One of the best Written Article from my Archives
Every seminar and book will tell you that controlling your emotions and having discipline in you’re trading are essential to your success. But no one tells you how to achieve emotional control and personal discipline while trading the market. Every trader sees the market differently because our past, our current lives, and our perceptions are unique. Understanding those things about yourself and harnessing their affect on your trading will help you keep trading realities free of emotional debris. Here are some steps that will make a difference. You must take a technical approach to your emotions and discipline training just as you take a technical approach to analyzing a stock chart. But before we get into the logistics of how to control emotions, you must understand some basics of why some market participants have solid control of their emotions while others do not.
All price action in stocks is critically dependent on emotional reactions from varying market participants. Without emotions, price sits flat. There are many degrees of emotional surges, waves of euphoria and greed, and waves of panic and despair that drive prices up or down. And always within those waves are the killer rip-tides that come from those who have learned to control emotions, and wipe out those who do not have control. Ultimately, success in the market is a combination of anticipating the next move and the moves of all the other market participants who may enter that stock, and determining when you should participate. Unfortunately, most traders trade the market not as if they were playing chess with the complexity of the bluff of poker, but as if they were in Las Vegas, gambling on a roulette wheel.
In the world of stock trading there are Master Traders who have control over their emotions and then there are the Gambler traders who buy and sell based purely on emotion whether they realize it or not. A Master Trader combines the skill of a chess player who anticipates an opponent’s moves and plans his own well in advance and also uses the poker player’s bluff in never revealing his hand before he chooses to reveal it. A gambler is simply reacting to his emotions without logic or forethought in what he does.
Market participants who trade the market with the skill of a Master Chess Player–anticipating price action days, weeks, and months in advance; incorporating the ‘never reveal your hand’ aspect of poker–have the extreme advantage over gambler traders. They have control over their emotions and hence control over how they trade. The gambler trader is just throwing money at the market and hoping something will go their way.
It is also important to realize that you do not come to the market as a blank page. You come with the personal history of your life, what happened to you and more importantly, how you reacted to what happened. You have preconceived opinions and preset emotional trigger responses to each situation you will encounter in the market based on past experiences relating to money. You come to the market fully loaded with trigger points just waiting for the right conditions to fire. And they do.
Now you understand that even before you initiate a trade in the market; emotions are already underway–negatively impacting how you study the charts, learn a new strategy, or take a weekend seminar. Emotions are ruling your decisions, interpretations, and how you use what you have learned. The entire mechanism of emotions has begun to impact your trading before you ever enter an order. You are trading emotionally right now, at this moment. As you read this article, you are basing opinions about what you read on emotional reactions to what you have read before, how those articles helped or didn’t help your trading, and what you are expecting or hoping to find now.
Of course, there are varying degrees of Master Traders and Gambler traders. Most of the time, the larger the capital base a trader has available to trade, the more emotional control and discipline a trader has developed. The giant institutional investor manager who trades billions of dollars has ultimate control and discipline. The odd lot trader who has only a couple of thousand dollars to trade has the least emotional control. Statistics show that the smaller the capital base, the less knowledge a person has and the greater risk they take.
That said, there are small retail traders just like you, out there trading, who remain calm, cool, and collected no matter what is going on with their trade at any given moment in time. A floor trader for a big market maker firm can be down in their account by a million dollars but still can stay calm and choose the right decision to turn trades around to his advantage. How you do achieve this kind of control?
Steps to Controlling Emotions and Gaining Trading Discipline:
1. Know what you are going to do before you do it.
A Master Chess Player is at least 6 moves ahead of his opponent at every step in the game of Chess. A Master Trader identifies the market participants in that stock at that moment, determines when the next level of market participants will buy, decides a specific price for entry, and has one or more exit strategies planned for that stock trade before he ever places an order. In other words: he knows what he is going to do before he initiates the trade and has all of his various strategies worked out for all the different scenarios that can happen to that trade. He is prepared for all situations and ready to trade.
2. Develop your own unique Trading Style.
Too often traders simply follow the crowd. Instead you should develop your own unique trading style. A trading style is not a strategy. It is a set of parameters or rules that you adhere to strictly, ignoring rare anomalies that occur in your trading from time to time that go against your rules. Your trading style should also ignore gimmicks, fads, and ‘hot new strategies’ that are constantly being promoted to crowd traders. If you establish a set of parameters for your trading, write those rules down, and follow them while ignoring the crowd mentality of most small retail traders, you will begin to establish strong emotional control in your trading decisions. The trick is writing the parameters down and then sticking to those rules. Emotions want traders to ignore rules.
3. Ignore the Money.
Don’t trade for the money. Trade because you can’t imagine doing anything else. Trade because it is the most enjoyable and rewarding profession you can do. You can have a passion for studying charts without letting passion rule your decisions. Highly successful people, in any career, do not do their job because of the money, they do it because they love what they are doing and can’t imagine doing anything else. The money is secondary to doing the job that gives them purpose and self-esteem. Money is not the ultimate motivator, purpose and self-esteem are.