Money and Emotions
01/02/2015 6:00 am EST
Frank Kollar of Fibtimer.com highlights the dangers of trading with emotion, with living in the past, and why traders need to leave those past losses behind them and always remember that the current trade is the only trade.
Possibly the most difficult aspect of successful market timing is dealing with our emotions. Like oil and water, money and emotions do not mix.
There is nothing wrong with emotions, of course. A good love story can fill the eyes with tears. Injustice can fill your heart with anger and a job well done can fill your soul with feelings of well being.
But when it comes to dealing with your money, emotions can be your worst enemy.
The same emotions which fill us with elation during times of joy, can also cause us to buy at market tops, to hold onto positions long after they become losers, and to give up when filled with despair, usually right at market bottoms.
Take a look at a chart of the stock market. It is easy to see the emotional bottoms when everyone is selling at the same time.
It is also easy to see the emotional tops, when everyone is buying at the same time. Huge spikes up on extremely high volume.
Most of those sellers—and most of those buyers—will lose their money.
Living in the Past
Although there are literally thousands of books written about emotions and trading, the biggest problem market timers face can be easily summarized in four words;
Living in the past.
Because we are all emotional about our money, taking a trading loss, or worse yet, taking a big loss, has an effect on every future timing decision we make.
"...if you carry the emotional baggage of a losing trade around your neck, every decision you make going forward will be affected by it." What is the old saying? "Once burned, twice shy."
But if you carry the emotional baggage of a losing trade (or several losing trades) around your neck, every decision you make going forward will be affected by it.
You will enter trades too late, to make sure they are not going to become losers. You will exit trades too early, to make sure they do not reverse on you. The end result? Losses and even heavier emotional baggage.
The Current Trade Is the Only Trade
The most effective and successful market timers live only in the present. The current trade is their only trade.
What happened last year, last month, or last week has no emotional bearing on their current trade. The trade is based on a successful strategy and it will take care of itself. So why spend useless time worrying about it, and potentially sabotaging it?
In other words, yesterday's trades are out of sight and out of mind.
Successful market timers look at those selling climaxes on the charts, and the buying frenzies, and see them for what they are.
"It's not about ego...it's about making money." Emotional responses to fear and greed.
Successful market timers ignore those emotional responses and instead trade the charts. They ignore the big ups and downs. They ignore the daily news and they especially ignore their know-it-all friend, who says he/she is absolutely right and you are absolutely wrong.
It's not about ego...it's about making money.
Trade the Plan
Trade the strategy. Trade the plan. Expect the markets to throw tons of darts at you but stick to it anyway.
Remember...at emotional market tops and at emotional market bottoms, everyone is right.
But a month or two later, although they may not admit it, better than 80% of those buyers and sellers will have lost a good deal of money.
Sticking to a trading strategy helps combat those emotional feelings. The strategy says when to buy. The strategy says when to sell.
Trading by emotions however, is doomed to failure from the very first emotional high.
By Frank Kollar, Editor, Fibtimer.com