Will You, Won't You? Staying out of the markets is a costly way of reducing investor anxiety.

For some investors the idea of getting involved in the markets at all is uncomfortable.  This investor anxiety is quite common in those people who get the emotional comfort they need by avoiding investing altogether.  Yet being too hesitant has large hidden costs.

What if...?

Certain people have greater natural reluctance than others to enter markets in the first place.  We call this low Market Engagement, which measures the degree to which you are inclined to avoid or engage in financial markets, usually due to a fear of the unknown or getting the timing wrong.  It is a component of risk attitude and is one of the financial personality dimensions one need to understand.

Low Market Engagement can mean you are nervous of investing at the wrong time so you tend to stay out of the markets which is a costly way of reducing anxiety.  To overcome this you may opt to invest in a gradual, phased manner, normally starting with the lower risk asset classes.  Low Market Engagement investors may also value some protection against large interim capital losses for products in riskier asset classes.

Those with high Market Engagement can find it easier to commit to investments.  However this can sometimes lead to damaging enthusiasm where investors appear "trigger happy" with investments, giving them less consideration than is due.  Investors are also more likely to invest based on passing recommendations from people they meet.


Ref:
Barclays
Wealth and Investment Management.

Extraordinary Popular Delusions And The Madness Of Markets

The twin bubbles of today: Government bonds (which are set to burst) and gold (which is getting ready to enter the mania phase).

Are you scared to invest? FEAR is your friend

Monday March 18, 2013

Are you scared to invest? Billionaire Warren Buffett's tips on how to overcome it

Financial Snacks - By Joyce Chuah

“If you’re going to be this way each time your shares drop by one sen, you might as well just sell them off!”

Fear is a common emotion in our lives and in many instances, it protects us from danger.

However, investors' fear may be more punishing than protective, writes JOYCE CHUAH.

I HAVE often said this in my seminars: “Many of us want to invest but a few of us are NOT prepared to be investors.”

The common question among investors is often “How much are we making?” True, profits are after all the benchmark we set for a successful investment plan. However, many often choose to forget that in the process of seeking profits, there will be times of unrealised losses and times of unfavourable returns due to events beyond anyone's control.

Even if it is an event which one tries to predict (such as the general election date!), many forget that such events are just temporary and not catastrophic, where total and irrecoverable loss cannot happen. The test of a successful investor is when the rubber hits the road' − that is, when faced with a loss position, can you prevent yourself from reacting and allowing fear to push you to sell your loss positions?

Fear protects us from danger, as in a fight or flight situation. But investors' fear may be more punishing than protective because it prepares us to react and changes our perspective of the external events.

Joyce Chuah

I have often said that the acronym F.E.A.R. stands for “False Evidences Appearing Real”, as fear deletes, distorts and generalises events which may are not as adverse as they seem or as we are told.

It is no wonder that Warren Buffett is one of most successful investors in the world. He practises what he termed as “inactivity” as an investor. Instead of reacting to fear, Buffett says, investors should learn to be calm and inactive.

His thoughts are best summed up in four of his famous wise quotes:

“The stock market is designed to transfer money from the active to the patient.”

“Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for 10 years.”

“My success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

http://biz.thestar.com.my/news/story.asp?file=/2013/3/18/business/12815616&sec=business

Greed and Fear. Who do you think is ultimately determining the market price in the long run?

What are instincts?

Any behaviour is instinctive if it is performed without being based upon prior experience or knowledge.

Since most investors base their investing on emotions and instinct, they follow the mindset of Mr. Market.  (Instinct = without knowledge).

Solution .. become knowledgeable.  Base your decisions on facts opposed to emotions.

Greed Cycle
People are chasing prices ... not value.
Mindset:  A quick buck is about to be made.


Fear Cycle
People are scared they'll lose everything.
Mindset:  I don't k now the value of these stocks, so I'm outa' here.


How do we know how much the stock is worth?  This is a tough question.

The knowledge of a stock's value allows an investor to determine if Mr. Market is Greedy or Fearful.  (That's why we are here.  :-)  )

The key is to be greedy when others are fearful and fearful when others are greedy.  - Warren Buffett.


The name of the game really is between Accumulating Shares versus Trading Shares.  You want to be the person who is accumulating shares.

The stock market behaves like a voting machine, but in the long term it acts like a weighing machine. - Benjamin Graham.

