How do you remove emotion from trading?

[Strw23]

I personally dont think its a good idea to remove ALL emotion from trading. Yes I DO agree that you want to remove the part were you are happy if you make a proffit and sad if you make a loss as this shouldnt phase you as it should just be one section of your equity curve as it climbs higher. The emotion I think should be kept is enjoyment. I think if you enjoy it you will try harder, be more determined to suceed and work through the slow times. Now I dont want this to be confused with trading for pleasue were you have fun trading and dont really care about the outcome because to you trading is entertainment and something you can brag to your friends about, because that isnt me.

I trade a mechanical system so the way I keep the other emotions out is by having thoroughly back testested system that I am completely happy with and can trust. I always allow for more drawdown than was given in backtesting and if my loosing trades in a row is double those given in backtesting I consider my system to over opertermised and not robust enough and time to develop a better system. Being mechanical all decisions have allready been made before I start trading by my set of rules so when a situation arises I already know what to do and I am not making a decision in the heat of the moment.

I also chat on another forum and a lot of people there who are being troubled by their emotions (selling early to take profit or quitting a system before its had a decent run) normally post what they're about to do. They then get about ten replies telling them not do it and why the should be following their system and that is often all the reasurance they need to remind them to stay on track.

My two cents worth.

Scott

 

[happytrader]

I am assuming that the system itself is sound and that the emotions are not in fact warnings of issues not covered.

Change can be stimulated either externally or internally. I have mentioned some internal resources in my previous post on this thread.

Externally I like the Nike, Just do it! works well if thinking too much is a problem. So is acting like a winning trader and going through the motions.
Take one trade at a time. Trade one stock. Trade one pattern. Trade small. If you are trading derivatives trade shares for a while.
Don't hold yourself up for judgement and the issues of others by telling them what you are doing. Instruct your broker to adhere to your profit and loss targets (thats my idea of a good broker) Don't giveup your job. (I do not know any seriously wealthy person who has given up theirs) Don't isolate yourself (the market does not define who you are). Become aware of your self talk (most people's suck) . Keep a journal. Learn to be in the moment.

Cheers
Happytrader

 

[Knobby22]

Ah

Knobby similar to the 50/50/90 rule.

If you have a 50% chance of making the correct decision there is a 90% chance you'll get it wrong!

Yea, funny that. Even for long term investors. :brille:

 

[ducati916]

Arousal

This is the component that is specific to the question contained within the threads title.

While disciplines such as motivation, goal-setting, visualization, teamwork, preparation can be consciously introduced by yourself, excitement, or arousal is a natural emotion that can either augment and improve your results, or detract from your performance, hurting your results.

Returning to professional sports briefly, to illustrate some differences.
Professional rugby, a physical, demanding sport, with much contact.
The level of arousal, must be as high as possible.
Professional target shooting. Polar opposite, arousal must be far lower.

What exactly is arousal?
Arousal is the body's physiological response to the event or situation, that is currently taking place, or, will take place in the determinate future.
It is a hormonal cascade of epinephrine, nor-epinephrine that stimulates end organs to a point of performance preparation..........muscles (including cardiac muscle) blood supply, neurological structures.

The sum total at one extreme is a hyper-active state, the fight, fright, flee syndrome......which is exactly what our rugby player requires, but not our target shooter.

Arousal operates on a scale, at one end we have low or zero arousal, or deep sleep, at the opposite end we have maximum arousal, a state of adreneline (epinephrine) secretion so high that eventually it generates fear.
This is the source of the *fear* in the markets.

Drive Theory, as it has been labeled, is the methodology (psychological manipulation) that has been designed to control the levels of hormonal stimulation to the correct levels for the individual, commensurate to the task at hand.

jog on
d998

 

[tech/a]

I always allow for more drawdown than was given in backtesting and if my loosing trades in a row is double those given in backtesting I consider my system to over opertermised and not robust enough and time to develop a better system.

Scott.

Defeats the purpose of backtesting.
If a mechanical methodology trades beyond its blue print to ANY extent let alone by large degrees,then its not even remotely close to its tested results.

If your getting drawdown beyond that found in testing then chances are your system hasnt enough data or the testing you are using doesnt have the capacity to test large data bases or multiple timeframes or portfolios.
Are you trading stock?
Or Futures?

