By Mike McMahon, Director of Education, Online Trading Academy*
Posted: August 1, 2008

There are too many items to keep track of in the market. Traders must understand that they cannot "know it all". If you could, you would be the ultimate trading machine. This being said, we realize that we are imperfect.

We have only 100 percent of our mental energy to use in any given time frame. Some of it is used in maintaining our bodies -- breathing, walking, talking, and so forth. Some is used to keep track of our lives -- What time is it? Did I turn off the coffee pot? Did I pay the phone bill? Most of it is used trying to understand the complexity of our world -- the input from our senses and its identification and categorization.

When we use energy of that last type, we tend to trap ourselves into sorting out signals and identifying them with past similar signals so as to make things easier and conserve this kind of energy. Unfortunately, this means that it is difficult for us to learn new things clearly and cleanly.

A simple example is the color red. Most of us drive a car; therefore, red indicates "stop". If we see the color outside the context of driving, we still tend to think "stop". Many word association tests have proven this to be true. Thus, if red is supposed to mean something other than "stop" in a setting other than in traffic, we might not learn this new meaning quickly, or, if we do, it still retains some "shading" of "stop" for us.

Thus, even though the market has little to do with their social world scenario, new traders often try to interpret the market using the social world as their frame of reference. The signals the market is putting out have little meaning to them because they can’t associate them with the social context, or, more often, they misinterpret what they’re seeing because they’re trying to associate it with something in the social context.

The confused trader then tries to gather more evidence to bolster his or her misinterpretation, further compounding the situation. The more the trader tries to learn via the wrong context, the more confusing the data appears to be. As the trader tries harder, he or she burns more and more of the energy available.

Because the amount of energy is finite in any specific time frame, the trader becomes mentally drained, pulling energy from his or her other areas of need -- life support, emotional response, logical thinking and rational control. As the energy reserves in these areas decrease, certain traits start to take over. The strongest of these are the violent emotions -- anger, sadness, frustration and projection.

Each of these in their turn further degrades the trader's ability to understand the direction of the market. Dazed and confused, the trader makes another bad decision based on good information that has not been properly learned and categorized. This is a downward spiral.

The trader must learn to learn properly. To clear his or her mind as best as possible and try to see reality and then to test it against the market -- not what he or she already knows.

So, for example, many see the price going down, and their "social" education tells them to sell while every market indicator might be screaming "oversold -- buy now". Perverse, maybe, but true.

Controlling Emotions

Emotion is a mental and physical expression of a perceived stimulus. Some emotions are considered "good", others "bad". However, this is, again, social thinking. Emotions simply are; they’re neither good nor bad.

For social reasons, it is not good to be euphoric at a tragedy, nor is it bad to be angry against injustice. However, emotions are energy hogs that drain our mental capacity quite quickly, and usually, with little benefit in the long run.

Learning Not to Magnify

We have all been guilty of making more of a situation than is warranted. A small personal jibe can bring out a totally-out-of-proportion response. Additionally, the injured party can then use even more energy to mentally challenge his or her aggressor with the "that's what I would have done" and concern him or herself with the possibility that the jibe was a capital "T" truth rather than the small, meaningless mutterings of an inconsiderate person.

What, then, of trading? Here is an incredibly stressful world, fraught with fears, personal failures and tremendous mental drains. All traders have problems with loss; the successful ones have learned not to magnify the situation. They learn to "let go" of inherent emotions. No one is immune to the natural response, but neither do the profitable ones worry about that piece of history.

There is no room for emotions in successful trading, but the process has within it the very stimuli that invoke the strongest emotions. Traders must be ever watchful of their composure as trades go against or with them. Euphoria or happiness can be just as debilitating as anger or frustration.

Of course, you cannot be without emotion; you are not a robot. You can, however, train yourself to control your emotions by staying focused on the goal to be achieved, monitoring yourself for symptoms of emotional outbreak and using simple physical stress relief methods to help keep these animals corralled.

Staying Focused

Staying focused is a trained response. A coach once offered me his philosophy, "If it does not add, it must subtract; there are no neutrals". His point was that, whatever you are doing, it must be additive to your goal. If it does not bring something to the achievement of that goal, then it is a "subtraction", a distraction.

Any distraction, no matter how small, is not helping you and, therefore, there are no "neutral" situations. There are pluses or minuses to your goals; you must try to eliminate the minuses.

Trading requires patience at times. It is not all split-second decisions. Trades need to develop, charts need time to form patterns and traders must focus. This is not easy. So, one way to have patience and keep focused is simply to keep going over the plan in detail -- Why did I open this trade? Where was my entry point? What is my stop loss? Where is my exit? How will I execute? Are my trade plan parameters still in place?

Otherwise, if you don’t put your mind to monitoring the plan, it wants to wander, to think of far-away places with strange-sounding names -- a distraction. A trader must love what he or she is doing -- watching the market move, monitoring price action, investigating market and technical indication. It is far easier for this vocation to be successful if it is also your avocation.

You need to understand your normal response pattern. If you do not see "it" coming, you cannot control the emotion or the stress. You need to inspect yourself. What is normal respiration? What is normal pulse? What tensions of muscles are natural? Once we can establish this baseline of individual performance, we can then monitor ourselves for signs that are "subtracting" from our trading goals.

Common symptoms of stress involved increases in:

• Perspiration
• Heart rate
• Blood pressure
• Muscle tension
• Bracing

Once any of these symptoms of an emotional release, or stress level breach, is identified, the trader must take corrective action immediately. The trader must close the trade because he or she is no longer in control of the plan.

The plan said no emotions, right? His or her objective thinking is now being clouded. The next step is to identify the "stressor", the item or influence that is causing the response. Then, the remediation can begin -- limiting exposure to that stimulus, using techniques to reduce both the mental and physical reactions. This would include deep breathing exercises to calm and soothe.

It might require physical exertion to eliminate some of the bio-chemical reactions in the body. It will certainly mean doing a rigorous inspection of "self" before going back into the trenches and trying to re-focus.

Outside Influences

At the outset of this article, I mentioned that there are simply too many things to keep track of. Thus, we need to develop a plan that "walls out" extraneous items that do not "add" to our goal. This is called a "trading system". Having a trading system is relying on data that you can perceive as having a benefit and eliminating distractions that you have not learned to appreciate.

Remember: The market is putting out all kinds of signals. We have to learn, as we go, to disassociate our social conditioning from our trading so that we might have a better chance of understanding the market's data. Our trading system must include only data that we know we have learned in a market context. Beginners often want to include everything possible. Old Pros have adopted the Keep It Simple, Sam (KISS) principle.

Other outside influences must also be considered. Having the support of your family and friends is just as important as a good Economic Indicator. Worrying about what your "significant other" is going to do or say when all is not going well is certainly a stressor or distraction. Listening to people who have not done the hard work you have is yet another.

Announcements, market calls, chat room gossip -- all of these need to be accounted for but not followed blindly. At best, they may be right, but they are not working for your best interests.

You must learn to exist on a few pieces of information you’ve tested and understand. Trade with those for awhile before adding any new "piece of the puzzle". Remember: You eat an elephant one bite at a time.

*Reprinted (and modified) with permission from Online Trading Academy www.onlinetradingacademy.com.