The Traders Emotional Cycle

By David Hobart
20 July 2009

There is a common cycle to the emotions experienced by traders. This cycle, when observed, can give you greater insight into some of the seemingly irrational decisions traders make in the markets; and from there, the frequent irrational pricing of markets.

When I first began trading back in 1994 as a trainee FX dealer for Banker’s Trust (BT) in Sydney, I noticed how emotional extremes were driving many of the decisions of the traders around me.

One of the things I noticed back then, even among the more seasoned traders, was a tendency to be emotionally effected by the results of trading from the day before. I would see traders swagger with confidence into the office having yesterday made a million dollars only to be punished by the markets for their self perceived invincibility.

And conversely, I would see opportunity missed by traders too timid to participate because of the knock to their confidence from losses the day before.

At the time, it occurred to me that there had to be a better way to not just survive, but to thrive in the markets. To be so affected emotionally by your daily activities seemed tiresome and not conducive to consistent profitability. I wanted to make money consistently, regardless of market conditions and despite the vagaries of my emotional state.

Defining my Emotional Cycle

Given how much impact the emotions of the traders around me were having on their profitability, I was sure that understanding my own emotionality was critical to my own success. So I began to look inward, and to study my own emotional swings. I listed the feelings that I experienced along the way; from elation at the top to depression at the bottom, and about 15 emotions in between.

It became obvious that my cycle was no different in nature to the cycles of the traders around me. This observation inspired me to define it as the Traders Emotional Cycle® (TEC) and has lead me further down a path to understand its origins and as a trader, it profit implications.

Profiting from my TEC

Over the years, I have used this cycle to varying degrees in increasing my consistency and profitability. Using it counter cyclically in managing my risk has enabled me to reduce the volatility of my returns. As a behavioral tool in my entry execution and bet sizing process, I am able to gain insight into the potential direction of markets.

Traders that work with me are often relieved when they realize their volatile emotionality is a common, shared and largely predictable experience. When learning to apply these insights into their own trading approaches, they gain a greater awareness of the common decision drivers for many market participants, and are inspired with a greater sense of self understanding.

Market Insights

Each month, I publish my thoughts and current market exposures in the Apeiron Global Macro Fund’s monthly performance reports. These can be accessed via http://www.apeiron.com.au/reports.html .

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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