Thursday, March 14, 2013

Emotions as information for trading

Mouse neuron showing multiple neuritis
with fan-shaped growth cones.
Source: University of California at San Diego

I am grateful to Denise Shull of for reminding me that the idea that you should “control your emotions” when trading, which has been the received wisdom for as long as anyone can remember, is often actually counterproductive.

Whether we like it or not, humans are emotional beings. Not only that, human emotions are strong forces. The belief that they can be easily suppressed is more wishful thinking than fact. Desperately focusing on the avoidance of something that you have been instructed to avoid without being given the wherewithal to deal with the emotions this engenders, is actually the surest way to increase the odds that you will behave in exactly the manner in which you are not supposed to.

But here’s the really interesting part: according to Denise, attempting to suppress emotions is also an attempt to eliminate a very useful trading tool. Firstly, there are emotions that it is very important to have, such as confidence, for one. Secondly, emotions are the subconscious’s way of processing information - sometimes, very important information.

So what is the answer to all this? How do you harness the power of emotions and still learn to behave in a manner that is productive – like not over-trading, for example? The answer is you build up experience that allows you to take the long view, and to have a deep feeling for what it means to think in probabilities. Omicron Forex algorithmic trading tools, used to study historical price action, can help. Then you have the confidence to place trades that have a genuine edge, with a real positive expectation, and to deal with the losing ones that are the inevitable cost of doing business with probability.

A real bonus is that, in time, you will be able to spot the price movements that illustrate that others in the game have succumbed to either fear, greed or remorse.

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