The Emotional Trader
Emotions; volumes of books are written about them. But they can be the biggest hurdle in trading. In fact, the fear of trading, or the fear of losing, can hinder even the most tenured of traders. Everyone hates to lose money, and everyone wants to make money. This is the fear and greed battle that we all go through. But if we let either of these emotions control us, we can’t trade, get out too soon, or stay in too long as the market goes against us. All these are indicative of not making money.
So we not only enter the battle field of the market, but also the emotional battle within us, and we ask the profound question of “how do we overcome our emotions?” The answer is not that simple, but to put a fine point on it, the answer is discipline. You must have a plan. We are Generals entering into battle and not only plan our offence, but figure out the defense and how to counter it. In trader terms, where do we enter, where do we take profit, where is the protective stop, and what are we going to do if the market does not go in the direction that we planned? These questions must be answered before the trade is placed. We therefore have a plan to follow and now know exactly what we are going to do as the market reacts.
In making a plan, we have taken trading from an emotional game, to a business decision based on market performance. We have a defined risk, a defined reward, and safe guards in place if the market turns against us. If the market goes in the direction of our analysis, then we begin to eliminate risk (fear) and embrace the reward (greed) as the plan comes to fulfillment. However, if the market goes against us, we begin to eliminate reward, and must reduce risk as much as possible. If we accept the risk where our protective stop is place, then it is a set risk. But if we want to reduce that risk further, we may exit sooner, or put on a hedge position to make up for the loss being incurred. The big thing is (this is the discipline) to stick to the plan and do not deviate from it.
Businesses are not run on emotions, if they were then they would fail in a short amount of time. Traders must look at trading as a business. Though trading can be frustrating at times (and so can working in a business), as long as we have a plan, and stick to the plan, then we can begin to get the emotions out of the way to give us a clear mind to think about what is going on in the market. Each day is a new day in the life of a trader, tomorrow make it a new day in your life of trading and begin with a plan.