Emotional Trading?


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A psychology article in todays Sunday Times looks at the role emotions play in decision. Its not specific to trading but has applications.

Now think again: making the right decision calls for the heart as well as the head - Times Online

I so often read that taking the emotion out of trading is key to avoid knee jerk decisions which then turn into bad trades.

This article however, suggests that without emotions decisions just can't be made..day to day tasks become impossible due to paralysis by analysis. Emotions take the paralysis out of the analysis and kick start the decision makng process. I have read in only one trading book ( I thinkit was Victor Sperandeo) that emotions are a key part of the trading decision making process and cannot be ignored but should be accomodated.
usually the stress is on taking the emotion out of decisionby having a dedicated system.
On the other hand others differentiate and say systems don't work - but methods do - intelligent methods must surely leave room for emotion to enter the equation.

The article then moves its attention from day to day scenarios to high level pro sports men...these take the thought out of their decision making processes by repetetive training so they no longer need to think when they encounter certain scenarios - their training has ingrained the correct actions into them and makes their actionsinstinctive.. When they do actually think about or scrutinise their actions as they take them, their performance suffers....

Can good trading technique become as ingrained as this e.g. like a perfect golf swing is to a professional golfer? Is over analysis at the time of pulling the trigger fatal to a trader? Are emotions good or bad for trading?

We can't review every decision thought and feeling we have as we act,
There are certainly traders who seem to make the same type of good trades over & over again so quite possibly practice makes perfect ... similar to pro sports.

There's more in the article. Its worth a look.
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Life without Emotion is nothing.

And many decisions will be made on the basis of emotion.

But if you're going to trade, successfully, all your decisions must be planned in advance and geared to respond to what’s actually happening and what is developing, rather than what your current emotional state ‘suggests’ may be happening (or more likely, what you ‘think’ is just about to happen – which rarely does btw).
I think that the less one read's the papers, the more objective one can be. The Madness of Crowds Syndrome---it's very difficult to avoid it and, in most cases, one reacts too late. How many, for example, were still buying their houses a year ago because they were afraid that they were going to be priced out of the market?

On "paralysis by analysis", surely you could argue that is due to the emotion of fear rather than just analysing/logic/intelligence. Otherwise, you'd come to a conclusion and act on it like a computer program.
Good article. Emotions will always play a vital part in all human decision-making including trading decisions.

A good trader will be guided by his emotions to do the right things, while a bad trader will be guided to do the wrong things.

A good trader will know it can be very painful to miss a big winning trade.
The fear of this pain will motivate him to take all his trading signals as he does not know which ones will be the big winners.

A bad trader fears to take another loss or he might fear giving back profits on a profitable trade. And this fear will result in him not taking a signal or exiting a profitable trade early.

Even if your trading is automated you can make an emotional decision to turn the computer off. Or you might start tweaking the program parameters during a losing streak. A good automated trader will fear to do either of these things unless there is very good reason to do so (a long losing streak is not one of them).

A trader’s conscious mind and his unconscious mind must be in synch so he feels the correct emotions at the correct times. The unconscious mind must truly accept that you have a valid method of trading and it must be comfortable with the level of risk you are taking (including the risks associated with long losing streaks). Otherwise it will make sure the ‘wrong’ emotions guide how you trade.
On "paralysis by analysis", surely you could argue that is due to the emotion of fear rather than just analysing/logic/intelligence. Otherwise, you'd come to a conclusion and act on it like a computer program.

I think the point in this particular case is that in the face of conflicting information it is emotion which becomes the tie breaker - otherwise your "rational" brain wouldn't be able to decide.