Today I thought I’d follow on again from my recent Trading Psychology posts, this time focusing on our emotions and how they can very well upset an otherwise profitable strategy, including the Planet Wealth Strategy as well as any other you choose to trade

Before you can manage your emotions it helps to understand what causes them. Our brains and endocrine system are a veritable narcotics factory, producing an array of natural chemicals that act as stimulants, depressants or pain-killers:

• adrenaline prepares the body for fight or flight: your heart starts pounding, your pupils dilate, you start to sweat and
  get “butterflies” as your digestive system switches off;
• endorphins, natural pain-killers many times stronger than morphine, are released by the pituitary gland;
• dopamine, released in the middle area of the brain, is chiefly responsible for pleasurable sensations;
• anandoline, a canabinoid, stimulates the appetite;
• PEA, a natural stimulant, performs in a similar manner to amphetamines such as speed;
• melatonin controls your sleeping patterns and stimulates the immune system; and
• serotonin is believed to play important roles in a number of areas: sexuality, anxiety and depression.
• More than 30 different neurotransmitters have been identified, some very specialized; some performing a wide range of functions. Others work in groups, while some, such as serotonin, control or moderate the affect of other neurotransmitters.

Lurking below our rational consciousness is a vast array of mood-altering chemicals, and it is virtually impossible to suppress them. The more we try to suppress our emotions, the more our performance is likely to suffer. Consider someone who experiences a fear of heights, stage-fright, or any other phobia; the more that they focus on fighting against their emotions, the more paralyzed they become.

It is far more effective to manage our emotions and use them in a positive way: to enhance rather than inhibit our performance. To do so, we need to be able to recognize our emotions and, having identified them, channel them or use them to our advantage, rather than try to block them.

Below I will attempt to identify the emotions that you are likely to experience while trading. The reader will need to reflect on his/her own experiences.

Trading Emotions

The most common emotions discussed by traders are greed and fear. In fact, some maintain that the only emotion that they contend with is fear: fear of suffering a loss, and fear of missing out on an opportunity. The actual array of emotions is far more complex than that. How many of the following do you recognise?

Excitement
Early man probably experienced an adrenaline rush while hunting: stalking his prey or a member of an opposing tribe. Nowadays we are more likely to experience excitement when dealt a straight flush in a game of poker; or when our latest trade starts trending upwards on big volume. I tend to get a rush of excitement every time I ring my broker to place a trade or indeed to close a trade.

Elation
Recognise Leytton Hewit’s “C’MON!” when he wins a point or a game? Or the roar of the crowd when your footy team scores a goal? Or when your trade has jumped almost 100 per cent inside 2 weeks.

Fear of Losing Out
The crowd behavior at a closing down sale: “Grab as much as you can”.
Or buyers when stocks are gapping up in a strong bull market: “I don’t care what the price is, just get me in”.

Fear of Failure
The trepidation a weekend golfer feels when standing in a deep sand bunker; or the uncertainty and indecision you face when placing a trade after a string of losses.

Fear of Impending Threat
When you see a police car in your rear-view mirror; or when the dentist says: “This isn’t going to hurt much.” Or when your stock posts three large red candles.

Denial (not a river in Egypt)
When price gaps down through your stop level: “This is not happening to me — there must be some mistake.”

When we confuse our wishes with reality. Denial is forlorn hope; a refusal to accept the situation:

• “This is just a temporary aberration — everything else is still going up.”
• “The fundamentals are still good — I’ll hold for the long run.”
• “I am sure that the stock will bounce at $4.20 — I’ll move my stop down to below there.”
• Anger
  The attack response triggered when someone cuts you off on the highway; or steals your parking space; or when a trade just won’t go your way:
• “I’ve been cheated.”
• “Brokers are a bunch of thieves.”
• “It’s the government’s fault - they should protect us.”
• Frustration
  Inward-directed aggression. Irritability. Negative self-talk: “You idiot — how could you have missed that.”

Inertia
An inability to concentrate or make decisions. You review more than twenty different indicators, many of which you have not used in the past two years, in an attempt to arrive at a decision — while price ticks inexorably downwards.

Panic
The abandonment of hope: “I don’t care what the price is, just get me out.”

Despair
Feelings of loss, sadness, worthlessness or helplessness. Loss of confidence.

Acceptance
Resolution of the whole process. Recognition of past mistakes. Acceptance that you have to incur losses if you want to make profits. The inner calm that comes from having “let go”. A feeling of having gained from the experience. An expectation that you will do better the next time. Confidence restored.

Conclusion
Each of the above emotional states is triggered by a different chemical cocktail released by your endocrine system. Most severely impacting on your ability to make rational decisions while trading. Later posts will discuss strategies for managing your emotions in order to enhance your trading which will benefit your trading of the Planet Wealth Strategy immensely.

Happy trading and remember…

Mums the word!

Marketmum
Stock Market Investor
Planet Wealth Blog © 2007

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Just to follow on from last week, I thought I’d give a more indepth view of how Trading Psychology can affect your decisions in the market. This becomes relevant in not only the Planet Wealth Strategy, but any strategy you choose to trade.

Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions.

1. Caution.

Excitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.

2. Patience.

Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.

