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In

Part 1 of this piece, I contended that all or nothing thinking about emotions misses the mark because it doesn't recognize that emotions can be a valuable source of information for decision-making.

Now I want to identify specific forms of tempered emotion to show how they differ from -- and are more useful than -- the more raw forms from which they spring.

Fear into caution

: Perhaps the clearest example of tempered emotion is fear transformed into caution. Sometimes we feel raw fear and anxiety when we are watching a position rapidly go against us. The adrenaline surge associated with raw fear is not pleasant, no matter what the stimulus may be.

But if we can learn to temper our fear into a more moderate caution that keeps us on our toes, it doesn't have to be unpleasant at all. In fact, we can stay cautious quite comfortably for long periods of time.

Caution, along with skepticism, helps turn us away from all those who might otherwise persuade us to commit capital at an unacceptably high level of risk. Caution may lead us to trade less often, take smaller positions and be satisfied with smaller gains when the market is jittery or the trend is unclear.

Fear tempered into caution may also keep us primarily in cash or bonds for extended periods of time when the waters are simply too murky or filled with too much undertow. Or it may lead us to find investments away from the equity markets altogether.

Caution also helps us temper our greed. It reminds us to think once and then

think again

before taking action. It is the yellow light hovering above the speedy and greedy intersection of trading, telling us we may be at risk for an accident.

Greed into conviction and quiet passion

: Greed in its raw form propels us to go too far, whether it be pushing too hard for gains, not knowing when to sell or biting off a larger position than we can comfortably chew. But tempered greed is interested conviction. We need sustained interest to make us focus attention and stay engaged. And we need conviction to take a risk when we are unsure of the outcome.

Interested conviction leads us toward feeling the confidence that the decision we have made is the right one -- before, during and after the trade has been executed. This may help us counter the

predisposition to be too quick to feel the pride of making a profit or guard against the regret of loss. It allows us to stay with a position long enough to ride out the gains.

Another form of tempered greed may be a quiet passion for trading. This passion keeps us coming back even when trading feels sour. It keeps us engaged in learning more about methods, techniques, tools, etc., and sharing our interest with others.

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Euphoria into satisfaction

: Other feelings that benefit the trader include satisfaction and contentment, which we may view as tempered euphoria. Feeling satisfied and content may be reactions to a winning swing trade of a few days, selling a long-term position for a healthy gain or a number of intraday trades that work out just as planned.

Why not just feel euphoric? Because euphoria, although intoxicating in the moment, breeds a false confidence and sense of invincibility that can push us to give back what we have made. When we feel invincible we think it's too easy, that we can't lose. And, of course, that is exactly when we tend to let down our guard, press our bets and make mistakes. If you want to feel euphoric, best to do it in some other activity away from your trading.

Disgust into loss of interest

: Disgust in its raw form makes us bitter and pushes us away from the market. As in, "I hate the market and swear I will never buy another stock as long as I live."

Those who have been

deeply wounded by loss often feel disgust. But tempered disgust is simply loss of interest and a more mild distaste. This loss of interest may allow us to disengage for a period. We take a vacation or we take a hiatus from trading, and we let the world go by without concern for the market.

Periodic disengagement is good for all traders, but it's especially useful for those who find themselves feeling disgust. Disgust is not as useful as loss of interest. One makes us want to turn off forever. The other turns us off for a while, until we feel ready to return with renewed interest.

Anger into determination

: Raw anger can be transformed into a fierce determination and perseverance. It happens all the time in the world of sports competition. Anger doesn't have to lead to uncontrolled and desperate attempts to go for broke. It doesn't have to lead to dumb trading or unconsciously self-destructive actions when we can temper it into a positive determination.

In sum, successfully tempering emotions means you don't need to be afraid of them or try to block them out. Cultivate tempered emotion, and make it part of your mental approach to trading. It will take you further than trying to become an unemotional robot.

Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996.

He is the author of

The Disciplined Online Investor

recently translated into Spanish. He is pleased to receive your comments and questions for publication in his public forum columns at

steven.hendlin@thestreet.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.

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