Not only does a trader need to be in control of their emotions, but he or she also must understand where their emotions come from. Why is it that you react to certain situations the way you do?  Every person reacts to situations differently and in degrees that vary from one person to another - sometimes completely opposite. 

"Three great forces rule the world: stupidity, fear and greed"

Albert Einstein

So why do we at times react so differently to others? And why is this important to wealth creation in general and trading in particular?

Mental Conditioning

During our upbringing we are conditioned with automatic responses to situations by our parents and the direct influences from society (school, sporting groups, church). The conditioning extends across things such as mannerisms, speech (accents), spending and saving patterns, relationship & social etiquette, group dynamics etc.  These could also be summed up as our ‘habits’ and the way we each deal with our individual self and all situations within our environment.

For example; how do you react to traffic congestion or long queues? Do you get hot, bothered, flustered and angry? What types of foods do you like? Do you smoke or have anxiety problems? Are you optimistic or pessimistic by nature?

Many of our automatic reactions to each of these are predominately a result of the conditioning we received as children; we mimick our parents' reactions to various situations. When relating this to trading or wealth creation, a very important characteristic is the way we handle money, how we think about money and our beliefs around money. The majority of these are directly in line with what our parents taught us and more to the point ‘showed’ us. It’s not what parents say, but rather what they do which has the most significant impact on their children.

If our parents only ever worked for their money - receiving dollars in exchange for hours on a minimum wage, then that is the most likely route we will take. If, as children, we are always hearing; “that is too expensive”, “we can’t afford that”, “we don’t have any money”, “the rich are greedy”, “money doesn’t grow on trees”, then this conditioning of how we think and feel about money manifests into our adult life.
If your parents never saved and invested their money, or showed you as a child how to implement money to work for you, then you will only ever carry out similar ways in obtaining money. Money can be made thousands of ways out of the share market, and it is easy to see the traders that believe they need to work hard for their money. Many of these people get caught up in day trading and intra-day trading strategies – and in effect have merely swapped one job for another. 

Will Trading be the lifestyle you dreamed of? 

There is nothing wrong with day trading or intra-day trading, but the reward must outweigh the effort, and if it is not planned properly you can find yourself compromising the lifestyle you dreamed of and missing out on the freedom the market can give you, if only you choose.

So it is crucial to understand what your views and beliefs are regarding money, and how those define your money habits; it isn’t the investment vehicle that will create wealth for you, it is the way you handle your money, the transactions you make and each and every decision you make, all of which are based upon your underlying beliefs. Your situation in life is a reflection of your thinking.

"Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort."

Franklin D. Roosevelt

There are three types of money habits:

• Excess Savers (aka Surplus Spenders),
• Level Spenders (aka Break Even Spenders), and
• Liability Spenders (aka Deficit Spenders). 

Excess Savers; never spend more than they earn, they always have excess left over that they intelligently invest. 

Level Spenders; these people spend what they earn, mainly on items that depreciate, so generally have nothing to show at the end of the day. 

Liability Spenders; spend all of their money and other people’s money. They live off debt and have many credit cards and always seem to be chasing their tail.

Each of these spending habits is generally not much different than the results achieved by our parents, which they in turn learned from their parents. If a person’s achievement is considerably different from their parents, it is because they made a conscious choice to change. But most people do not really ‘consciously think’, since we are creatures of habit. 

Trading is all about YOU and nobody else 

We as people can make a conscious decision to reflect upon our own actions and not blame other people or external circumstances for the outcome of our lives. Only then will we be able to choose different actions that will certainly result in different outcomes.

Until we do, we will keep acting from a subconscious programmed habitual level.  We like to believe that we are ‘thinking’, however the majority of the time we are simply following the crowd and acting from our conditioned responses and habits.

Again relating all this to trading the financial markets, you can see that most of our reactions to events and circumstances with our lives are from a subconscious level. And if the subconscious programming is not congruent to the results we want to achieve from trading, then we will be wondering why we keep experiencing a shortfall in our results.

