When Steve Rhodes, editor of the daily trading newsletter Mastering Probability was named Timer of the Year for 2018 by Timer Digest last month, it marked a culmination of a dream.
“In 2006, I owned 100 different individual stocks,” said Rhodes, who received the award based on his model’s performance against more than 100 other leading market-timing models. “But what I never understood was how a company could generate great quarterly results, yet its stock could drop by 10, 15, 20 percent or more in one day, and I couldn’t tell whether the selling was the beginning or the end. How was it that as a CPA, who understood the financial statement fundamentals of every company owned, couldn’t see the most fundamental aspect of trading and investing, which is the message in the chart about what buyers and sellers were planning to do next? Thus, I set out on a mission to better understand this mystery.”
And boy did he. the “Rhodes Momentum Trading Strategy” has been spot on, leading to the aforementioned award as well as thousands of subscribers to his newsletter and viewers of his show, The Trader’s Edge. The show is seen and heard daily from 1 p.m. to 2 pm EST at TFNN.com.
It was Rhodes’ success and his unique niche of ascertaining the power of emotions as a driver of the financial markets, which led to our decision to interview him.
Question: Talk a little bit about your philosophy concerning the role of our emotions.
Answer: The stock market is the representation of the psychology of the entire world at any given moment and chart data is the exact blueprint of that moment. Pattern recognition has allowed me to take chart data and decipher what the world is thinking and what shareholders next move is.
Some of the grounding for this philosophy came in the 80’s, when I began attending workshops and reading books by Jim Rohn, Anthony Robbins, Chloe Madanes, and Milton Ericson. Each provided me with insight into why we make the decisions that we make and more importantly, why we don’t take action even though we know we should. It can be summed up in one word, fear!
I then concluded that if the stock market reflected the psychology of buyers and sellers, I needed to develop tools that could identify the emotion of the markets.
Why did you create a human needs test and give it such a high profile on your website?
Each of us do the things we do in life to meet our six human needs, which are significance, certainty, variety, love & connection, growth and contribution. Our top two needs typically become our driving force. For me, it’s contribution and growth.
My goal is to help people overcome the obstacles that are preventing them from having the life they imagine. To do that, we must understand the forces driving our decisions, which ultimately shape our destiny.
How do emotions affect trading decisions in a positive way with examples?
Emotions, a/k/a our six human needs, can be met in empowering, disempowering or neutral ways.
An individual who has certainty as one of their top two needs, can meet that need by always controlling risk. A trader can control risk with proper position sizing, utilizing stops and identifying the price target of a move. All of this can and should be done prior to entering a trade.
A trader who has growth as a driving emotion can determine the system expectancy of their trading system and therefore anticipate the distribution of wins and losses.
A trader who has variety as a driving emotion can trade multiple instruments and multiple time frames to meet their need.
And in a bad way?
Some traders choose to meet their human needs in disempowering ways.
An individual who has certainty as one of their top two needs, could stay in a trade that they were certain was the correct action even though that trade is going against them and beyond where they should have been stopped out.
A trader who has significance as a driving could believe that they are always right and stay in a trade that is going against them even though a substantial loss is what they are currently dealing with.
A trader who has variety as a primary need might trade too many instruments or other distractions that take away from his or her need to focus on managing the trades.
What are some of the keys to making emotions work in your favor?
Decisions are the ultimate power and our single greatest resource is emotion. If we get the right emotion, we can get ourselves to do anything, but emotions are controlled by three questions we ask ourselves every moment of every day and the answer to these questions are what shape our destiny. The three questions are what am I focused on, what does it mean and what am I going to do? Are you focused on your past, your present, your future, yourself, others …… ?
What we focus on and what we feel gives us our meaning. Is this the end or is this the beginning? Are we being punished or rewarded or is this just a roll of the dice?
Our state of mind and our blueprint of the world are the invisible forces that shape our emotion.
Our state of mind is controlled by our physiology, what we focus on and the words we choose.
The blueprint of our world is controlled by our six human needs and our top two needs are typically the driving force behind the reasons of why we do what we do.
The way we make emotions work in our favor is to choose empowering ways to meet our six human needs and to accept that unfortunate circumstances happen to all of us. The key is what we do with those circumstances and how we frame things.