Sunday, April 22, 2018

A Deeper Look at Emotions and Trading

On Wednesday morning, 8 AM EST, I'll be doing a webinar with the good folks at Two Blokes Trading.  Brandon sent me very good trading psychology questions that we'll be addressing during the session.  (By the way, check out the excellent podcasts on their site.)

One question I particularly liked asked, "As a retail trader, what is the most effective way to emotionally detach yourself from a trade? Is this even a good thing to try and do?"

Here is my answer--it's a little tricky:

To be successful, you *have* to be emotionally detached from your trade.  To be successful, you *have* to be emotionally connected to the market.

Let's explore:

To the degree you are attached to something, that thing owns you.  That is why we have to be so very careful with our attachments.  Two people are attached in a good marriage and, yes, they own each other.  Something is lost of me if I do not have my partner.

Any trade, however, is merely a probabilistic bet.  Would I attach myself to a relationship if my wife was faithful 75% of the time?  Of course not.  I have to stay detached from my trades and their outcomes because I know that there will always be occasions when the odds fail to play out.  I own my trades--I take ownership for them--but I cannot allow them to own me.

That is very different from staying emotionally attached to the market itself.  That emotional attachment is similar to empathy:  you're not just observing market activity, but *feeling* it.  As a psychologist, I have to be fully attuned to the person I'm working with.  I can't be distracted with thoughts about myself, how much money I'm making from my sessions, etc.  In that emotionally attuned state, I can pick up on subtle shifts in tone of voice and shifts of topic that tell me what's going on with the other person.

Similarly, when we are emotionally open to markets and focused on them, we can identify subtle shifts of buying and selling that alert us to opportunities.  That attachment to the market is vital to pattern recognition.  When we lack that degree of emotional connection, we become tone-deaf to the market's communications.  Later, we look back on poor trading decisions and wonder what we were thinking.

Emotionally detached from our trades and emotionally focused on the market--that is not an easy balance.  The common element is that we remove our egos from trading.  To the degree that you're wedded to an outcome, you can't be fully immersed in the process.

Further Reading: