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Emotional Discipline and Reactive Flexibility |
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If our aim is to "hug the emotional flatline," the more mental control we exercise in dealing with changing conditions, the less greed and fear will enter into our decision making. When investment teachers talk about having a plan and following it, their intention is partly to eliminate strong emotion from trading by automatically following the steps that have been taught to deal with a particular situation. |
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Their intent is to give students a recipe or formula that can be applied uniformly under different market conditions. In this way, the numbers will decide, and emotion will be taken out of the equation. While this is not a bad idea in theory, the problem is that each new market condition is slightly different. And this means no one plan is necessarily going to fit best for what is right in front of us now, which is not going to be exactly the same as the last time, even if the conditions look similar. |
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While it is desirable to control strong emotion, some feelings associated with our thinking process can be useful in helping make trading decisions. For many, intuition based on previous experience is also valued as part of the process. This is where the creativity of the trader is required, knowing how to take the action that the moment calls for, without being overly rigid in our thinking or overly emotional. |
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The goal is not to turn into mechanical robots, unable to assess each new situation, where we are afraid to take reasonable risks when called for, even if the charts don't support us. The idea is to control fear and greed so they don't dictate the decision as they are wont to do. |
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We said that market psychology is based on belief and perception. Belief (what we think is true) and perception (how something appears to us) are influenced by changing emotions, which are always exaggerated in the short-run, both positively and negatively. |
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When we ask why belief and perception are influenced by emotion in the stock market, the answer has to do with the speediness of the market and the need to react very quickly to news. Because of this, traders don't have the luxury to sit leisurely and consider all trading decisions carefully before taking a position. What they think is true and how the market looks to them are often largely colored by passing emotions, as they react to the changing conditionsnot by carefully considered rational thought. |
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