How do you separate your emotions from trading
and learn to sit on your hands; for example, how do I quit chasing a stock etc?
I remember someone asking me once, how on earth do you remain detached from your emotions when it is emotions that cause you to want to become a trader anyway? In actual fact it’s more like; emotions cause you to want to find financial freedom, but it means the same thing.
I agree, emotions do play a huge role and it’s even more pointless if you set out to achieve a financial goal in trading, so that you could enjoy a lifestyle goal, such as going on a cruise, only to not enjoy the cruise! All that work for nothing.
But let’s get serious.
Patience, or lack of, is an emotional issue; also is chasing a stock. To simply say you must not do these things is easier said than done. One reason for the lack of discipline is not knowing how well your system performs, because if you did, you’d know the probabilities of losing trades. If you know that, then you’d have no need to chase a stock.
But another reason may be because you feel that if you miss this trade there won’t be any more opportunities coming soon. Once again, this comes from now knowing your system, and as much as people hate to hear this, it simply means you haven’t back tested and paper traded enough, OR it means you don’t have a system at all.
But let’s say you do have a system, you have back tested, and paper traded and know it should perform, but you still keep having these same emotional reactions, then may I offer a solution. Log your trades.
Yes, log your trades and as part of the log have a checklist towards the bottom with all your weaknesses listed. It can be on a simple excel spreadsheet (this is what I use), and have a list of every bad emotional reaction, behaviour, habit etc that you have or are doing in your trading that is costing you. At the end of every trade, check off any of those that you did, or even came close to doing.
Examples can be,
• watching the screen even though you have a exit and stop loss in place
• trading with too many distractions
• cutting trades short because your thinking about the money
• chasing a stock or trade
• ignoring your stops
• getting impatient with the trade
and so on….
If you know you do these sorts of things but you make yourself accountable, you’ll start to place a wall in front of them. The process is by first acknowledging, and then overcoming. Acknowledging is by checking them off if you did them, and overcoming is by drawing up a plan to overcome them.
For example, if you have a tendency to be impatient and you can’t sit on your hands, and you find you did this in your last three trades, then get accountable by telling someone close to you. If you don’t have someone who can set you straight then find someone. Or, decide that as soon as you find a trade, you enter and set your stops, go do something that will prevent you even looking at the screen – go outdoors or for a drive!
The same goes for chasing trades. If you think an opportunity is forming, set a particular limit to how far it will go before you say it’s gone too far. Once it has gone too far set off an alarm, make some noise, turn off the computer – just do something that is totally unexpected by your brain, and it will respond in your favour.
How you plan to overcome bad behaviours which are the result of emotions is not the issue; the issue is recognizing they’re their when they happen, and knowing your system’s mechanics. Emotionally driven bad habits are the result of a poor trading plan (not system), and not being totally accountable.
Happy Trading
Dean Whittingham
Pentagonal Trading © 2004 - 2007