Short Term:   Anyone can price the stock.
Long Term:  The Value becomes absolute.

Who do you think is ultimately determining the market price in the long run?

Warren Buffett: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur.  The timing of these epidemics will be unpredictable.  And the market aberrations produced by them will be equally unpredictable, both as to duration and degree.  Therefore, we never try to anticipate the arrival or departure of either disease.  Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

As this is written, little fear is visible in Wall Street.  Instead, euphoria prevails - and why not?  What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. However, stocks can’t outperform businesses indefinitely.

Even Lousy Investing Beats Not Investing

By Chuck Saletta September 18, 2012

It wasn't that long ago that we suffered through a period of time in the stockmarket that has come to be known as "The Lost Decade." The 10-year period between the start of January 2000 and the end of December 2009 was one of the worst for stock market performance, ever.

Yet even during those dark times, one very straightforward strategy would have allowed you to just about break even -- or perhaps even make a few bucks along the way. All you would have had to do is dollar-cost average into the low-cost market-tracking SPDR S&P 500 (NYSE: SPY  ) ETF and reinvest the dividends you received. That's one of the simplest ways to invest, and that strategy -- or one essentially equivalent to it -- is very often available in 401(k)s and other retirement accounts.

Although those returns were lousy, both in absolute terms and when compared to the market's long-run average, there's one strategy that it certainly beat: not investing at all.

The act that matters most
When all is said and done, doing what it takes to invest in the first place matters at least as much as the actual returns you get on your invested cash. There are several reasons for this. Perhaps the most obvious is that if you never put any money away at all, no rate of compounding will get that goose egg to ever be anything but a goose egg.

But on another, more subtle level, the act of investing itself matters because making the commitment to do it well requires the rest of your financial house to be in order. You need to be in control of your debts and have enough cash coming in not only to pay your bills, but also to put some away for your future. In essence, investing takes discipline -- the exact same type of discipline that will help you manage whatever sized nest egg you do manage to amass over your investing career.

Your potential $1 million payout from "lousy" investing

A typical working career may last in the neighborhood of 45 years. Having and keeping a consistent investing plan throughout that journey may seem like a daunting task, especially if we suffer through many more of those "Lost Decades." Still, as the table below shows, the reward at the end of the 45-year process may well be over $1 million, even while earning consistently lousy 2% annualized returns:

Monthly Investment	-1% Annual Returns	0% Annual Returns	1% Annual Returns	2% Annual Returns
$0	$0	$0	$0	$0
$100	$43,499	$54,000	$68,162	$87,466
$200	$86,998	$108,000	$136,324	$174,931
$300	$130,497	$162,000	$204,487	$262,397
$400	$173,996	$216,000	$272,649	$349,863
$500	$217,495	$270,000	$340,811	$437,328
$750	$326,242	$405,000	$511,216	$655,993
$1,000	$434,990	$540,000	$681,622	$874,657
$1,250	$543,737	$675,000	$852,027	$1,093,321
$1,416	$615,945	$764,640	$965,177	$1,238,514

Source: Author's calculations.

Granted, to reach the bottom line of that table, you'd have to contribute the maximum allowable $17,000 to your 401(k) throughout your career. Still, the $1 million nest egg at the end is an incredibly impressive result for only managing 2% annualized returns. No matter how challenging it may seem to sock away more than $1,400 a month, note what happens on that top line. If you don't invest at all, when it comes time to retire, you won't have anynest egg to tide you through your not-so-golden years.

The joys of lousy investing

Once you realize how important making the commitment to invest is, getting past the fear of investing poorly is much easier. You can much more objectively look at every investment you have made as either a place to earn or a place to learn. For instance, I view my investment in industrial and financial titan General Electric (NYSE: GE  ) as one of the best investments I've ever made. It was a good investment because of what I've learned from it, in spite of the lousy returns I've received along the way.

Indeed, the principles I learned from that GE investment -- looking for a strong balance sheet and a well-covered and rising dividend -- have yielded far more successful investments than failures over the years. When coupled with the third key lesson from that investment -- prudent diversification -- the experience formed the foundation of an investing strategy that looks capable of withstanding the test of time. Not bad for an investment with objectively lousy returns.

