The Apiary Fund is helping people break the trading psychology barriers that are holding them back from success in the financial markets. Each week we’re focusing on a different psychological barrier to help you better see it and beat it!
Today’s obstacle is the psychological phenomenon called fight or flight!
When faced with adversity, we all have an instinctive response: some confront the challenge head-on while others run for hills. In psychology, it’s called fight or flight, and sometimes our instinctive response comes at odds with rational decision making in the financial markets.
Emotional traders will often allow their pre-programmed response to make the tough decisions. Do you close the position? Do you keep it open? Do you double down? Do you quit trading altogether?
The problem with emotional triggers is timing – the emotion does not always manifest itself at the right time. So the instinctual response to the emotion of adversity is often ill-timed.
It would be nice if the emotional trigger and the right time to make a decision always correlated… But they don’t, so the trick is to make buy and sell decisions when it’s a rational time to make the decision – not when the emotion is tugging you into a response.
One approach traders use to overcome the instinctive response of fight or flight is to identify when the emotions start tugging on the instincts. You must learn to recognize it by documenting or making note of every situation where the emotion starts to express itself.
Once you recognize the emotion, then you can start looking for patterns. At first you may only recognize the pattern as a losing trade, but you need to dig deeper if you can. Is it a pattern to the size of the loss? Or the duration of the loss? Is it the opinion of another trader? Is it CNBC? Understanding the patterns that trigger the emotion will allow you to plan your trade better.
The final step is to make pre-defined decision points before you enter a trade. In this way, you’ll know when to make a decision and when not to, irrespective of how you feel. You’ll begin to develop confidence that these points work within boundaries of your natural instincts. It will save you from making a decision based on emotions and it will help you be more rational in your trading.
Stay tuned for the next trading psychology barrier: Pleasure or Pain.