When You're Hot You're Hot

Almost everyone's instinct is to be overconfident and read way too much into a hot or cold streak.
Nate Silver

No matter who you are, there are times when you just aren't functioning at the top of your game. You try and put on a trade, but your heart just isn't in it. What do you do? Do you continue on and hope for the best or stand aside and wait before tackling the markets again? As a general rule it's usually a good idea to stand aside.

If you are a music fan you may remember the 1971 song by Jerry Reed "When you're hot you're hot". The verse of the song is: "When you're hot, you're hot. And when you're not, you're not". My father (one of my hero's) loved that song and used to tell me remember those words for that is how life is! He was a salesman much of his life and used to tell me most sales people do it backwards, they make a sale in the morning, then take the rest of the day off to go fishing, play golf, whatever. He told me no, no, this is when you work harder than ever because you're hot, so try and pile up the sales for when things go bad and go bad they will. It is when things are not going well that you take a day or two off, go fishing or play golf, or whatever to clear your head of the cob webs, then begin again. Sage advice!

At first glance, this advice may seem counterintuitive. Throughout our lives, we've been told over and over, "At first if you don't succeed, try again." It may be necessary to try again, but it may not be a good idea to try again when you aren't ready. Give yourself a break. Your body and mind have limits. When you are feeling low, a lot of your mental energy is spent so that no one will suspect you're in a slump. If you broke your leg, you wouldn't try to jog two miles a day. You would stay off your feet until you recovered. If you had a high fever, you wouldn't jump in a cold pool and swim a few laps. When physically ill, your body can't take it. You would end up feeling worse when it was all over. It is vital that you rest and recover Similarly, when you're not feeling up to par, and have wavering confidence, it's wise to say out of the markets until you are feeling better.

A common mistake is to ignore your feelings and just push yourself to keep going. When you are a seasoned trader who is not feeling very badly, this may work. But if you are relatively new to the trading profession and are feeling down, you will find that the harder you push yourself, the more you'll feel let down and frustrated. Instead of pushing yourself beyond your limits, calm down, rest and cultivate a fighting spirit.

It may seem unproductive to take a break when feeling in a slump. But it works. Don't fall for the conventional view of success as making huge profits even when you aren't psychologically fit. It's better to work at your own pace, and focus on the process of trading. If you hone your skills in a calm yet deliberate manner, and take breaks when your psychological energy or confidence is depleted, you come back with a tough, fighting spirit that will help you achieve lasting success.

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Reprint from PrudentTrader Archives 2006

Emotional Influences on Trading Decisions

I'm not emotional about investments. Investing is something where you have to be purely rational and not let emotion affect your decision making - just the facts.

Bill Ackman

Greed and fear, do they play a roll in your market decisions? When we fear a potential loss, we sell. When we are greedy, we buy or buy too much. It is a little more complicated though. Regret and hope also play a roll. People may trade in or out to avoid feelings of regret or may hold on to losing positions out of denial and a hope that the loser will turn around. Emotions play a powerful role in decision making.

Dr. Jennifer Lerner of Carnegie Mellon University conducted a series of studies on how emotional states influence trading decisions. In one study it was shown that people who experience intense levels of anger tend to be willing to accept greater risks. Anger is experienced when we feel unfairly treated or we have been slighted. If you take things too personally it's easy to feel slighted by the markets when they don't go our way. To gain control we get angry. We fight back and enact our revenge. When this occurs we act out of desperation and often take on risks that we shouldn't.

In another study reported in "Psychological Science," Dr. Lerner and her colleagues showed that emotional states that have nothing to do with a financial issue might have a subtle impact on a subsequent economic decision. Participants watched films that made them feel one of two emotions, sadness or disgust. The movies had absolutely nothing to do with business or decision-making. The first film was about a loved one passing away, while a second film was about a man using an unsanitary public toilet. Participants were subsequently asked to estimate the value of a possession while in either a sad or disgusted emotional state. At the start of the experiment, participants were given a pen and asked to hold on to it. After the emotional states were elicited, participants were asked to estimate the value of the pen if they were to sell it. In some ways, you might see how this is analogous to holding a position and determining how much the price of the stock needs to move before you would be willing to sell. In contrast to participants in a neutral mood, participants who were incidentally disgusted or sad greatly underestimated the value of the pen; neutral participants estimated its value as about $4.50, while sad and disgusted participants put its value at about $3.00. The interesting aspect of this study is that there was no obvious connection between the emotional state and the financial decision to sell. It would be as if you watched a sad television show right before the open, and for no good reason whatsoever, under-valued a position and immediately sold too early. One event should have nothing to do with the other, yet in Dr. Lerner's study feeling sad or disgusted influenced a subsequent economic decision.

Ideally, it would be nice if we could trade with a totally objective, disconnected and purely logical mindset, but we are merely humans. The impact of common emotions of fear, greed, hope, and regret may seem obvious to many. Realize, it's possible that incidental emotions that have nothing to do with the markets may have an influence on our decisions. It just goes to show that trading is in many respects a pure psychological endeavor. The more you can stay logical and objective, the more you'll trade profitably.

Reprint from PrudentTrader archives 2005

It Is All About You

Try not to get lost in comparing yourself to others.
Discover your gifts and let them shine!
Jennie Finch

As children, parents and teachers tell us whether or not we are doing well. When we get older our significant others offer praise when we met their expectations and punish us when we break the rules by going our own way. Society tends to reinforce looking to others for the standards that we should achieve. The media bombards us with images of success: Buy a sleek, new sports car and impress the neighbors. Wear the latest designer fashions and watch heads turn as you walk by. As a result of our surroundings, it becomes natural to ask yourself, "How well am I doing?" which in turn leads to asking, "How well 'should' I be doing?" When "should" and "must" enter the picture, it can place a lot of unnecessary pressure on us to perform. When the pressure is on, it is very common and we often usually choke under the strain. There's a danger when you look outward. You start to judge yourself. You start to think that you are doing well or poorly based on how others may see you. Instead look inward, and follow your own personal standards for where you want to go next.

Comparing ourselves to others is useless, time consuming, and counterproductive. Look inward for your own personal standards instead of outward in an effort to beat out the next guy. Each trader brings his or her own knowledge, personality, trading method, and tools to the trading arena. Through a coordinated integration of these various components, the trader builds up a set of individualized trading skills that produce lasting success. This integration doesn't happen over night, but though hard work and persistence. Over time, you make trade after trade, gaining key experiences along the way, until it all comes together in the end. You need to find one's own personal talents, accentuating your strengths and working around your limitations. Every trader is on his or her own path. For some people, the path is full of many curves and is quite long. For others, the path is straight and short. Follow your own path and accept the amount of effort and time it will take to reach your goals.

Studies of successful and creative people have shown that such people tend to work by their own standards. Even in competitive situations, creative people don't compare themselves to others. They look inward and let their internal standards guide them. They know that through persistence and determination, they will achieve success. They don't force it. They know that if they allow themselves to follow their passion, success will come naturally. If you take a similar approach to trading, you'll achieve lasting success.