Quote from Maverick74:
Shan and I have been talking about this topic every day. He was quite surprised to hear my feelings on this issue as he said it contradicted what he has always been told in many popular books. My views on this subject come from actual experience trading at one of the most notorious daytrading firms in the country at the height of the daytrading bubble. I traded with Worldco in NYC from 2000 to 2002. At our peak we had over 800 traders. We traded 5% of the total volume on the NYSE. Absolutely mind boggling if you stop to think about it.
Psychology is very important as Shan has mentioned. It truly is the most important thing when it comes to trading not because it's an edge in and of itself. But because it can over ride whatever edge you actually have. And if you don't have an edge, it will take you out of the game before you actually find it. So one can definitely not ignore psychology.
This is a very long topic and I don't mind discussing it here since this thread has actually gotten quiet and could use a new bid. So the topic came up about executing your "system" and "following your rules". These are things you read about over and over again in books. Don't trade with emotion, just follow your rules. This is of course a load of shit of the highest grade of shit. There are no rules in life, only in books. We have a country of laws, values, rules, ordinances, regulations, etc and at the end of the day, people are going to do what they are going to do. And it's usually predicated on emotions. Who they vote for, who they marry, the movies they watch, the music they listen to and yes, how they trade.
There is no way to get rid of emotion and I'm not sure why anyone would even want to. Emotions are the only proof we have that we are actually alive. That we actually care. Try being in an emotionless marriage and tell me how that goes. Try working a job every day for the rest of your life where you have no emotion and tell me how fulfilling that is.
Emotion is the one thing in our life that is actually strong enough to create "change". Think about it. Good or bad, it's not logic that sways us, or facts, or rules, but emotions. People smoke every day knowing that lung cancer will kill them. That is the fact. But it's only when confronted with the emotion of it, being told by a doctor that they have it, does it really create change in behavior. Knowing that you are going to leave loved ones behind. It's the "emotion" that gets us.
And to bring this back to trading, emotion is the only thing that can ultimately make a trader profitable. Emotion is what drives that change. Emotion is also a regulating force. To a trader who already is profitable, emotions help when they hit a bad streak. It causes them to care, to take notice.
There are a lot of people that think losing money in and of itself does that but that is not true. People throw money away every day. It's only when they start "'caring" that they begin to modify their behavior.
Now I'm not saying that traders should trade on their emotions. I'm saying we cannot ignore the emotional feelings we have. We need to find a way to use those emotions for good. For example, in sports, coaches try to ride a certain athletes momentum when they are hot. When a basketball player for example gets hot, coaches want to get him the ball as much as possible because his self confidence is high. Studies have shown over and over again that self confidence is really the magical cure for almost everything. Whether your trying to pick up a girl in a bar, or fight cancer. Whether you play the guitar or on the PGA tour. And when one is lacking self confidence, it's almost impossible to succeed at anything, even when one has the actual skill. Think tiger Woods. He didn't forget how to play golf, he lost his self confidence. And before anyone brings up injuries as a counter point as it pertains to sports, great athletes have overcome injuries for 100 years. One thing that injuries do to people is they take away your self confidence. You have to overcome that. You have to find that confidence.
Trading is all about confidence. When a trader is self confident, that's when following the rules and executing his edge becomes important. When a trader is lacking confidence, following rules becomes very difficult and edge, well, you have to "believe" in your edge to actually have it. And self confidence, or lack there of, can destroy that belief.
Keep in mind, that most of our emotions are hidden away at the subconscious level, not the conscience. So you could look at a trader and you should not necessarily see his emotion when trading. That is not good. You don't want to be screaming at your screen or the market nor do you want to be celebrating a good trade, that all takes place at a much deeper level. This is why one can't simply "remove" emotions" from the equation. One can trick themselves by thinking that just because you are not screaming or cheering that you have removed emotions but I assure you, at the deepest level of your sub conscience, it's there and it governs everything you do.
So to bring this back again to how we can "use" emotion to our benefit, I was explaining to Shan that traders should do as much as possible to optimize their performance when they are doing well and do as little as possible when they are not. Losing money begets losing more money and making money feeds on itself as well. Let me be very clear about this. I am not suggesting one should trade "more" simply because they are trading well. I'm saying when they are trading well, they should be trading bigger and certainly should not STOP trading. The old, I'm having a good day I think I'll stop. When you should STOP is when you are having a bad day. You often hear one say, I need to get back to flat then I'll stop. But the problem is, they most likely won't because they are not in the proper mind set.
Back at Worldco, we use to scorn guys who would quit trading after having a good morning and we use to scorn those who would trade all day when they were in the hole. The best way to re-set your emotions and your compass is to stop and get out. Take the small loss vs the bigger loss that comes from trading in a hole. Btw, this does not just apply to daytrading. It applies to swing trading and even investing as well. When you are doing well, you are seeing the market well, you are self confident and you are executing. That is the OPTIMAL environment you can have! Why would you want to stop?!?
Think of a poker player. When he has a lot of chips and the others don't, he wants to squeeze them. Why? Because they are backed against the wall and they have to make decisions they don't want to make. They have to play bad hands. The guy with the big stack can do anything he wants. He has the edge. Well, the market has a stack of chips as well. When the winners are riding winners and the losers are holding losers, the winners begin to press. They have the edge. They have the confidence. The losers feel the heat and continue to make poor decisions. This is how trends form and persist. This is what drives momentum. This is what creates a market. The key is not trying to figure out how to remove emotion from trading, but how to USE it to your benefit.