What software do you use for testing?
Have you tested using MonteCarlo analysis.

Rather than take away emotion,results as you have described would heighten in security and deminish trust!
Why give any allowence at all!

 

[Julia]

Ah

Knobby similar to the 50/50/90 rule.

If you have a 50% chance of making the correct decision there is a 90% chance you'll get it wrong!

Tech

I'm interested in knowing the background to this. Was this "Rule" derived from some scientifically conducted research or is it the result of a lot of anecdotal experiences (often just as valid).

Thanks

Julia

 

[tech/a]

Julia.

Nothing scientific here.Some other character came up with it and I liked it so much I claimed at as my own! Every time I go into a street I'll turn the wrong way 90% of the time and I'll be most others do to.
90% of the time I'll say the wrong thing according to the missus.

 

[RichKid]

Julia.

Nothing scientific here.Some other character came up with it and I liked it so much I claimed at as my own! Every time I go into a street I'll turn the wrong way 90% of the time and I'll be most others do to.
90% of the time I'll say the wrong thing according to the missus.

'Given a 50/50 chance, you'll get it wrong 90 of the time.'

Tech, I'm interested in the concept too, so if you have a 50% chance of getting the right outcome YOU get it wrong 90% of the time. Of course we only know it's wrong in hindsight.

So the initial odds don't change (provided there are only two possible results) and to alter the outcome (for your benefit during future ventures onto the streets of Adelaide!) we'll have to know what your initial judgement was based on. Has anyone discussed this in a meaningful mathematical way over the years that you have mentioned it? Has piqued my interest since I'm still looking at probability vis a vis trading and expectancy. I don't think there's much in it, ie just a phrase, but some one wiser may think otherwise.

 

[tech/a]

Settle down its a joke.

 

[Strw23]

I also chat on another forum and a lot of people there who are being troubled by their emotions (selling early to take profit or quitting a system before its had a decent run) normally post what they're about to do. They then get about ten replies telling them not do it and why the should be following their system and that is often all the reasurance they need to remind them to stay on track.

Happy Trader I am assuming part of your post is a reply to mine, if it is not ignore what I say

Don't hold yourself up for judgement and the issues of others by telling them what you are doing.

I have to disagree with this. Following the signals that are given by a mechanical trading system is perhaps one of the hardest part of trading. A mechanical trading system forces you to take actions that can be in direct conflict with natural human responses. For example, if a newly purchased share decreases in value, the natural reaction for many people is to hold the stock in the hope that the price will recover. Most mechanical trading systems would give a sell signal to cut your losses in this situation.

A mechanical system will not be right all the time, we all know this but some of the traders I socialise with will often comment
* That their system told them to buy XYZ and it was a loosing trade so they sold it. Next week it comes up again so they buy it and again it gives a loss. The next time it comes up they say Im not falling for this again I have already been bitten twice and dont buy it, only to discover it makes considerable gains.

* That they bought ZFX (real example) in June 2005 for about $3.00. Now its six months later they have doubled their money and want to lock in profits instead of waiting for the the price to fall and hit their trailing stop. They sell out and cant believe how lucky they are. Now its another three months later and the price has hit $10.00.

These are both real examples of people not following their mechanical trading plans and giving in to their emotions and loosing out. I also have another dozen examples of people who were going to do this or similar things and break from their plans. The spoke to others or posted what they were planing to do on the forum and have been encouraged to stay true to their plans as it has been tested. This is often all the reassurance they need and most of the time sticking to the plan was the profitable idea.

Their is a saying for mechanical trading "The only thing worse than breaking from your plan and loosing money is breaking from your plan and making money", as this teaches you it is alright to break from your plan which it isnt.

Scott.

Defeats the purpose of backtesting.
If a mechanical methodology trades beyond its blue print to ANY extent let alone by large degrees,then its not even remotely close to its tested results.

If your getting drawdown beyond that found in testing then chances are your system hasnt enough data or the testing you are using doesnt have the capacity to test large data bases or multiple timeframes or portfolios.
Are you trading stock?
Or Futures?

What software do you use for testing?
Have you tested using MonteCarlo analysis.

