How to Trade the Stock Market Part 3...Emotionally Comprimised Trading

Awww, Ratfarts!

Ever tried playing golf pissed off? It doesn't work. Almost at all. And the more pissed off you get, the more you are working against yourself trying to force the play. And that makes you even more pissed off. Suddenly you are bending a club over your knee. The same can be said of trading. You can't trade when you are angry.I know someone that threw around chairs in his basement and fell to his knees screaming "God Why", when a series of trades went bad. Do you think that he was able to keep his head together when he tried trading the next day? Trading angry and compromised will actually change the way you trade...and it will usually lead to things going the wrong way and your account being depleted. You got to keep your head in the game or you aren't even playing the game.

Reasons You Might Go on Tilt

There are several common reasons that you might go on tilt and I will go through them and then tell you what to do about it as we go. So just chill out and get a martini and here we go:

Your Previous Trades Went Bad

When previous trades go bad, this can release an emotional cascade of chaos. You experience cognitive dissonance as what you thought was correct was incorrect. Then you wonder what the hell you are doing here trading in this manner anyway. Then you start to think that maybe you won't be

able to make money in this after all, and that makes you feel like crap because you need money to live and lots of money for your dreams. While all this is coming down over your head, you start to feel frustration of not having the ability to do what you set out to do...live life on your terms. You want to make it right again, you want to get even. 

Seeing that you want to get even, you will attempt to jump in quickly in order to fix the situation, and that means with speed and without due process. You will start to cut corners and while angry you will shoot from the hip and try to jump in something else quickly that several days ago you would have no business being in. And a part of you feeling sorry for yourself actually in a twisted way thinks you deserve this new trade, especially if it fails.

This is generally is a bad idea.

What to do to fix this: When you have a series of trades go bad, take a few hours off. Then go back like a CSI Detective and go through the entire thing and find out what happened. Go through the trade, look at the set up. Look at the price action, its price history. Now look at what you did, but most of all what you did DIFFERENT. I take it that if you have gotten this far in your trading, you must have had some success or you wouldnt  be trading. This time it went wrong. Chances are you deviated from what you usually did or took a chance on some new factor in the equation. As you are reviewing everything, you will feel the snake uncoil and your rational mind will take over, even relief that you no longer have that gnawing feeling of the need to get even.

You Need The Money (Trading With Scared Money)

Nothing will make you trade differently than with scared money. If you really need the money, you will either be A) Too cautious and or B) Too reckless. Being tight with money will not allow you to properly work the trigger and get in when you really need to get in. It will also make you hang on to stuff when you should have gotten out, as you pathetically hold on and hope and hope things will turn around.

It also causes something called buying high and selling low. For example, you turn on the news and you see that the stock is roaring. Well, you don't know. You only have a bit of money and you don't want to lose it. So you wait. The next few days the radio and TV are talking about how the market has been roaring over the last few days. Now you are really thinking about it. Finally after another day of record highs in the market, you decide, well, it must be safe, so you put your money in. Then the next two days the market starts to drop. You panic because you don't want to lose your money. It then drops further and further past the point you bought in at, so you panic and sell. Congrats bonehead, you just bought high and sold low, the exact opposite thing of what you need to do to make money in the market.

Heres how to know if you have side money to invest in the market: All of your immediate needs are met, rent, food, car payment, bills, lights, utilities, etc. Then if you have money left over that is not scheduled for anything, great. If any of the above need to be paid, then you dont have money to play with and you will be trading with scared money. If you enter a trade and then you start to panic thinking how else you could be spending the money on, then you are trading with scared money and you shouldn't be trading until you have more of a surplus after everything else is taken care of, and even other items you semi need are purchased.

What to do to fix this: Before you get into the market, pay off your bills first, and make your rent and your bills and purchase your food. Don't gamble with money you can't afford to lose. Once, while me and my friend were researching options 20 years ago, we came across one guy who said that options were like taking a huge wad of money in your closed fist, getting on the highway, sticking your closed fist with the money in it out the window at 60mph and then slowly opening your fist. This of course was coming from someone that didn't know how to make money on options, but you get the gist. Everything else you need comes first. Only surplus that you dont need for anything else is to be used. Because if you really need to buy a mower that fear of loss because you really need the money for the mower can really f%$# with your head and cause you to trade differently and take a loss because you fear the loss. For example, you get in, and the stock dips. You look at the technicals and see the market had a bad day and it should be coming up in the next few days, but damn, you really need that mower and you find that because you need that mower you really cant lose that money. So you panic and sell for a bit of a loss. The next several days though, the market comes back and your stock came back up. If you had stayed in, you would have made some money. Don't trade scared, its like driving a car with 7 beers in you. Not a good idea.

Tired, Angry from Something Else

This is a no brainer. Being exhausted is a performance killer with no matter what you do. And being Angry from something else once again is like driving with a few beers in you...your inhibitions  are going to be lower and you are going to make some goofy decisions, more based on emotion instead of logic. The reason that the crowd is almost always wrong is because the crowd trades based on

emotion and not logic, especially immediately after news comes out before logic prevails and the crowd gets its head together. Contrarian trading is trading against the crowd and using the crowds emotions to prevail against said crowd by trading the other way and therefore leveraging the crowd's wrong money against them to make large profits.This means by definition that as a Contrarian trader, you don't trade angry or tired.

