Two Emotions That Can Influence Your Trading
Short term market volatility is powerfully influenced
by fear and greed.
But fear and greed aren't the only emotions that influence market decisions.
Other emotions, such as "disappointment" and "regret," can also impact what market
timers do and can have adverse effects on their timing decisions.
It is only normal to feel disappointment when our trades fail to meet our expectations.
We feel regret when we think that we have made a poor decision that could have
easily been avoided.
There's an assumption that underlies both emotions, and both of these assumptions
can be dangerous to our ability to be profitable.
Must We Always Be Right?
We may believe irrationally that as market timers we must always be right and
each buy and sell outcome must meet our expectations. If those expectations
are not met, we believe it's not only unacceptable, but our fault. That it
proves we are unlucky as timers, or that the markets always move against us.
This assumption, however, must be questioned. And by doing so, you will be
able to create a mind set that will help you to make your timing decisions
decisively and without worry.
It may be unpleasant or an inconvenience when our expectations are not met,
but it isn't so terrible, awful, unacceptable or our fault.
Changing Our Perspective
First, you have to be able to execute. Following a tested timing strategy is
crucial to your ability to execute trades. The common error of not taking trades
until you see if they are profitable, or jumping the gun and taking trades
ahead of time because you "think" a signal will be issued soon, can be a disaster
to your profitability.
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By not sticking to a timing
strategy, you allow emotions to rule your finances, and
that places you right in with the majority of investors.
Those who are the cause of the market's volatility. The "herd" followers.
At Fibtimer, all of our strategies are non-discretionary.
Emotions are not allowed. Our strategies offer disciplined
execution of non-emotional buy and sell signals.
feelings of disappointment and regret cause us
to miss trades! This is the single most common
reason timers fail."
The reason for following any timing strategy is to remove yourself from making
emotional trades. To remove yourself from the herd, which is often headed in
the wrong direction.
By merely changing our perspective, we can change how we respond emotionally
to market timing setbacks. If we believe they are our fault, or a result of some
rain cloud that follows over us, or that we are just not cut out for market timing,
then we are going to experience extreme feelings of disappointment and regret.
Extreme feelings of disappointment and regret cause us to miss trades! This
is the single most common reason timers fail. Timers allow their emotions
to keep them from following their strategies. And this almost always occurs at
the most inopportune times. Those times when emotions are at their peak, and
trades are imminent.
However, if we assume that setbacks and losses are inevitable, that they are
to be expected in even the most successful of market timing strategies, in fact
that they are caused by market fluctuations that are beyond anyone's control,
we will be prepared to cope with them.
We will come to expect them, and we are likely to then think that they aren't
as terrible as we had assumed they might be.
Anticipatory Approach To Trading
By taking an anticipatory approach to trading, not only can we rein in our emotions,
but we can put a market timing buy or sell signal in the proper perspective.
Remembering that a single trade is just one trade among a series of trades and
the only outcome that matters in the end is the overall profit across the series
Across a typical series of trades there will be winners and losers, and usually
more losers than winners. But the winning trades are much larger than the losing
trades because they are made when the market trends! And market trends, by their
very nature, last for considerable time frames.
Once we accept this fact of trading, we will be able to see that setbacks aren't
as terrible and devastating as we had thought. They are just part of the game.
There's no point in overreacting.
Control Unpleasant Emotions
Control unpleasant emotions by taking the proper perspective.
Humans tend to overstate the adverse effects of a dreaded outcome. But there
are a few simple strategies we can use to control these emotions. For example,
if we control our risk on the trade, and plan it out carefully, the risk will
be minimized and the actual potential loss will not be catastrophic at all. Remember
that all timing strategies at Fibtimer use strict risk management. That is why
losses, when they occur, are kept so small.
Once the risk is truly minimized, a useful thinking strategy can be used; remind
yourself, "I'm making more out of this potential loss than it deserves; it is
not going to be as unpleasant as I am thinking it will be."
|"The outcome of any single trade
means nothing. The big picture is all that counts"
The Relative Insignificance Of A Single Trade
Another way to minimize disappointment and regret is to try to impersonalize
the trade. Think in terms of probabilities, "This is just one of many trades. The
outcome of any single trade means nothing. The big picture is all that counts."
By reminding yourself of the relative insignificance of a single trade, you'll
minimize the potential regret should you lose. Similarly, it's also important
to avoid over-interpreting the significance of a trade; a single losing trade
(or even a few losing trades) doesn't mean that you have a poor market timing
strategy. It is an unavoidable fact of trading in the markets. You ARE going
to have losses.
With good risk management techniques, such as those we strictly adhere to in
Fibtimer strategies, any losses are kept very small.
Remind yourself that by following the strategy, you will never miss a good gain,
and that those gains, which are usually considerable in size, over time, will
make you very profitable and successful at timing. But you must be there at the
time the signal is issued, and you MUST take the trade.
Remember that NO ONE knows ahead of time which trade will be the big winner for
Self-worth On The Line
Most importantly, never put your self-worth on the line with your money. The
outcome of the trade should not influence the positive view you have of yourself
as a person.
Don't let regret and disappointment influence your market timing decisions. Keep
in mind that if you make a losing trade, you may feel a little disappointment
or regret, but you can handle it.
Control your emotions. If you do not, you will likely miss the trade that makes
the big gains. If you do control your emotions, in the long run you'll achieve
the profitable results you've been seeking.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.