Short term market volatility is powerfully influenced by fear and greed.
But fear and greed aren’t the only emotions that influence market decisions.
Other emotions, such as disappointment and regret, can also impact what market timers do and can have adverse effects on their timing decisions.
It is only normal to feel “disappointment” when our trades fail to meet our expectations. We feel “regret” when we think that we have made a poor decision that could have easily been avoided.
There’s an assumption that underlies both emotions, and both of these assumptions can be dangerous to our ability to be profitable.
Must We Always Be Right?
We may believe irrationally that as market timers we must always be right and each buy and sell outcome must meet our expectations. If those expectations are not met, we believe it’s not only unacceptable, but our fault. That it proves we are unlucky as timers, or that the markets always move against us.
This assumption, however, must be questioned. And by doing so, you will be able to create a mind set that will help you to make your timing decisions decisively and without worry.
It may be unpleasant or an inconvenience when our expectations are not met, but it isn’t so terrible, awful, unacceptable or our fault.
Changing Our Perspective
First, you have to be able to execute. Following a tested timing strategy is crucial. The common trading errors of not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you “think” a signal will be issued soon, can be a disaster to your profitability.
By not sticking to few strategy, you allow emotions to rule your trading, and that places you right in with the majority of traders . Those who are the cause of the market’s volatility. The “herd” followers.
The reason for following few strategy is to “remove” yourself from making emotional trades. To remove yourself from the herd, which is often headed in the “wrong” direction.
By merely changing our perspective, we can change how we respond emotionally to market timing setbacks. If we believe they are our fault, or a result of some rain cloud that follows over us, or that we are just not cut out for market timing, then we are going to experience extreme feelings of disappointment and regret.
Extreme feelings of disappointment and regret cause us to miss trades! This is the single most common reason timers fail. They allow their feelings to keep them from following their strategies. And this usually occurs at the most inopportune times.
However, if we assume that setbacks and losses are “inevitable,” that they are to be expected in even the most successful of market timing strategies, in fact that they are caused by market fluctuations that are beyond “anyone’s” control, we will be prepared to cope with them.
We will come to expect them, and we are likely to think that they aren’t as terrible as we had assumed they might be.
Anticipatory Approach To Trading
By taking an anticipatory approach to trading, not only can we rein in our emotions, but we can put a market timing buy or sell signal in the proper perspective.
Remembering that a single trade is just one trade among a series of trades and the only outcome that matters in the end is the overall profit across the series of trades.
Across a typical series of trades there will be winners and losers, and usually more losers than winners. But the winning trades are much larger than the losing trades because they are made when the market trends! And market trends, by their very nature, last for considerable time frames.
Once we accept this fact of trading, we will be able to see that setbacks aren’t as terrible and devastating as we had thought. They are just part of the game. There’s no point in overreacting.
Control Unpleasant Emotions
Control unpleasant emotions by taking the proper perspective.
Humans tend to overstate the adverse effects of a dreaded outcome. But there are a few simple strategies we can use to control these emotions. For example, if we control our risk on the trade, and plan it out carefully, the risk will be minimized and the actual potential loss will not be catastrophic at all.
Once the risk is truly minimized, a useful thinking strategy can be used; remind yourself, “I’m making more out of this potential loss than it deserves; it is not going to be as unpleasant as I’m thinking it will be.”
The Relative Insignificance Of A Single Trade
Another way to minimize disappointment and regret is to try to impersonalize the trade. Think in terms of probabilities, “This is just one of many trades. The outcome of any single trade means nothing. The big picture is all that counts.”
By reminding yourself of the relative insignificance of a single trade, you’ll minimize the potential regret should you lose. Similarly, it’s also important to avoid over-interpreting the significance of a trade; a single losing trade (or even a few losing trades) doesn’t mean that you have a poor market timing strategy. It is an unavoidable fact of trading in the markets. You ARE going to have losses.
Remind yourself that by following the strategy, you will never miss a good gain, and that those gains, which are usually considerable in size, over time, will make you very profitable and successful at timing. But you must be there at the time the signal is issued, and you MUST take the trade.
Remember that NO ONE knows ahead of time which trade will be the big winner for the year.
Self-worth On The Line
Most importantly, never put your self-worth on the line with your money. The outcome of the trade should not influence the positive view you have of yourself as a person.
Don’t let regret and disappointment influence your market timing decisions. Keep in mind that if you make a losing trade, you may feel a little disappointment or regret, but you can handle it.
Control your emotions. If you do not, you will likely miss the trade that makes the big gains. If you do control your emotions, in the long run you’ll achieve the profitable results you’ve been seeking.