Wednesday, October 1, 2014

Handling Emotions

The rest of the world thinks we traders are a stoic bunch.  We are cold, ruthless, with ice in our veins.  We silently handle huge personal financial losses with alacrity and grace.

This is not true at all.  I think the career of trader is much harder than mere physical work, and even harder than so-called "mental work."  

For example:

1.  Construction worker.  Hard on the back.  Exhausting.  But when the shift is over, you go home and drink a bunch of beer and watch TV, free from concerns.
2.  "Knowledge worker."  Lawyer, app developer, coder, copy writer.  Harder yet, and yes, you take some of the work home with you because you are never "done."  Also your mind is not your own during the work day because you have to actually THINK.  White collar sweatshop.
3.  Trader.  Hardest yet.  It requires thinking; mental work all day.  But more important, and much more difficult, it requires you to HANDLE your emotions.  I don't say "control" emotions, because that is impossible. 

Ari Kiev, in "Mental Strategies of Top Traders" makes some good points about the subject of emotions, which I paraphrase and summarize here.

Handling emotions.  A process.
First, recognize the problem so that you don’t perpetuate it.  Own the problem.  Don’t try to rationalize or justify your actions. Simply admit the facts.  This is what happened. This is what I did.  When you are too busy trying to defend yourself, you are not open to instruction from the past or from peers.  Then, make a conscious decision not to act impulsively or automatically in an effort to eliminate feelings of discomfort.  Notice the feelings.  Recognize that they are not pleasant but move forward with determination and a clear presence of mind, reacting to the events at hand- not to the feelings you have conjured up as a result of the events.  Don’t waste time trying to change how you feel.  Just notice them, let them pass; learn to stay centered in the present moment.  Keep coming back to the present moment.  Keep coming back to your plan of action, what you know, not what you feel, away from the off-kilter thoughts which impel you to become distracted by negative impulses. 

Keeping a log of your trades and how you felt and how those feelings affected your actions and decisions in the trade can be very useful.

Developing the trader’s edge requires staying calm and managing risk in periods of great market volatility. The toughest lesson for most PMs is to cut losses and to get out of trades that aren’t working, especially during periods of drawdowns.


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