THE tortured artist Vincent van Gogh left a useful piece of advice for traders: “Let’s not forget that the little emotions are the great captains of our lives and we obey them without realizing it.” Although unable to control his own emotions, van Gogh understood the importance they play in all our actions. To be a successful trader, it is vital that you acknowledge this to avoid trading on sentiments.
“Letting emotions, particularly ego, interfere with trading decisions is probably the main reason why some traders fail to sustain profits,” says Simon Brown of ProSpreads. Angus Campbell of Capital Spreads agrees: “Controlling one’s emotions is one of the most important things to master when you are trading. Because you see a red negative profit and loss figure your emotions can run high and lead you to make irrational decisions.”
“A typical and lethal emotion is living your last trade, which is where a trader’s decision is skewed depending on whether his or her last trade was a winner or not,” says Brown. He suggests that this can work both ways: “After a winner or winning streak, traders start to feel invincible and therefore feel they will make money, whatever the weather.” Equally, “if the last trade was a losing one, traders will often take greater risks again on the next trade because they are desperate to make all the money back quickly.” It is a truism, but every trade should be weighed up on its own merits, with past successes and failures separated from the trade in progress.
Malcolm Pryor, author of three books on spread betting and editor of www.spreadbettingcentral.co.uk has a six-point strategy for how traders should manage their emotions. Successful traders understand the impact of emotions on trading; understand themselves and how they react to the pressures of trading; have specific trading disciplines to facilitate decision making; have specific rehearsed strategies that provide them with an edge in the market; continually monitor and work on themselves; and have documented trading plans that cover all of the above.
Spread betting tools can be utilised to help manage the emotions of trading as well. Manoj Ladwa of ETX Capital believes “a stop loss is crucial for keeping stress levels down.” He also recommends, “buying a put option against a long position. You wouldn’t buy a house without insurance, so why lump a large amount of capital without protecting yourself against any downside.”
Rather than losing because of your emotions, you could profit from the combined emotions of other traders. Pryor believes that “markets swing from euphoria to capitulation and back” and uses technical analysis to help identify these two states. He cashes in on this because “euphoria can be a good time to sell and capitulation a good time to buy.”
Don’t be dismayed if after trying all of this you are still unable to rein in your emotions. Ladwa believes “being able to control your emotions becomes easier the more you trade. As you begin to realise that any current trade may be one of the next thousand or the next ten thousand, the emotional attachment to that trade becomes insignificant.” If only van Gogh were around today – even the temperamental artist might have become a successful trader to support his then unprofitable painting.