Often, investing does work out
Of course, not all investments turn out poorly, and in fact some wind up doing quite well. Over the course of an entire career, the combination of lousy and great investments in the context of an overall solid strategy could very likely exceed that 2% annual return level. But if you're planning for lousy returns and wind up with better ones, you'll end at a much better place. Yet no matter what your ultimate returns, it's having the foundation and the dedication to invest that matters most.

http://www.fool.com/investing/general/2012/09/18/even-lousy-investing-beats-not-investing.aspx

Diversification and fear of risk

Fear of risk is a legitimate fear - it is the fear of losing money.

Master investors don't fear risk, because they passionately and actively avoid it.  Fear results from uncertainty about the outcome, and a master investor only makes an investment when he has strong reasons to believe he'll achieve the result he wants.

Those who follow the conventional advice to diversify simply don't understand the nature of risk, and they don't believe it is possible to avoid risk AND make money at the same time.  

While diversification is certainly a method for minimizing risk, it has one unfortunate side-effect: it also minimizes profit.

Warren Buffett Explains Why Fear Overshadows Greed

By: Alex Crippen

Getty Images Warren Buffett

It's a good time to remember one of Warren Buffett's classic rules:  "Be fearful when others are greedy, and be greedy when others are fearful."

With so much fear in the financial markets right now, it's not a surprise that Buffett is being greedy.

He reminds Fortune's Andy Serwer that "the lower things go, the more I buy.  We are in the business of buying."  (He, of course, won't say exactly what he's buying.)

Buffett often makes a comparison to the price of hamburgers at McDonalds.  If the price tag is reduced he doesn't get worried, he buys more and feels good that he's paying less for the same hamburger than it would have cost him the day before.

He acknowledges, however, that overcoming fear is easier said than done.  "There is no comparison between fear and greed.  Fear is instant, pervasive and intense.  Greed is slower.  Fear hits."

http://www.cnbc.com/id/44108052

The 10 Mistakes Investors Most Commonly Make

All investors make mistakes. Otherwise, we'd all be millionaires. The trick is figuring out what our investing mistakes are -- and then trying to avoid them.

Meir Statman, one of the nation's leading experts in behavioral finance (the study of why people do irrational things with their money), has written a new book on the topic. In What Investors Really Want, published in October by McGraw-Hill, Statman goes a long way toward helping investors understand that many of their mistakes are caused by their own deep-seated emotions rather than, say, a company's unexpectedly poor earnings. 

In an interview with DailyFinance, Statman, a professor of finance at Santa Clara University in California, shared his top 10 errors that trip up average investors:

1. Hindsight error. "One of the most pernicious mistakes," Statman says. Because you can see the past clearly, you think you have a similar ability to tell the future. Hindsight error is common at the moment, Statman says, because many people are convinced they saw the crash coming in 2007. In reality, they may have thought a crash was possible, but they also thought the market might continue to zoom upward. Now, investors are convinced they actually saw the problem in 2007 but just didn't act on it. So, they believe wrongly that they can act correctly today. They think they know to sell at the precise moment the market is high and buy when the market is low. Based on their hindsight of 2007, portfolio diversification doesn't protect you from losses. But market timing rarely works, Statman says.

2. Unrealistic optimism. This is loosely related to overconfidence. Psychological studies have shown that when you ask people if they think they have the ability to pick stocks that will have above-average returns, men tend to say yes more often than women. "It's not because men are so smart. It's because men are unrealistically optimistic about their abilities," Statman says. This quality is great for job interviews, where you need to stand out from a crowd, but lousy for investing. "When you are unreasonably optimistic in the stock market, you are just readying yourself for an accident," he says.

3. Extrapolation errors. People expect that trends that existed in the recent past will continue in the future. For example, the fact that gold has gone up for the last 10 years has led many to believe it will always go up. But a study of a longer period -- going back to 1971 when President Richard Nixon ended the gold standard -- shows that gold hit a high of $850 an ounce in 1980 but was selling for $345 as long as 10 years later.

4. Framing errors. Often, Statman says, investing is like a game of tennis. People tend to see themselves hitting a ball against a wall, which seems easy. But that's the wrong frame. Investing is really like playing against another player -- when the other player is Warren Buffett or Goldman Sachs. Investors make framing errors when they see a CEO on TV talking up his stock. If it sounds good and you buy that stock, that's a framing error. Instead, you should be asking yourself: "Who else is watching this program, and what do I know that is uniquely mine?" "The answer is nothing," Statman says.

