“Hope is not a strategy: it’s a simple emotion.” said retired army Major General William Nash. He was speaking about the war in Kosovo. I laughed and thought about trading. I remembered times when hope was just about the only strategy I had.
One could say this about almost any emotion and trading. Greed is not a strategy; it’s a simple emotion. Fear is not a strategy; it’s a simple emotion. Sometimes, unfortunately, fear or greed, hope or determination does become a trader’s basic strategy. Trading becomes dictated by emotion rather than a consistent strategy for entering and exiting the market. Simple emotions are not an effective strategy. The Major General was right; a strategy built on emotions will be at best, inconsistent and disastrous at worst.
An emotion is a response to a thought that expresses itself in the body. That is why we call them feelings. We feel the emotion in the body. Emotions are the body’s response to a thought. An emotion responds to a thought and soon that emotion affects other thoughts as well as actions which in turn express themselves in more emotions felt in the body. We build an interactive cycle between thought, feeling, and action.
Most traders say they don’t want to experience any emotion. They want to respond like a computer, a machine. Traders aren’t isolated machines, unconnected to a feeling body. They’re humans with potential for feeling. Mind and body interact. They are correspondents.
If you want to respond as a computer, you can set up your trading to be completely computerized. You can even have the computer place the orders electronically. This takes you completely out of the loop. No harm here, but you won’t have human input as to visual patterns or current events. My computer mentor tells me that computers are simply a combination of on-off switches, and don’t begin to have the power of a human mind. Probably not, however, if the human mind is hopelessly emotionally conflicted, the computer is a good idea. My guess, nonetheless, is that if a person is emotionally entangled, she won’t be able to leave the computer to do the work without her intervention.
Because most of us are intimately involved with the trading process and because mind and body interact, it is essential for us as traders to acknowledge the emotions we experience and to shift them in ways that will enable us to still accurately perceive the information the market is giving us. We need to act in a timely fashion, based on the conjunction of outside information and our trading plan or strategy. A consistently winning strategy cannot be based on emotion because our perceptions and our behaviors will be skewed. Hope causes us to give extra meaning to each little up or down tick. Fear causes us not to see the trend or general movement of the market.
Pure positive emotions could cause us to overtrade or to fail to apply risk precautions. Pure negative emotion could cause us to hesitate or even freeze.
If emotions are human and inevitable, how do we deal with them? First, we acknowledge the emotion for what it is. We recognize that we’re feeling something and we pay attention to just what it is we’re feeling. Each emotion, positive or negative, is giving us a message. The message contains important information.
In this article I’ll be focusing on the emotion we call anxiety. Anxiety is a future oriented emotion. Think about it. We don’t get anxious about events that have already occurred. Suppose we had been anxious about an event but now it’s over. We no longer feel anxiety. We might feel relief, remorse, disappointment, sorrow, or some other past oriented emotion. Anxiety is focused on the future.
Anxiety is telegraphing a message that there’s something in our future for which we need to prepare. This is a vital message. If you’re anxious about anything, ask yourself, “What can I do to prepare for this event?” If you’re anxious about your trading, ask yourself, “Is there anything else I need to do before I can trust my trading?” This might involve research, verification, or personal growth. Get yourself ready.
If, after you’ve prepared, you’re still anxious, you can use this sure-fire anxiety squelching exercise. It’s very, very simple. Just go out in your imagination to a few minutes after the anxiety causing event is completed. Look back on the successful conclusion of the event. The anxiety dissipates, like magic.
If you’ve done the necessary preparation, the only reason the anxiety persists is that you’re imagining an unsuccessful conclusion of the event. This became manifest to me in the case of a professional singer who came to me to resolve a problem. He was missing high notes in his performances as a church soloist. I asked him what he thought about before the service. “Well,” he said, “I imagine missing the B flat and afterwards nobody will look at me because they feel sorry for me.” Of course, he missed the B flat! He was giving himself vivid suggestions for failure; he was imagining the unsuccessful conclusion of the event.
The same thing happens with the trader who can’t pull the trigger. She’s imagining all the ways the trade could go wrong. And we know that when imagination and will power are in conflict, the imagination wins every time. If she’s imagining loss, she won’t take the trade. All, the king’s horses and all the king’s men couldn’t get her to put on the trade. She’s intensely conceiving loss. Furthermore, she’s looking for reasons-and there are always reasons-not to take the trade because she doesn’t want the discomfort of being in the trade as she expects loss or the pain of actually losing.
I suggested to one client who was having difficulty taking every signal that he imagine a winning result to each trade as soon as he gets the signal to take the trade. “Just imagine,” I said, “the trade going in the direction of the probabilities.” He responded, “Oh, Ruth, then I’ll feel so disappointed when I do lose!” “Well,” I said, “do you want to feel bad both before and after the trade?”
Disappointment, or the fear of it, keeps many people from expecting success. The problem here is that we need to anticipate success in order to succeed. Can you imagine what would happen if a professional athlete expected to fail? Such a thought just never crosses the mind of a truly good athlete. An outstanding athlete operates “in the zone” fully anticipating his own flawless performance.
In his new book, “Trading in the Zone”, Mark Douglas convincingly and clearly outlines a basic trinity of attitudes necessary to be a successful trader. A trader needs to accept loss. A trader needs to accept the total uncertainty of the results of the next trade (or any given trade). A trader needs to think in terms of over all probabilities.
Now, I know my suggestion to imagine the successful conclusion of a trade appears to fly in the face of these truths. Successful traders accept and expect losses. Losses are endemic to trading. Losses are a simple cost of doing business just as inventory is an acceptable cost to a merchant. A merchant never sits and whines and says, “Oh, dear, I hope I don’t have to buy any inventory this season.” of course not! Neither does a successful trader sit and whine, “Oh, I hope I don’t have any losses this quarter! Oh, I hope this trade isn’t a loser!” The consistently successful trader accepts deep in her heart, deep in her bones, that her winnings will be tempered with inevitable losses. So what! She also anticipates her ultimate triumph because she’s structured the probabilities in her favor. She takes the long view.
Since we never know what will be the result of any given trade, since each trade is unknowable and only one in a series of probabilities, it’s probably better not to imagine the success of an individual trade. It’s best to keep your mind open to the uncertainty of any given trade. Remember it’s not your job to know whether any given trade will be a winner or loser. It is your job to apply the probabilities of your method.
So, unless you’re really stuck being unable to put on a trade, don’t imagine the success of a given trade, but rather go out into your future and look back on the successful conclusion of the day’s, the week’s, the month’s, or the year’s trades.
Here’s, how I do it. I envision my time in this life as a line in space. You could call this my time line. My past is behind me, my present right around me, and my future is an upward rising path in front of me. (Other people may have a different configuration such as past to the left and future to the right, or something else.) In my mind I float up over my time line to just after the end of the year’s trading. I settle down on my time line and in my imagination I experience the successful conclusion of the year’s trading. I watch how events re-evaluate themselves. Then I float back to my present and any anxiety I might have had is simply gone. I couldn’t care less how any one trade comes out. It’s meaningless in the scheme of time.
There is a caveat here, however. Remember that anxiety or fear is an emotional messenger telling you that there is something in your future to prepare for. You mustn’t use this technique to avoid preparation. Before speaking to large audiences, I go out into my future to just after a well received speech. I sometimes even imagine a standing ovation. It removes any nervousness I might have. But I always remind myself that just because I’m not fearful doesn’t mean I don’t have to get ready. I prepare vigorously. Preparation is key to any success, and fear is your preparation alert. Once your preparation is complete, however, there’s no longer any need for anxiety.