Fear and greed are the core emotions that drive the stock market. These emotions are hardwired into our brains and it’s impossible to control them.
Over more than a decade of my trading experience, I have always tried to control my emotions while trading. I always believed that the key to successful trading is the ability to tame your emotions. After having experienced multiple accounts blown up, I now realize that trying to fully control your emotions is a futile exercise.
Trying to have full control over your emotions is like trying to control your breathing. Both are involuntary and hardwired into your brain. You can hold your breath for a while, but eventually, you’ll have to breathe no matter how hard you try. With dedicated practice, you might develop the ability to hold your breath for longer than most people, but at some point you’ll have to breathe, and that’s inevitable.
Similarly, emotions are a fundamental and involuntary part of being human and you cannot really get rid of them.
Fear, Greed, Hope & Regret – the four core emotions that drive the stock market.
As you grow older and gain more experience in trading, you start to understand yourself better. You become aware of how you react emotionally to specific triggers like sudden drop in stock prices and stressful situations like managing a loss making position. You might develop the ability to regulate your emotions and thereby controlling your reactions to such situations but you still cannot fully get rid of them.
Every once in a while, market will put you in a situation that will make you react emotionally and that’s the last thing you want in trading. Strong emotions like fear will essentially hijack your ability to think rationally and take right decisions.
So what can you do?
When you cannot control something, you learn to adapt and overcome it. That’s the hallmark of human intelligence.
In the context of stock markets, you need to build systems that will support your trading. These systems have to be “external” control systems like having a trading partner/mentor, having a strictly enforced risk management policy, controlling the availability of funds, etc.
Internal vs external control systems
The most important part here is that these systems have to be externally controlled and not internally controlled. Internal systems like self-discipline, resilience, etc. are prone to failure due to our brain’s hardwiring. Our brains are predisposed with cognitive biases like prospect theory, loss aversion, disposition effect, confirmation bias, etc. which are disastrous mind traps in stock markets.
External systems on the other hand distribute the roles and responsibilities among various individuals which makes it easier for a trader to stick to a predefined trading plan. Everyone involved in an external system is accountable for a specific part of the plan like managing risk, entries, exits, capital management, etc. Although such systems are also prone to biases like herd mentality and information bubbles, but the chances of failure are less likely as compared to internal systems.
External systems need to have in-built mechanisms of rewards and punishments to make sure that the rules of the systems are followed strictly. Rewards can be in terms of bonuses or increase in leverage and punishments can be in the form of cooling-off periods, decreasing leverage, etc.
Being successful in trading is a by-product of mastering specific mental skills.
To conclude, your best bet to be a successful trader is to build external control systems and not rely on your internal ability to control your emotions.