Comments on: How discretion will kill you

By: Milktrader

Milktrader — Sun, 13 Dec 2009 19:35:48 +0000

The topic of emotions and trading is interesting. There is the view that you shouldn’t have emotions when trading, but I don’t agree with that view. There is a field of research in psychology now that suggests that emotions clue us in on conditions before our other sense pick up on the clues.

Clearly emotions can have a major bad impact on our trading. But I feel it has more to do with how well we know ourselves and less to do with the emotions themselves.

On discipline and emotions. I don’t think it works. If you need to control your emotions with rules and such, then you need to work on your belief system first so you don’t experience the emotions that are getting you in trouble.

System trading has a huge startup cost and I’m still paying it myself. It’s easy to get frustrated and revert to old ways. It’s okay if you do. Big deal. You always do the best you can. Your actions are simply a reflection of who you are as a trader. Take note and move forward.

By: NH

NH — Sat, 12 Dec 2009 14:52:26 +0000

I have one question: do we need them (ones who do discretion trading?)
Since the cost of information technology is low, it become so easy to implement some kind of system to find some trading edges – and there are possibilities that those system by different people are similar, even identical. Just like two people can both buy tradestation, and decided to design a system using moving average cross over, and they optimize there system for the same market – they get the same result.
Ok, the example might be too simpified. But I would like to hear from your opinion. Thank you.

By: B7

B7 — Fri, 11 Dec 2009 13:50:08 +0000

I agree 100%. Our emotions are the #1 reason that traders lose money in the markets. If a trader follows a simple trend following system for example, the chances of making money are quite high. However, when we make decisions with our emotions (which virtually everyone does), our chances of losing money are greater than 90%.

That’s a great point that you make about riding a motorbike. (I love motorcycles!) It’s interesting to see the similarities between things that seem unrelated (fast bikes and markets) but are actually similar. We experience the exact same emotions! The visceral rush of acceleration, danger and the speed of pavement moving by just inches from our body. We get the same rush from the excitement of winning (also known as greed) and the danger of losing (fear).

Our emotions have been refined over hundreds of millions of years to protect us and help us survive in our environment. But the environments of riding a motorcycle and trading the markets are completely new to human beings. They have been around for just a few thousand years at most, in the case of markets. And, in the case of motorcycles (first designed by Germans, who make the best cars!), 125 years ago.

That means that we have not learned how to succeed in the markets (or on a motorcycle) on an emotional level. We can only use our intellect to overcome the limitations of our evolution and our emotions. I think that the best way to do so is to eliminate our emotions. This can be accomplished by trading with a system that is based on rules, automated, and not discretionary.