Emotions, Trading Systems, And The Stock Market

By: Clint Maher

Do you remember your first trade? Did you get butterflies in your stomach when you were giving your broker the authority to place the trade, or if you were placing the trade online did you get a buzz when you were about to press the confirm button?

If you are like most people than you probably did, and you probably also read the share price every day in the morning paper, or watched the computer screen the entire time the market was open. With each movement of the share price up you probably experienced great joy, and likewise each downward price movement it seemed like the world was crashing down around you.

And possibly then you discovered that the overseas markets that were open when you should have been sleeping had a great impact on your local market the following morning so you would stay up and watch the overnight action. Pretty soon you begin to be consumed by the entire process. Does anyone relate to this?

The Stock Market is a based a lot on emotion, or psychology. Fear and greed, that's the two major players at work. Greed causing those who would not normally invest come out in droves, typically towards the end of a bull market, and then the fear sets in, quickly driving prices down as the crowds rush to dump their shares.

You have a choice over whether you bring your emotions in to the game, or you have a choice to leave them at the door. Each has their merits, and each are suitable for different people and different strategies.

When you do bring emotion into the stock market, it can and does cloud your judgement. For a new investor, they are in the unenviable position of losing their entire capital, as they get off winning trades too early, and let the losers run, living in the hope that the ticker will start to swing their way soon. For those with some years of proven market experience behind them, they are able to use their judgement on the run and use their learned instinct to exit a trade early, or get out of a trade when things don't appear correct.

A far better approach, both for your capital and your nerves, is to employ a mechanical trading system and to stick with it, always. Using such a system allows you to have your entry point, exit point and stop loss all organised before you even enter the trade. From here, you do not have to do anything, and you can sleep well at night knowing if the market goes against you that you are protected at a predefined value.

Mechanical trading systems are extremely valuable tools for many traders, and there are many websites around now that freely offers this information. The trick is to find one that a system that sits well with your own personality. Once you have found one, back test it as much as possible and move onto to paper trading it, and finally if it still produces winning results, begin live trading. Tweak only if necessary, and always, always, stick to your plan.
By sticking with our plan we have the ability to completely take emotion out of the scenario, and it allows the trader to analyse both the winning, and the losing trades so that the system can be finely tuned as the traders experience manifests.

In conclusion it may be a very wise decision to implement a mechanical trading plan, and very quickly your emotions will be kept in check and will allow the trader to concentrate on their job, which is to turn a profit. Rather than being chewed up and spat out by the market, the trader can grab their little slice of the market when the conditions are right and live to trade another day.

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