Adrian Reid (speaker) answers a viewer question about managing emotional impulses while trading. He attributes emotional reactions to lack of confidence in one’s trading system and recommends: backtesting rules to build confidence, ensuring the system fits the trader’s personality/objectives/lifestyle, consistently following the decision-making process (including position sizing and signal-taking), and converting recurring emotional reactions into explicit, testable rules to decide if they are warranted. The goal is to maintain consistency so the approach can be tested and proven profitable over time.
How can traders manage their emotional impulses and reactions when they're buying and selling?
And this again, it all comes down to your psychology, which is rooted in the confidence you've got in your system and your rules. So if you're finding it, when you're trying to place trades, you've got impulsive reactions like, oh, this is a good one, I'm gonna, like, I'm gonna place a double order and buy twice as many stocks as I should, or oh, I don't like this one, I'm gonna, I'm gonna reduce my size on this trade because that's, that's, I'm not comfortable with that stock or I lost money on this stock last time. So therefore I'm gonna take a small position, I'm gonna skip this trade. If you're having impulsive reactions like that, then that is stemming from or coming from the lack of confidence in your system. And so again, what you've got to do is you got to step back from that particular trade, look at your process, look at your system and make sure that you've back tested it enough to build confidence, make sure it fits your personality, your objectives, your lifestyle, and then follow it more consistently. Okay, I know it can feel easier said than done, but when you're looking at this one trade and you're grappling over how to do it, or you made a ton of money on this stock last time and you want to place, you know you've got another signal you want to double, you're going to go all in this time. But you've got to ask yourself every single trade, what would my system do? And do that, because if you're to win this game, if you're going to win the trading game, you have to stay in the game. And to stay in the trading game, to be a profitable trader for years, decades, you have to make sure that you follow a consistent decision making process. Follow your system, because when you start varying your decision making process, when you vary your position size, when you vary whether or not you take a signal.
All of a sudden you don't actually know anymore whether your approach is profitable because you can't possibly test it if you're varying it all of the time. You need to have consistency in your decision making process so you can take those rules and test them and make sure that approach is profitable. So that's how you get consistent, how you eliminate the emotional responses, more testing, build the confidence. When you have the reactions, formulate those emotional reactions and crystallize them into a rule. That you can test and decide whether that reaction is warranted, and that will build your confidence in your system. It.
