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The Irrationality of Emotions


The best traders detach themselves emotionally and focus only on the technical picture


Despite my rule to not discuss stocks with family or friends, I will often break down and engage in a cordial conversation with someone generally interested in how I spend my time. While I find it worthless to debate my style or approach, I am eager for the opportunity to impart some of what I have learned to someone who is equally eager to receive it. Regardless of the subject matter, however, I will never discuss specific stocks as my primary objective is to effectively relay the core of my style--letting the charts be my guide no matter what.

Just recently I was discussing this with a family friend who was intrigued to learn that price and volume are the primary variables that guide me in allocating millions of dollars. Rather than dismissing my strategy, he wanted to know more as his basic understanding was that I had been relatively successful over the last several years.

As we talked, the topic of psychology came up and he was inquiring about instinct and emotions. I recounted a story of how just recently my emotional capital was spent and my instincts told me to cash in and sell everything; but, my rules said to stay put, and they ultimately made a significant difference. We went on to discuss the current state of the market and the potential for a wall of worry, however it wasn't until long after the conversation had ended and I was at home relaxing on the couch when I realized something that hit me like a ton of bricks.

Often I attempt to analyze or determine what others are thinking as a way of gauging which direction the market will move, but in reality what I am feeling, thinking, or believing is exactly the same as most. Ironically, there are many times when I feel that I am alone in my thoughts; however, that is simply not possible and rather than analyzing my feelings and guessing at others, I see this as yet another reason to block out those emotions and look only at the chart as my guide. I will mask my feelings by saying they are contrarian, however how could I possibly know what contrarian is unless I knew exactly what the majority of others were thinking? Are my emotions somehow superior to others'? Of course not. Will I feel differently from the majority when a market moves in a certain direction? Doubtful. So how can I possibly attempt to overlay any emotional feel or instinct on a market that is more than likely being bought and sold by millions who feel the same way as I do? I can't.

Does this mean that because everything is already priced in that markets are so efficient that no one can possibly gain an edge? Not a chance. So, how can you achieve superior results when you think or feel the same as a vast majority of others?

Well, as I continued to think through these thoughts, my brain flying by now, I considered how emotions--including mine-- will always go to extremes and rarely be rational. Therefore, in order to effectively play a market I must continue to remove these emotions and focus more and more on the action before me rather than anything else.

These thoughts dramatically changed what I have always viewed as growth for a trader. I believed that someone who has grown has somehow gained more insight, feel or instinct over the markets. In reality, the best and most seasoned traders I know have been able to successfully detach themselves emotionally from the markets, and focus only on the technical picture that holds the truth.

I have to continue to ponder this further; however, it once again reiterates the importance of laying down our preconceived notions or ideas, and accepting only what is before us and nothing else.

In line with these thoughts, and despite what the general averages are doing, it is tough to argue with the following technical action:

  • Noble Energy (NBL): Recently broke out to new all-time highs and is now consolidating recent gains.
  • Manitowoc (MTW): Broke out of a cup and handle on Friday to new all time highs.
  • Intercontinental Exchange (ICE): Breaking out of consolidation area to new all time highs.
  • Hologic (HOLX): Breaking out of multi-month base to new all time highs.
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Positions in NBL, MTW, ICE, HOLX

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