Dave Curran is a respected author on a number of sites, Forex Avenger being one of them.
Today Dave will talk about managing your emotions in this tough market, specifically fear and greed. Read what he thinks
about disciplined trading.
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After the trader has learned the mechanics of trading, we then enter into the world of Greed & Fear.
When you have your trading system in place, and know all about technical analysis, money management, probability, risk to reward and all the other components needed to be a successful trader, we are then introduced to our two friends Mr Greed and Mr Fear.
Greed and Fear = Emotions
It is sad to say this is the area that most traders cannot master, and if there was ever a secret attached to trading, this has to be one of the biggest, just behind money management.
If the trader can stay focused, and still show discipline to take the trades their system is generating after a string of losses then this is a quality that will result in becoming a great trader.
Most traders will be deeply affected after taking a few hits, and their discipline will waver by making changes to the plan. These changes mainly come in the form of exiting too early, cutting the trade's potential for the need to be correct. Not realizing that doing this reduces the profits on the winners, and places the whole money management plan in jeopardy.
Handling a string of losing trades is not the only hazard because landing on a winning streak will places demands on your discipline.
A trader is most vulnerable when they start thinking this is easy, and start to take their foot off the pedal. Reading about some of the best traders in history reflects on some of my own experiences, that the biggest losses come very shortly after some of the biggest wins or a run of wins.
The fear factor will increase after every losing trade and the greed factor pops up after winners.
Very few traders are content with the results of every trade, they always think they could have won more on winners and reduced the amount on losers.
(Remember you will never find the tops and bottoms consistently, but all you need is that part in the middle to be profitable.)
Mr Fear and Mr Greed
Fear and greed, will play extraordinary tricks with your emotions but only through self control and discipline will you be able to control them.
Everybody has different levels of fear and greed, some people show no fear at all whatever they are doing, and then you get the others that are so greedy they will literally do anything. Having a balance between the two will be easier to control.
It`s without doubt, trading is a test of emotional control as the price swings up and down.
Without doing the ground work and arming yourself with the correct trading education, the diagram below highlights the emotions the trader will experience.
The only way we can control these emotions is to have complete faith in the system we are trading and understand that part of the system (plan) means that there will be losing trades.
To have undoubting faith in your trading system does not come cheaply in time and effort, the need for testing is really important. You should back test and forward test until you have conditioned your mind to accept all the possibilities that can be thrown at you.
Only then will you be able to dispatch Mr Fear and Mr Greed out of the equation, and trade with complete discipline.
But..?
How many traders will ignore this advice and jump in to soon, because of impatience and the lack of respect to their educational needs in conditioning their minds?
Self control and discipline is what makes a good trader, if they can hold their hands up at the end of the month and be true, by saying, I have traded my system without any deviation from the plan, then the future is looking good.
Trader's that show discipline in their everyday life usually bring this quality to their trading business.
Happy Trading,
Dave Curran
Forex Avenger
su*****@fo**********.com
You really saved my skin with this ifnormiaotn. Thanks!
This article is an eye opener! There are a lot of important things in life that we should ponder upon. Yet we should not delve into negative things for us to continually move on with life.
I applaud the powerful simplicity of this article. I will say the most potent part of the article for me is this," How many traders will ignore this advice and jump in to soon, because of impatience and the lack of respect to their educational needs in conditioning their minds?" This is because the precise skill many traders, including myself at one time, lack is the conscious process of conditioning one's mind for the if,then scenarios that occur in trading. Giving yourself time as a trader to identify the possible scenarios you will encounter while you follow your plan and then designing a schedule to condition these responses so that you can follow your trading plan is essential and can be done with out actually trading.
Like any form of conditioning, the beginning is the most critical, condition must be done frequently to start a change. However, where most traders fail, when they lose their edge, is because the conditioning is not scheduled at intervals thereafter. If you leave your trading up to too much active trading, your discipline will likely suffer especially after extend periods of good trading and good performance. Mental circuits get burned out, you need time also to refresh these mental circuits to stay sharp. This also explains why many traders take huge losses after a period of excellent trading discipline combined with favorable market conditions for their particular method. Mentally they are just plain tired and can't respond well enough to protect the downside.
