Trading Psychology – Controlling Emotions -Pt2
Is there an idiot inside of you right now that’s making decisions for you? Now, that’s kind of funny and I just want you to think about this for a second. Every day we have 60,000 thoughts. We have this inner voice inside of us that is constantly talking to ourselves and we’re always asking ourselves questions and rationalizing and so forth. So we have this inner voice. Now you might think this is kind of hokey and a little bit weird, but if you’re thinking that right now, that is your inner voice talking to you right now, as you’re saying that to yourself. That’s how I know this works. This is how I know this is true.
Now, in trading, that inner voice is actually an idiot because this concept is amplified in trading because you have money on the line and that inner voice, or idiot, is pretty worried about the fact that you have money on the line. The idiot is going to constantly come up with reasons why a trade is not going to work, trying to keep you out of the trade. The idiot’s always going to be second guessing your decisions, because no matter how nice the setup looks, you’re always going to have that inner voice, that inner idiot, giving you some doubt.
When you finally do enter a trade, the idiot is going to be constantly talking in your head with every possible decision you have to make. Should you sell now? Should you hold on? This is going to happen. Earnings are coming out. All these things are playing in your mind and this idiot is constantly trying to undermine your decisions. If price does go up a bit, this idiot is going to want you to sell it immediately and if price goes up a lot, the idiot’s going to want you to hold on and squeeze more profits out. Its greed and fear in a nutshell.
Come on, you know this is true. You’ve been in trades before and you’ve had that little voice telling you “Hang on” or “Sell now”, “Ring the cash register” and when price finally does go down, the idiot tells you to hold on because price will come back eventually, the famous last words. I’ve been there. You’ve probably been there. How many times have you held onto a stock as it blows past your stop loss, if you had a stop loss in the first place, and that little voice told you to “Hold on, don’t worry, it’ll come back eventually.” Does that ever really work? If it does, how much time does it waste?
How do you control this idiot? Well the fact is you can’t eliminate the idiot completely. It’s you. It’s your inner voice in your own head. But you can learn to deal with him or her, with a boss/employee relationship. What do I mean by that? When I’m buying a stock, I’m hiring a stock to do a job for me, and that job is to make me money. If it doesn’t do its job, I fire it immediately. This isn’t a marriage where we have to compromise and talk about our feelings and do all kinds of weird stuff. This is a business and if it’s not doing what it’s supposed to be doing, it gets fired. When the idiot starts talking to you on the employee’s behalf, you need to understand that you are the boss and you make the final decisions, and you know what’s best for your business or your portfolio, and if it means firing it, you need to listen to that instinct. Just remember, you are the boss and stick to your rules.
Why did I say 95 percent? You may recognize this from another video that I’ve done. It’s also actually in my book right now. I used to say “Trading psychology was worth 55 percent”. Why 55 percent? Well I wanted to emphasis the fact that it was worth more than half the battle, so to speak, and I wanted to pick a number that was more than 50 percent, so I can put it in a nice pretty pie chart here, which I’ve done. Money management and system are still critical components. I can’t emphasize that enough, but the real reason I’m now saying its worth 95 percent, and that’s because I’ve found that despite having a proven system with solid management rules, you still might not follow it. Your emotions get in the way. The inner idiot is talking in your head.
It doesn’t matter how good the system is or what money management rules you follow, if you don’t stick with them, none of it matters.
What is the absolute best way to get control of your emotions? Are you ready? It’s having a detailed trading plan. More specifically, have a detailed set of money management rules within a trading plan. Now does this contradict my last statement? I don’t think that it does. You can have money management rules, stop losses, entries, and still not have a trading plan. If you have a detailed set of specific rules for all aspects of your trading, it takes emotions out of the equation because now you are forced to just follow your rules. As long as you can maintain the boss/employee relationship with your inner idiot, then you’re not going to have any problems. If you just have some loosey goosey trading rules, sometimes I do this, sometimes I do that, I have a little loose stop loss, then you’re constantly going to be opened up for these emotions to creep in and start second guessing yourself.
The big question is, do you actually have a trading plan? If you do, great job. I commend you for that for sure. My success didn’t really start to happen until I finally wrote a trading plan down on paper. If you don’t have one and you don’t know where to start, it doesn’t really have to be this complicated 100 page document. Just start with something. Write down what your entry rules are, what your exit rules are, what your basic trading rules are, such as how are you going to take your targets? How much are you going to put into one trade? How much of your portfolio into one trade? These are the types of things you really need to know and you really need to start putting down on paper.
My trading plan is a living, breathing document that’s changed tremendously over the past three years. But by just having it written down, it really cements all the things that I’ve learned, and by constantly updating it with new experiences, it really helps me understand the concepts even better. I highly recommend that you start writing down some things. Even if you write it on a napkin, it’s better than not having anything at all.