Emotional control is the key to success in the market says the market wizard. Control your emotions and half the battle is won says another. Trade with your mind, not your heart chants another. So what exactly is this emotional ball game? How is it played? What are the rules of this game?
To understand this let us study a few hypothetical examples.
A novice, let’s call him ‘A’ who has never traded before puts in his first trade (everybody had a first time!). The trade ends in a loss. Not the one to accept defeat he puts in another trade which ends in a loss too. Angry and frustrated he tries yet again but lady luck refuses to smile at him and yet again the trade ends in a loss. At this point, the trader’s account size has diminished considerably and is almost negligible. Most of his trading capital has been wiped out. What will be his emotional state? What goes through him? Anger, frustration, dejection, defeat, low self-esteem, and a sense that the world has come to an end.
At another place another novice, let’s call him ‘B’ who has also never traded before puts in his first trade. The trade is successful and results in a reasonable amount of profit. His confidence boosted he puts in another trade which is an even bigger success. Elated, he puts in another profitable trade. His trading capital has multiplied considerably and ‘B’ is smiling ear to ear with all his teeth visible. What will be his emotional state and what goes through him? Euphoria, confidence, a bloated ego and the question he is asking himself are “Am I, God?”
At this stage a third novice, let’s call him ‘C’ comes in and wishes to seek advice about the markets and approaches ‘A’ and ‘B’. It is no matter of surprise that trader ‘A’ will advise him to stay away from the markets as it is a dangerous place where one can get hurt and trader ‘B’ would inform him that it is the best place in the world and that he is wasting his time doing anything else but trading. None the wiser ‘C’ decides to wait and watch for a little while.
After the initial badgering ‘A’ has regained control of himself, taken formal training on the subject, studied a few more techniques, and is now ready to try the market again. He places a trade after deep study and contemplation and this time it goes in his favor. He makes a killing and all his earlier losses have been recovered. His trading account also shows a small profit. How does he feel now? All his negative emotions have disappeared and ‘A’ now feels cheerful, confident, and completely satisfied with himself and the market.
On the other hand, ‘B’ puts in his next trade which is a complete disaster. He has incurred a huge loss so much so that all his earlier gains have now been wiped out and his trading account has become negative. He is flabbergasted and looks at his charts with utter disbelief. How could this have happened to me? How could I be wrong? He is not as concerned about his financial loss as he is about the fact that he was wrong and the market turned against him. Infuriated and with a crushed ego he decides to take a sabbatical from trading and tries to understand what happened.
At this stage, if ‘C’ were to approach them for advice ‘A’ would be presenting a different point of view and ‘C’ would probably not be available for comments.
What I wish to demonstrate from the above examples is that the trader allows his wins and his losses to govern his state of mind at every stage.
‘A’s’ initial losses took him to the pits of depression and his subsequent wins later brought him happiness and cheer. Similarly ‘B’s’ initial wins transported him to the pinnacle of elation and his subsequent losses left him shattered.
These extremities of emotions are faced by almost every new trader every single day. The bigger the losses and the wins the greater is the damage. This emotional roller coaster continues within the trader until one of the two is achieved-either the trader gives up trading as he can no longer handle the extremes of joy and pain within himself or he becomes immune to his victory and losses and takes charge of himself.
The market place comprises a plethora of infinite variables that are impossible to quantify. When one realizes this, he lives with the belief that anything is possible. He realizes that the market is a land of probabilities and stops trying to predict market movements. He flows with the tide and looks for high probability situations. He allows his wins to run and protects his capital from undue loss.
The trader has finally come to peace with himself. His wins do not elate him and his losses do not depress him. He finally comes to terms with his emotions and moves on to become a successful trader.