Breaking the Emotional Cycle of Fear and Greed

[up23 10]

Okay so this is my first post. Something I felt that would help others out there. I posted this in a blog I started. My style is trading index futures intraday swings.

 

I made a huge realization today regarding to the psychology of trading. The cycle of emotions resulting from fear and greed. I will be positive here and call it the cycle of being too cautious and then too careless. This cycle has happened to me at least 3 times now. The last time, on demoralization, I decided to be positive and face the failure and find the out exactly what I did wrong so I will do right in the future.

 

At first the trader (me) is afraid of losing, so he waits for best setups. They come along, but because of fear he doesn't take them. Or if he does, he closes out early due to fear. After this occurs a few times, he decides that he will absolutely take and hold the next great setup.

 

The next great setup comes, and he holds. It works out, and he makes a big win. He is now filled with the emotion of joy, and becomes greedy. The next trade comes, and he holds again, and it works. He now thinks he is infallible. And, becoming impatient, he no long just sticks to best setups. Or when best setups fails, he refuses to stop when a trade is invalidated, and keeps going at it stop after stop.

 

Soon all his winnings are wiped out, and he back to where he started. He is back to being fearful, or rather, overly cautious again. Which will make him skip the best setups out of fear. And the cycle starts over again.

 

Hopefully each time the cycle ends with his equity at break even, but often is the case that he is down. If the trader focuses on the negative emotions instead of the lesson to be learned, he will go through this cycle more than once until he learns what he must learn in order to succeed. This is not the time to be emotional, but to be positive and objective.

 

What is the lesson to learn from the failures? What state of mind was actually profitable? The answer is the state of mind when the trader was determined to take and hold the next best trade, but only the best trades. And should he be stopped out, he will wait for the next play and not recklessly re-enter. And that is the state of mind we need to be in at all times in order to break this cycle.

 

Interestingly, this cycle can sometimes coincide with the volatility of the market. Lets say the trader starts the cycle coming out of base of accumulation where volatility is high. Lots of good setups show up, and near the end of it he gets one or two. Then, as volatility decreases where two days of the week are inside days, the trader gets impatient and start taking non-optimal setups. One or two may work, fueling the err. But then a solid correction occurs and volatility picks up again. During this time, the trader loses all his winnings from non-optimal setups and re-entering after being stopped out. The timing of volatility could be reversed depending on the trader's setups.

 

So the takeaway here is:

1) Enter fearlessly on only the best setups, and hold to target.

2) If stopped out when taking the best setup, then it's okay. Now wait for the next setup at a new swing and possibly in a different direction. It's a numbers game, and this is expected.

3) Don't get fooled by low volatility into taking non-optimal setups. One or two may work, but in the long run, they have negative expectancy. Trade another instrument or just wait for volatility to pick up again.

[TheNegotiator 13]

Hi up23,

 

Btw welcome to TL! I have a few comments on your ideas here.

 

1- I think a trader should strive to enter on only their setups. If there is discretion on this in that there are poorer and better setups, it breeds that cyclic behaviour in a trader.

2- I think that the whole cycle principle is to a great extent created by fundamental human emotions. Our ability to accept loss as part of the probability of trading and see the market run in the direction of the trade we just closed out can potentially have a great affect on our future trades. Being able to square yourself with these scenarios is an important aspect of trading.

3- Lastly, when traders are having a tough time because they are trading poorly, they rarely weight cyclic market behaviour as it should be. All too frequently, you hear people either blaming themselves for being terrible traders when the market has just been trading in a particularly unusual manner or complaining about the awful markets they trade and how 'they' are out to screw them on every trade.

[zdo 20]

up23,

 

 

I base this whole post on one little tip off in your thread - the use of the word "determined ". Head off the to 'sychology' threads. Do some work 'off the field' before you play, not all of it 'during the game'. Else, several years later you'll still be vulnerable to the same initial patterns - not in the same exact ways or to the same exact degrees - but still at risk. It doesn't have to be that way.

 

hth. sorry so short - gotta scoot.

 

all the best,

 

zdo

[chartwaves 10]

Everyone has their own style of doing things, and mine is probably different than most when dealing with trading emotions. I simply enter my trade, set my stop and stop watching it. My trades are typically 2 days and longer, so I will come back near the close and adjust my stop if price has gone my way, and then I just keep adjusting my stop until finally the position self closes. I trade much better in this way, the times when I have watched price action like a hawk, I will start dreaming up all sorts of reasons to pull the plug or something else stupid out of pure emotion.

