There are too many items to keep track of in the market. The trader must understand that he cannot "know it all". If you could, you would be the ultimate trading machine. This being said, we realize that we are imperfect. We have only 100% of our mental energy to use in any given time frame. Some of it is used in maintaining our bodies ? breathing, walking, talking, etc. Some is used in keeping track of our lives ? what time is it, did I turn off the coffee pot, and did I pay the phone bill? Most of it is used in trying to understand the complexity of our world ? the sensory input from our senses and their identification and categorization. In using this last energy, we tend to trap ourselves into sorting out signals and identifying them with past similarities, to make things easier and to conserve on this energy. Unfortunately, this means it is difficult for us to learn new things clearly and cleanly. A simple example is the color red. Most of us drive a car; therefore, red indicates "stop". If we see the color outside of the context of driving, we still tend to think "stop". Many word association tests have proven this out. Thus, if red meant something other than "stop" in a different setting, we may not learn this new meaning quickly or perhaps if we do; it still has some "shading" of "stop".
Thus, new traders often try to interpret the market using the wrong context as the market has little to do with their social world scenario. Thus, the signals that the market is putting out have little meaning or are, most oft, misinterpreted. The confused trader then tries to gather more evidence to bolster his misinterpretation, further compounding the situation. The more he tries to learn via his old context, the more confusing the data appears to be. As he tries harder, he burns more and more of the energy that is available. Because the energy is finite in any specific time frame, the trader becomes mentally drained, pulling energy from his other needs ? life support, emotional response, logical thinking and rational control. As these items decrease, certain traits start to take over. The strongest of these are the violent emotions ? anger, sadness, frustration and projection.
Each of these in their turn degrades the trader’s ability to understand the direction of the market. Dazed and confused, he makes another bad decision based on good information that has not been properly learned and categorized. This is a downward spiral.
The trader must learn to learn properly. To clear his mind as best as possible and try to see reality, and then to test it against the market ? not what he already knows. So many see the price going down, and their "social" education is to sell, while every market indicator might be screaming "oversold ? buy now". Perverse but true.
Emotion is a mental and physical expression of a perceived stimulus. Some emotions are considered "good", others "bad" ? however, this is, again social thinking. Emotions simply are ? neither good nor bad. It is not good to be euphoric at a tragedy, nor is it bad to be angry against injustice. However, emotions are energy hogs that drain our mental capacity quite quickly, and usually, with little benefit in the long run.
Learning Not to Magnify
We have all been guilty of magnifying a situation. A small personal jibe can bring out a totally out of proportion response. Additionally, the injured party can then use even more energy to mentally challenge his aggressor with the "that’s what I would have done" and concerning himself with the possibility the jibe was a capital "T" truth rather than the small, meaningless mutterings of an inconsiderate person.
What then of trading. Here is an incredibly stressful world, fraught with fears, personal failures and tremendous mental drains. All traders have problems with loss; the successful ones have learned not to magnify the situation. They learn to "let go" of inherent emotions. None are immune to the natural response, but neither do the profitable ones worry about that piece of history. There is no room for emotions, but these are the very stimuli that invoke the strongest ones. The trader must be ever watchful of his composure as trades go against or with him. Euphoria or happiness can be just as debilitating as anger or frustration. You cannot be without emotion, you are not a robot. You can, however, train yourself to control your emotions by staying focused on the goal to be achieved, by monitoring yourself for symptoms of emotional outbreak and by using simple physical stress relief methods to help keep these animals corralled.
Staying focused is a trained response. A coach once offered me his philosophy, "If it does not add, it must subtract, there are no neutrals". His point was whatever you are doing, it must be additive to your goal. If it does not bring something to the achievement of that goal, then it is a "subtraction", a distraction. Any distraction, no matter how small, is not helping you and, therefore, there are no "neutral" situations. There are pluses or minuses to your goals; you must try to eliminate the minuses. Trading requires patience at times. It is not all split second decisions. Trades need to develop, charts need time to form patterns and traders must focus. This is not easy. One way is to simply keep going over the plan in detail ? why did I open this trade, where was my entry point, what is my stop loss, where is my exit, how will I execute, are my trade plan parameters still in place. Otherwise, the mind wants to wander, to think of far away places with strange sounding names ? a distraction. A trader must love what he is doing – watching the market move, monitoring price action, investigating market and technical indication. It is far easier for this vocation to be successful if it is also your avocation.
You need to understand your normal response pattern. If you do not see "it" coming, you can not control the emotion or the stress. You need to inspect yourself. What is normal respiration, what is normal pulse, what tensions of muscles are natural? Once we can establish this base line of individual performance, we can then monitor ourselves for signs that are "subtracting" from our trading goals.
Common symptoms are:
- Increased perspiration
- Increased heart rate
- Increased blood pressure
- Increased muscle tension
Once any of these symptoms of an emotional release, or stress level breach is identified, the trader must take corrective action immediately. He must close the trade as he is no longer in control of the plan. The plan said no emotions, right? His objective thinking is now being clouded. The next step is to identify the "stressor," the item or influence that is causing the response. Then the remediation can begin by limiting that stimulus and using physical techniques to reduce both the mental and physical reactions. This would include deep breathing exercises to calm and soothe. It might require physical exertion to eliminate some of the bio- chemical reactions in the body. It will certainly mean doing a rigorous inspection of "self" before going back into the trenches and trying to re-focus.
At the outset of this, I mentioned that there are simply too many things to keep track of. Thus, we need to develop a plan that "walls out" extraneous items that do not "add" to our goal. This is called a "trading system". Having a trading system is the reliance on data that you can perceive as having a benefit and eliminating distractions that you have not learned to appreciate. Remember, the market is putting out all kinds of signals. We have to learn, as we go, to disassociate our social conditioning so that we might have a better chance of understanding the market’s data. Our trading system must include only data that we know we have learned in a market context. Beginners often want to include everything possible, old Pros have adopted the KISS ( Keep It Simple, Sam) principle.
Other outside influences must also be considered. Having the support of your family and friends is just as important as a good Economic Indicator. Worrying about what your "significant other" is going to do or say when all is not going well is certainly a stressor or distraction. Listening to people who have not done the hard work that you have, is yet another distraction. Announcements, market calls, chat room gossip needs to be accounted for, but never followed blindly. At best, they may be right but they are not working for your best interests. You must learn to exist on a few pieces of information that you have tested and understand. Trade with those for awhile and then add a "piece of the puzzle". Remember, you eat an elephant one bite at a time.