Trader - Beware the Cauldron of Churning Emotions

Trading may look simple but it is not easy to do. Recall a point from Shakespeare's Merchant of Venice: If to do were as easy as to know what were good to do, chapels had been churches and poor men's cottages prince's palaces. This is apropos of trading.

The markets often disappoint and inflict adversity. Those who engage in trading at one time or another experience losing in a trade, suffering frustrated expectations, traumatized self-confidence and the painful loss of money.

In the face of a potential or imminent trading loss (as when there is a sudden and unanticipated reversal of market direction), most traders begin to suffer emotional turmoil. Like every human being who perceives the oncoming or imminent danger of loss and pain, emotions set in and bodily changes occur. There is an increase of sugar in the blood. There is greater supply of blood in the arms and the legs. The pulse beats faster. There is tension in the blood vessels and muscles. The heart and breathing rhythm change. Even the condition of the skin and other tissues change. In short, bodily commotion is experienced and felt. Depending on the person's bodily makeup, the emotions may be more or less violent. As all these changes occur, the body is transformed into a cauldron of churning emotions of anxiety, fright and fear.

Those who studied and analyzed emotions, from Aristotle to the present, ascribe them to the instinct to survive, the instinct prompting a decision to take flight or fight. They comment that emotions are common to men and animals, that emotions are more closely related to instincts than to reason or intelligence. Emotions involve a feeling of an impulse to act or do something. While emotions dominate a man's mind or action, he does not listen to reason. And he is in danger of doing the very opposite of what reason will tell him is right. Emotional moments do not permit study and reflection. Because they tend to overwhelm. This has long been recognized in legal jurisprudence. This is why the person who acts under the influence of passion and obfuscation, under penal laws, may be found exempt from being penalized. An example is the defense of temporary insanity.

Unfortunately, no such exemption exists for a trader's unwise actions in the face of an imminent trading loss. Like they say in the Hispanic world of the game of Jai-Alai, "El fallo del juez es inapelable." (The verdict of the judge is not appealable). The trader must live with his loss and the pain and suffering it brings.

What does a trader have to do so his trading will not be adversely affected by emotions. The answer is to develop discipline. The discipline the trader needs is two-pronged. One prong is subjective; the other objective. The subjective prong requires him to look into his inner self, identify his emotional predispositions, and train himself to keep them under control. The control needed is not momentary control but habitual control developed by training. This includes forming habits of emotional response which restrain his emotions from taking over his actions. He must learn to direct his emotional energy to conform to right and reason. This is rigorous but doable and requires the investment of time.

The other prong is objective and simple in its execution. Create a good trading plan and stick with it. The discipline required is the development of the mindset to stick with the trading plan and trust it. This discipline extends to strictly refrain from second-guessing the trading plan during emotional moments.