Is it Possible to Trade Without Emotion? // Ep. 20

In This Episode

• What you're actually doing when you “trade emotionally”
• Why it's OK to feel bad about your trading performance
• Gerry Spence
• How to “trick” yourself in to a positive mindset

Is it Possible to Trade Without Emotion?

The short answer is no. All humans have to deal with their emotions. Even if you have a 100% automated trading system, you still have to decide when to turn it on and off.

When the system has a losing streak, it can be tempting to turn it off.

…and that's usually the time that it starts winning again.

So what can you do? We explore the options and give you solutions in this episode.

Read the Transcript:

Hugh: Hi Walter. There’s this, I don’t know if you want to call it a misconception in trading but some people believe that you have to beat your emotions in order to succeed in trading. So what do you think about that?   

Walter: I don’t necessarily agree with that. I think what's happening is people are confusing emotions with breaking your rules and trading. Trading on the basis of your emotions. So I think that's true.

The idea that you should take emotions out of trading, I don't agree with that because I think it's nice to feel good when things are going well. And it's okay to feel bad when things aren't going well. That’s part of life. It's okay to be fearful when you're in a situation. 

I remember my wife was telling me. She went into the jungle, I can't remember if it was Uganda or somewhere. Anyway she was on this grand tour of Africa. They were going through the forest or whatever and then they came up on the silver back gorilla. 

The silver back gorilla was standing right in front of them. He's like bumping his chest you know and all this stuff. Showing that this is his territory and kind of back off you humans. She said, “You know, it was amazing.” Whenever you hear her tell the stories and she tells it right. 

I've heard it many times but she never says, “I was scared that this gorilla was going to do something.” Although, I'm sure that everyone there felt a level of fear. Maybe the tour guide didn't feel the level of fear like everyone else. Do you know what I mean? So that's kind of a thing that stuck with me. 

There was a famous trial attorney named Gerry Spence. He's written several books. I'll put them in the show notes for people. What he was talking about and his books are more about how he never lost a trial. He was a criminal defense attorney and he never lost a trial. 

He talks about fear in the book and how when we have fear we know we're alive. Like that's such a core thing of being alive, is feeling fear. What is fear? Fear is just like you're not sure what's going to happen. 

You're standing in front of this gorilla and he's thumping his chest. He's trying to look all tough and stuff and you kind of just stumbled on this. I can imagine the same thing would happen if you stumble upon a bear in the woods. 

For me, if I’m surfing and the waves kind of get bigger than I'm comfortable with or whatever. There's always those things you know. In trading it's like, “Wow, I've had five losing trades this week. Am I really going to take another one?” That's all part of being alive. 

So I think you need to disentangle whether or not your emotions are causing you to stop trading your rules versus, are you just feeling emotions because of the normal ups and downs of your equity curve? To me that's how I see it. What do you think about it?

Hugh: I totally agree. I don't think you can actually totally remove emotions from trading. Even if you have an automated system, you're going to have your ups and downs because the system is working, the system is not working. Like you say it's part of being human. 

So you might as well enjoy the good part of it with the bad. As long as you don't swing too far in one direction. I think that you need to maybe control them a little bit more but not necessarily eliminate them altogether because that's impossible.

Walter: That's kind of the default. It's sort of like the two-percent rule where they say always risk two percent. Some strategies, two-percent you're going to go broke. Like Matthew in London. He has an eight percent win rate. If he risks two percent he will go broke. He will lose all of  his money. There’s no doubt because he's beyond the optimal F point. 

Anyway, I'm with you. I think it's kind of like a mind trick too. Traders listening to this, if you get to that point where you can be like, especially if you have a low win rate strategy, if you can kind of trick yourself into thinking after you've had lots of losing trades in a row, “Hey, this is really exciting. I know I'm fearful but that's because that's what I get paid for as a trader. I get paid to take risks where other people won't.”

There are people who are punching in every day. They're doing their time and they're getting the same paycheck every week or every month or whatever it is. Every fortnight as they say here in Australia, every two weeks. So you're not doing that. You're a trader. Maybe you have another job on the side or whatever but that's cool. 

What is cool about what you are doing is, you are embracing fear. You are saying, “Look, I understand I get paid for this excitement, for this fear. I don't know what is going to happen. I've had five losing trades in a row. I have a thirty-seven percent win rate. Chances are I'm going to have another loss. I know I have a positive expectancy and this is what I get paid for, this moment” and then pull the trigger.

