4/15/2008

HOW TO
CONTROL YOUR

EMOTIONS
IN TRADING
By Benny Lee

For ATIC 2008 KUALA LUMPUR

How to CONTROL your EMOTIONS in trading

INTRODUCTION
1996 :
• Got into the stock market frenzy while in college
• Started attending some technical analysis seminar
• Got first charting software, MetaStock

1997 :
• Started trading the futures market in 1997.
• Was against the trend, Lost heavily

1997 – 1999 :
• Worked in a Recruitment Agency (Need to pay back debts!).
• Started to study about trading. Discovered and learned mistakes
• Developed trading strategies and traded lightly. Benny Lee
• Learned about Automated Trading Strategies

1999
• Started trading privately. Stocks and Futures, Malaysia and Singapore.
• Started learning TradeStation and Omnitrader.
• Training Consultant to a Software Company. (This was when my training experience
started)
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

INTRODUCTION
2004 till present:
• Still trading privately
• Joined NextView Group as Regional Trainer, later as Chief Market Strategist

Training/Coaching Experience (More than 8 years):

Professionals and Retail Investors in Malaysia, Singapore, Thailand,
Vietnam, Pakistan and Hong Kong

Speaking Engagements (More than 6 years):

Malaysia, Singapore, India, Indonesia and Thailand
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

INTRODUCTION

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

INTRODUCTION

WHY DO TRADERS FAIL?

NO PLAN
• Becomes emotional…
• Gets Confused…
• Be at the mercy of others… To Buy or not to Buy
• Lack of Discipline…
• Leads to FEAR…

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

INTRODUCTION

WHY DO TRADERS FAIL?

NO RISK MANAGEMENT
• Does not know the risks…
• Becomes a gambler…
• Afraid to lose…
• Leads to FEAR…

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

INTRODUCTION

WHY DO TRADERS FAIL?

NO MONEY MANAGEMENT

Bad reward to risk ratio

Have huge drawdowns…
Becomes over greedy
Leads to FEAR…

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

INTRODUCTION

FEAR!
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

INTRODUCTION
INGREDIENTS OF TRADING CONFIDENTLY

Money Risk
Management Management

STRATEGY

Trading Plan Risk and Money

Management relates to
trader’s psychology

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

TRADING PLAN
THOSE WHO FAIL TO PLAN, PLAN TO FAIL…

What is a Trading Plan?

A Trading plan is a set of ideas or rules to make trading decisions (entry and
exit), often known as trading set ups.

We make trading decisions through:

Quantifiable information
– fundamental and price information

Unquantifiable information (Second hand information)

– news, rumors, tips, recommendations

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

TRADING PLAN

Fundamental
vs
Technical
Analysis
Are you an INVESTOR or a TRADER?

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

TRADING PLAN

Discretionary
vs
Mechanical
Trading

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

TRADING PLAN

1. ENTRY:
Mechanical or discretionary

2. STOP LOSS:
Money Management / Technical Stop

3. EXIT:
Mechanical or discretionary

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

TRADING PLAN

POTENTIAL REWARDS TO RISK RATIO

Mechanical
Average Win to Average Loss ratio

Discretionary
Potential Profit Target to Stop Loss

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

RISK MANAGEMENT

There are 2 types of RISKS in trading:

i) Information/Analytical Risk
How much information did you get for this trade? Are your analysis
good? Do you have enough experience? What is the hit rate of your
mechanical system?...etc

ii) Monetary Risk (Position size)

How much money are you willing to risk for this trade?

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

MONEY MANAGEMENT

A SIMPLE yet IMPORTANT MONEY MANAGEMENT QUIZ:

Trader A has $100,000 capital

Trader B has $10,000 capital

Both Traders uses the same method and enters the market at the same price
and at the same time. Both traders enters the market with a position size of
$10,000.

Which trader has more pressure?

Are both traders maximizing their capital?

