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How can I eliminate the emotional responses in my trading?

by admin on March 19, 2013

It is very common to see investors or traders trying to avoid, deny, control, hide or reject the emotional responses that investing produces in them but, guess what? That does not work.

Furthermore, it gets worse when these traders and investors are influenced by cultural pressure, gender or past experiences.

The thing is, the more fear or pain they feel, the harder it will be for them to attempt to accept those feelings and learn from them, which sends them deeper into a vortex that ultimately consumes them. After all, that is going against their own human nature.

The simple fact of trying to avoid feeling these emotions can be completely overwhelming and debilitating.

Usually when a person is stressed or afraid, it causes a chemical reaction in the person’s body, generating a chemical called adrenaline. The adrenaline will cause choppy breathing, the heart will pump harder and send blood to the muscles, the senses become more acute and even the person may feel palpitations, dizziness, difficulty swallowing and a lump in the stomach. Trying to fight stress, results in increased generation of adrenaline.

Already at this point, we can expect any of two reactions, either we flee or we become paralyzed completely. Such paralysis may end in not closing a transaction that we see is eating our money as if we had water in the palm of our hands.
On the other hand, our own personality and past experiences in relation to stress management may also be important factors that hinder or help us to more positively manage stress. There will be some people that will even come to need help from a psychologist.

I’m not a psychologist, but I have experienced firsthand the ravages of stress that trading will generate. Now, one of the things that has worked for me is to make a daily analysis of my emotions, thoughts and errors. When I have been willing to face the uncomfortable feelings and learn from them, is when I have achieved the greater positive impact on my portfolio.
There are three practical things we can do. A trading plan, documenting our daily experiences and analyzing our transactions.
For these three to work, it is important to do them when the markets are closed (after-market) or we are not invested. This will allow our focus not to be impacted by the constant movement of information or interests.

The type of analysis that can help further is a thorough analysis of the facts without interpretation. Things are as they are, our interpretation is really inconsequential. If we already have a trading plan, it is highly advisable to compare our plan with what we have truly done.

Changes in our perception about things can help, as it is much better to accept things as they are instead of trying to change them. Our attitude and disposition will be crucial to achieve this change or adaptation.

Each person is different and what works for one may not work for another, but having a guide of where to start can make a big difference for some.

The main emotions that any trader experiences are fear, greed, hope and indecision. When a trader is going too fast to a transaction he or she is usually motivated by greed. When a trader wants to take profits too soon he or she usually wants to get out fast because of fear of losing his or her income.

Anxiety leads us to develop or enhance these patterns. These reactions are natural and are part of human nature. Statistics show human beings tend to cling to hope when something is not right and also act for fear “lest the gains go to waste.”

The biggest difficulty or emotional challenge in trading is precisely that to be successful in business you need to act against our human nature. We can hardly fight our emotions, but if we can learn to react positively to these or learn how to reduce our stress. Rather than control it is learning.

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