95% Of Retail Traders Fail. How Can You Succeed? 3
The problem with trading emotionally isn’t so much that emotions are unreliable indicators of future outcomes, it is that allowing them to dictate our trading decisions is frightfully inconsistent.
The lack of consistency means that after a trade is complete (entered into and exited, regardless of profitability), the result cannot be evaluated in a way that provides insight into how to improve.
This is because there wasn’t an underlying process to the trades that were made, and as such, no areas of improvement which can be identified.
In other words, if we were to continue to allow our emotions to influence how we trade, we cannot improve as traders, and if we cannot improve as traders, we will end up being part of the 95% who lose money.
All of which begs the question, how do we keep our emotions from influencing our decisions?
Firstly, it is important to understand that we are only human and our emotional responses are natural. This means that, for the sake of your own mental health, don’t try to avoid feeling the emotions or suppressing them in some way.
Doing so presupposes that we can be robots, which we obviously aren’t, and hence will not help us to achieve our objectives.
What you need to do is to become very aware of how you respond to different situations when trading.
How do you feel when a trade moves against you and causes you to lose money?
How do you feel when a trade is profitable?
Of course, everyone’s answers to these questions will differ slightly. But, in general, the response to losing money will be fear tinged with hope and anger.
The fear stems from the uncertainty that more money may be lost, the anger from the fact that circumstances did not work out in a way favorable to you; and hope from wishing that you can recoup the losses quickly – if only the market turns.
The danger here lies in allowing the loss to grow larger by not exiting the position because of this hope, potentially resulting in an ultimate loss of catastrophic proportions.
On the other hand, the response to making money will be fear mixed with greed.
Fear in this case arises from the reluctance to lose those gains, and greed from the desire to see those gains grow larger. In this case, should you give in to fear and exit the position, you are giving up potential gains (cutting winners too early).
Conversely, if you were to hold on for too long, the market might turn against you and leave you with less profits, or possibly even a loss.
As such, the objective is to not allow small losses to snowball into large ones, while keeping positions open in the market for as long as possible in order to make the most amount of money possible.
Since your emotions will change as your profits and losses fluctuate with the market, the only way to accomplish this is to have a predefined process.
To be concluded…
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