The best analogy for mental conditioning to trading probably is piano tuning. When you buy a new piano, the tuner comes once or even twice during the first week, each week for a few weeks, then each month, then maybe once of twice per year. The interval of dedicated conditioning increases but never stops. Have you ever played a piano that hasn't been tuned in years? What do you think happens when you don't periodically take time to refresh and recondition the optimal trading behaviors? The results are undesirable.
The same is true of elite athletic skills, and the same is true of trading. Trading is your competitive arena, but you must take periodic time outside of trading to review and practice conditioning the proper profitable responses to various market scenarios in order to consistently follow your plan with no deviations. I am not sure the best reconditioning schedule for each person, but, for example, I have shut down quote servers and services for october 2010 (becuase I pay professional exchange fees across a wide variety of exchanges) to take probably a few days to condition my good trading habits. This is my method for regaining or increasing my sharpness. Each trader should work to define a conditioning schedule that works for him or her.
A good way to know when to recondition or to think about it might be to graph your account equity. A good trader's equity should have a postiive slope which you can define by a simple trendline. When your equity shifts below the upward trendline, consider some kind of recharge and reconditioning work at that time. True, the break of your upward equity trendline may be due to market conditions, however, generally a real break of the trendline represents some change and strengthening your conditioning at that point is probably a wise thing to do.
I applaud the powerful simplicity of this article. I will say the most potent part of the article for me is this," How many traders will ignore this advice and jump in to soon, because of impatience and the lack of respect to their educational needs in conditioning their minds?" This is because the precise skill many traders, including myself at one time, lack is the conscious process of conditioning one's mind for the if,then scenarios that occur in trading. Giving yourself time as a trader to identify the possible scenarios you will encounter while you follow your plan and then designing a schedule to condition these responses so that you can follow your trading plan is essential and can be done with out actually trading.
Like any form of conditioning, the beginning is the most critical, condition must be done frequently to start a change. However, where most traders fail, when they lose their edge, is because the conditioning is not scheduled at intervals thereafter. If you leave your trading up to too much active trading, your discipline will likely suffer especially after extend periods of good trading and good performance. Mental circuits get burned out, you need time also to refresh these mental circuits to stay sharp. This also explains why many traders take huge losses after a period of excellent trading discipline combined with favorable market conditions for their particular method. Mentally they are just plain tired and can't respond well enough to protect the downside.
The best analogy for mental conditioning to trading probably is piano tuning. When you buy a new piano, the tuner comes once or even twice during the first week, each week for a few weeks, then each month, then maybe once of twice per year. The interval of dedicated conditioning increases but never stops. Have you ever played a piano that hasn't been tuned in years? What do you think happens when you don't periodically take time to refresh and recondition the optimal trading behaviors? The results are undesirable.
The same is true of elite athletic skills, and the same is true of trading. Trading is your competitive arena, but you must take periodic time outside of trading to review and practice conditioning the proper profitable responses to various market scenarios in order to consistently follow your plan with no deviations. I am not sure the best reconditioning schedule for each person, but, for example, I have shut down quote servers and services for october 2010 (becuase I pay professional exchange fees across a wide variety of exchanges) to take probably a few days to condition my good trading habits. This is my method for regaining or increasing my sharpness. It just takes a phone call and a few minutes to turn the switch back "on." My quantitative computer programs I still run each day usually but the live feeds stop. Each trader should work to define a conditioning schedule that works for him or her.
A good way to know when to recondition or to think about it might be to graph your account equity. A good trader's equity should have a postiive slope which you can define by a simple trendline. When your equity shifts below the upward trendline, consider some kind of recharge and reconditioning work at that time. True, the break of your upward equity trendline may be due to market conditions, however, generally a real break of the trendline represents some change and strengthening your conditioning at that point is probably a wise thing to do.
I agree with Paul Sandison about points of greatest risk and opportunity--if you are on the long side. If you are on the short side of things, then the Dave Curran analysis is right. Most people are on the long side.
p.s. there is a really great (been in business for generations) Currans family restaurant in south Minneapolis. Probably not ralations of Dave.
The nadir on the downside (the opposite of euphoria) is contempt.
I would also swap the points of greatest risk and opportunity. The greatest point of risk is mass euphoria, and the greatest point of opportunity is mass contempt (for the market).