In the past few weeks, have you felt like you were in quicksand?
By the markets’ volatility causing a lot of uncertainly and P&L swings, does it feel like the harder you try, the worse things get?
Do you feel overwhelmed?
Well, you are not alone. These are very hard times in the markets. One of the hardest things to deal with is uncertainly. You hear a lot about risk management which has different aspects. The normal ones are market, credit and operational risk. One of the most important risks that people seldom talk about and it is much more evident in these markets, is the emotional risk.
JP Morgan has a group called the Behavioral Finance Team which deals with how emotions influence investments.
In the past few weeks, you have been witness to the panic that has been in the markets. You have seen that babies have been thrown out with the bathwater.
So how do you manage the emotional risk?
- Clear your mind
Do not make emotional decisions. Realize that emotions are emotions. What differentiates us is how we react to these emotions.
This reminds me of an interview that I watched. The interviewer was talking with a surfer and asked him what he does when a big surf comes and he goes underwater. The surfer said it was simple. “If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.“
What does surfing have to do with trading? In these choppy markets, if you let your emotions get the better of you, you could lose all of your capital. However, if you take a moment and think about your trades, you can have much better results.
- Look at your portfolio objectively
Think about your portfolio as if you are looking at the portfolio of your best friend.
Ask yourself:
- What was your trade horizon?
- Are the reasons that you executed your trade still valid?
- Can you tolerate the P&L swing?
- Does it impact your health and well-being?
Based on your answers, you can make more informed decisions.
- Limit your input
With the current state of the market, anyone and everyone is talking about what is happening in the market and what we should do. If we want to listen to all of them, it becomes very confusing, and the confused mind does not make a decision.
Instead of listening to everybody, pick the top 3 people that you respect and listen to them. This way you can remain focused and have much better trading results.
- Trade the market as is
Trade the markets as they are and not as you want them to be.
If we don’t pay attention to what is happening in the markets and what influences are at play, we are going to be in a losing game.
After all, hope is a lousy hedge.
- Be in a supportive environment
We often surround ourselves with the people that we like and we listen to them. In any business, it is important to listen to the people that we respect and are successful.
How often have you heard of traders whose spouse and/or friends are not supportive? These people have little or no risk tolerance. As a result, these traders allow the fear of their spouse and/or friends to become the boundaries of their success.
Why not surround ourselves with the mentors that are successful in their fields?
To summarize, the steps that we can take to deal with our emotional risks are:
- Clear your mind
- Look at your portfolio objectively
- Limit your input
- Trade the market as is
- Be in a supportive environment
Remember, not the most talented or skilled person wins the game. The game is won by the ones who can manage their emotional risk and have a Mental Edge.
Here is to making trading success your habit!
Nazy Massoud is a Wall Street Insider who shows traders, investors and hedge fund managers how to develop the mental edge to execute trades more profitably. For more articles and tips, go to http://www.mentaledgetrading.com.