If your programming is of the Liability Spender (aka Deficit Spender), where you spend more than you earn, the temptations to draw money out of your trading account and not reinvest the majority of its profits, (lessening the advantage of compounding interest), seriously interrupts any wealth creation progress. 
A person who has anxiety problems, and is more reactive than proactive to situations and events, will be caught up in the white wash of the markets, getting tossed around by their own emotions. This person is much more likely to trade out of emotions such as fear, hope, greed and ego.

To summarize, we are actually discussing two very similar things;
1. Our programmed habits or reactions to events, and;
2. Our ability to control these reactions, so that we can make unemotional decisions and ‘choose’ more logical and productive responses. 

Once we understand why we react the way we do, and why we make the decisions we do, only then will we be able to be objective – where we allow things to just happen rather than become emotionally involved with a situation; we also remove the limitations of having expectations of an event which stem from old restrictive beliefs.

The Power of One

Individual speculators make up around 95% of the Foreign Exchange market, so as an individual trader we have no control over the market's movement; there is nothing we can do to influence the direction which the market moves in. Having no control over the external environment is a very new concept to people when they first step into trading. We are all used to being able to control most things in our life, or at lease believe we can influence them. However, in actual fact, since early childhood we all have many external controlling factors which are directing most everything we do. We are almost like a puppet on strings. As babies we have our parents making all of our decisions for us; then during our schooling years we are instructed by our teachers in addition to our parents; whilst in our adult life our employers and spouses heavily influence our decisions; and without a doubt the biggest external influence is the clock - telling us when we need to be somewhere.
When newly introduced to the trading environment, novice traders find it hard to grasp the concept of no external controls. They are caught by surprise when they all of a sudden find themselves in a world they have never experienced before. It can actually take them quite some time and different levels of frustration to realize this. Sometimes they fail to understand it at all. 

Some people are brought up and molded with the right characteristics and disposition to be successful traders. They have mental habits that allow them to function better in an uncontrolled environment. These natural habits are those of excellent internal control and self-discipline. People possessing these characteristics will find it easier to adapt to this unruly trading environment. They study new information in great detail, and then set up orderly processes which they follow down to the finest detail. They are also not afraid to pull the trigger; some people are so busy checking and rechecking details that they have paralysis of analysis and never do anything. 

During the intensive study period, when you are getting to know your trading plan, a trader must go deeply into the fine detail so they ingrain the sequences of the information into their subconscious; until the actions become automatic for them.  Like when driving a car, once you have a few years of experience under your belt you will find that sometimes you can drive for kilometers without even remembering it. Your conscious mind was busy, deep in thought about something most likely a million miles away from the functions your body was carrying out. During those few kilometers you could very well have gone through round-a-bouts, stop signs, give way signs, and varying speed zones – while all the while your subconscious completely took over; as you changed gears, sped up and down, stopped, started, turned and adjusted the steering as required. Once something has been stored through repetition into our subconscious mind, it can almost take over on ‘auto pilot’, while our conscious mind is free to wander off on other, more entertaining topics.

I hope by now you can clearly see the importance for a trader to have a system (trading plan rules/set of strategies) imprinted into their subconscious; so their subconscious can carry out the functions with minimal involvement or questioning by their conscious mind.

Any questioning of your strategies opens doors to succumbing to the emotional lure. Traders need to first create or find themselves suitable rules for the game (their Trading Plan), and then establish the discipline to always follow those rules despite any market movements that tempt you them bend the rules “just this one time”.

For the most part, throughout life our decisions are based on emotion; love; fear; jealously; hate; hope; ego. But in the financial markets these very emotions are the most ineffective guidelines. Emotions tempt traders away from their strategies in hope for the “big trade”; the one that will be the solution to all their money problems or will make up for any previous losses.

Hope tempts the trader to hang on to a losing trade, waiting for it to turn back into a profitable one; Greed grows with each winning trade, tempting the trader to ‘double up’ on the next trade – which happens to be a losing one and eats up all his original profits and more; Emotions are lurking everywhere, and a good trader must be fully aware of them. Wrong emotions lead traders to add to their first profitable position on the one currency pair in a ratio that is higher than the first trade, so that if the added trade ends up losing it is likely to also eat up all the profits of the first trade; or to foolishly trade without a stop loss; or to close their eyes when a losing trade hurts too much, so that they become frozen, unable to make the right decision.

