Emotions, Feelings and Systems Trading
Many of us feel system trading is removing the emotions from Trading. Nothing could be further from the truth. A Robot may not have emotions. This again is debatable. How does system trading help, if at all, then, in trading?
Many of us feel system trading is removing the emotions from Trading. Nothing could be further from the truth. A Robot may not have emotions. This again is debatable. How does system trading help, if at all, then, in trading?
Our emotions are layered, just like the various peels of an onion. Many are at the surface, and maybe visible to ourselves and to others. A deeper layer of emotions though, is invisible. It is layered so deep and entrenched so much within us, that it may not be accessible to
our conscious. When we create a rule-based mechanical trading strategy, what we are doing in a way is channelling all our emotions together into an algorithm or set of rules, which we feel is suitable to us and our temperament. How can then, a system which is good for me,
be necessarily good for you? And vica-versa.
We all have different constructs. Our emotional tolerances and feelings may be very different from each other. There are a number of trading systems available in public domain with positive expectancy.
We all have different constructs. Our emotional tolerances and feelings may be very different from each other. There are a number of trading systems available in public domain with positive expectancy.
However, if it was only about the trading rules, the followers of these rules or the followers of the rules would be millionaires, if not billionaires. Trading system rules are only 10% of the entire picture, like the tip of an iceberg, where we see only the top but cannot see
the huge mountain of 90% underneath. Of this mountain, the entire 90% is a manifestation of our feelings and emotions in one way or another – which we call as money management and risk management.
These terms we hear very often, money management and risk management, what do they actually mean. Deeper thoughts would lead us into understanding that these are conversion of our emotions into a set of rules which we believe we can follow.
And various studies have shown that most of us over-estimate our risk appetite. If we think our appetite of taking a loss on a single trade is 10%, it actually is 5%. So we need to be most beware of us fooling ourselves!
Is it equity, commodities, forex we should trade?
Is it equity, commodities, forex we should trade?
Should we use futures or options or a mix of both? How much risk per trade should be taken? What happens if the worst possible outcome we envisage occurs on a single trade, how much percentage of our capital would we lose? When we answer these questions, we are again
dealing with a lot of our emotions. Volatility of different instruments leads us to deal with different risks. Trading Asian Paints and trading Bitcoin are two vastly different things.
Trading a system, which is suited to our temperament or personality, is almost like surfing.
Trading a system, which is suited to our temperament or personality, is almost like surfing.
Once you get the right combinations, then it is like you may be going up with the up waves and going down with the downwaves. It’s scary at times, fun at others, and involves a lot of emotions. Sometimes there can be a large downwave, but you may not be devastated as long as
you’ve envisaged it before you started surfing. Yes, there are tons of emotions that will come while trading a system! But, they can be beautiful once everything is aligned. A profit (or big up wave) should no longer be necessarily a phase of joy or a loss (or down wave) should
no longer be necessarily a phase of misery. The joy of surfing and feeling the wind on your face is where you are being in the now and enjoying the ride.
In fact, most of the times, the feelings we encounter while trading a system are counter-intuitive. Let me give an example.
In fact, most of the times, the feelings we encounter while trading a system are counter-intuitive. Let me give an example.
I may be feeling bearish but my system has given a bullish signal. I buy. The market starts going up. I feel bad or beaten or wrong. The system is making money. That’s where I may be feeling all bad but the system is making money.
The system and you (the trader), eventually have to become one. There should be no difference between the two. That’s when may tend to be more at ease with all that’s happening. You'll still face turbulences, but it may be within the plan.
Occassionally you may face something out of the plan. That's where you may need to go back to the drawing board. Go deeper into your feelings and find the system you can trade. Once you are attuned to it and if you find that systematic trading is yielding you results,
then start expanding your use of systems for trading. You may find your your Nirvana or as they say "The Road To Freedom".
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