Trading Coach: How to Avoid Frequent Trading Losses and Panic Selling
Over the years, I have traded my own account, managed accounts for wealthy clients, and mentored many traders. I know what really matters in running a successful business operation.
When I managed a million dollar account, I quickly learned that self-discipline and awareness were more important than my overall strategy. Many new traders think that they need a trading system to be profitable, but that is only partially true.
I was lucky to have instant success in trading early on, but that success made me tired because I never experienced huge drawdowns or saw red on my trading screens. This is because I started managing accounts at the start of the 2008 financial crisis and you couldn’t help but make money after such a monumental market crash.
Having to answer client calls, while trying to focus on trading, put a lot of stress on me. My thinking became confused and my mind began to fill with doubts. I lost sleep and self-confidence as stress consumed my days and nights. Customers during the crisis wanted instant responses to every front page story. I quickly learned that hand holding and talk therapy were not my strongest asset. It took my focus off the trade.
Many trading books tell you to check your emotions at the gate when it comes to trading. I always thought that was very unrealistic, since we are naturally emotional as part of our human nature. Ignoring our emotions is like an alcoholic denying his condition. So I started a journey to try to better understand myself and what really influenced my business decisions.
Business losses due to the color red?
Researchers have long known that color can affect your mood. Artists and restaurant designers have always used color to subtly manipulate the emotions of their patrons. Red evokes passion, excitement, anger, danger. Blue and green promote calm and serenity. Yellow screams optimism. Orange increases appetite. White is clean and pure, while black is imposing and terrifying.
Colors have a real physical effect on the human body: certain colors have been shown to raise blood pressure or speed up the body’s metabolism. Other colors promote a relaxing environment for stressful situations.
The color red has a particularly strong influence on mood and emotions. Red draws attention. Red is associated with strength, power, and sexual attractiveness. Your face turns red when you get angry as blood rushes to the surface of the skin.
Red has been shown to contribute to poor test taking by college students who have been exposed to color prior to testing. Associated with failure (teachers often use red ink on schoolwork to indicate an error), the color appears to evoke anxiety and fear that impairs performance. In one study, students who were shown red scored twenty percent lower than students who were shown a different color.
In another study conducted by Science Daily in 2011, researchers found that test subjects displayed more strength and quicker reaction time when faced with red instructions instead of black ones. Red tends to enhance physical reactions, mobilize extra energy and acts as an inhibitor of mental processes. Color evokes emotions that reduce mental clarity. At the same time, red provokes a fast and forceful action. Acting quickly while mentally distracted is not the best combination for making smart decisions.
What does this mean for your trading results?
Traditional candlestick charts typically use red and green candlesticks to indicate price movement. Although they are very common to see, they could be the reason behind some of your trading losses. Think about how these colors translate to an everyday item, like a traffic sign. Red means STOP and green means GO. Red means SELL and green means BUY. Red grabs your attention more than any other color because red basically screams LOOK AT ME!
Business coach and neuropsychologist Denise Shull has done extensive work on the psychology of decision making among financial professionals. Her unconventional theories on trading and the psychology of risk go against everything she may have already learned about trading.
In his 2012 book, Market Mind Games: A Radical Psychology of Investing, Trading and Risk, he proposes that the common investing strategy of conquering or denying emotions is precisely the wrong thing to do. She argues that, as human beings, we cannot eliminate or control our emotions in the decision-making process. In reality, our emotions are an inherent part of everything we do. Instead of trying to eliminate them, we need to understand them, take advantage of them, and make them work for us.
Red, which represents fear, and green, which represents greed, can have unconscious effects on your trading simply by being present in your field of vision. Because fear tends to be a stronger motivator, studies have shown that people are generally 2.5 times more afraid of taking a potential loss than they are of making a potential gain.
If you offer test subjects the choice between winning or losing money, the gain has to far outweigh the loss before the subject makes the choice. For this reason, many people will stay on the sidelines during a bull market. The fear of taking a loss overrides their greed and replaces the desire for any potential gain they may make.
Both fear and greed can make us act irrationally. Both emotions need to be recognized and controlled. You need to understand that if one of those emotions is driving your decision-making process, you may not be making the best decision possible.
These two factors are so prominent in trading and investing situations that CNNMoney even features a fear and greed index that shows which emotion is leading the market. The index is calculated based on seven different numerical inputs, such as market momentum, action in put and call options, and market volatility. These factors are distilled into a single number that is represented on a graph as green (greed) or red (fear).
With a high greed index reading, you see a steadily growing market with occasional dips and plateaus to mark brief breaks in greed. However, when the index turns to a scary reading, the falls are generally quick and steep. Fear causes a much more aggressive level of activity because people are more inclined to sell out of fear than to buy out of greed.
Denise Shull acknowledges that the colors red and green on candlestick charts can have unconscious effects on our trading decisions. She even suggests removing these by removing these colors, especially red. She should try changing her charts to solid (above) and open (below) black and white candlesticks and see if it makes a difference to her emotional reading of her charts. This simple change could have a profound impact on your business success.
My business approach is to always look for that advantage. I try to find the little things and fine tune my strategy to help avoid that big mistake that could put me in a slump. In fact, I changed my colors to pink/purple, pink/blue, and pink/green to study my emotional reactions and what combinations work best for me.
This is what I suggest doing now
1) Use my color scheme or find the one you prefer. Give it a try for a couple of weeks and see if the lack of colors changes your emotions and your trading performance. You may be surprised with the results.
2) Share this on Twitter or Facebook