5. Availability errors. This refers to what information is available in your memory. Investors are often lulled into this error by investment companies. When you see an advertisement for a fund, it's almost invariably for one that has a four- or five-star rating from Morningstar. That way, the one- and two-star funds, with lackluster results, aren't available in your memory. "You say to yourself that there's a 90% chance I will be a winner," Statman says. Instead, look at results of entire fund families -- including the losers, not just the winning funds for a particular period, he says.

6. Confirmation errors. Investors tend to look for information that confirms their hypothesis, but they disregard evidence that contradicts it. Gold bugs, for example, constantly remind us that gold is a good hedge against inflation and a declining dollar. But when confronted with the evidence that gold actually fell price for an entire decade, they dismiss that as a different era because Ronald Reagan changed the rules of the investing game, and that problem won't be repeated.

7. Illusion of control. This is a sense investors have that they can make the market go up or down. It's like gamblers blowing on their dice before rolling. "These investors think they're riding the tiger, when in fact they're holding the tiger by the tail," Statman says. If you think you have a trick that can get the market to go your way, you better think twice: This is the illusion of control. "When you realize the market is actually a wild beast that can devour you, you try to put it in a cage," he says. A much safer approach.

8. Anger. This is an emotion we all know: It leads to things like road rage. In investing, you try to get even with the market. You do such things as double down or even sell all your stocks impulsively. "If you feel angry, it's better to wait 10 days before buying or selling, or you'll regret it later on," Statman says,

9. Fear. The other side of exuberance. When you're afraid, everything looks like a threat, and when you're exuberant, everything looks like an opportunity. Lots of investors are still afraid because of the market crash two years ago. They're sitting on the sidelines in cash earning no return or investing in things like Treasury bills, which aren't much of a bargain. "Risk and return go together," Statman says. "So, if you think the market is risky today, then you should also think the market has a good potential for high returns."

10. Affinity of groups. Also known as herding. You hear from your pediatrician that he's buying gold, so you think you should, too. But what do these people really know? What is the analysis based on? Statman notes that some herds are worth joining and some aren't. Many investors follow Warren Buffett's investment decisions and buy similar stocks. Since Buffett is usually a winner, perhaps that's a herd worth joining. But buying Internet stocks in 1999 or houses in 2005 based on what everyone else was doing was a horrible mistake.

Statman makes no grand conclusions in his book, but he does point out repeatedly that the average investor can rarely beat the market. Therefore, he recommends small investors put their money in index funds that provide average, if not spectacular returns -- and not catastrophic losses

"But if you like the pizazz of investing," he says, you might take a shot on individual stocks. Just be careful. 


By Charles Wallace

Posted 6:00AM 12/05/10
http://www.dailyfinance.com/2010/12/05/10-mistakes-investors-make/

Nervous UK investors make a dash for cash

Thousands of nervous investors are shunning shares as the financial crisis drags on.

Investors opting for the safety of cash amid the economic debt crisis Photo: Howard McWilliam

By Emma Wall

8:03AM BST 24 Jun 2012

British investors are making a dash for cash as the eurozone turmoil shows no sign of abating. Stockbrokers, fund providers and investment managers all say that investors with Sipps (self-invested personal pensions) and Isas are keeping their powder dry by investing in cash rather than stocks and shares.

At the end of May, one leading fund broker, Bestinvest, said 75pc of the money invested by its clients went straight into cash as the uncertainty around Spanish banks and a Greek default put investors off.

Last month Fidelity's Fundsnetwork said 36pc of all investments went into cash funds, compared with an average of just 3pc, while Skandia said twice as much money was invested in cash in May as in April.

Barclays' investment management arm has also reported increased demand from investors to move money into cash. Oliver Gregson, an investment manager at the bank, said it had been a year of two halves.

"Until March we saw investors being significantly 'risk on', with large flows into equities and other assets. Japan and the US were particularly popular," he said.

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"However, in the past three months money has been coming out of markets, and deposits into cash are up."

Mr Gregson added that cash was the only asset class that could fulfil the remit set to him by many clients at the moment: not to lose capital.

Such is the market uncertainty that Barclays is allocating a substantial 45pc of low-risk investors' portfolios to cash. Move up the risk appetite scale and the proportion is reduced to 12pc for those who want moderate risk and 7pc for those who have high tolerance.

