John Netto, a very successful trader, is currently finishing his book The Global Macro Edge wherein he takes on what he sees as the myths of Wall St. One of the chapters will be titled “Emotions are your Biggest Ally”. How, when it seems emotions are usually our biggest enemy, could John think such a thing – nevermind declare it in his book?
Maybe it’s partially because of the following comments in recent research:
“The research reveals that emotions constitute potent, pervasive, predictable, sometimes harmful and sometimes beneficial drivers of decision making.” (Lerner Et al. 2015)
“As our understanding of both the complexity of emotion and its underlying neural systems expands, there is clearly no clean delineation between brain regions underlying emotion and cognition.” (Phelps Et al. 2014)
“…Affective processes may influence a primary factor underlying choice behavior: the computation of subjective value.” (Phelps again)
At a very minimum, we can’t escape the emotional component in a trading decision because a decision requires an implicit confidence factor. Individuals injured in such a way that they lack emotional signals in the brain also can’t make even the most basic of decisions – like what to wear – and certainly not what or when to trade!
John knows that some emotions tell him to manage risk and some tell him what the market is about to do. He constantly monitors his fear of missing out as a risk management tool (and will talk about this in our upcoming workshop). Some feelings are impulsive and energized for reasons other than a good market read. Other feelings are the result of unconscious pattern recognition. When emotions are deemed an ally, it becomes much easier to tell the difference.
Some trading psychology advice has seen fit to recommend traders aspire to the myth of purely objective value when making a trade. But objectivity is an illusion. The emotional meaning of the profit or loss will eventually win the day and have you entering or exiting the market at the exact place you hoped not to!
If you embrace your emotions as information, they become much more friendly. You actually reduce the odds of acting on them by making them explicit or conscious. If you keep considering feelings your enemy, you are war with yourself – a mental state unlikely to produce either a good market read or a timely trade.