Rather than take away emotion,results as you have described would heighten in security and deminish trust!
Why give any allowence at all!

tech/a,
Fistly I made a mistake in my last post, its if my drawdown doubles I quit my system. On the other issue Im sorry but I have to disagree. Backtesting results are simply that tested over past performance. We all know the disclaimer at the bottom of every financial product "Past performance doesnt guarentee future results". Given these results I know how it performed in the past and how it should perform in the future but there is no guarentee. If it deviates from past results to much I know I have over optimised it. One rule in my trading plan will clearly state if ABC deviates from backtesting results by XYZ then to stop trading the system.

The following is taken from the TMS website
"Having a trading plan is a good start. However, it is important that a strategy has been historically tested before using it. While this is not a guarantee of future performance, it may be better than simply relying on someone’s subjective opinion on whether something is good or bad – do you really know their full track record? Do rely on quantifiable results, involving records of every single transaction that could have been taken by a trading plan before ever trading it.
...
Back testing a trading system involves applying the rules and conditions of a trading system to historical price data.
...
Back testing does not give a 100% accurate measure of a trading system’s properties, as price movements in financial markets are never exactly repeated. The price of a share is driven by supply and demand. Supply and demand ratios are the direct result of decisions made by humans. For this reason, price fluctuations are somewhat similar over time, which makes it possible to estimate the properties of a system based on back testing results.
...
By back testing your system you can quantify the profitability of the system with reasonable certainty."

As for you other questions I trade CFD's on AUS stocks. I use Metastock 9 EOD and Tradesim for my backtesting, but I am not overly happy with the limitations of both programs. I also have WealthLab Developer but havent got around to learning this yet, thats my next task. When testing I normally use ten years of data and do out of sample testing as well. Sometimes I use MoneCarlo testing and rely on the worst case situation given in backtesting, but generally prefer to trade systems where I can take all possible trades. One thing I would like to incorperate into my testing is that if my system throws up three trades and I only have the equity to take two I want a rating system built into my rules so it tells me which two to take to make it completely mechanical. Metastock cant do this but I am told it can be done with WealthLab.

 

[Sir Burr]

One thing I would like to incorperate into my testing is that if my system throws up three trades and I only have the equity to take two I want a rating system built into my rules so it tells me which two to take to make it completely mechanical. Metastock cant do this but I am told it can be done with WealthLab.

or AmiBroker!

see http://www.amibroker.com/guide/afl/afl_view.php?id=223

 

[happytrader]

Hi strw

No my comment,

'Don't hold yourself up for the judgement and issues of others by telling them what you are doing'

was not actually in reply to your post. The majority of 'others' I refer to are those who have very limited understanding of trading. I also refer to those who don't know anything about you, your risk profile or your time frame. Chances are they are not even likely to see what you see. I've heard and seen people show visible signs of distress just listening and thinking about a possible loss of your or their own money in many business endeavours. Nine times out of ten these types haven't developed the tolerance or the knowledge and can't understand or handle any concept that involves risk. And of course their are others with ulterior motives.

If your goal is to make consistent money as a trader you do not have the luxury of being mediocre or fearful in any area of your trading. If you want to increase your level of irrational and emotional fear, then telling others and listening to their emotive fears and their issues will accomplish this anytime.

Most traders aren't particularly interested in anyone elses opinion but their own. Of course along with this attitude comes self responsibility. If you listened to all that 'noise' how could you possibly make sound decisions and follow your system consistently or any business venture for that matter?

Cheers
Happytrader

 

[tech/a]

STRW27

Would you be a Hometrader student?

You are using the same as I.

Back testing does not give a 100% accurate measure of a trading system’s properties.

But what sound systems testing will give you is a very accurate set of numbers based on the performance of those conditions and variables chosen for use in the system.
What you have in the end is a business plan based on those inputs.
A good system does not require all trades to be taken,infact due to capital constraints often this is not possible.

You keep mentioning optimisation.
What are you optimising?
Variables used in a Stock trading system?
How many stocks do you trade at a time?

 

[Julia]

'Given a 50/50 chance, you'll get it wrong 90 of the time.'

Tech, I'm interested in the concept too, so if you have a 50% chance of getting the right outcome YOU get it wrong 90% of the time. Of course we only know it's wrong in hindsight.

