2 Emotions That Make or Break Traders

06/08/2015 6:00 am EST

Focus: TRADING

Fear and greed aside, Frank Kollar of FibTimer.com discusses disappointment and regret, two emotions that must be handled properly in order to achieve consistency and long-term success in the markets.

Short-term market volatility is powerfully influenced by fear and greed. But fear and greed aren’t the only emotions that influence market decisions. Other emotions, such as disappointment and regret, can also impact what market timers do and can have adverse effects on their timing decisions. 

It is only normal to feel disappointment when our trades fail to meet our expectations. We feel regret when we think that we have made a poor decision that could have easily been avoided.

There’s an assumption that underlies both emotions, and both of these assumptions can be dangerous to our ability to be profitable.

Must We Always Be Right?

We may believe irrationally that as market timers, we must always be right and each buy and sell outcome must meet our expectations. If those expectations are not met, we believe it’s not only unacceptable, but our fault, and that it proves we are unlucky as timers, or that the markets always move against us.

This assumption, however, must be questioned. And by doing so, you will be able to create a mindset that will help you to make your timing decisions decisively and without worry.

It may be unpleasant or an inconvenience when our expectations are not met, but it isn’t so terrible, awful, unacceptable, or our fault.

Changing Our Perspective

First, you have to be able to execute. Following a tested timing strategy is crucial to your ability to execute trades. The common error of not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you think a signal will be issued soon can be a disaster to your profitability.

By not sticking to a timing strategy, you allow emotions to rule your finances, and that places you right in with the majority of investors, those who are the cause of the market’s volatility: the “herd followers.”

At FibTimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.

The reason for following any timing strategy is to remove yourself from making emotional trades; to remove yourself from the herd, which is often headed in the wrong direction.

By merely changing our perspective, we can change how we respond emotionally to market timing setbacks. If we believe they are our fault, or a result of some rain cloud that follows over us, or that we are just not cut out for market timing, then we are going to experience extreme feelings of disappointment and regret.

Extreme feelings of disappointment and regret cause us to miss trades! This is the single most common reason timers fail. Timers allow their emotions to keep them from following their strategies. And this almost always occurs at the most inopportune times. Those times when emotions are at their peak, and trades are imminent.

However, if we assume that setbacks and losses are inevitable, that they are to be expected in even the most successful of market timing strategies, in fact that they are caused by market fluctuations that are beyond anyone’s control, we will be prepared to cope with them.

We will come to expect them, and we are likely to then think that they aren’t as terrible as we had assumed they might be.

Anticipatory Approach to Trading

By taking an anticipatory approach to trading, not only can we rein in our emotions, but we can put a market timing buy or sell signal in the proper perspective.

Remembering that a single trade is just one trade among a series of trades and the only outcome that matters in the end is the overall profit across the series of trades.

Across a typical series of trades, there will be winners and losers, and usually more losers than winners. But the winning trades are much larger than the losing trades because they are made when the market trends! And market trends, by their very nature, last for considerable time frames.

Once we accept this fact of trading, we will be able to see that setbacks aren’t as terrible and devastating as we had thought. They are just part of the game, so there’s no point in overreacting.

NEXT PAGE: One Trade Shouldn't Make or Break You

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Control Unpleasant Emotions

Control unpleasant emotions by taking the proper perspective.

Humans tend to overstate the adverse effects of a dreaded outcome. But there are a few simple strategies we can use to control these emotions. For example, if we control our risk on the trade, and plan it out carefully, the risk will be minimized and the actual potential loss will not be catastrophic at all. Remember that all timing strategies at FibTimer use strict risk management. That is why losses, when they occur, are kept so small.

Once the risk is truly minimized, a useful thinking strategy can be used. Remind yourself, “I’m making more out of this potential loss than it deserves; it is not going to be as unpleasant as I am thinking it will be.“

The Relative Insignificance of a Single Trade

Another way to minimize disappointment and regret is to try to impersonalize the trade. Think in terms of probabilities, “This is just one of many trades. The outcome of any single trade means nothing. The big picture is all that counts.“

By reminding yourself of the relative insignificance of a single trade, you’ll minimize the potential regret should you lose. Similarly, it’s also important to avoid over-interpreting the significance of a trade; a single losing trade (or even a few losing trades) doesn’t mean that you have a poor market timing strategy. It is an unavoidable fact of trading in the markets. You are going to have losses.

With good risk management techniques, such as those we strictly adhere to in FibTimer strategies, any losses are kept very small.

Remind yourself that by following the strategy, you will never miss a good gain, and that those gains, which are usually considerable in size, over time, will make you very profitable and successful at timing. But you must be there at the time the signal is issued, and you must take the trade.

Remember that no one knows ahead of time which trade will be the big winner for the year.

Self Worth on the Line

Most importantly, never put your self worth on the line with your money. The outcome of the trade should not influence the positive view you have of yourself as a person.

Don’t let regret and disappointment influence your market timing decisions. Keep in mind that if you make a losing trade, you may feel a little disappointment or regret, but you can handle it.

Control your emotions. If you do not, you will likely miss the trade that makes the big gains. If you do control your emotions, in the long run, you’ll achieve the profitable results you’ve been seeking.

By Frank Kollar of FibTimer.com

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