Mastering the Emotions of Trading

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 3

Some would argue that the biggest barrier between you and success in trading the financial markets is time, money, software or strategy, but I would argue that the biggest barrier to success is simple human emotion.  Fear and greed.  Being able to stay calm when a trade turns against you and make a rational decision based on price/volume and support levels as well as being able to avoid the temptations of greed.. trying to squeeze more out of an extended trade is something that can’t be learned through paper trading and back testing.  Only when you have experienced the thrills of big gains or the agony of sharp losses can you learn more about your own emotions and who you are as a trader.  Only then can you begin to work to tame these emotions an increase your success.

A recent newsletter from Gary Scott describes the element of emotion so well:

" Change can come quickly…and does.  Knowing this fact can make you a millionaire.

This thought came to mind as Merri and I hiked over a deep ravine on a train trestle with our daughter Francesca.  Many readers write in and tell me how they plan to speculate in currency (or other commodity) futures, based on programs they have tested on paper.

Studying markets in advance is great but ….for those who plan to then move forward and speculate…may I suggest…buy a 12 foot two by four board.

Lay it on the floor.  Walk on it. All 12 feet. Unless you have an inner ear problem, or other mobility issue, walking the board is easy. 

Now go find a 100 foot chasm like the one below. Lay the board across the rift. Now walk across the board over the drop.  It’s the same. Right?  Can your emotions ignore the drop? Probably not. Mine certainly can’t!

Actually do not do this!  Hopefully the point is clear without the risk of death from a headlong plunge. The 12 foot walk is easy on the ground. Over the chasm it could be impossible……because of emotion. 

20% of good investing with real money is knowledge…80% is emotional control.

My experience suggests that 20% of investors look for change, calculate what the new horizons might bring and invest based on inner beliefs they stick to.  They do not get caught in the emotions of greed when markets rise.  Nor do they panic in the emotion of fear when markets fall.

80% of investors invest emotionally and lose.

Until next message, embrace change and embrace the reality of your emotional circumstances. Adjust your investing style accordingly."

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I recently had the great pleasure of joining Gary and his wife Merri for clam chowder as they stopped in Seattle during a cross country road trip.  I know that my life is enriched for having known them and highly recommend having a look at some of the seminars they offer in Ecuador and North Carolina.  Everything from investing in foreign currency markets to natural healing/health toSpanish lessons are offered.  I’m hoping to get to Ecuador early next year myself!  You can see more at http://www.garyscott.com/

Filed under Guest Author: Gary Scott by Tate Dwinnell

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Comments on Mastering the Emotions of Trading »

January 22, 2008

Robert Cahill @ 11:25 am

Love your writing style. It is extremely readable. I just found you this morning, and look forward to learning more about ETF investing from you as well. Keep the articles coming!

Bob

Tate Dwinnell @ 4:47 pm

thanks Robert, appreciate the feedback

September 7, 2008

Stock Research @ 6:23 pm

Just came across this post. Rather late but had to comment. I find that a lot of the emotion is about taking your losses – getting out of bad decisions before they turn into really bad losses. I think most investors make the mistake of hanging in there even after the downward spiral becomes obvious.