It's so cool. One of my favorite quotes is you know the Larry Williams story about how he won that trading contest? 

Hugh: Yeah. 

Walter: He was in a nine hundred thousand draw down when he won. I think in November, December at the end of the year, he actually lost. He would have won but his record stands. You guys can look it up. I can link it up to the show notes if you guys want to check it out but his record still stands. 

I think his daughter has the second best result ever. She's an actress. She's not even a trader, Michelle Williams. So he was saying, “Hey man, I'm a trader.” He's like, “Look, I knew by August that I had wrapped up the contest”. He knew or even by June he knew that he was going to win it. 

He could just kick back, not take any more trades he's like, “Hey man, I'm a trader. I'm going to keep taking my signals.” Do you know what I mean? It's awesome. I think it's really cool that he's decided you know this is what I'm going to do because even though I could just say, “Oh there, I won. Game over. I kept going”. 

When he kept going, it even put him down from 1.9 million to 1.1 million. He lost that eight, nine hundred grand or whatever. It was the last month or month and a half because he decided, “Hey, I’m going to trade. If I get a signal, I’ll take it.”

Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Walter: That's really I think if you can kind of mind trick yourself into remembering that you get paid to take risks. It's a different story. 

Hugh: Yeah, totally. The trick that I started using, that helped a lot, was just being curious about the losers. Why did it lose? Was there something I could have done better? Just being able to dig into that without any judgment or like fear of loss or any regret of the loss either, that really helped me out.

Are there any other mind tricks that you know of that have helped you or other traders? 

Walter: The biggest one that I really like to promote for people is the execution journal. For me that was a game changer. The idea and I'll explain what it is. So most traders, what we do is we go, “Oh, you got to keep good records. You’ve got to pull the emotions out” or whatever. They say things like that or if I automate it, then the emotions are out.

Like you said that's all BS. You still turn on the robot. You still turn off the robot. You still see drawdowns from the robot. It might be able to shirk the responsibility and say, “It's not me anymore. It's the robot that's doing it”. You can still intervene and say, “Holy crap! The markets are crazy. I’m going to turn off this robot.”

So automating trading does not take the emotions out. You still have to babysit your stuff but the other thing is this execution journal. For me was the biggest game changer. So instead of focusing on you know which system did I take; what was the signal; when did I take it; how much did I make; where was my stop; what was the R return and all that and that's all great. 

In writing down, “Oh, I felt really bad about taking the signal. It didn't look really good to me but technically it was so I took it” you know that sort of stuff is great. However, the best thing I've been able to do for my trading is to have an execution journal. Where I actually rate my entry on a scale of one to five and rate my exit.

What this does is, it shifts my focus from why did I lose to am I following my strategy. It's really weird to do that and to start rewarding yourself for having seven losing trades in a row. But, if you've performed your system according to its rules and you're getting four and a half, five out of you know five stars because you're doing a really good job then you should be happy.

The only reason why you have draw downs, the only reason why you have losing streaks; provided that your strategy actually makes money of course and presumably we tested that we have a pretty good idea; we have a handle on that, it's because of bad luck.

All of a  sudden you are letting go and you're saying, “Bad luck has given me a losing streak. I can see I'm executing according to my plan.” So it's a different way to look at trading. 

It's so easy to change things up because you have a losing streak and go, “Oh well, I see here. If I would have added this stochastic then I wouldn’t have you know missed out” do you know what I mean? That's how you go down the slippery slope, that's terrible.

Hugh: It's all about something from the process, right? Not necessarily the result but the process.

Walter: That is a great way of putting it. That's exactly right. Exactly what you said. Focus on the process. Focus on am I executing not am I losing money. Am I making money? One of the worst things that can happen to you as a trader is for you to do really well on the back of bad habits. That happened to me on my first week trading. 

My friend convinced me to move in with him. Quit my job. Take my trading stake. We put it in our account. Second night, we tripled my money in our account. That was Tuesday and then by Friday it was gone. That was my story. That was my introduction to forex trading in 2000. That was it. 

Twenty years ago, I got into the game. It was all bad habits and not knowing what the heck I was doing. So that was probably one of the worst things that could happen because I saw that you could make money doing it but I didn't know how.

It was just dumb luck. It  was stupid. So execution is key. Focus on like you say you know it's really all about, are you doing the right things? Not the result. It's the process. Like they say keep chopping wood you know that's the key.

Hugh: Cool, awesome. Thanks Walter.

Walter: Thank you.

Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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It will usually be something that will help you improve your trading psychology. 

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