News events in particular cause traders to make incorrect decisions, because they play on emotions. The urge to follow the crowd is normal. It is comforting. And in a strong bull market, it may just be correct.
But in most circumstances, letting emotions push you into making trading decisions costs traders money.
There are two kinds of traders.
1. Those who make emotional decisions based on any of the above.
2. Those who make money off of those who make emotional decisions.
When trading there are two emotions that are more common, and more dangerous, than all the rest; fear and greed.
Fear and greed can ruin even the best trading strategies
One moment of fear or greed can lead to a moment of madness and months of hard won profits going down the drain
Uncontrolled emotions should not be an excuse for losses and losses should not be an excuse for uncontrolled emotions
Remember!! Trading affects psychology as much as psychology affects trading
“You can’t feed on greed”
- Many people think that greed is thinking that the sole aim of trading is to make money.
- This is NOT what greed is
Greed is trying to make money too quickly
There are lots of ways to be greedy in trading;
- Trading in sizes that are too large
- Trading too frequently
- Having unrealistic expectations
- Dreaming of the big hit trade, rather than steadily building your equity
Fear in trading has two faces;
- Fear of loss
- Fear of missing out
The fear of loss compels traders to close profitable trades prematurely, meaning they miss out on potential profit
The fear of missing out compels traders to abandon their trading strategy so they do not miss a major price move
Fear is NOT good as it leads to overtrading and miss-timed entry and exit points
DON’T BE SCARED!!
1. Harness the power of intention
As you become more and more focused as a trader and as you learn to clear your emotions the power of your intention will become stronger and stronger. Begin the day by setting the intention that you will be successful, that you will be profitable, and that you will be safe. If possible visualize it, or feel that it will happen.
If any feelings or thoughts come up contrary to that intention (e.g. I lost yesterday perhaps I’ll lose today) go straight to the next point and clear that thought/feeling.
2. Clear limiting thoughts and emotions
Did anything happen yesterday or on previous trading days that is bothering you? Anything happening in your personal life that may be affecting your state of mind? Any recurring thoughts or feelings that come up during the trading day?
3. Brain power
Make sure that you have exercised and eaten properly so that your mind is clear and fresh. Have the right snacks at hand so that you can keep your blood sugar balanced, so that you mind stays fresh and optimally focused.
4. Know when you are going to trade
You may say “How do I know when I am going to trade ahead of time?”. In response I’d say, “if your trading system doesn’t tell you when you are going to be trading ahead of time, then you are missing out on a huge advantage”. As you’ll see from the various posts on cycle trading I am convinced that time is as important a factor in determining entries as price. This is why I use a combination of cycles and harmonics in addition to regular technical analysis to determine entries.
Adopting this trading methodology was the single biggest contributing factor for me in becoming a consistently profitable trader, because I can calmly prepare for the times that I am going to trade and I can relax my focus during the times when I know I should be on the sidelines.
One of Sun Tzu’s most famous quotes is: “Every battle is won before it is fought.” The phrase implies that it is planning and strategy that wins wars and not the battles themselves. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.
Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade.
Conversely, unsuccessful traders often enter a trade without having any idea of at what points they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even more gains.
Take-Profit Points, trading greed, trading fear, trading emotions, financial behavior
A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often times, this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.
On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often times, this is when there is limited additional upside given the risks. For example, if a stock is approaching a key resistance level after a large move upwards, traders may want to sell before a period of consolidation takes place. (more…)
In the book “Reminiscences of a Stock Operator,” Edwin Lefevre writes:
“The speculator’s deadly enemies are: Ignorance, Greed, Fear and Hope.“
In today’s commentary we will take a look at “Hope” and see why it is one of the four deadly enemies of successful market timing.
Each of us has a desire for success. That is why we use market timing in our investing. Not only to increase our gains in both bull and bear markets, but importantly to protect our capital against loss.
But that same desire for success can stand in the way of our ability to recognize reality, even if it is right before our eyes. All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided, or at least put on the back burner.
When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss may be erased. (more…)
Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.
Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.
- Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
- Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
- Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
- Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
- Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
- Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
- Diversifying traded markets or stocks before doing the proper research is a mistake.
- Trading so big that your emotions interfere with your trading plan is a mistake.
- Trading when you are very sick or going through emotional personal problems is a mistake.
- Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.
Let’s be brutally honest, there is no easy way to react to trading losses. If you are expecting me to give you a magic formula, then I am really sorry, as I don’t have one. Going trough losses is not easy because, for many, these are your hard earned money and of course it will be painful. However, every time you feel the pain from losing, you have gained new perspective to how “pain” feels like. From personal experience, I can honestly say this – it only gets easier because you start to know how your emotions will react and to a certain extend, you get immune to it.
Some would think that getting immune to losing is not a good thing. Agree, but you’re missing the point. When you are immune to losing, it is because you understand yourself better and you are better at managing your expectations and emotions. More importantly, when you are immune, you are emotionless and you can focus more on making rational decisions. And that is the ultimate goal of staying positive.
You must trade without emotions. If you are human, that’s impossible. More importantly, when you understand your emotions, you will realize they are assets, not liabilities. The real keys are:
- Being aware of how your emotions interact with and influence your trading, and…
- Developing the skills needed to trade with them