Emotions

Hey Gang,

There are numerous trading strategies that can produce profits.  Learning the fundamentals of any strategy is often the easiest part of trading to master.  Controlling the rollercoaster of emotions is the hardest.

These emotions are fear, greed, excitement, hope, lack of confidence, overconfidence, and much more. When any of these emotions grab hold, we as human beings tend to deviate from the principles we are trading by. This deviation leads to poor decision making.

Lets take a look at an example. We will use support principles, which are simple, but among the most powerful tools.

Say you bought COP on Feb 11 as it was hitting support at $45.  Buying under this simple condition the last three times it happened would have brought in very nice profits. Feb 12 and 13 saw a ride along the support level of $45. We are optimistic. On Feb 17 COP gapped down below this support level….what do you do?

The principles of support tell us that when the level is broken, the stock will continue to fall. So we sell. Easy for a machine to do, but what about you and I as real people with real money.

We see the gap Monday morning and say to ourselves, ‘lets wait to see if its just a false break of support.’ We HOPE to see a recovery.

The next day, ‘good a gap up, we should be on our way to recover. I will regain my losses.’ But by the end of the day things turn worse.

We are now down 8-9%. In frustration we hold saying….’there has to be an up day where I can get out with only a 5% loss.’ More hoping.

The next day, another gap down, another 5% loss.

And like that, things snowball until we are holding big losses.

As traders we must master the principles that we use to trade by. Then learn to master our emotion so that fear, greed, and especially hope do not make our decisions for us.

Making decision based on emotion is no different than gambling in Vegas. Trading is not gambling, rather learning sound principles that predict price movement, and then employing those principles.

Happy Trades,

Jeff