Thursday, March 5, 2015

The Emotional Trader

You have to be okay with wins and losses. You can't just be looking for the wins and, when the losses happen, you can't buy more and more because you're sure it's going to bounce. We call that revenge trading.
Josh Brolin

The nature of trading demands that you have an objective and logical approach. If you are experiencing extreme elation after a winning trade and likewise extreme disappointment after a losing trade, then you are riding an emotional roller coaster: Up and Down, Up and Down. Your account balance is probably doing the same thing jumping Up and then Down. Many go to the extreme of picturing and trying to become an emotionless being, such as the ultra-logical Mr. Spock from "Star Trek." That's fine just realize it is not easy. After all how can you not get at least a little excited after a win and become just a little disappointed after a loss, its human nature, it's natural to feel that way; and that's the point, it is not easy to control your emotions, it takes lots of practice, but it is possible to control your emotions in order to achieve your objective, a logical mindset that is conducive to profitable trading.

Probably the most significant way to control your emotions is to use proper risk management. If you're risking money you cannot afford to lose, or you're risking too much of it, you will feel pressure. However if you minimize the
amount of money you risk on a trade (think position size for instance), you'll be able to tell yourself that the actual downside is bearable; you'll know you can easily survive the worst case scenario. It will also help a great deal if you have a detailed trading plan and keep a log of each trade with clearly spelled out strategies for how you entered and how you will exit.

Emotion control and discipline require energy, both physical and psychological. If you are under stress because of external life events such as a death in the family, a new home, problems at work, or with your spouse, that will eat up a great deal of your energy and make controlling discipline and emotions a much more difficult, if not impossible task. Don't underestimate the powerful influence stressful events can have on your life. If you are feeling extreme stress, take a break from trading until those issues are resolved. You will save yourself untold additional hours of stress from the markets and in all probability saved a good deal of money from making careless errors. 

If you feel you must perform flawlessly on every trade, you will also feel pressure. You will become easily fearful and disappointed by minor errors or routing trading losses. Accept your limitations, you are human after all, you will feel more at ease. You cannot do more than is humanly possible no matter how much you would like to. Patience and practice build the skills you will need to be a consistently profitable trader.

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