How to fix: First for the no duh answer: Get enough sleep so you can function. Do not engage in high level decision making and trading when you only have a few hours in the tank. Even if you have a few coffees or Monstser energy drinks, they will only mask tired and you will still be making stupid mistakes. If on the other hand you have had enough sleep but you have just gone through something emotionally exausting or if you are pissed off, wait an hour or two to get your head together. If you are still pissed later, wait until tomorrow. Your pocketbook will thank you.

Live Money vs Play Money

This almost should fall under 'Scared Money'. Usually if you are using play money you don't have that much experience trading under live fire with real money. What is so simple as making decisions and hitting a button and taking your shot starts to get overwhelmed by 'monkey mind'...that little monkey at the back of your mind that starts screaming "Danger" which makes you hesitate on pushing them button with real money and can influence your decision-making process.

You see, that 'monkey mind' is there for a good reason. Through the ages we needed that inner voice to give us warnings about events and situations that we found ourselves in. Monkey mind kept us alive. However, monkey mind is now overwhelming us with paralyzing fear now when educated risk is the medium that will make us money.

How to fix: The only way to make monkey mind stop chattering is exposure therapy. Baby steps. When you introduce something in little bits and pieces that monkey mind can see has no disastrous consequences, monkey mind will shut up. Exposure therapy is the only way to move forward with you have been having problems due to fear. Figure out what would be an inconsequential amount of money for you to lose but that would still allow you to trade stocks and or options and play with that for a while. You will find that trading more loose than tight will allow more educated risk and therefore more profits. Of course, you will have to have a sound system or else monkey mind was right. So: Have a sound profitable trading system, and advance in baby steps to larger steps.

Tracking Your Trading In a Reviewable Log

Sometimes you will not even be aware that you are trading compromised. In order to give you an example, I would like to tell you a gambling story. An author that I was reading once mentioned in a chapter that he was keeping records of his gambling. He would typically bet with green chips ($25 dollar chips) and decided to switch things up and started betting with $5 dollar chips. At the end of the next month he realized he was down and really was at a loss as to why. So he poured over his gambling journal and found that his trading style had altered when he switched from 25 dollar chips to 5 dollar red chips. He saw that he started making more dangerous bets and higher payoff but higher vigorish (house edge) bets in a faster and looser style. He came to the conclusion by pouring over the data that he wasn't respecting the value of the 5 dollar chips as much as the 25 dollar chips and started playing faster and looser with the money, but over time, the losses piled up. He never would have found that if he hadn't kept a trading log.

How to Fix: Keep a trading diary. For all trades, write down the in and out price. Also write about what attracted to you the trade initially and what your thought process was. Write down how you analysed the stock and what conclusions you drew from that analysis. Then journal the activity of entering the trade, watching the trade and exiting the trade. Did you have an exit strategy before hand? Did you follow the strategy in the heat of the battle when monkey mind was shrieking at you? If the trade went wrong from outside factors (like suddenly while you were holding a major analyst issued an upgrade or downgrade that went against your position or the stock suddenly announced unexpected news) were any or part of them foreseeable to some extent but you chose to ignore them because you really wanted the trade to work?
I would like to touch on that last sentence. Really wanting a trade to work is emotionally getting in bed with your trade and that is a big no no. You want to trade like Spock, not like a middle aged guy at a car show hitting on the model standing next to the new car on the floor. A big part of trading Contrarian Style is keeping a deadly cool mind and watching the reactive crowd run to the left and right and calmly making decisions. Keeping a Trading Log is PURE GOLD and is almost as important as the money you are using to trade. Going back over something and seeing what you did wrong is a lifesaver. It allows you to modify your behavior, and it alleviates a lot of stress by keeping a lot more coin in your account and your emotional head on straight.

Trading Under Time Pressure

One time about 15 years ago I had a job in a cubicle and I had 30 minutes for lunch. During those 30 minutes I frantically logged on my online trading account. Knowing that I only had 30 minutes to find a good trade (including logging on and off and placing the trade) was making me rush. And because I was rushing, my decision making was flawed. Totally flawed like someone on a 2 minute shopping spree in a
supermarket. There just is no time for complete rational thinking that you need to have in order to play the game correctly.

How to Fix:  Allow enough time to trade. If you are trying to pack in an intense session between two things that you have to do, don't do that. Attempt to reroute. If you have a job during the day, perhaps you can do your trading end of day style when you come home at night and set up limit orders for the next morning. Perhaps if you really want to trade for a living you might want to rethink that cubicle job (finances permitting of course). Find the time that isn't rushed is my main point, or you will be trading with a sizable handicap.

Trading stocks and Options means you have to be able to step out of your own head and take a look at yourself. Are you cool calm and collected and using logic or are you hopped up and emotionally invested in the trade? Like playing Chess angry, its not a good idea. Play stocks like Big Blue plays chess.
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