There is a common misconception that trading should be a purely logical activity devoid of all emotion. Let me make quick work of this erroneous belief right now. For one thing, if you try to discipline yourself not to feel your emotions, you will end up simply playing hide and seek with them and ultimately that¡¯s quite counterproductive. Your subjugated emotions will arise and display themselves in the most unexpected and usually unprofitable ways
Let¡¯s face it, when you trade stock picks, you¡¯re trading for a reason, most likely because you want more money. To an extreme, that leads to greed. There¡¯s nothing wrong with wanting money, but that want needs to be disciplined so you don¡¯t end up wanting more money than the situation in a trade will reasonably provide.
It would be nice if such discipline were something you could just make up your mind about and it would happen. However, the reality is that often it takes a lot of experience, sometimes painful experience, before you get to the point where you have an innate sense about how much profit a trading situation will provide.
Conversely, a certain amount of fear is healthy. It keeps you from entering an ill considered trade. And, once in a trade, fear gets you to question whether you should continue to be in that trade. But again, that fear has to be tempered so you don¡¯t end up getting out of a trade due to fear just at the very point it turns around. In fact, you might find yourself getting out of trades just at that very pivot point a disturbing number of times. Once again, experience ends up being the best teacher.
You may also find that greed is simply fear in disguise. Greed is a fear of loss: loss of opportunity, loss of those things money can buy.
Let¡¯s also talk about hope. Hope is a very dangerous emotion when it comes to trading because you may find yourself holding onto trades which a proper dose of fear would have gotten you out of. Hope is an emotion that in trading can bleed you to death, slowly and surely.
If you ever find yourself saying, ¡°I hope this trade turns around in the next few minutes or hours,¡± that should raise a huge red flag. Although sometimes the trade will indeed turn around, holding onto a trade simply because you hope it will turn itself around is usually a huge mistake. If you do continue to hold onto a trade there should be a very clearly defined logical reason for doing so. Often this relates to the underlying conditions of the trade not having changed significantly from the reasoning you used to enter it.
Again, it takes true discipline to notice when you¡¯re in a state of hope. In the case of trading, it¡¯s simply false hope. In trading, it¡¯s always false hope. Just because sometimes you get away with hoping does not mean it is a part of good trading discipline.
We¡¯ve talked about emotions on a personal level, and hopefully you¡¯ll develop an awareness of how those emotions affect your trading. However, there is a much more powerful use for those same emotions.
You see, the whole market, the herd as a whole, trades on fear and greed. If you have mastered your own fear and greed, you can then start to recognize the mood of the market. Once you¡¯ve recognized the mood of the market, the balance between fear and greed, it is often possible to anticipate what a stock or the market in general will do. As you can imagine, the ability to ¡°predict¡± what the market will do can be immensely profitable.
So as you can see, mastering your own emotions and understanding the emotions of the market will provide you with a great advantage in your trading. Every attempt should be made to develop this mastery.
Doug Newberry is a Director of Investing Systems Network. He also is its founder. Investing Systems is a company with more than 20,000 customers from more than 70 countries. These customers use the Investing Systems tools and services to become better, more disciplined investors. You can learn more about profiting from Fear, Greed and Hope at Stock Picks.
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