traderpsyches: “To be better risk-managers or traders, you need to become conscious of your feelings and emotions. Then, you can be aware of your biases and you’ve got a better data set.”

If anyone is interested in becoming a better trader or investor, then I highly recommend the work of Denise Shull over at traderpsyches. The following comes from a recent article:

'...Feeling and emotion are part of your analysis and decision-making,” she says. “To be better risk-managers or traders, you need to become conscious of your feelings and emotions. Then, you can be aware of your biases and you’ve got a better data set.”

She says modern portfolio theory and behavioural finance have neglected to explain how individuals’ views of the market are shaped in the first place, while context-free trading formulas and market theories fail to describe financial markets accurately.

“These are social markets,” she says. “All you’re doing is betting on what other people are going to pay for. We’ve tried to turn that into an algebra problem and it’s not.”

This is challenging stuff – not just for the male-dominated world of trading. Ms Shull suggests that what she is proposing is nothing less than “rethinking thinking” – challenging our ingrained views about how we should use our brains in the first place.

“Our psyche uses feelings and emotions as a resource, but we’ve all been brought up to think it’s not a resource,” she says. “It’s been denigrated. We’ve got to teach people how to reclaim it and analyse it. It’s always been there, colouring our perceptions of the market.”

By telling traders to set aside these emotional data, Ms Shull maintains, conventional wisdom goes against human nature. “We’re fighting the way our brains work,” she says. “Let’s start working with our brains. If you do, you’ll be able to manage risk better and read markets better – and have a chance of beating the people who aren’t.”

She is sceptical of the notion that high frequency trading has removed feelings from the activity. On the contrary, Ms Shull says, algorithmic trading strategies are stuffed full of assumptions and sensitivities – and deciding when to shut them off can be emotional...'

'...Ms Shull’s technique is founded on identifying feelings and articulating them. “Feelings and actions are separate things,” she says. “Everybody says: ‘control your feelings’. But you don’t have to control your feelings, you have to control your actions.

“However, because people haven’t been taught to deal with feelings as data, the energy of the feeling goes straight to the action – you act out the fear, the greed, the anger, because you haven’t been taught to look at fear, greed and anger as data first.”

She advises traders to identify their emotions and analyse how much they are connected to their trading positions as opposed to external influences. It helps to articulate them – if not to a psychologist then by speaking into a tape recorder or writing in a journal.

This way, traders can know if they are anxious because of something in their personal lives, or because of their feelings about the market.

Ms Shull says emotions can sub-consciously signal trading opportunities. “Your brain has been watching these markets for years,” she says. “It knows patterns you’re not conscious of, and it’s communicating that on a feelings-based level...'

Trader Psyches' 'Psychological Capital Tips and Tricks', 10/18/2009 issue, highlights the 'fear of missing' concept.

The following is taken from Trader Psyches' 'Psychological Capital Tips and Tricks', 10/18/2009 Issue (i can't find a link to this issue or where to sign up for the free distribution of it....if you are interested, then email them at info@traderpsyches.com ):

"...Behavioral and neuroscientific evidence has shown in multiple studies that the fear of missing out is more motivating than the fear of losing money or the the knowledge that you have a better chance of making money if you wait.(Weber & Johnson, Columbia)

What can you do? You know this happens and after-wards you say "how stupid" and promise not to do it again. But then...

The key lies in developing an awareness level of your own feelings, urges and motivations that equals or even surpasses that of your awareness of what the markets are doing.

Using that valuable knowledge of your own biases, impulses and feelings can literally be the very best risk management tool you have!..."

Quiz: what emotions significantly influence trader/investor behavior and thus significantly influence how markets move?

in the middle of july, i posted the following quiz:

• when the average trader makes a decision to enter or exit a position, one of two emotions is probably dominant in the traders decision making process...what are the two emotions that the average trader might be keying off of?
• i believe that i engage in this process, a lot, especially when i daytrade...
• disclosure: this might be a trick question...

the usual pairing of fear and greed may come to mind...however, while i continue to believe that greed may influence the average person's desire to get involved in trading/investing in the capital markets, i don't believe that greed plays much of an influence in the decision making process of entering or exiting a position...rather i continue to believe that fear, and more specifically 'fear of missing' (the move up) and 'fear of losing' (during a move down), significantly influences all 'non trading master's' decision making process... i know it does mine...about a month or so ago, JE and i had a great phone conversation about this...

the folks at traderpsyches appear to have a similar viewpoint:

"...Many traders and investors work off “fundamentals” – i.e. company prospects or economic data. Many traders work off “facts” i.e. the actual price something is trading at and the relationship of that price to prices gone before (some may not think these are enough but they are indeed facts – the S&P is trading right this moment at 984.50 and that IS a fact) and we all can get caught up in the two kinds of fear that drive the market – fear of losing and fear of missing out..."

if you are interested in exploring this line of thinking, then check out the traderpsyches blog...

thanks again to Me vs. WallStreet for posting a link to their site on his blog...