Barclays uses a mixture of floating-rate notes, short-term bonds and instant-access accounts for its clients' cash allocation – with at least half of the money in instant-access accounts for liquidity purposes.

Mark Dampier of Hargreaves Lansdown, the advisory firm, said cash was the more attractive asset for investors right now.

"While many cash accounts fail to beat the rate of inflation, at least your capital is protected if you keep it in cash," he said. "It may be an unpopular view among advisers, but the markets can lose you money."

Mr Dampier added that although fixed-rate accounts might offer a greater return on your money than the "cash park" facilities found on fund supermarket platforms, the most important thing about today's market conditions was keeping your assets liquid.

Cash parks allow investors to "park" their cash before investing it in an Isa, protecting its tax-free status and buying the individual more time to choose which fund to invest in. You can then return to the investment platform when you consider there is a worthy investment opportunity and transfer your money into a stock or fund without losing its tax-efficient status.

The cash park on the Hargreaves Lansdown platform pays 0.25pc for deposits of more than £50,000, 0.1pc for less. Fidelity Fundsnetwork's cash park facility pays Bank Rate minus 0.2 percentage points – currently 0.3pc. Bestinvest's facility pays 0.25pc on deposits of more than £20,000, but nothing for smaller sums.

Mr Dampier said: "The market moves so much at the moment that there may be a buying opportunity today that has passed in a week. If your cash is locked away in a 30-day notice account, that is no good," he said.

"Yes, you may not get an inflation-beating return in the cash park, but your capital is protected and your portfolio liquid."

While savers' fears about investing in the market are well founded, Adrian Lowcock of Bestinvest urged them to steel their nerve if they could.

"There is no doubt that the uncertainty in Europe, particularly around the Greek elections, has put investors off. It is important that, if you do put cash aside in an Isa or Sipp while waiting to invest, you actually take action and invest it. Don't forget about it," he said.

"It is human nature not to act in times of crisis. Ultimately when investing they buy high and sell low, when in fact they should be looking for the longer term and buying on weakness, not waiting for a rebound."

The euro crisis has hit this year's Isa investors hard and their caution is understandable. Last week The Daily Telegraph's Your Money section disclosed that many savers will have seen as much as 25pc wiped off the value of their fund in just three months as global economic fears intensified.

Several of the biggest and most popular funds have been hardest hit. Aberdeen Emerging Markets, for example, was one of the best-selling Isas in the run-up to the end of the tax year. But anyone who invested £10,000 in mid-March would now be sitting on a fund worth £9,156, according to Morningstar.

An investor who bought the popular JP Morgan Natural Resources fund would have seen a £10,000 investment fall by almost £2,500 to just £7,683 – which means that the fund needs to climb by more than 30pc from here just for savers to break even.

And there is little sign of relief on the horizon despite the Greek election result, which did not rule out the threat of the country exiting the euro.

Fund managers are in a cautious mood, too. A survey of 260 asset managers across the globe by Bank of America Merrill Lynch found that cash positions rose to 5.3pc in June, levels similar to those seen at the height of the financial crisis in January 2009 and the highest since March 2003 and December 2008.

Falling sipp rates

The rates paid on cash by Sipp providers have come in for criticism in the past – last year several financial advisers branded them as "unacceptable".

Investors who choose to keep Sipp allowances in cash frequently earn Bank Rate (0.5pc) or less; the average rate is just 0.75pc, according to Investec Bank.

With inflation still riding high at 2.8pc, this gives negative real returns for hundreds of thousands of pension investors.

Advisers said that on average investors held almost 10pc of their Sipp in cash. Investors are allowed to deposit £50,000 or 100pc of their salary a year into a pension, whichever is the lower. This means that potentially £5,000 a year of pension savings is guaranteed to be eroded by inflation.

The average amount of cash held in a Sipp is £39,000, Investec said, with some investors having as much as £50,000 in cash – built up over years of pension contributions.

Lionel Ross of Investec said: "The stagnant Bank Rate is having a knock-on effect on the rates paid on the cash element of Sipps. Advisers are now waking up to the need to challenge their current cash account provider to ensure that their clients are getting the highest possible returns on their deposits, which should in turn enhance overall pension fund performance.

"Given ongoing market volatility, investors, particularly those nearing retirement, are increasing their cash allocation. However, it is essential that they check that this money is held in an account paying a competitive rate of interest."

Around £90bn is held in Sipp accounts nationwide.

