The Traders Emotional Cycle
By David Hobart
There is a common cycle to the emotions experienced by traders. This cycle, when observed, can give you greater insight into some of the seemingly irrational decisions traders make in the markets and consequently, the frequent irrational pricing of markets.
When I first began trading back in 1994 as a trainee FX dealer for Banker’s Trust (BT) in Sydney, I noticed how emotional extremes were driving many of the decisions of the traders around me.
One of the things I noticed back then, even among the more seasoned traders, was a tendency to be emotionally affected by the results of trading from the day before. I would see traders swagger with confidence into the office having yesterday made a million dollars only to be punished by the markets for their self-perceived invincibility. Conversely, I would see opportunity missed by traders too timid to participate because of the knock to their confidence from losses the day before.
At the time, it occurred to me that there had to be a better way to not just survive, but to thrive in the markets. To be so affected emotionally by your daily activities seemed tiresome and not conducive to consistent profitability. I wanted to make money consistently, regardless of market conditions and despite the vagaries of my emotional state.
Defining my Emotional Cycle
Given how much impact that the emotions of the traders around me were having on their profitability, I was sure that understanding my own emotionality was critical to my own success. So I began to look inward and to study my own emotional swings. I listed the feelings that I experienced along the way; from elation at the top to depression at the bottom and about 15 emotions in between.
It became obvious that my cycle was no different in nature to the cycles of the traders around me. This observation inspired me to define it as the Traders Emotional Cycle (TEC) and has lead me further down a path to understand its origins and as a trader, its profit implications.
Profiting from my TEC
Over the years, I have used this cycle to varying degrees in increasing my consistency and profitability. Using it counter cyclically in managing my risk has enabled me to reduce the volatility of my returns. As a behavioural tool in my entry execution and bet sizing process, I am at times able to gain some insight into the potential direction of markets.
Traders that work with me are often relieved when they realize their volatile emotionality is a common, shared and largely predictable experience. When learning to apply these insights into their own trading approaches, they gain a greater awareness of the common decision drivers for many market participants and are inspired with a greater sense of self understanding.
About David Hobart
David has been a trader and portfolio manager since 1994. He has managed teams of traders for global investment banks and hedge funds including BT, Macquarie, ABN Amro and Blue Sky Alternative Investments. He has worked with numerous traders and portfolio managers as a trading coach/performance consultant. For a detailed review of David’s CV, please see his LinkedIn profile.
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