I’m sure many of you remember the moments when you felt so ‘extremely certain’ about the direction of the market, or how accurately you predicted prices but didn’t make a penny out of it. Do you remember telling your friends, “see, I was right all along!”, but at the same time you felt so frustrated because you didn’t get rewarded on your correct predictions?
No, I’m not alluding to risk management as the key ingredient of successful trading. I’ve learned one hard fact in the course of trading: The trading behavior is completely emotional. I prefer to use that word emotional over psychological, as the human brain has two distinct centers that control our rationality and logical thinking, and that which is responsible for generating feelings and emotions that lead to sudden reflex actions. So, ‘psychological’ can refer to your perceptive and cognitive abilities. How well you read and analyses the charts, especially before you take a trade, and make conclusions based on them is all cognitive in nature. Once you are in the market, your emotional brain becomes very active and tries to subdue your logical brain.
It can’t be denied that having a solid market strategy that gives you an edge is not important. Of course it is. However, in the course of trading, it is not the cognitive centres, but the emotional centres of your brain that rule your cognition about the market. The emotional center becomes the ‘dictator’ that tries to coup the rational part of the brain as you enter the trade. It is scientifically established that the emotional centres of our brain were developed millions of years ago, as opposed to the relatively modern analytical centres; that are at most times, no match for the forceful and blunt emotional power of the most primeval parts of your grey matter. That’s why we often set out with a logically analyzed and a perfectly planned trade with and end up doing something much different, unpleasant and sometimes catastrophic.
The emotional brain will cause you to be fearful as soon as you see losses, and send signals to the rational brain saying “you must reevaluate and ‘logically deduce’ that the market will not go in your favour”. When the rational brain is used to challenging or resisting the emotional one, it gets overpowered and ‘deduces’ that you were incorrect in your prediction, as a result of which you exit the trade in losses, when you were right all along. Remember that your trade was a loser as a result of your emotions, not due to logical or reason.
How we deal with our inner emotions in the course of trading is not a ‘very important factor apart from technical analysis and risk management;’ it is in fact the foundation of successful trading. If the foundation is weak, no matter what you build on it and with however much effort, your efforts will be in vain. No matter how good you are with your chart reading skills, no matter how much information and knowledge you can carry, and no matter how sound your risk management strategy is, if you haven’t learnt to discipline and tame your emotional mind; which is wired to send out signals of hope, fear, regret, betrayal, anger and euphoria and others as your equity fluctuates against or in your favor, then your emotions can trade your account right down to zero.
The importance of emotions in trading can be understood in a pictorial depiction not as slice of a pie chart that declares so and so percentage importance to “psychology” in trading. The correct picture that explains the importance of emotions and the inner mental environment of a trader is a big, solid foundation on which the structure of a pyramid stands. If the foundation crumbles, the entire structure is dilapidated. The more swiftly we understand the overriding significance of emotions in trading, and the absolute conditionality of controlling and harnessing our emotional mind as we make logical trading decisions based on our knowledge, and skills, the more quickly we will be able to overcome our trading dilemmas, enhance our trading results and realize better rewards.