W.D. Gann on Emotions in Trading. The following article was written By Jay Hawk. Here Jay outlines one of the biggest reasons why most people fail at Forex. Emotions & the failure to control them. This is a brief resúme of Jays forex career:

I had a 12-year professional financial markets career incorporating exchange-traded stock, options, futures and forex experience, having leased seats and traded as a specialist market-maker on the CBOE in Chicago and the PSOE in San Francisco. I also ran broking desks with hundreds of retail and professional accounts, and I actively managed trading portfolios for private clients as large as $30million both on and off the floor.

Title: W.D. Gann on Emotions in Trading

Description: Covers many of W.D. Gann’s thoughts on the dangers of allowing your emotions to rule your trading process and how to overcome this potentially serious obstacle to profitability.

Who Was W.D Gann?

Born in 1878, he was reputed to have made $50 million over the course of his career. William D. Gann is a trading legend. In 1909 the magazine ‘The ticker and Investment Digest” reported they had witnessed his trading for October of that year and it included 286 winning trades and 22 losing, a win rate of 92%.

To most successful traders, the effective management of emotion in the trading process is one of the keys to profitability and a principal component in the mindset of successful traders. Made famous as the inventor of the Gann Angle technical indicator, W. D. Gann was a psychologically-prepared master trader who relied on technical indicators of supply and demand to direct his trading.

Perhaps one of the most difficult personality traits for some people to overcome when trading is stubbornness. Doing so effectively first involves admitting that you are wrong on the market’s direction and then taking evasive action in a timely manner in order to manage your risk sensibly.

Developing such flexible humility provides one of the key emotional qualities that contribute to the mindset of a consistently-successful trader. Gann was notably flexible as a trader and was therefore always prepared to change his mind (and his trading position) when it came to the market’s trend.

Along these lines, Gann once advised his fellow traders to: “Face the facts. Change your position. Change your mind. Change with the trend and you will make profits.”

Furthermore, fear and greed are the emotions most commonly associated with trading. With respect to the former emotion of fear, Gann put his view on the subject quite succinctly as follows:

“Fear causes many losses. People sell out because they fear commodities are going lower, but they often wait until the decline has run its course and they sell near the bottom.”

Often traders will close out positions in fearful desperation after having watched them lose consistently since they want to put an end to the emotional pain they feel. Fear also manifests during the trading experience as the fear of missing out, the fear of impending doom and the fear of failure.

All of these fear-based emotional responses are experienced daily in the trading arena and can contribute to trading losses if not managed appropriately.

Nevertheless, fear can also be useful and, as Gann says, “Fear will often save you if you act quickly when you see that you are wrong.” Many seasoned traders can attest to the value of using their natural gut feelings of fear to show them the right time to exit the market before an even worse loss subsequently ensues. As Gann so aptly put it, “The fear of the market is the beginning of wisdom.”

When it comes to greed, some traders actually defend the emotion, saying “no one ever went broke by taking a profit.” Others have also defended greed, such as the fictional character Gordon Gekko from the film Wall Street who maintained that:

“Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

On the other hand, if you only take small profits as soon as you see them, but let your losses accumulate to a greater extent, you will soon be out of business as a trader and this is the primary risk of succumbing to greed in your trading process. Greed also sometimes manifests as the tendency to overtrade, which can cause losses due to taking trades with low risk/reward ratios, as well as from paying excessive commissions and spreads.

Furthermore, being greedy and failing to act when it is time to take profits on a position will often ultimately lead to disappointment since that initially winning trade might even eventually turn into a losing one!

On the subject of the emotion of hope, Gann warned his fellow traders in his book “How to Make Profits in Commodities” to:

“Never trade on hope.Hope wrecks more people than anything else. Study the market and determine the trend. Face the facts, and when you trade, trade on facts, eliminate hope.”

The emotion of hope presents a significant pitfall for the trader since it can prevent them from taking appropriate action to protect their account’s value. As Gann also observed on the subject,

“Hope will ruin you because it is nothing more than wishful thinking and provides no basis for action.”

Like Gann, many people have found out the hard way that, when it comes to trading, emotions should be controlled at the very least, and in most cases completely avoided in the decision-making process.

Accordingly, the vast majority of successful traders develop a technical trading system to trade the market with and they maintain a strictly-disciplined mindset with which to approach their trading activities, just like Gann did. In doing so, they avoid the some of the main emotionally-based trading pitfalls that include: taking profits too early, failing to take profits when appropriate, overtrading and holding onto losing positions.

Basically, as Gann would certainly have advised, the best idea when trading remains to stick to your trade plan’s rules and manage your trading account’s risk with as little emotional involvement as possible.

We will shortly create a separate page where all of the articles from Jay, Julie & other guest writers can be viewed. It is very important that you do not allow yourself to become too side tracked with these or any other different techniques. As I have mentioned once or twice the aim of this site is K.i.S.S – keep it simple stupid. If you are new to forex or still trying to get to grips with my methods just continue as you are and dont let yourself become side tracked.

I spent the first three years of my forex trading career jumping from the latest “wonder product” to the next. All I did was spend a lot of money, wasted a lot of time and confused myself. None of these methods or this weeks latest forex marketeers offerings are the “holy grail.” There isn’t one. Master the basics like support & resistance, trends, fibs etc (all covered in the lmt videos on the forex strategies page).

Having said all of that the story of W.D Ganns trading career is extremely interesting and there are facets of his methods that you could “bolt on” to my techniques at a later date, if you so choose.

To find out more about WD Ganns methods take a look at this site: Do W.D Ganns Swing trading rules still work today?

The best book I have read re Controlling Emotions in forex is “Trading in the Zone” by Mark Douglas which is available on Amazon.

Regards, Marc