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

POSITION SIZING
RISKING MAXIMUM OF X% OF TOTAL TRADING CAPITAL
THE MAXIMUM RISK DEPENDS ON YOUR RISK APPETITE / PROFILE

EXAMPLE : (RISKING 2% of CAPITAL)

TRADING CAPITAL (A) = $100,000
HOW MUCH CAN I BUY IF THE TRADING RISK (STOP LOSS) IS (B) 5% ?

MAXIMUM RISK (2% (C) OF $100,000) = $2,000

THEREFORE 5% RISK = $2,000 (2% from CAPITAL)

POSITIONS SIZE THAT I CAN TAKE =$2,000 / 5 X 100 = $ 40,000

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

POSITION SIZING

A = TRADING CAPITAL
B = MAXIMUM RISK OF CAPITAL %
AxB
C = RISK FROM A TRADING DECISION %
C

EXAMPLE 2 :
Trading Capital = $100,000
Max Risk = 2%
Trading Risk = 4% (Stop Loss)
Position Size = $100,000 x 2 / 4 = $50,000

EXAMPLE 3 :
Trading Capital = $100,000
Max Risk = 3%
Trading Risk = 5% (Stop Loss)
Position Size = $100,000 x 3 / 5 = $60,000

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

CONCLUSION
EXAMPLE 1:

INDICATORS:
MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING)
MOMENTUM OF TREND: STRONG (RSI +VE DIVERGENCE)
CURRENT PRICE ACTION: PULLBACK IN THE UP TREND
SUPPORT AND RESISTANCE : PRICE NEAR SUPPORT LEVEL (TREND LINE)
REVERSAL PATTERNS: CANDLESTICKS ENGULFING BULL PATTERN
COMPANY FUNDAMENTALS: GOOD

INFORMATION RISK = LOW

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

CONCLUSION
EXAMPLE 1:

ENTRY PRICE = $ 5.00

STOP LOSS PRICE = $4.50
TRADING RISK (STOP LOSS) = $0.50 (10%)

TRADING CAPITAL = $100,000

MAXIMUM RISK = 4%
TRADING RISK = 10%

POSITION SIZE = $100,000 X 4 / 10

= $ 40,000
= $40,000 / $5.00 (8,000 shares)

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

CONCLUSION
EXAMPLE 2:

INDICATORS:
MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING)
MOMENTUM OF TREND: WEAK (RSI +VE DIVERGENCE)
CURRENT PRICE ACTION: PULLBACK IN THE UP TREND
SUPPORT AND RESISTANCE : PRICE BETWEEN LEVEL (TREND LINE)
REVERSAL PATTERNS: N/A
COMPANY FUNDAMENTALS: GOOD

INFORMATION RISK = MEDIUM

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

CONCLUSION
EXAMPLE 2:

ENTRY PRICE = $ 5.00

STOP LOSS PRICE = $4.50
TRADING RISK (STOP LOSS) = $0.50 (10%)

TRADING CAPITAL = $100,000

MAXIMUM RISK = 2%
TRADING RISK = 10%

POSITION SIZE = $100,000 X 2 / 10

= $ 20,000
= $20,000 / $5.00 (4,000 shares)

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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How to CONTROL your EMOTIONS in trading

CONCLUSION

HOW TO CONTROL YOUR EMOTIONS IN TRADING

1. A PLAN WITH AN EDGE
A MECHANICAL OR DISCRETIONERY METHOD THAT YOU ARE
COMFORTABLE WITH AND ABLE TO ACHIEVE YOUR TRADING
OBJECTIVE .

2. EFFECTIVE RISK MANAGEMENT

POTENTIAL REWARDS > RISK (STOP LOSS)

3. MONEY MANAGEMENT
POSITION SIZE DEPENDS ON INFORMATION RISK AND YOUR
RISK PROFILE

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

How to CONTROL your EMOTIONS in trading

THANK YOU
Email: benny@thenextview.com
Courses Website: www.thenextview.com
Forum Website: www.investasiaonline.com
Blog: www.tradinglobby.com

Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)

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