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Your
Emotions
and Trading ...
By: Terry Ashman

Musashi, a legendary seventeenth century

Japanese Samurai, formulated rules for
warfare which are still used by Japanese
business people today.

One rule is ...

Plan logically, but attack with emotion.

While this rule is suitable for a physical battle, if you use it while trading, you are
at a supreme disadvantage. To apply it to trading, the rule should read ...

Plan logically, and attack (trade) WITHOUT emotion.

A number of psychologists have noted that normal human behavioral patterns

are unsuited to trading the markets. Normal human responses to winning and
losing will cause people to do exactly the wrong thing at the wrong time in the
markets.

To illustrate ...
1. Take the situation where you have a long position and it immediately goes into
profit. The normal human response is to want to take the profit quickly. This gives
immediate gratification and removes any fear you may have had of losing the
profit while the trade was on. This results in the situation called "cutting your
profits short."

2. The opposite situation is when you put on a trade (again let's say it's a long
position), and it goes against you. The normal human response is to hang on to
the losing trade and hope it comes back and gives you a profit. But it keeps going
down, so now you want it to come back so you can at least break even.
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But it still goes down, so now you hope it will come back and give you a small
loss. Down it goes further and you now have a big loss but you don't want to take
the loss because it is emotionally painful to take losses. So you keep delaying
the pain and losing more money.

If you are trading non-leveraged stocks, (that is, you have bought the shares
outright and have paid for them in full), by now you may rationalize the loss by
calling it a "long term investment" and just hang on to the shares. After all, if you
sold now you'd lose heaps.

If you were trading in leveraged commodities you could be in real financial

trouble at this point. This situation is called "letting your losses run."

You'll notice that cutting your profits short and letting your losses run is the exact
opposite of what you are supposed to do, which is cutting your losses short and
letting your profits run.

3. Now let's go back to the first situation where you've taken your profit quickly
and you have your immediate gratification and removal of anxiety. You have a
nice little profit but now the market is still going up. If you'd hung on you could
have made even more! You get out your calculator, work out how much money
you should have made by now, and think about what you could have done with
that money. So you ring your broker and buy in again, noting with satisfaction
that the front page news headline now reads ...

"Bulls Roar in Market Surge"

The market messes around for the next week or so and then starts to drift a bit
lower, but you hang on because the broker says it's just a temporary reaction and
anyhow, the media is still full of reasonably bullish news.

You hang on for a few more days but the market just keeps going down. Now the
media has turned bearish.

What went wrong?

A number of things. Let's list them ...

1. Greed. You looked at all the money you thought you should have made and
jumped back in - just as the market was topping.

2. You "spent" the money you thought you should have made. You must never
do this.

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3. You listened to the media. You used the media to back up your decision to get
back in, not realizing that the media is not a predictor, it's a follower. It just
reports what has happened, usually when it's all over. Never trade on the news.
Once the bull market hits the front page news and you decide to buy in on the
strength of this news, you are trading with the mob - not the smart money.

4. You listened to the broker. If you've got a properly researched and tested
trading method that you know intimately and have confidence in, you don't need
or want the broker's advice on specifically when to buy and sell. Remember - the
buck stops with you.

5. You exited your original position based on emotion, not logic.

Let's see what Gann says about this aspect of trading ... On page 16 of "How to
Make Profits in Commodities", Gann says ...

"WHAT TRADERS DON'T WANT TO KNOW. With all due respect to my

readers, many traders when they are in the market don't want to know the facts
and don't want to know the truth. They hope the market will go their way. They
want it to go their way and want to be told that it will. When you are in the market
you should be unbiased and try to determine whether you are in right or wrong.
When you find you are in wrong, admit it quickly and get out. Our old rule is,
when in doubt, get out. When you have nothing to hold on for but hope, sell out
at the market quickly. Don't look for the man who will advise you that your
position is right and that the market will soon start going your way. Look for the
man that will tell you the truth and prove it to you. Better still, learn how to prove it
to yourself whether you are right or wrong. Face the facts. Change your position.
Change your mind. Change with the trend and you will make profits."

On page 17 of "How to Make Profits in Commodities", Gann says . "HOPE AND

FEAR: ........ The average man or woman buys commodities because they hope
they will go up or because somebody advises them they will go up. This is the
most dangerous thing to do. Never trade on hope. Hope wrecks more people
than anything else. Study the market and determine the trend. Face the facts,
and when you trade, trade on facts, eliminate hope."

"Fear causes many losses. People sell out because they fear commodities are
going lower, but they often wait until the decline has run its course and they sell
near the bottom. Often when they have been out of the market for some time,
they get in because they fear it is going higher. Never make a trade on fear. The
Bible says, "Ye shall know the truth and the truth shall make you free." Know the
facts and know the truth. When you do this, you will have no hope and no fear

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and you will trade on well defined rules and go with the trend and will make
profits."

That last sentence is very important. "When you do this, you will have no hope
and no fear (trade without emotion) and you will trade on well defined rules and
go with the trend and will make profits."

Other quotes from Gann on this subject ... "You will never succeed buying or
selling when you hope the market is going up or down. You will never succeed by
making a trade because you fear the market is going up or down. Hope will ruin
you because it is nothing more than wishful thinking and provides no basis for
action. Fear will often save you if you act quickly when you see that you are
wrong. "The fear of the market is the beginning of wisdom". Knowledge that you
can only obtain by deep study will help you to make a success. The more you
study past records the surer you are to be able to detect the trend in the future."

"Remember, never buck the trend : after you detect the trend, go with it
regardless of what you think, hope or fear and you will make a success."

"People often write me and say "You were bearish on a certain stock on such
and such a date; now .........you are bullish on it. My answer is "A wise man
changes his mind, a fool never." ............ "Go into the market to make money and
be ready to change sides when the occasion demands it."

Copyright © 2001
Terry Ashman

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