Achieving Unconscious Competence

The problem is that most traders do not realize the pivotal role emotions play in every trader's results. If they do not harness their emotions the realization may just come too late, after they have either given up or lost all their money. We must take the time to drum our strategies into our subconscious, so that we can detach from our emotions and trust our subconscious to do what is correct. Otherwise we will be caught tumbling around in the emotional whitewash of the turbulent river. This level of competence that traders need to aspire to is called “unconscious competence”. There are four stages one must pass on the way, before completing the journey to unconscious competence:

• the first is called “unconscious incompetence” – this is where the person does not know what they do not know. They aren’t aware that the financial markets exist or that these markets can be traded to make money;
• the second level is “conscious incompetence” – this is where the person knows that there are things they do not know. They know the financial markets exist, and they also know that they do not understand how to make money from these markets;
• the third is “conscious competence” – this is where the person knows what they know on a conscious level. They know about the financial markets and have knowledge of how to trade the markets;
• the forth is “unconscious competence” – just like the example of driving a car for kilometers, with minimal conscious thinking about the process of driving, Here the person just knows. They understand the financial markets and their relationship within the markets, with an in-depth knowledge of their Trading Plan, but the knowledge has become part of the trader and not something he has to think about. There is never any questioning, and minimal emotion involvedness.

When setting out to trade the financial markets, novice traders are focused on entering the market, as their intention is “to start trading”. This leads them to look for ‘Entry Strategies’ as they feel their first step is to enter the market. Once they learn a few tips, tricks and indicators they jump into the waters of the raging river. Then they suddenly realize they might need some knowledge of indicators telling them when to get out! If the market is going against them they may panic and sell out; or hang on to hope, watching the prices fall further south whilst they continue wishing and praying for the price to come back to at least their entry price. They fail to realize that there are so many more areas and functions that make up consistent successful trading, other than entry strategies. 

The worst scenario is when a novice trader who has no trading plan, or is not following their trading plan, ‘accidentally’ makes a profit. Their ego becomes inflated and they have an unrealistic impression that they know what they are doing, and that they cannot lose. Many delude themselves with the belief that they have a natural intuitive sense about the market, even when they have absolutely no knowledge at all about it. This causes irrational decisions that leads to the trader's own demise.

Entering Uncharted Waters

Trading is a very different environment to almost anything you have experienced before; many compare trading to gambling, but there is a huge difference. In gambling you need to actively participate to get into the game but do nothing to stop losing; whereas in trading you need to actively participate to get into a trade and if you were to do nothing you could end up losing your whole account, or in some financial vehicles everything you own. 

Trading cannot be compared to gambling, as in gambling you know exactly what your ultimate risk is and the game always ends.  I only ever compare trading to gambling when it comes to the excitement. But if you want thrills take a punt on the ‘ponies’ at the local racetrack – never use the financial markets for emotional highs.

A trader would only ever enter the market with the expectation to make money. You would never be placing a trade expecting a loss; otherwise realistically you wouldn’t have placed it. Accepting that losses are a part of trading is essential. If you don’t you will get caught up in emotional stress and anxiety simply because there is a basic conflict between the nature of the market and your beliefs. Most likely you will react to the emotions of stress rather than the rules of your Trading Plan. However, if you understand that a trader can have more losses than wins and still succeed, given their position sizing is effective, this knowledge will assist you to stick to your trading plan. 

If the traders’ position sizing is effective and the losses are smaller than the wins the trader must be able to psychologically handle loss after loss after loss. Novice traders may find one, two, or three losses bearable, but any more than that and slowly their ego collapses and all their hopes are ground down till finally they just cannot bear any more pain. They then crumble and go against their trading plan rules. Their faith goes out the window. Always remember that having trust in your trading plan is crucial. 

It is important to know your trading plan win/lose ratio so you have an understanding of exactly how many losses, on average, you can endure in comparison to the average wins.