[Tams 20]

there is only one way to break fear -- with knowledge

[Tams 20]

there is only one way to break greed -- with humility

[MightyMouse 12]

there is only one way to break greed -- with humility

 

The many faces of Tams

[Tradewinds 12]

I made a huge realization today regarding to the psychology of trading. The cycle of emotions resulting from fear and greed. I will be positive here and call it the cycle of being too cautious and then too careless.

 

I can get into a cycle of bad trades. I make a mistake, and then get out of a good trading rhythm. When I'm marching along with the market, the P/L just keeps ratcheting upward. If I get "out of step", and then don't take a few moments to figure out what is going on, then I start making one bad trade after the other.

 

If I believed in conspiracy theory, I would tell you that this is what the market is designed to make you do. :rofl: And sometimes I mindlessly let the market brainwash me, and take me for a ride. Maybe the broker is flashing subconscious messages on the screen to make me take bad trades. lol. Oops, I better not give them any ideas.

[TheNegotiator 13]

I can get into a cycle of bad trades. I make a mistake, and then get out of a good trading rhythm. When I'm marching along with the market, the P/L just keeps ratcheting upward. If I get "out of step", and then don't take a few moments to figure out what is going on, then I start making one bad trade after the other.

 

If I believed in conspiracy theory, I would tell you that this is what the market is designed to make you do. :rofl: And sometimes I mindlessly let the market brainwash me, and take me for a ride. Maybe the broker is flashing subconscious messages on the screen to make me take bad trades. lol. Oops, I better not give them any ideas.

 

 

I know this isn't directly relating to what you said, but it is a good illustration of my point.

I have heard it said that for example the e-mini s&p is designed to stop people out. Every move is just happening to force one set of traders out. Well I think this is a cynical way of looking at things. The market is very big and liquidity is high. All kinds of traders doing all kinds of things. Momentum plays a big part in how this market trades because of this. So when it overshoots, weak players(and others) are relenting and a climax peak in trading happens. This tends to then bring in traders from the opposite side who are waiting to enter at a better price. Once this is reached they quickly take a position which moves the market back. Seeing this, a trader with a profitable position may want to take some profits and lighten up.

 

So my point is market behaviour can always be viewed negatively if you are in a certain frame of mind. However, most of the time there is a mechanical explanation which is a function of cumulative market participation.

[Arthur 10]

yes psychological and emotions really effect the trading. Special we may be the victim of escalation de commitment ; entering into a false decision and continuing it even after we know it . But what about the suggestion of entering being fearless and entering the target ?It might cause more loss ....

[Tradewinds 12]

So my point is market behaviour can always be viewed negatively if you are in a certain frame of mind. However, most of the time there is a mechanical explanation which is a function of cumulative market participation.

 

That's a good point. To take your point further, and relate it to trading psychology; a negative view of the market could become a self-fulfilling, self-destruct exercise. If the trader is focused on a negative view of the market, that becomes the focus of their attention; as opposed to being focused on trying to understand the market.

 

It's an exercise in simply filling the mind with a clean and accurate view of the market. I need to have an unbiased, and balanced perspective of the market.

 

Simply accept what the market is, and is not, and execute the probabilities.

[TheNegotiator 13]

Definitely. It's so easy once you start thinking negatively to fail and get stuck in a rut. I don't know if you like sport, but I watch (english) football and it is very clear that some teams that do badly are suffering mentally most of the time, more than they lack ability. Conversely, this year a newly promoted and not especially highly regarded team - Blackpool, have far exceed what was thought was possible from them.

[Tradewinds 12]

I watch (english) football and it is very clear that some teams that do badly are suffering mentally most of the time, more than they lack ability.

 

That is an excellent example. I see the same thing all the time myself, but with NFL football. It's so obvious. Players and teams will get upset after having some points scored against them, and they can't overcome their emotions, even though they are the better team.

 

In practice trading, I can loose a lot of money, and then come back and never have a loosing day. I don't ever loose money for the day in practice trading. In real trading, I might have a hard time loosing a large amount of money right off, and not make it back.

[TheNegotiator 13]

Success trading isn't contingent on the following, but it certainly helps not just from an a/c balance perspective.

 

Many times during my time as a trader so far, I have heard of traders who go on to be successful after plodding along doing not well but not badly. They have one trade that 'makes' them. One super sonic trade that just gives them the confidence and which is backed up by a/c balance. I am certainly not an advocate of trying to go for these trades all the time, but if you just have an opportunity and it pays big, you're set. Same thing with football at the other end of thee scale. The more I look at it, the fewer top teams that there are about which are actually head and shoulders above the rest in terms of ability.