I’m of the belief that the single biggest barrier to success for most traders is themselves. Psychology is one of the aspects of this job that is discussed the least. Yet when you ask most professional traders, they will agree it is the most important to understand. Master yourself and the rest is easy.
As traders, we know that we must run our winning trades and cut our losing ones. This is of course, more easily said than done. How many times have you been in a position where the chart is screaming at you to get out because your trade is not playing out as planned, and yet you sit there staring at the screen? Staring, hoping, and wishing that it’s going to turn around, that it’s all going to come right? It happens to us all, it kills our profits, and it happens because we let our emotions take control of the trade. If we could trade without emotion, without caring about whether we were making or losing money, it would be easy to push the right buttons at the right time. It would be easy to do the right thing.
We Are Not Our Feelings
At the start of my career I spent a lot of time trying to get to grips with this whole emotional side of trading. One of the biggest discoveries I made, and one that should have been blindingly obvious from the start, is that we are not our feelings. Our feelings are a part of us, but only a part. We can, to a certain extent, control them. We don’t have to let them control us. Once I recognised this, I found I could start to play with my emotions. For example, if I began to feel anxiety as an entry point approached, I acknowledged that the emotion was there and then either chose to switch it off, or turn it into something positive.
Huh? Turn it into something positive? How do you make a negative emotion positive? You channel that mental energy into something useful. I know I can’t control the market, so becoming anxious about whether it will go my way it is pointless. But I also know I can absolutely control my execution, so if I direct my emotional energy at that, I wont have time to let negative emotion sabotage a good trading opportunity.
Profits Don’t Matter
Now when I see a trade setting up, I think to myself “If I take this entry at the correct time, it doesn’t matter whether the trade is profitable or not. I will have followed my trading rules and will feel good about that”. I place the trade and put in my emergency stop loss order. I know the most I can lose, assume that I have already lost it, and sit back and remain relaxed. The actual outcome of the trade becomes irrelevant. I’m feeling positive about the fact that I have followed my trading plan to the letter – I’ve done the right thing. If I make a profit, that’s a nice bonus, but I won’t allow any excitement to creep in because then I’d be letting my emotions take control again.
Controlling emotions in this way is not necessarily easy at first, but with practice it becomes easier. There are all sorts of techniques that can help, and over the years I’ve gone very deep into this rabbit hole, researching exactly why it can seem so difficult. Turns out that we’ve evolved in a way that is incompatible with the demands of profitable trading. Our brains are actually wired in a way that makes it easier for us to lose money than to make profits.
Fortunately our brains, despite being incredible, complex feats of natural engineering, are also easily fooled. It’s possible to trick them. We can take the biases that evolution has programmed into us and turn them 180 degrees. In other words we can, with the right techniques, take the things that make trading hard, tweak them, and have them make trading easier.
Note that I said easier, not easy, because execution is probably never going to be easy. I’ve been in this came for multiple decades and though I am consistently profitable, it’s rarely easy in the way that making a cup of coffee or walking the dog is easy. Trading always requires a certain degree of mental effort. The moment we stop watching ourselves, the instant we switch to auto-pilot and let our minds wander, we revert to the standard programming running inside our brains and begin to make the same old mistakes. Vigilance must be constant. Still, trading remains the single most profitable activity in terms of return on time spent ‘working’ that I know of. A few hours effort each day can (and does) yield an income far in excess of any normal job.
By the way, all my research into the evolution of the brain, the tricks it plays on us as we trade, and the tricks we can play on it to have it work for us rather than against us, all ended up condensed into my third book — Brain Hacks For Traders. There’s a short video intro if you follow that link.
Next time you trade, next time you feel the urge of greed or the creeping pull of fear exert themselves, remember that those emotions are part of you, but they are not you. Acknowledge the message they are evolutionarily programmed to deliver, then choose to ignore it and focus on the one message that really matters in this game — what the market is telling you.