Are you having trouble controlling the frequent highs and lows of your trading experiences? Are the dopamine boosters and stress-inducing cortisol going to your head? It’s all chemical in the end, as is falling in love. But there is a way through.
We aren’t going to provide you with agony aunt style emotional support, nor extol the dubious virtues of mindfulness. There are plenty of self-help books on that.
Operating in any space dominated by limited information is challenging, and making it to the top of the game does require a particular mindset. Ask any successful poker player. An ideal approach is a kind of intuitive Bayesian thinking in which you continually remodel your perceptions based on changing information—but more on that in a later article.
For now, we will look at eight trading tips which, if you stick to, will override any emotional entanglements and keep you on an even keel. In other words, to use another poker analogy, that will stop you from going on tilt.
Two famous traders
But before then, a few words on two of history’s most famous traders, Irving Fisher and John Maynard Keynes. While they both made significant impacts on economic theory, they were also highly successful traders, though with very different approaches. The first let emotions dictate his strategy, while the second was altogether far more pragmatic.
Irving Fisher wanted to make money. Initially poor himself, he married an extremely rich childhood sweetheart, but not wanting to be dependent on her he set out to make a personal fortune as a point of pride.
He accumulated a tidy sum from book royalties and selling various of his inventions including the forerunner of the “Rolodex” which he sold to a stationery company for what would be many millions of dollars in today’s money. He also sold trading information at a considerable premium.
His investment strategy was to back growth using heavily leveraged positions. It was during the 1920s, and there was plenty of growth going on. Share prices soared, and he became absurdly wealthy.
However, he was on the brink of a financial precipice. The stock market crashed in Autumn 1929. The Dow Jones lost a third of its value over two months. As Fisher was heavily leveraged, his losses were severe, but not ruinously so. He had plenty of opportunities to salvage his losses.
In September 1929 the Dow Jones was 380 points and fell gradually to 40 points in Summer 1932, a long slow grind. But Fisher was emotionally stubborn. Instead of getting out, he doubled down on his losses borrowing even more money to support his absurdly leveraged investments, convinced the market would turn upwards.
He was frozen by his emotions and eventually went bust, avoiding bankruptcy only with financial support form his wife’s family. He was incapable of changing his mind despite the substantial evidence that he was wrong.
John Maynard Keynes
Although his economic theories changed the planet, Keynes was also a keen trader. He founded what was the first hedge fund, speculated in forex, and managed an extensive portfolio for investors.
Like Fisher, he initially made money fast. He bet that the currencies of France, Germany and Italy would suffer from post-war inflation following World War One, and for a while, that was the case.
But a sudden optimism that the German economy would thrive wiped out wealth. Unable to invest on his behalf, he went back to his investors offering to invest for them. They did, and he was soon back in profit.
However, like Fisher, he failed to predict the 1929 stock market crash. But, unlike Fisher, he recovered. The reason was he changed his mind and investment strategy. He didn’t let emotions get in the way. He went on to become a multi-millionaire.
Top trading tips to control your emotions
As promised, here are eight trading tips that will keep your emotions in check. Each of these will increase the information you have, thus decreasing the information gap where emotions can get in the way of rational choices.
- Stop and notice your emotional reaction to a proposition rather than rejecting it or rejecting it because of how it makes you feel.
- Combine the technical perspective of a trade, for instance, from an indicator, with your personal experience. This gets easier as you gain more experience.
- Make sure you know what is really being described and don’t jump to conclusions until you do know.
- Always look behind the statistics and examine from where the information came.
- Ask what might be missing from the data you are looking at. Perhaps your conclusions would be different if the information was available.
- Ask questions about algorithms you are using and the data that drives them. Are you sure you can trust them?
- Always look under the surface of any graph or chart. Are you convinced you are reading it correctly or is something lurking behand the way it appears?
- Keep an open mind. Ask why you might be mistaken and whether the facts might have changed.
So there is some simple advice to control your emotions when trading. It is one of the toughest aspects of trading to master but one of the most important. Very few manage it and those that do tend to go on to be very successful traders.