Adrian Reid explains how to test whether your emotional reactions to market behavior actually improve trading results. Identify what triggers you, code it as a rule, backtest it, and usually find it loses money. Testing your emotions builds the confidence to ignore them.
I mean, I've been doing this for 20 years. So much less so now. But still, right? Even still. And what's great, again, about systematic trading is you can constantly build that confidence using those emotions. And this is. This is really important. This is something I teach my students all the time. When you've got a set of rules and you follow them, you're going to have emotions. You're just like, oh, no, I don't want to buy that one, or, you know, I really want to load up on this one. And what you've got to ask yourself is, what is it about this situation that makes me not want to buy it or makes me want to load up? And typically, it's something in the nature of the price movement. You know, it's moving so nice and beautifully and smooth, or it's really jumpy and gappy, or the tails on the candles were really big. Whatever it is, identify what that behavior is that caused the emotion. Then you can codify that and add it to your rules and see if that emotional reaction would have helped if you traded it objectively. And what you find is the vast majority of the time, probably 95, 98% of the time, it destroys value. It makes the system worse. And when you see, oh, the thing that I had an emotional reaction to, if I'd have followed through on that consistently over years, my profitability would have been negative.
Ah, okay, I better ignore that emotion. And the more you do this, the more you test these reactions, the more confident you get, the calmer your mind, the easier it is to just follow the rules.
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