Not all Sipp cash rates are bad, however. Investec's own offering pays 2.25pc for sums of £25,000 or more. James Hay Partnership pays between 1.4pc and 2.9pc, and Hargreaves Lansdown said it offered fixed deals paying up to 2.5pc for Sipp holders who wanted to hold cash for three months or more.

But Darius McDermott of Chelsea Financial Services warned investors to avoid cash funds. "There are funds that invest in cash or cash equivalents but other than providing more of a 'safe haven' for your money, as they invest across more than one financial institution, they offer little incentive at the moment. Most are returning only in the region of the Bank Rate so you'd be better off in a bog-standard savings account," he said.

Moneyfacts, the financial information service, said a higher-rate taxpayer would need to find an account paying at least 4.7pc to negate the impact of tax and inflation. However, there are few accounts available that will pay this much, meaning that once people have exhausted their Isa allowance they will struggle.

Basic-rate taxpayers have more luck, with 210 accounts that overcome both the effect of inflation and the taxman's cut by paying 3.7pc or more.

Birmingham Midshires has a three-year fixed-rate bond that pays 4pc and can be opened with a deposit of just £1. Secure Trust Bank's five-year fixed-rate cash bond requires a larger deposit of £1,000 but pays an impressive 4.45pc.

The best one-year bond on the market is from Cahoot and pays 3.6pc. For instant access go to santander.co.uk – the bank's online saver account pays a market-leading 3.2pc and can be opened with £1.

http://www.telegraph.co.uk/finance/personalfinance/investing/9352043/Nervous-investors-make-a-dash-for-cash.html

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What should Prince William do with his £10m inheritance?

Developing Your Emotional Intelligence for the Next Level

by Rande Howell 06-05-2012

Most traders wake up in an emotion, never having seen the tell-tale signs of how an emotion takes over perception and runs a trader's thinking. Yet, the emotion was hiding in plain site - it is the trader's blindness that led them into a decision-making ambush. Working with emotions is not optional in the life of a trader. A trader’s lack of understanding of emotions and how they work is a major obstacle in trading performance, and it will stay that way until the trader learns to deal with emotions effectively. Most traders do not notice an emotion (fear, greed, or euphoria) until it has already corrupted their mindset and hijacked their capacity to think clearly. By the time the trader notices the "feeling" of an emotion, it is too late. When you (the trader) “feel” the emotion, it is already coursing as chemistry in your body and brain and your thinking is compromised in whatever direction the emotion is taking you.

When this happens, there is no way to put the brakes on the emotion and return to clear thinking. The best solution at this moment is let the emotional chemistry “burn” itself out so you can come back to your senses. (You can accomplish this by getting away from trading - i.e. take a walk, go exercise, go for a run – anything that accelerates the burn of the emotional chemistry in the body). But, it does not have to be this way. Let’s take a look at emotions in trading and discover how it is possible to build a path to emotional mastery.

What is an Emotion?

First, emotions are not feelings, although feeling is an element of an emotion. Emotions are not touchy-feely – they are biological. Emotions take over psychology and thinking. They are built to provoke the body and mind into specific forms of action based on the motivation of the emotion. This is why managing them is so important in trading. 

Fear, for instance, is built to avoid threat – both biological and psychological. The emotional brain, once provoked to fear, will manhandle the thinking mind to create explanations that support what the emotional brain believes. This is because all thinking is emotional-state-dependent. The key to successful state of mind management, therefore, is emotional state management. 

Second, an emotion (being biological in its nature) is defined as any disruption to a standard sensorial pattern that the brain has already established. That standard sensorial pattern is often referred to as your "comfort zone". So, as you are trading, if any deviation occurs from a pre-existing homeostasis, an emotion pops up to deal with the disruption.

Now what does that look like in trading? The movement from evaluating set-ups to committing to an entry point is just such a disruption to standard sensorial pattern. Suddenly your cozy comfort zone is disrupted and you are committing capital to risk. For many traders, this represents threat. And, if you do not develop your EQ (emotional intelligence), it will not matter how much you KNOW about trading and risk management while in the safety of your comfort zone, your trader’s hand still freezes and you cannot pull the trigger because the emotional brain dictates how the thinking mind will think. Here, the emotional brain perceives the uncertainty of putting capital to risk as a threat and jumps to fear and hesitation.