So the initial odds don't change (provided there are only two possible results) and to alter the outcome (for your benefit during future ventures onto the streets of Adelaide!) we'll have to know what your initial judgement was based on. Has anyone discussed this in a meaningful mathematical way over the years that you have mentioned it? Has piqued my interest since I'm still looking at probability vis a vis trading and expectancy. I don't think there's much in it, ie just a phrase, but some one wiser may think otherwise.

Tech

Your response to Richkid's post above was "Settle down, it's a joke".

That's why I asked the question as the "Rule" didn't make a lot of sense to me. e.g. I don't think that, when faced with a 50/50 choice, I - or for that matter, most people - would get it wrong 90% of the time.

You will probably consider that I'm being stuffy and pedantic here, and perhaps I am, but I'm always conscious of new investors who will take anything they read which is written by someone who obviously knows what they are talking about - and you know you are thus classified - as being TRUTH. They may not have the confidence to question what you mean so will puzzle over it and wonder what they're missing or doing wrong.

This is not intended to "get at you" at all. Rather to ensure that all the useful and constructive info you post which people find so helpful doesn't get confused with the bits that you regard as jokes.

Cheers
Julia

 

[Strw23]

Tech/a

Yes I did do my initial training with Home Trader and highly recommend them.

When I talk about optimising I am talking about changing moving averages, indicator periods, etc etc to produce more profit over the sample data. Obviously you dont want to over optimise over one certain period or it might not perform in different market conditions, that is also why I do out of sample testing. Generally speaking though most systems will break down over time.

As for how many stocks do I trade at a time it depends on what systems I have running. I have a few designed but dont trade with them all. Most of the time when I design a system it will be for stocks in the ASX200 because I trade CFD's to increase my returns. Other systems will be for ASX FPO shares but include price gates to exclude some stocks. The latest system I am fine tuning is for GICS Sectors traded on margin with CMC and looks to be very profitable I am just trying to find the right balance between profit and drawdown. Once this sytem is complete I will be designing a short system for CFDs as this bull market cant last forever. I would like to get into FX but that is a little down the track at the moment, to many other projects.

The reason I often prefer to trade a system were I can take all possible trades is to increase my chances of a profitable return as based in back testing. As you know with montecarlo testing it generaly gives you the highest, lowest and average results. If I am given five trades and can only take two what trades do I take? They all have the same probability of making money based on my entry conditions but more often than not they all wont. I want to take the ones that will give me the highest return but will never know until all trades are closed and its to late then. With a system that has been MC tested you have a predicted profit range between the highest and the lowest but if I take all trades I have one target I feel more confident in being able to reaching.

Scott

 

[yogi-in-oz]

Hi folks,

Just going back to Mark's original question in this
thread:

How do you remove emotion from trading?

Answer is:

... remove the fear of winning or losing MONEY !~!

If you doubt this at all, stop trading for real and
just paper-trade the markets for a month and
hey presto ..... NO EMOTIONS.

Car sales 101 ..... the reason for getting a deposit
from the prospective buyer, is:

..... because, his MIND is where his MONEY is !~!

Trading is no different, if we have a sizable chunk
of cash tied up in a trade, then that's where our
minds (emotions) will be centred.

-----

Any trader, who feels emotional about paper-
trading should give up immediately and find
another vocation ..... for real trading will
burn you out, very quickly.

-----

For some, trading for real presents a fear of loss,
brought on by a variety of factors, but the main
reasons are probably:

Lack of a proper overall trading plan.

No mechanical trading system within trading plan.

Positions sized too big, triggering constant concern
and monitoring of trade positions ..... scale back
and sleep soundly.

Poor risk and money management, which should
also be addressed in the trading plan.

By trading according to a (winning) trading plan,
we gain more confidence in our systems, with
every winning trade .....

As our confidence builds in our own trading plan,
our emotions become more positive and the
negative emotions subside significantly ..... but
this can only happen, if we can see a log of
profitable trades building in our records, over
a period of time.

So, during the time it takes traders to improve
their win/loss ratio significantly, raw emotions
are bound to surface .....

..... it's all part of learning our craft .....

