trading plans. They could read a chart and tell you everything that was going on. They understood the dynamics of markets. They understood what they were seeing, how human behavior acts and reacts in the marketplace. They understood indicators and how and when to use them, yet they couldn't win at trading.

They could develop logical trading methods and systems. They could recite all sorts of statistics about the markets in which they traded. They could win with backtesting and simulated trading, piling up huge amounts of make-believe money. Yet, something happened to them when they traded with real money on the line. Suddenly they couldn't see anything on a chart. They were unsure of any of the tools they normally used for winning in their simulated trading. It was as if they came apart at the seams as soon as real money was involved.

I thought about this for a long time. What happens to these people when the trading is real? What is it that goes wrong with all their plans, hopes and dreams?

Perhaps a good way to explain it is to compare it with falling in love.

A man and a woman meet and maybe because they are mutually attractive, they become infatuated with one another and "fall in love??" Maybe they just fall in heat, but that is not my point here. Because of pure infatuation, neither is willing to see beyond the physical.

Underneath her outward appearance the woman is really a nag. She is super critical and controlling. Others can see it but the man in love cannot. Love has made him blind to reality.

Underneath his outward appearance the man is a cowardly bully, a womanizer and is known to drink to excess. Others can see it but the woman in love cannot. Love has made her blind to reality.

In both cases, emotions cause the persons to become blind. They are no longer thinking rationally. Their intellect and logic has gone out the window, and all that remains, is an emotional lump of human blindness.

I have come to believe that the same sort of thing happens to traders when real money is on the line. All their market prowess goes out the window and they no longer see what is really happening in the market. They have lost the big picture. They have strayed from their plan. They have abandoned their method or system and they are now simply reacting. They are no longer proactive, they have become entirely reactive.

Some traders attempt to overcome this human fault by trading mechanical systems. The problem here is that they never actually learn how to trade. They become entirely dependent on the whims of the system they are trading. When the system no longer works, they don't have a clue as to what to do next. But they do have an out: They can blame their losses on the system and thereby save their pride. Lying to oneself by blaming the system only creates a new level of under-confidence, if I may call it that. Whatever courage of their convictions may have existed has now fallen to a lower level. The trader who blames his system rather than himself, knows he is lying but he does it to save face--even if only to himself.

It takes work and practice to separate the emotions of trading from the logic of trading. But it can be done.

I love to watch the Rambo movies from the point of view of what can be done with trading. The character Rambo is a well-oiled fighting machine. He is entirely focused and unemotional. He has a job to do and knows how to handle adversity. He can deal with any eventuality. Emotions are not a part of his character. He is simply fiercely determined to get the job done. Rambo should be the role-model for everyone who aspires to trade.

How did Rambo get to be an unemotional fighting machine? He did it through intensive combat training. This is not unlike what a trader must do: Train himself to execute without emotion. Once you learn to take the emotion out of your trading, you will find that trading is amazingly simple. You will be able to think and act logically while you make money trading.


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Friday, 09 December 2022

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.