Trading Psychology & Emotional Participation

Holding positions in the market can be extremely emotionally involving. And, of course, the larger the position (the more at risk) the greater the emotional involvement. Every uptick causes delight and every downtick causes sorrow. It is sufficient to cause otherwise intelligent people to spend hours staring mesmerized at changing numbers.

The craving for emotional involvement may be the same as gambler's excitement. But we are not a gambler and hate gambling we know the odds are against us. We never buy lottery tickets and when we go to a conference in Vevada, the small amount of money we have put into slot machines was motivated by curiosity rather than by an expectation of winning.

We don't randomly trade. When we commit money in the future market we always do so on the basis of some theory we have about how the market will move and why. Nonetheless, some of those theories can be pretty flimsy, so we try to make the amount of money we commit correspond to our intensity of certainty (knowing that we often wrong). We are right more often than wrong but have been terribly wrong too many times. We continue to learn, but continue to find new mistakes we can make.

A professional investor friend of mine has said that many people lose money in the market because being in the market is motivated by reasons other than making money or avoiding losses, such as talking to their friend about trading or the emotional involvement of trading. When in doubt, stay out is good advice. We experience great grief when we are out of the market and watching the market make big moves that could have been making money for us. We wonder at times if that emotional grief isn't greater than the grief we experience when we have a position and losing money.

A run-up in price inspires optimism (an emotional buy-signal) even though it is bad policy to buy into a run-up (similar to selling into a sudden price decline). Like many traders we have great difficulty taking a loss from a losing position. For some people this difficulty is associated with too much ego-involvement in their trading decision. They took a position on the basis of some belief and are unwilling to admit having made an error. In our case, however, it is more that we cannot truly accept the fact that we have already taken a loss as if our unrealized loss is not real and that by holding the position the market may move in our favor. Moreover, reason like a contrarian that if the market has already moved so far in one direction a reversal is more likely (when prices have fallen, buyers are attracted and vice versa). When we realize that we have walked into a propeller and being cut to pieces, we have all the rationality of a deer that stares transfixed into the headlights of an on-rushing car. The worst position is to be feeling sick with grief and to be passively/helplessly hoping the price will make a move for the better. Such emotions are a sign of poor money management too much has been risked.

Programmed or mechanical trading would remove the emotion from decision-making, but it would not remove the emotion from profiting or losing. Futures traders often blame their failures on lack of self-discipline. By this theory, one should not enter a position without having a well-defined exit price and one should have the discipline to act on the plan.

We do have non-monetary, emotional incentives for involvement in the market and we don't believe this is a bad thing. Years ago we made a conscious decision that we did not want to drink alcohol at parties as a means of reducing my anxiety. We wanted to experience our emotions fully and to learn to deal with them. We can say similar things about trading. Also, we are one of those people for whom market behavior is a fascinating puzzle and we are arrogant enough to believe that we have the capacity to solve that puzzle. We go from mistake to mistake, thinking that we approaching the point where we will run out of mistakes and consistently make more money than we lose.

We believe that we have learned a great deal about ourselves by trading and believe that we have grown as a person in learning to control our impulsiveness and impatience. Unlike Keynes, who arrogantly proclaimed that the market can be irrational longer than can stay solvent, we have learned humility in the face of many false forecasts. Life & survival is a process of risk management. We believe the market is teaching me wisdom & good judgment that has helped us (and, hopefully, others) in managing many many areas of life. We still have lots to learn. We still become too giddy & reckless when successful and dysfunctional from despair (or desperate & reckless) when we fail. The learning is on a very deep level of personality much deeper than factual knowledge because in many cases we already know the mistakes but have not gain enough mastery over you so as to not make them.