1. Trading Psychology
By Ken Hodor
10/15/09

2. Overview Background on neurological trigger/response
Identify the responding emotions involved
How to successfully deal with these very strong emotions

3. Primative Emotions
Fear and Greed come from most primitive part of the brain—amygdala
3-times stronger than logical mind

4. Nervous system responses to various triggers
Touch something hot < .22 seconds
Nerves close to spine pull you away
It takes too long to get to the brain and respond
Being attacked by a lion—fear < few seconds
Amygdala responds saying run
Amygdala also turns up heart rate and blood pressure
Shuts down cerebrum—logic is out the window
Financial attack->planning > days/weeks/months
Logic function of brain the cerebrum—very slow!
Only works if Amydala is not dealing with emotions

5. Fight someone 3-times stronger
Use an equalizer…such as a weapon
Sling-shot—David and Goliath
Knife
Sword…a bigger knife
Gun
Run him over with your car
Walk/run away
Amygdala
Logical
mind

6. Dealing with Trading Emotional Response
Do not activate the trigger
Complete confidence in strategy
Any doubt triggers “fight or flight” emotional response
Drugs
Serotonin uptake inhibitors—you do not care
Exercise—natural “drug”
Generates serotonin minimizes emotional response

7. Measurements based on Market’s Emotional Response
Fibonachii Retracements
Measuring Individual waves
Point A Demand Exhaustion
Point B Renewed Demand
Point C Exhaustion again
Elliot Waves
Multiple wave response
Beginners enter here
High Emotion
I’ve got to get in!
Experienced Traders
enter here—No emotion
If it goes against me…I am out.

8. Emotional Wave

9. 14-Emotions
Optimism – A positive outlook encourages us about the future, leading us to buy stocks.
Excitement – Having seen some of our initial ideas work, we begin considering what our market success could allow us to accomplish.
Thrill – At this point we investors cannot believe our success and begin to comment on how smart we are.
Euphoria – This marks the point of maximum financial risk. Having seen every decision result in quick, easy profits, we begin to ignore risk and expect every trade to become profitable.
Anxiety – For the first time the market moves against us. Having never stared at unrealized losses, we tell ourselves we are long-term investors and that all our ideas will eventually work.
Denial – When markets have not rebounded, yet we do not know how to respond, we begin denying either that we made poor choices or that things will not improve shortly.
Fear – The market realities become confusing. We believe the stocks we own will never move in our favor.
Desperation – Not knowing how to act, we grasp at any idea that will allow us to get back to breakeven.
Panic – Having exhausted all ideas, we are at a loss for what to do next.
Capitulation – Deciding our portfolio will never increase again, we sell all our stocks to avoid any future losses.
Despondency – After exiting the markets we do not want to buy stocks ever again. This often marks the moment of greatest financial opportunity.
Depression – Not knowing how we could be so foolish, we are left trying to understand our actions.
Hope – Eventually we return to the realization that markets move in cycles, and we begin looking for our next opportunity.
Relief – Having bought a stock that turned profitable, we renew our faith that there is a future in investing.
From:

10. Fear and Greed

11. Additional consideration
Emergencies that force emotional response
Hit by a car
Heart surgery emotionally drains both you and partner
Divorce
Children’s emergency
How do you deal with trading in emergencies?
Automation
Other support people to help—non-emotional

12. Investools Expectations after classes

13. You do NOT feel these emotions.
Paper Money Trading
You do NOT feel these emotions.
Because you can
always get a “do over.”

14. Cannot Handle Fear Emotion

15. Emotional Journey Use each trade as an opportunity
Use the wave to help identify your emotions
Log what you are feeling in your journal.
Forgive yourself and move on
When logic returns
Refine your strategy so it does not happen again.
Ask yourself what should have been done?

16. Gambler or Bipolar Disorder Loves the emotional swings

17. Learn a Successful System

18. Build Confidence Focused equity and strategy
Diversified equities and strategies
Many equities, Strategies, Indicators
Confidence
Confidence

19. Doctors Dealing with Emotions
Life and death situations
Completely rely on plan
There can be no emotion to cloud logic

20. Strategies Dealing with Emotion
Start very small $ then grow larger building complete confidence—there can be no doubt
Set it and forget it
Brian
Analyze the night before
Put in trades
Then go to work and don’t watch market
Ken
Program all possible outcomes in software
Watch computer to make sure it is working

21. Professional Help “The Daily Trading Coach” book
by Brett Steenbarger
What type of trader are you?

22. Start Small Grow Large Start small
$20 call
Increase only when confidence in your strategy suppresses fear and greed.
Suggest doubling investment size
Modify strategy in writing/software

23. Compounding effect Gain 20% Initial capital $ 20.00 Day Week 1 Month$
Day
Week
1 Month
3 Months
Days 1 5 20 60
Networth $ $ $
$ 1,126,950

24. Ken’s Strategy
Winners
Stop Loss

25. Conclusion Deal with something 3-times stronger
Use a bigger weapon
Walk/run away
Do not trade impulsively based on emotions of Fear and Greed.
Do not focus on the money, instead focus on the strategy (your rules).