We have so far covered the tools to use when trading or investing in the financial markets.  Now, we take a look at the most essential element of the trading system which are trading tactics and market feel. 

While fundamental analysis and technical analysis answers what stocks we can trade or invest in, trading tactics and market feel focus on how we will do it.  Our analysis gives us a trading plan (battle plan) which is a set of figures for us to follow in a given trade - entry, exit, cut loss and holding time.  However, the most common problem is that many investors or traders end up spoiling the plan because of human emotions such as greed, hope, patience, desperation and fear.

Many people fail to realize that trading the financial markets is 100% emotion driven.  Rumors, speculation and good financial news can cause a trader to be greedy and hold on to his shares.  A stock price going below one's purchase cost can cause him to hope and wait instead of cutting losses.  Impatience for a stock price to reach its computed target can cause one to sell prematurely.  Desperation to join a trending stock can cause a trader to panic buy and end up buying at a higher cost.  A market going lower and lower each day cause people to fear and stay away from the markets.

Trading financial markets has never been a competition of who earns the most but it's actually a battlefield of one's emotions.  A lot of people feel frustrated when the price turns against them.  What's even worse is that some people, who would cut their losses, end up seeing the stock price skyrocket after they do it resulting in more frustrations.  Others feel bad having to sell their shares too early at a small 20% margin after which it hits 50% in a few more days.  Bottom line, every trader in his trading career takes a beating from the markets.  The tough part is when the trader fails to acknowledge the emotional nature of the markets and starts being emotional with his trades.  Talk about vengeance.

When traders start trading, they feel excited and extremely happy when they earn while a loss can bring them down to the lowest point in their life.  The emotions are at the extreme ends and the goal is to make both ends meet.  When emotions are at the extremes, it generates more problems.  A winning trade builds confidence for a trader.  When he loses money in succeeding trades, his pride gets affected.  The inability to swallow his pride or accept his losses, would cause more emotion-driven trades.  Thus, it is very important for the trader to pull in the extremes and manage his emotions.

Emotions will always be there. We can try to trade as mechanical as possible, but we still can't help feeling elated or depressed at times.  It is up to the trader to manage his emotions.  He can choose to ignore which is very difficult or he can choose to face it and learn from it.  Any technique would work as long as the trader doesn't let the emotions get over his judgement and eventually his quality of life.

Here are a few basic steps to help contain and manage emotions:

1. Develop a good habit.

It is of utmost importance to understand that trading can be habit forming.  The lack of a good system at the start of one's trading career can hinder growth.  What is even worse is the lack of realization that a good system, a must when trading financial markets, can lead to a dead end street.

Bad habits are hard to break but to admit that needing a system in trading is already winning half the battle in your struggle to be a better trader or investor.  The next step is to study and develop your personal trading system and be committed to it.

2. Be committed to your trading journal.

Having a trading journal where you log your trading plan and the progress of it helps contain emotions.  Below is a list of items you put in your trading journal:

- Stock Code

- Reason for Entry

- Entry Price

- Cut Loss Price

- Target Price

- Holding Period

- Date of Entry

- Emotion During Entry

- Emotion During Price Movement After Entry

- Date of Exit

- Net Profit (Gain or Loss)

- Emotion After Exit

The trading journal is your containment system.  This where you pour your emotions and leave it there.  This is a technique that keeps you from being an emotional trader and allows you to study your emotions as well.  After a few weeks or months down the line, you can go back and observe how you are doing with your trades.  It can give you statistics on how successful you are and how you are handling the emotions.

3. Think out of the box and analyze.

The human body needs a stimulus to generate hormones that make us feel the way we do.  When we get burnt, our initial reaction is: "Ouch, it hurts because I got burnt."  It never was: "I got burnt, ouch, it hurts." 

The moment a trader sees his portfolio getting red, his body releases hormones that will let him feel anxiety, fear, depression and all other negative emotions.  At this point, the trader is vulnerable to more emotional burden and is susceptible to making unreasonable decisions.  Just to counter the effects of the stimuli, the trader should exert extreme mental effort to control his emotions.

The first thing to do during such scenarios is to step out of the box and analyze what is happening: determine what the stimulus is; what the emotions are; what were the mistakes committed (if any); what will be the correct actions to take; and what are the steps to take to avoid such mistakes in the future.

This is very difficult to do especially for traders who are emotional by nature and have developed bad trading habits.  However, this is the best way to assess the given situation and to learn from it.  Continuous learning on how we trade individually enhances our trading personality and attitude.  It allows us to be better investors and traders.

4. Develop the realistic mind set.

Trading can be a rat race.  A lot of traders develop this idealism of being able to buy a stock at its bottom - the cheapest price - as well as being able to sell at the peak - the highest price.  Moreover, many investors tend to fall in love with their stocks as they get fixated with fantasies of how much money the stock will give them.

For the unguarded mind, trading can be such a fantasy because of the many stories they hear about individuals earning huge amounts of money in a short span of time.  They end up getting fooled and brainwashed.

It is important for the trader to develop a realistic mind set.  Before we enter any investment or trade, we should expect the risk and the loss thereafter should we fail.  This makes it easier for us to accept defeat and to move on as well by swallowing our big fat pride.

When we miss a good trade, an investment call, or when we profit from a trade but later realize that we sold prematurely - opportunity loss - we can feel regret.  We should keep in mind all the time that market opportunities are abound and endless. If we miss an opportunity, remember that there is more to come.

5. Implement a Buddy System

An investor or trader who constantly has difficulty getting out of the box to analyze his trades or has problems in implementing the trading plan at full force, should implement a buddy system.  The buddy system basically works by having a co-trader act as a police who guards over your actions.  This co-trader or police even has the option or the right to execute exit trades (cutting losses or taking profits) in cases when hope and greed are weaknesses of the trader.

It is best to have a buddy who is well accomplished in trading or investing.  A matured buddy can act as a consultant who will spot the strong and weak points of the trader.

6. Having trading breaks

Successive winning trades pushes us to do more.  However, successive losses can be a warning sign to tell us to back off and take a break.  A trading break relieves the trader from stress and fatigue.  It energizes the body and allows the trader to review his trades and to get back to trading with a better disposition.

The trader can implement a standard on trading breaks.  For example, if the trader loses about 2% of the total portfolio, he forces himself to have a break.  Another example would be to force oneself to have a trading break after experiencing 5 consecutive trading losses.

Investing in financial markets is really simple.  Opportunities are endless.  The only cause of a trader's downfall is the lack of a trading system and emotion management.