But remember, making more and more trades will not bring you greater success. Over trading can be the outcome of nervous energy and bad emotional control. Traders fall victim to believing that the more trades they make, the more successful they become.

Leave your ego at the door

Your ego and trading must not mix. Personally I have found over my trading career that it is much better to never discuss trades whilst you are in them, and even afterwards it is advisable to not boast about wins, or whine and blame anyone or anything for your losses. The main reason is not mere politeness, but that in both cases you are getting yourself emotionally involved.

When our egos become too inflated and we are feeling invincible and over optimistic, we are likely to do something incredibly stupid; like adding to existing positions when our rules have not yet been met; or adding in lots that exceeded our first position (e.g., if our first position was 200,000 currency units and then we added a second position of 400,000 currency units – double, or anything that exceeds the first). The reason is because if any of the added positions become a losing trade they are very likely to eat into much of, if not most of the profit made on the first position. 

Adding in larger portions than the first is a tempting for inexperienced traders, especially if they have had a lucky run of successful trades. Greed promotes bad decisions.

Traders are lulled into false pretences that ‘trading is easy’ and too quickly believing that the very next trade can solve all their money problems if they open more contracts than their first positions. If money is made too easily when you start out – WATCH OUT!  The result is likely to be disastrous. Naturally the ego takes over, and people believe that they are naturally gifted with trading talent. They experience feelings of invincibility – they haven’t yet experienced or seen the downside to ignorance, but it certainly won't be long before they do.

Money can leave your trading account just as quickly as it arrives. Before you realize what happened you can lose it all. This can deflate the biggest ego at 100 miles per hour, causing an effect where the trader becomes so timid they lose their nerve, hesitate and procrastinate over their next movements - where either no trades eventuate or they are in and out of trades like a ‘jack-in-a-box’. They lose trust in their trading plan and make bad decisions.

Emotional Restraint is Key

A trader should aspire to always maintain his or her cool, calm and disciplined behavior. If they are getting over elated by their wins and depressed and somber over their losses, then they are not achieving the essential goal of non-emotional and mechanical movements within the trading environment. Although this is a style of behavior that is far outside of most people’s natural range of reactions, it is essential to acquire. To become successful you need to always practice the traits that contribute to success.

Receiving admiration and compliments from other people always feels nice, and it is a shame that the trader needs to avoid these. Until you have mastered the art of disconnecting from your emotions while making decisions, you can not be led by these feelings.

In every other endeavor people can regularly become emotionally involved and express their successes through celebrations with colleagues, families and friends. Or openly discuss the pitfalls they may have experienced without it most likely having a detrimental effect to their future success. If a person is used to feeling admired or acknowledged through the results of his work or hobby, then to not speak of his trading success will be very hard. He must learn to find the gratification from within rather than hearing words of congratulation from others.

This isn't to say that you can’t celebrate your success once you have learned the art of emotional control. During the learning process, however, it is virtually impossible to master if you continually search for approval externally.
A trader needs to learn internal gratification throught their ability to always follow their trading plan, regardless of the current win/loss situation. The emphasis needs to be on the discipline of successfully following all rules of their trading plan 100% of the time, not just following it 95% of the time. That is the ultimate achievement in trading; not ad-hoc, sporadic behavior. Such behavior, regardless of whether profits are made or not, is virtually impossible to duplicate. The reactive trader doesn’t even know what actions they took and in which exact sequence. Therefore, it is virtually impossible to duplicate your actions and create another successful outcome, or to avoid a repeating a negative trade.

If we can’t seek approval externally, we must learn to fulfill that natural need internally, and without conceit. Our ego is what prevents us from taking responsibility and will try to lead us to believe it was someone or something else that was the reason for our loss. 

"Whenever you think you are going to make a killing, watch out!"

Joe DiNapoli.

Once you learn to find fulfillment in the disciplined, methodical and meticulous process of following your trading rules, you will become a very calm and relaxed trader. There will be no wishing, hoping or praying for any miracles to happen. may encounter a string of losses, but if you keep following your plan without deviation you must have winning trades arising soon. Your experience will be a world away from the chaotic whirlwind which 90% of market participants experience throughout their trading journey.

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