“I must say I am finding your stuff pretty revolutionary. Just a big thank you. Just a quick question if I may: what exaclty do you mean by leverage? Your psych cap/emotions? Am I correct in assuming it means when your emotions tell you to do something (by fully experiencing the emotions) that one should then trade a bigger position, size for example, in that case?” Colin asked this question in response to the post below about old brain new brain and since it is such a great question – and comments R kinda hard to click thru to, I thought it best to bring it front, center and top!
First – I use feelings and emotions as synonyms even though technically that isn’t correct (feel a headache, feel angry …) But for practical purposes, they both are information and motivation that we experience primarily in our bodies versus our brains so ‘feelings’ ususally captures both. The idea of leveraging feelings/emotions begins with recognizing them as information.
Look at your feelings/emotions as data. Research them, seek to understand them in the same way you understand a chart. Now yes, that is a big endeavor as they, like price, are ambiguous but the payoff is at least as big as learning to read charts.
Once you are working with feelings and emotions as data, you then are on the path to being able to tell the difference between unconscious pattern recognition (experiential knowledge) and impulse – which generally can be thought of as the desire to trade something because you either want something to happen or are afraid of something else happening.
In the latter category, impulse. Impulses are feelings laced with the urge to act. Where we get revolutionary is the conventional advice which is to overpower that urge with your intellect and analysis. The problem is that the urge is taller, heavier and has been to the gym for years whereas the intellect is sleek, thin, wiry and doesn’t work out. It is funny though – if you look impulse in the eye, if you allow him to threaten you by actually feeling what he is sending out, he withers like a bat in bright sunlight. (OK I am mixing up my metaphors but…) To mix some more, try thinking of it like the martial arts, in other words, with training, you can use the “opponent’s” strength to the service of your goals.
Now what happens when you do this? By definition, you will take fewer impulsive trades and implicitly this improves your bottom line. This is leveraging emotion as a RISK MANAGEMENT tool first and most definitely includes knowing when to walk away because the impulse can bench press 450 pounds.
Now onto leveraging feeling and emotions as a strategic and tactical tool… as you get used to recognizing impulse and feeling the feelings (research), you will start to be able to recognize the difference between the feeling of impulse driven by the fear that your profits will evaporate and the feeling of instinct that your trade is not going towards your target at which point your can wisely make a judgment call to exit earlier than originally planned.
Now at this moment, the revolution really kicks in. But first, if you are following standard trading psychology you have to feel guilty and like you screwed up because you deviated from your plan. This feeling is always exacerbated by the market’s universal trick for rushing to your target moments after you’ve used your judgment or conversely rushing to your stop if you managed to stick to your original plan. These two phenomena always then reinforce that you should have stuck to the plan and you screwed up. This makes it very hard to feel confidence and it exacerbates the worry and impulse. If however you plan to use your judgment and you make the best call you can make at that point, you don’t’ take the same hit to your psych cap. When you don’t take that hit, you are a much better position to read the next trade (i.e. you FEEL MORE CONFIDENT) and know the difference between your intuition and your impulse.
The more you do this, the more you will feel it when you are really in a sweet spot and the market is about to move hard in your direction – and this Colin, when you press it – or in other words, use PSYCH CAP (feelings/emotions) AS STRATEGIC & TACTICAL TOOLS.
The thing is – all of this requires both a change in perspective and more importantly, putting the same effort into understanding your internal signals as you put into the ones the market is providing! It so happens to also leverage the brain’s reading of ambiguous market data and the fact that we are really only trying to predict other market player’s behaviors NOT where the bar on the chart is going!
DKS aka TP
(Consider this Part 1. Obviously, revolutionary advanced trading psychology is a complex topic that can’t be covered fully in one blog post. Check out the other key words and also this page if the full course in Psych Cap is of interest)