Eventually, with enough PRACTICE, trading our
own plan becomes second-nature, even to the
point where it becomes a mundane operation,
with few thrills ..... for some, it's just job or
another way to pay the bills.

Believe it ..... there's much more fulfilling things
EMOTIONALLY-speaking, than making money ...

happy easter

yogi

P.S. ..... there's a similar story connected to the
fear of winning, but the emotions are
still responding to the same triggers.

 

[Knobby22]

Tech

Your response to Richkid's post above was "Settle down, it's a joke".

That's why I asked the question as the "Rule" didn't make a lot of sense to me. e.g. I don't think that, when faced with a 50/50 choice, I - or for that matter, most people - would get it wrong 90% of the time.

You will probably consider that I'm being stuffy and pedantic here, and perhaps I am, but I'm always conscious of new investors who will take anything they read which is written by someone who obviously knows what they are talking about - and you know you are thus classified - as being TRUTH. They may not have the confidence to question what you mean so will puzzle over it and wonder what they're missing or doing wrong.

This is not intended to "get at you" at all. Rather to ensure that all the useful and constructive info you post which people find so helpful doesn't get confused with the bits that you regard as jokes.

Cheers
Julia

The point Tech is making, is that given a 50/50 chance and given you are trading on spur of the moment judgements with emotions running, adrenaline flowing etc. you are more likely to get it wrong than by instead tossing a coin. The 50/50 is the coin, the 90% is the chance you CHOSE wrongly.

If anyone thought about it then they would see that the 90% chance is just a figure plucked out of air as everyone is different in any case and usually improve their decisions over time.

I didn't take it very seriously but there is TRUTH in it.

..and yes I agree with you that your argument is pendantic. Come on, people should be thinking about information, not just accepting every bit of info as gospel. Otherwise it's garbage in garbage out.

Even the best info is not 100% true 100% of the time. When we stop questioning we are allowing our minds to atrophy. I hear many people quoting books that are basically a lot of crap but I don't bother with questioning them as I would be doing it all day. This thread has quite a lot of it.

Sorry to be so black and white. Please do not take offence.
This forum is hardly an academic study in human behaviour.

Regards

Knob

 

[bullmarket]

Human nature being what it is I doubt anyone will be able to eliminate emotion from trading/investment decisons 100% of the times.

But what imo can certainly help eliminate emotions say 99% of the time is discipline

Discipline to firstly put to paper what your objectives and investment/trading methods, criteria, paramaters etc etc (an investment/trading plan) are.

Discipline to then paper trade, back test - call it what you like - and fine tune that plan until it generates the returns included in your objectives.. Friends have paper traded a few hundred trades before they were happy to start trading with their own funds and are still successful today.

Discipline to stick to that plan (when trading with real funds) even when you make a few losses and not throw it out the window. (remember, losses would also have been made during paper trading)

Discipline to review the investment/trading plan periodically especially if for some reason expected returns are not being achieved. Reviews could be monthly, quarterly or whatever suits.

Also, all of the above is dependent on individual make-up, psychology, temperament, attitudes and determination.

cheers

bullmarket

 

[Knobby22]

Great post Bullmarket!
No bulldust there!
Discipline is so difficult for me at times.

 

[Julia]

The point Tech is making, is that given a 50/50 chance and given you are trading on spur of the moment judgements with emotions running, adrenaline flowing etc. you are more likely to get it wrong than by instead tossing a coin. The 50/50 is the coin, the 90% is the chance you CHOSE wrongly.

If anyone thought about it then they would see that the 90% chance is just a figure plucked out of air as everyone is different in any case and usually improve their decisions over time.

I didn't take it very seriously but there is TRUTH in it.

..and yes I agree with you that your argument is pendantic. Come on, people should be thinking about information, not just accepting every bit of info as gospel. Otherwise it's garbage in garbage out.

Even the best info is not 100% true 100% of the time. When we stop questioning we are allowing our minds to atrophy. I hear many people quoting books that are basically a lot of crap but I don't bother with questioning them as I would be doing it all day. This thread has quite a lot of it.

Sorry to be so black and white. Please do not take offence.
This forum is hardly an academic study in human behaviour.

Regards

Knob

OK, fair enough. I'll pull my head in.

Julia