Mastering Emotions: A Trader's True Edge

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This week, I'm excited to share a guest post from Kris from Safe Harbor Stocks.

I first met Kris through one of my interactions here on Substack, where we connected over discussions on investing and trading psychology. Our shared experiences led to some insightful conversations, and I’m thrilled to feature his perspective in this post.

Hope you enjoy it!

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Between business classes I eagerly called the 800-number on the payphone at college. I was checking the price of CMGI. I couldn’t wait to see the current quote.

And no - we didn’t have smart phones. This was a different era than today. If I wasn’t at a desktop, then it was difficult to get real-time quotes, let alone execute a trade. Texting (SMS) only became common later that year.

It was January 2000, and I just saw a 3x in my CMGI investment within a month. I had recently made a nice gain in a couple of months from trading in eBay shares. I was deciding how to handle CMGI.

I felt I was unbeatable. Turns out I wasn’t. I proceeded to hold CMGI for the next several months, watching my profit vanish and then a good portion of my principal on that trade.

I was only 20 years-old at the time, and I learned a lot over the next few years. Since then, I’ve traded futures, options, Forex and stocks. Now with 26 years of experience, I want to share with you what I’ve learned as it relates to becoming a High-Performing Trader.

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Balance: From the Ground Up

It took me years to learn my true mistakes back then. Today I can tell you in a single word what I had missed in 2000: BALANCE. We can apply this idea to the physical and mental world. I was off balance emotionally, had my guard down and became overconfident.

There’s a saying in sports that everything starts from the ground up.

• When I played basketball in high school, I had the best balance thanks to my coach. For example, I could box out my opponents in the paint because I had a good center of gravity and firm stance.

• Even today, when I practice taekwondo along with my daughters, I focus on proper balance and see the results from practicing the form of this martial art. I won’t land precise strikes in sparring without it.

Okay so how does this relate to my abysmal CMGI trade - and more importantly your trading?

Sports requires more physical balance for consistent motor skills and muscle memory. Trading (and longer-term investing as I now do) requires more mental balance. However, the underlying process and discipline remain the same.

Mastering Your Emotions: The True Edge

I wrote an article for my readers about fear and FOMO in investing that’s relevant to our topic. You can read it below to learn more:

Fight FOMO: Building Emotional Discipline in Investing

I’ve now spent more of my life as an investor (long-term focus) than a trader. Nonetheless, the concepts as it applies to balance are equally relevant and much the same. In my experience and observation of others, the best traders (and athletes) stick to process over emotions, adjusting their strategy without losing that discipline.

The Steve Nash Hack

Let me give you an example again in basketball.

Did you know that Steve Nash has the highest percentage free throw percentage in the NBA at 91%? Moreover, he was also more consistent - landing his first free throw as often as his second free throw. The average player in the NBA only hits 73% of his first free throws versus 78% of his second shots. In fact, the higher percentage rank of FT shooter, the narrower the difference between first and second shots.

What could explain these statistics?

Take a look in the video below at Steve Nash’s “process” before his first and second FTs:

Maybe it looks a bit awkward, but Nash actually practices his FT just before the actual shot. Breakthrough Basketball posits that his accuracy can be attributed to this process. Effectively, it shifts the brain’s focus from long-term to short-term. Many basketball fans refer to this as the “Steve Nash Hack”. And I believe it helps “balance” emotions.

The Best Shooters Have the Worst Memory

Here’s another example to drive home the point of how mastering your emotions can lead to success in trading (or sports).

“I just think he hasn't just built up his body and his skill over the years, I think he's also built up his mind. He's so strong-willed that he doesn't let things bother him and he knows that the law of averages are going to play out.” - Steve Kerr on Stephen Curry

Stephen Curry doesn’t have a bad memory, but the point is he practices discipline in not thinking about his last missed shot - or any of his previous shots for that matter - at least during a game. This mindset removes emotion from the game and allows his honed skill to play center stage.

Emotional Challenges in Trading & Investing

Let’s break down some of the emotional challenges for traders into a few categories, then I will discuss how to master them.

Fear and Greed

• Fear makes a trader hesitate, exit too early or avoid good setups. It also makes your realized performance deviate (sometimes materially) from your theoretical performance.

• Greed leads to chasing moves, ignoring stop losses or overleveraging. I’ve observed (and personally experienced several instances) where a trade plan turns into disaster by letting greed creep in.

FOMO and Overconfidence

• I shared my personal example of overconfidence with you earlier with CMGI. Traders can enter their setups late hoping momentum will carry them longer.

• Investors chase stocks after big runs, convinced they’re missing out. It’s easy to slip into an emotional state and react after seeing a successful trade setup that you failed to take.

The Illusion of Control

Traders often think they are in control yet allow their emotions to dictate their actions subconsciously. The market is bigger than any individual trader, so mastering your emotions is the only way to survive. You only control your risk, your discipline and your entries/exits.

Trust me. I can say this as someone who has blown up a few $10,000 accounts back in my earlier days.

How to Master Emotions

These are the best tips I can give you in terms of managing your emotions in trading. Understand that no one can eliminate emotion. The best we can do is manage it.

And as I like to often say: Mastering emotion is a journey without a destination.

What I mean is that you must wake up each trading day and practice it all over again. To a degree, practice can make emotional discipline easier to manage but fear/greed is always around the corner waiting to break you. Mastery requires your lifelong effort to practice your process. Imagine if a Stephen Curry or a blackbelt simply stopped practicing one day. How would it affect their performance?

Practical Tips

1. Develop a Process and Stick to It

Define clear rules for entries, exits and position sizing - and follow it. Just like Steve Nash follows a routine, a trader needs structure to succeed.

2. Accept What You Can and Cannot Control

While you cannot control the outcome of a trade completely you can control how you respond to the trade. And, yes, I used the term respond (as opposed to react) intentionally here. Detach from any individual trade as Steph Curry detaches from any previous shot.

3. Use a Pre- and Post-Trade Routine to Reset Your Mind

Athletes warm up and stretch to prepare before competition. Use pre-market routines to ground yourself emotionally.

In Taekwondo, we have focus drills where we must kick a moving hand target. This focuses the brain on our process and form. This could be as simple as meditation, some light exercise or reviewing your trade setups.

I highly recommend writing a trade journal after each session. While we don’t want to think about the prior trades in the moment, it is important to review and digest your performance and behavior after-the-fact.

After a couple thousand shots (or trades) you get an idea of what you can improve on during a review - IF you journal.

4. Accept Randomness

The market owes you nothing. Perfect trade setups will fail. Judge yourself on your discipline. Outside market hours is the time to re-evaluate your setups and trading performance.

Closing Thoughts

The market does not reward those who try to control it. The market rewards those who can control themselves - who master emotions, remain disciplined and execute consistently. If you maintain your emotional balance and discipline, then you can maintain trading success.

I have had the benefit of being both a long-term investor and a short-term trader. I am happy to share with you another idea which you may find inspiring.

Being short-term in nature (sometimes on the order of minutes), the trader has a particular advantage emotionally over a longer-term investor in one particular aspect.

You need only to manage your emotions over a short period of time. It requires more rapid decision-making but also removes the long window of susceptibility to emotional pressure. Investors, on the other hand, must confront their emotions over long time frames, resisting FOMO and more market noise including overnight holds.

Finally, I want to thank Sara for allowing me to publish this guest post for you. I hope you find it useful. If you do, please consider checking out my newsletter, Safe Harbor Stocks.

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Disclosure: This information is provided for informational purposes only and should not be considered a solicitation or recommendation to buy or sell any securities. The author or entity providing this information may hold positions in the securities discussed. This is not investment advice.

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