Managing Emotional Capital

By David Hobart
13 April 2009

In the trading business, emotional capital is almost as valuable as financial capital. Without financial capital, you can’t trade. With a draining emotional bank account, it is very difficult to trade with any objectivity and consistency, which typically leads to reduced financial capital anyway.

What is emotional capital?

Emotional capital is the emotional energy available for the trading process. I see it like a bank account; you need sufficient funds to be able to draw on when things are a bit tough, and you need to replenish it so that there is always an abundant supply.

Trading can be a very emotionally draining experience. Being confronted with repetitive losses is difficult enough, but it is compounded when you make yourself wrong for them. When you do, you use up significant emotional energy. Each negative thought, causes a negative emotional response. If not checked, this can rapidly deplete your emotional reserves.

Quantitative/Systematic or Discretionary?

Even quantitatively (quant) focused traders experience these same issues. I have seen many traders turn systematic to try to better manage their emotional capital, only to find that their discomfort was largely unrelated to their process. In my experience, whether you are quant/systematic or discretionary matters little in terms of the emotional swings in trading.

Some tips to keeping your emotional bank account full

So regardless of your style, you’re likely to experience some emotional volatility in your trading. Understanding the origins of this emotionality has been one of my driving passions in the trading game over the years and it is where the traders that work with me typically get the most value.

Here are some simple thoughts on how you might better manage your emotional capital.

1. Betsize appropriately – if you’re over betting, you will often become attached to the outcome on any individual trade. This is the surest way to throw you off balance and have you feeling emotionally drained. If you’re having trouble removing attachment, try reducing your betsize. In my trading, I run a betsizing model to ensure that I’m efficiently allocating to each idea.
   
2. Turn your computer off and stop staring at the screen – when you are confident in your process and are positioned in the market appropriately, turn off your computer and do something else. If you find yourself resisting the idea of turning your screen off, then you probably have either 1. Got too much risk on because you’re attached to the outcome or 2. A negative thought pattern running on a subconscious level causing self doubt.
   
   This self doubt often leads to addictive behaviours, one of which is the need to continually watch your screen. Identifying and clearing these thought patterns can open up a world of possibility for generating greater and more consistent profits.
   
3. B e grateful – in my daily meditations, I arrive at a zero point when I experience gratitude. When I am grateful, I have forgiven myself for all my mistakes; I’ve erased regret for all of my questionable trading decisions, and I am open, receptive and quietly confident. 

If you would like to find out more about David Hobart’s trading coaching and mentoring programs, please email David at dhobart@traderemotions.com.au  .  
 

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Disclaimer: The contents of www.traderemotions.com.au is general information only and in no way provides advice in a personal or general nature. David Hobart and his related entities can not be held responsible for any loss, cost or expense resulting from your activities related to the subject matter in this document and or relating to www.traderemotions.com.au

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