Sunday, August 06, 2006

Managing emotions

This is not a guide on the issue, rather, think of it as a confession.

With a very large chunk of my net worth committed I’m naturally subject to the emotional ups and downs as the market fluctuates. Before going further, let me preface by saying that although I believe the general market has topped, my current short positions are still less than my long ones. In addition, I’m very aggressively long the precious metals complex at this moment. Nor am I calling a new leg down after Friday’s reversal at key resistance levels. One day simply does not make a trend.

One of the most common advice to the trader/investor is to be unemotional. But how to be unemotional? An answer is seldom provided. I’m not sure that is even the right question. Now if we go back to the name of this blog. In accordance with the Middle Way, one would say emotion is neither good nor bad, it just is. It’s no more or less valid than reason, its supposed antagonist. Emotion is not to be suppressed; it should be first made aware of, then accepted. With acceptance comes understanding; with understanding, transcendence. What helped me the most in confronting my own emotion has been digging deeper at the baser origins. That is, to ask myself questions such as "why do I invest?", "what do I expect in the markets and why?", or simply "why do I feel this way?", etc.

One thing I noticed was that the possibility of a renewed down spell brought a little glee in me. You may think it’s paradoxical given my net long exposure, but I assure you it is not. I have known for a long time that I derive greater satisfaction from being right, as if profit is only an afterthought. I crave that understanding of the hidden order of things. Everything I have learnt about economics and finance tells me that the economy is slowing and this market ought to be going down. So a down market is naturally a confirmation of my worldview.

A more sinister reason lurks behind: I believe a down market boosts my relative performance. When things are going up and up, everybody jumps aboard and the rising tide lifts all boats. However when times are tough, risk management, timing and the flexibility to go both long and short matter a great deal more. It is here that I hope to have an edge. I know it’s unkind to rejoice when the masses suffer, but it is a manifestation of my competitive instinct and I make no apologies.

Simply by being more aware of those emotions and their origins I seem to have a better handle on them: I no longer will the market to move the way I want -- I'm more adapt at taking what the market is willing to give while still maintain some strong opinions. As for my need to "beat the market", as long as it doesn't make me over-reach, it actually provides a powerful mental edge.

I hope the above puts some of my writings in context and is of help to you and your trading endeavors.

Additional reading: Mapping the trader's brain