Don't Make It Personal
02/03/2015 6:00 am EST
Since novice stock traders often struggle with the emotional side of trading, Frank Kollar, of Fibtimer.com, outlines several steps to help newbies unlearn a lifetime’s worth of lessons that—while they may be effective in other pursuits—just don’t work within the realm of trading.
Stay Detached from Trading Decisions
For example, novice timers (and traders) may take market timing losses and subsequent drawdowns personally. Seeing it as a hit to their ego and attaching personal significance to what is just an everyday fact of all timing and trading decisions.
Small losses should be expected and it's vital that you don't take them personally. What is important is keeping them small. Never allowing any loss to grow into a big one. That is accomplished by following a timing strategy that is designed to protect capital.
Disappointment Is Natural
It is natural for a person to feel disappointed after experiencing a drawdown. Financially, real money has been lost.
"...we spend a lifetime building up an array of emotional responses to help us cope with uncomfortable feelings, those same, quite normal emotional responses are exactly the opposite of what is needed to succeed in market timing."
It's perfectly reasonable to feel a little disappointed, but it isn't useful to take it personally. Disappointment is a natural emotion, but not very helpful in market timing.
In fact, if you take it personally, you might then try to gain back that small loss, by exiting your strategy and taking an ego-inspired trade. The odds are good that you will be the poorer for it.
Market Timing Requires Doing the Unnatural
Although we spend a lifetime building up an array of emotional responses to help us cope with uncomfortable feelings, those same, quite normal emotional responses are exactly the opposite of what is needed to succeed in market timing.
Timing requires that you do the unnatural and control your emotions. A lifetime of learning how to respond to uncomfortable feelings or situations must by unlearned to succeed in market timing (or any trading for that matter). Responses that are correct in personal, and even business situations, are sure to cause losses in trading the financial markets.
You expect to make a profit over time, but in the short-term, even a winning timing strategy is bound to have losers. That's just the nature of probability theory.
So, why make it personal? Why put your ego on the line with each trade?
Why brag when you are lucky enough to have the odds work in your favor and then be depressed when the odds go against you? Both emotional responses are normal, yet they are dangerous to successful market timing.
But how do you control perfectly natural emotional responses?
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Unlearning a Lifetime of Lessons
When it comes to market timing, you've got to unlearn responses that you've spent your whole life learning.
Market timing isn't about you. It is just a strategy that works over time.
In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the people who pay you, and you're a success.
In the traditional workplace, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff.
But with market timing, the odds can go against you, no matter how much work you put in. The perfect trade can go wrong.
"If you are a seasoned market timer who really has mastered his or her emotions, you are assured that the odds will, over time, work in your favor."
That's hard to accept for most people because it means that being a successful (profitable) market timer or trader, to some extent, is just a matter of the odds randomly working in your favor. But there is good logic behind this randomness. And a successful timing or trading strategy uses this logic to profit.
A successful timing strategy will exit losses quickly. It will not stay with a bullish or bearish position to sooth the ego of the strategy's designer. It will also stay with a successful trade and not exit quickly to lock in a profit. That may feel good for a day, but if the profitable trend lasts two, three, five times longer, you have lost out on a huge profit.
Recognizing that odds are part of trading takes some of the glory out of it. But, on the other hand, understanding odds helps you cope with inevitable drawdowns.
If you are a seasoned market timer who really has mastered his or her emotions, you are assured that the odds will, over time, work in your favor.
You will enjoy your times of glory as the gains add up. You will hunker down and quietly follow the signals during unprofitable sideways markets or during failed trends.
Taking a detached, unemotional approach may take some of the glory out of market timing, but on the other hand, that same unemotional approach is the key to market timing success.
Most importantly, the unemotional market timer will implement the timing strategy. He or she will make each trade consistently, with the certainty that over time the odds will make him or her a successful timer.
Staying with the chosen strategy eventually paid off. Timing strategies are designed to make their profits over time, not in a few weeks or even months, though it is always nice when that occurs
Remaining unemotional, so that a timing strategy is adhered to not only in easy (profitable) trading conditions, but also during the tough (unprofitable) ones, leads to success in a field where the majority fail.
By Frank Kollar, Editor, Fibtimer.com