Markets reward rational thinking while punishing fear. This may sound like a cliché, but it’s painfully true. During times of noise and confusion, it is easy for a speculator or an investor take (or not take) actions based on emotions instead than on rational considerations.
Noise, fear and emotions bring to irrationality. Irrationality brings to bad decisions. It’s a circle that, once established, can damage your account and your emotional capital relatively quickly – depending on your firepower and trading experience, of course.
In this regard position traders are relatively in a better position than short term traders: their strategies are hardly laid down and executed within hours or minutes. Position traders have the privilege of having plenty of time to make their decisions. Their disadvantage, on the other hand, is that it takes much more time to recover from a mistake or a loss. It also requires patience to wait weeks to have either a good setup formed and a profitable position to reach its goal.
I’m currently reading an interesting book called The Chimp Paradox. In the book, the author explains his thesis on how our brain functions and give some practical brain management tools to improve mental performances and life in general.
According to Mr. Peters, our brain can be seen as a three party entity, a Chimp a Human and a Computer. The Chimp works with emotions, is irrational and quick to respond to external events, but not necessarily wise. The Human is calm, sensible and logical. Both of them struggle for control our thoughts and actions. Sometimes the Chimp and the Human agree, but other times the Chimp wins, and this may bring us to bad decisions and regrets.
In a job where it happens every month, if not week, to handle loosing positions, greed, fear and regret, learn how to recognize when one might be sabotaging oneself without even realizing it is of extreme importance. This is why I highly recommend this book.
How are you dealing with your emotions and fears? Do you have some tips to share with other readers?