Becoming emotionally intelligent is essential to the development of successful traders. Learning how an emotion operates will give the trader an edge in managing his emotions and mastering the mind that he brings to trading.


Elements of an Emotion

Emotions are composed of a number of interlocking elements. The important thing to understand about emotions is that they are biological and they take over your psychology. Learning how emotions operate is the first step to mastering them. Here are the elements of an emotion:

Arousal. First, there is a change in the status of a trade which triggers an emotion based on the trader’s perception of threat (fear) or opportunity (euphoria or greed). What happens next is that the body begins to ramp up for action. Breathing changes. It stops or begins to become shallow and rapid. Muscles tense, getting ready to spring into action. The heart begins to race or miss a beat. You are now experiencing the arousal of an emotion. It is building, readying the body for action. This is the place you want to catch the emotion – before it builds up a head of steam and becomes an out-of-control locomotive. As the emotion’s engine revs up, it reaches a critical mass. It flips an internal switch and it springs into action. It is no longer building up – the switch is flipped and the emotion activates the feeling component.

Feeling. Feeling is the subjective experience of the emotion and is where most traders notice the emotion. However, the feeling element of the emotion is also the chemistry of the emotion coursing through your body. This chemistry is what you “feel”, and this is when the emotion contaminates thinking. In the life of emotional activation, the emotion can easily take 45 minutes to an hour for the chemistry to burn out if it is no longer being stimulated – not good for the trading mind. So you will no longer be in your “right” mind for trading if you are experiencing fear or euphoria. Both fear and euphoria set the trader up for skewed thinking. The feeling element of the emotion produces a belief in the certainty of whatever direction the emotion is provoking you to go.

Motivation. Motivation is where the emotion is taking you. Remember, emotions are biological and are about producing action in a particular direction. Those directions are called emotional motivation and are either avoid (run, hide, freeze, submit), attack, or approach. Feeling and motivation conspire to sweep the trader’s mind away. If you have ever been reviewing your trading day and wondered what happened to your right mind in the heat of trading – this is it. Motivation provided the direction of the e-motion and the feeling provided the certainty of the belief that hijacked your thinking mind.

Meaning. Meaning is the self-belief concerning the trader’s adequacy, worth, mattering, or power to manage uncertainty that becomes attached to the emotion. You can declare that you believe something, but that is only cheerleading. The proof of what you really believe about your capacity to manage uncertainty will be found in your trading account. Most traders avoid looking into their self-limiting beliefs (no matter how boldly their trading account points to them) because it creates discomfort in their comfort zone or current organization of self. This lack of courage is what keeps the trader locked in his self-limiting beliefs, that negatively impact his trading account.

Pre-disposition. Genetic pre-disposition is simply beyond the scope of this article. We are all wired with certain potentialities – it is what we do with our potential that matters, though.




Freedom of Emotion, Not Freedom From Emotion

Emotion is unavoidable in trading. The EQ skill is learning how to use emotions to produce effective states of mind for peak-performance trading. As a trader develops his EQ, he learns to regulate reactive emotionally-based pattern. The first step is to volitionally alter the arousal element of the problem emotion through breathing and tension release. By doing this, he is able to better manage the intensity of the emotion so that it does not activate the feeling state of a reactive emotion while trading. (If that occurs, the trader’s mind is compromised.) 

As he gains the emotional competence to regulate the emotion, he is able to get to the door of the trading mind. This is where he can use new-found courage to examine the beliefs that limits his capacity to manage the uncertainty of probability. Here is where meaning can be transformed - first, by discovering his inherent worth as a human being. This is really important. It is at this point that he can focus on his trading as a performance rather than a characterization of his being. At this point in the journey of a trader, he is re-organizing the meaning of self that is embedded into the emotional structure.

Here, the trader can begin to use emotion as information or data because he is no longer afraid of what he might find out about himself. He begins to see what is manifesting in his trading with far less avoidance and denial and he uses this information to design the mind that trades. No longer does he try to avoid the discomfort of reactive emotions and the self-limiting beliefs that lurk behind them. Instead, he is able to use the emotion as information that tells him where he needs to look for self-limiting patterns. He knows that emotions will lead him to what he needs to know about himself so he can grow as a trader. Fear has been transformed into reverence, vigilance, and concern. These emotional states that give rise to a peak performance state of mind are rooted in discipline, courage, patience, and impartiality.




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