“I have blown out my account twice because I write down the rules, but then a few hours go buy, I get caught up in the in the emotions and the volatility, and then I notice I never followed my rules, wtf is wrong with me? am I just too obsessive and unteachable? should I strap an electro-shock collar to my neck like an invisible fence for my dog? will I get better over time. How do you quit for the day when you hit your max drawdown? are some people just not able to trade, or is there still hope? I have all these great rules but they go out the window in the heat of the battle. And, as you correctly point out the battle is with myself.

I am just so f…..k smart I am stupid. —”

I found it in an old-email today and know that many traders feel like this – especially today and yesterday. The problem is your brain has a circuit for ambiguity and it is what overrides your rules. The trick is to learn how to work with that circuit – which is modulated through feelings. … regardless of what any other trading shrinks say.

It seems like it would go without saying but it doesn’t. A key to making money as a speculator is knowing what combination of market factors you are looking for – and then waiting for the elements to converge. This starts with knowing what your factors are…. can you describe them? In enough detail so that I could trade them? Making these decisions outside market time – and then knowing when your unconscious pattern recognition is augmenting your plan is a big key in Psych Cap.

a 1000 points???? are they kidding…….

Richard Bookstabber in Demons of our Design had it right when he described how interconnected all trading and all markets are…. the only part he didn’t really cover in detail is this:

it is NOT fear and greed – it is fear and fear2. Fear2 is the fear of missing out….and this matters because fear of missing out drives lots of trades. Now today that probably made you money – but we don’t get 90% days very often. … well wait, maybe that isn’t true. we sure have had lots of them lately.

In either case, it pays to understand the emotional backdrop to every trade – there ALWAYS is one… not matter how many people have told you there isn’t or shouldn’t be. They don’t know what the neuroecon guys know!

… and in the comfort food department… a grand up sure feels good for a change! now if i could just remember if it was Petula Clark or Nancy Sinatra who sang “up up and away in my beautiful balloon?” …. it sure wasn’t Alice Cooper…. Pink Floyd? … no that was “Money” …. okay – a little giddiness going on here on the shores of the East River (tidal estuary).

At this point, it goes without saying – the entire world is gripped in fear. .. and for good reason. Forgive me for disagreeing with FDR but it isn’t that “the only thing we have to fear is fear itself” but “the only thing we have to fear is acting on our fear AT THE WRONG TIME.” Sometimes fear makes us act in a way that protects us – like if someone is about to assault us or we see a car speeding through an intersection (well okay in NYC we say to the car – “Dare you” – but that is – well – it is New York and we are “odd”.)

The facts are that no one knows what is going to happen and that it is clear, lots of people are selling. Does that make it seem like a good time to sell? Is it usually a good idea to do what most other traders and investors are doing? … The truth? It depends on your time frame. If like me, you sold today at 3:50 and covered at 4:00 then it was good to be doing what everyone else was doing. If you did what I did earlier, then it wasn’t (in fact I had some money to make back so thank god for that last swoosh).

Two questions you should always know the answer to -

1) What is my time-frame?

2) What is really driving me?

…the answers will always lead you to a better decision!

We still believe this is the best way to read price action. In fact, we would go so far as to say that it is the best way to integrate the ideas out of behavioral finance into a way to actually trade the markets. Put simply, being able to easily see the areas of congestion versus thin trading gives you a clear picture of what other people are thinking – and doing. This is really all you need to extract alpha out of the market. It is also where most traders (and portfolio managers) miss out. It is all too easy to think of the market as a series of numbers or bars… but it really is a series of human decisions which are simply reflected in the bars.

The crisis (gee that word is getting really old) that we are in now is a great example of how the series of human decisions, some based on numbers and some based on fear, cause an asset to be priced at what it is – at least until a new series of decisions ensue. If you want to judge how much is rational and how much is irrational, does it really help? What you need to know is where others think there is value – and auction market theory allows you to do that.

The trick is what tools best assist in understanding human decisions? We all have essentially the same data – but how we choose to interpret it and what we choose to do with the interpretation – is the harbinger of our results.

Decision-research basically proves that we need our emotions to make a good risk-reward decision.

If this is the case, what do you suppose happens when you proactively attempt to eliminate all emotion from your thinking? Do you think you can succeed? Do you really want to succeed – given what we now know about how the human brain processes feeling-denominated sources of input?

Does the idea of “marking-to-market” your feelings make sense?

We’ve all heard of human capital and the importance of the human element. The concept of psychological capital takes that discussion to another level – a level where we can begin to further understand, analyze and actually build on our most significant asset.

Most people believe that their intellect – the combination of their learned knowledge and their ability to process or respond to new information – comprises the bulk of the human capital equation. But, is this really true? What about the imprecise and fluid elements of confidence or determination? Where do these feeling-based dimensions fit into the role of human capital?

It is the inclusion and specificity of both feeling and emotional elements, in addition to intellectual ones, that defines psychological capital.