Emotions and Trading (November 7, 2007)

On a down 361 point day in the market, it’s a great day to reflect and analyze what it is we are doing. Why are we doing it and what is it we are trying to achieve? Oh, I know you’re thinking I’m trying to make money. Of course you are. But on a day like today it’s a great time to take a moment and think about what are you doing to help yourself make money and what are you doing to hinder that objective.  

For most of us, the answer lies in our ability to handle our emotions. Yes, both fundamental and technical analyses are critical to your investment success. Research and disciplines are necessary for you to make money in the markets. But Dan and I and many other regulars on this site have written a great deal about emotions and the negative impact they have on successful long-term trading. Simply put, I believe the ultimate key to successful investing is the ability to handle and ultimately totally remove emotion from your investment equation.

Emotions and trading are mutually exclusive. They cannot co-exist successfully. Repeat.

After 30+ years of investing, including the last several years of running a private hedge fund, I have learned there are no highs when trading and there can be no lows. Emotionally, there is only a good trade or a bad trade. Each is treated with the same emotion: none. There are no high fives and there is no remorse. You are either making money on your bottom line or you are not. If you are not, your partners will take the money away from you and give it to someone else to run. If you’re handling your own money, then you should give it to someone else to run unless you are investing as some form of very expensive entertainment. Either way, there are no woooo hooo’s or there is no self-deprecation and self-doubts. There is only the next trade. 

To be able to trade over a prolonged period of time or as your vocation, ups and downs in the market must be treated equally. To survive, and that is the ultimate objective, they are the same thing. More often than not, big wins in the market are a result of following your disciplines or the result of an up trending market. Big losses often are the result of an unforeseeable event or a change in the market trend. Yes, you chose the sector and the stock, but the market lets you make that money or proved your decision to be wrong.

Either way, the result is what it is. You are merely the market’s conduit. In order to stay in the game and keep some resemblance of sanity and a personal life where non-traders can tolerate being around you, you must detach the emotion from your trades, the market and your daily-weekly successes or failures. To be successful as a trader you must learn a great deal about yourself. Often, more than some people want to know about themselves.

Just as we never panic sell into a big down day or chase on a big up day we never let emotion dictate our trading. We let our bottom line, not a single trade or a market sell off that is totally out of our control define our success. We follow our disciplines and take what the market gives us and do not let fear or greed enter our trades.

We are disciplined. We are professionals.

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