3. Conviction.

Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.

4. Detachment.

Concentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow.

Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.

5. Focus

Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.

6. Expect the unexpected.

Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.

7. Average up - not down.

If you increase your position when price goes against you, you are liable to compound your losses. When price starts to move it is likely to continue in that direction. Rather increase your exposure when the market proves you right and moves in your favour.

8. Limit your losses.

Use stop loss orders to protect your funds. When the stop loss is triggered, act immediately - don’t hesitate.

The biggest mistake you can make is to hold on to falling stocks, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital.
Human nature being what it is, most traders and investors ignore these rules when they first start out. It can be an expensive lesson.
Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound technical analysis.

These guidelines should be internalised and if you are uncertain of which way to turn with a particular trade, re-read these statements and your answer should become clear.

Guidelines taken from Incredible Charts.

As always, Happy Trading and remember…

Mum’s the Word!

Marketmum
Stock Market Investor
Planet Wealth Blog © 2007

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I posted this in my Trading Diary blog and received such a huge response, that I thought I would post it here too. After all, it is very relevant to both the Planet Wealth Strategy and the Renting Shares Strategy, and in fact, any successful stock market strategy.

It is said that Psychology is 80% of trading and I believe it.

With the choppy conditions we have going on in the market at the moment, I think it is important to understand just what emotions are behind the rises and falls in the market.

Most traders are on the lookout for ways to improve their trading, but some dedicate their lives to searching for the holy grail — the perfect indicator or trading system that will provide setups with a 100% success rate. Many of them have been trading for years, and have tried and tested a number of successful systems, but they seem to suffer from a short attention-span. They drop what they are doing at the first opportunity and head off after the latest fad.

Perfectionism and Avoidance

Perfectionists are often motivated by avoidance: the need to avoid unpleasant emotional experiences. Traders who seek the perfect system are also likely to be motivated by the need to avoid unpleasant experiences.

Avoidance
Imagine taking part in a game where participants are divided into two groups, blindfolded and asked to stick out their right hand. The first group is given ten dollars each time they extend their hand. They soon learn how to play the game and, no doubt, enjoy playing at every opportunity.The second group is also given ten dollars, randomly, about 80% of the time. The remaining 20% of the time, instead of being given a dollar, their hand is jabbed with a pin. Most participants in this group are likely to quit fairly quickly — they focus on the pain and ignore the reward.With trading losses, the only pain that you will suffer is the emotional reaction to a loss — often far worse than being jabbed with a pin. If you concentrate on avoiding losses rather than on maximizing your overall gain, you are unlikely to succeed at trading.

Personality Types

A group of traders may all incur the same loss but suffer vastly different emotional responses. A lot depends on their past experiences — not only while trading but in the broader arena of life.

A-type Personalities
The more competitive you are, the more uncomfortable you are likely to be about incurring losses. From an early age, many of us are programmed to compete: to win; to accomplish; to be top of the class; to always be right; and to succeed at whatever we set out to do. Losses are equated with losing — to be avoided at all costs.

Perfectionists
Not all perfectionists are A-type personalities. Many procrastinate, or avoid competing altogether, to avoid failure.

Beginners
Newcomers to trading often start off with a string of positive experiences. Unfamiliar with the basics of money management, they are often over-confident and prepared to bet large amounts of their capital in the expectation of further gains.

Traumatic Experiences
Past trauma affects how we view related experiences. A child who almost drowns may be prone to developing a fear of water. Similarly, when hit with the “shock and awe” of a major loss, many traders never recover. They quit trading completely or spend their entire career trying to avoid a repeat of that negative emotional experience.

Developing A Healthy Attitude Towards Losses

Avoid chasing after the perfect system that promises to eliminate losses.

Don’t equate losses with failure. In fact, complete elimination of losses should be seen as a failure — you are likely to have eliminated most of your gains as a consequence.

Distinguish between abnormal losses and the small losses normally incurred by any trading system.

Accept that small losses are an unavoidable part of trading — and that you will regularly incur them. They are as much a part of trading as are profits.

Most successful traders, enjoy success rates no greater than 50%. What they are able to do, however, is to restrict the size of their losses while realising substantial gains on their successful trades.

Focus on the collective effect (maximising your overall gain) rather than on the impact of individual transactions.

Happy trading and remember…

Mums the word

Marketmum
Stock Market Investor
Planet Wealth Blog © 2007

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Hello everyone and thank you for the introduction Sean, it’s great to be here.

As Sean mentioned, I have been Trading For a Living since November 2005 and started my own site a little under 6 months later, where I decided to place my trading diary online so others could view and learn from both my good experiences, and those that were not so good!

MarketMum’s Strategy

I trade a simpler strategy than Planet Wealth but have had much experience using Andrew Dimitri’s strategy and are very pleased to be able to share my experiences with you all here. I mainly sell puts and then if I have to buy the shares, write covered calls over them. This strategy has allowed me to completely replace my income so that I am able to stay at home with my two beautiful boys, and yet run my successful business.

I look forward to many more posts and will see you all back here next week, so until then,

Happy trading and remember…

Mum’s the Word!

Marketmum
Stock Market Investor
Planet Wealth Blog © 2007

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