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Trader’s Emotions

  
  Education
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The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.

To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.

You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.

Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.

With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:

Despair = Losing Money – Trading Better

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.

Disappointment = Expectations – Reality (more…)

Overcoming the top 10 Pains of Trading.

  
  Education
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PAIN-ASE

Here are 7 painful aspects of trading and what to do about them.

  1. The pain of losing money. (Trade smaller so it is not painful, it is just an outcome)
  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market didn’t match your trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, it’s the market not you.)
  3. The pain of a draw down in capital.(Even the world’s best money managers do not continually hit all time equity highs. Your path may look like this $10,000 to $20,000 to $15,000 to $25,000 to $20,000 to $30,000.  Mine was rockier than most, and after blood, sweat and tears I am now able to trade with $250,000.)
  4. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your back-testing, or paper trading of the method.)
  5. The embarrassment of public losses. You told everyone who would listen about a great trade, and you were wrong. (Never be overconfident in any trade, but always be sure of your stop loss.)
  6. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  7. Losing paper profits, you are up 20% on a trade then a massive whip saw takes back those profits in one move. (Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilled milk.)
  8. You are following a guru and come to realize he truly is a salesman not a trader. (You stop following gurus and look to learn how to trade you yourself.)
  9. You buy a super hot stock that you have researched for many weeks then it goes down due to a bear market. (Only trade stocks long in up-trending markets)
  10. You start trading a system that did amazing in back-testing and promptly lose 10% of your account. (You have to stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

Whatever the pain, just don’t quit, there is gold to be found in trading right over the long term.

Letting Winners Turn in to Losers

  
  Education
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Trading problem that I want to focus on is allowing winning trades to turn in to losers. Many of us have probably had a time when a trade was making big loot, and we started to count the profits like they were ours before we exited the trade. When the stock started to lose the ground it had gained, we avoided selling because we had built up an emotional attachment to the paper profits we had seen. Instead of selling the stock to lock in some gain, we opted to hold out for the stock to go back to where it used to be, promising to sell when it came back to the point where we felt good about the trade. The stock drifts lower, and eventually the gain turns in to a loss. We ultimately sell it at the bottom, swearing never to do it again. But without some reprogramming, we probably will.

The Solution

Like Kenny Rogers used to sing, “Don’t count your money, when you are sitting at the table, there will be time enough for counting, when the dealing’s done.” Do not calculate your profits before you lock them in. Avoiding the profit watch will help you avoid an emotional attachment to the paper profits, giving you greater clarity to take the exit door when the market tells you it is time to do so.

I hope this outline of mental problems and some solutions helps you become a better trader. The difference between those who succeed in trading and those who fail is not the system they play, but how well they play it. Your mind is a powerful thing, don’t let it beat you in the market.

How to Trade Through the Pain

  
  Education
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10 painful aspects of trading and what to do about them.

  1. The pain of losing money. (Trade smaller so it is not as painful, it is just an outcome not an emotion).

  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market didn’t match your trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, it’s the market not you. As long as you followed your own plan.)
  3. The pain of a draw down in capital.
  4. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your back-testing, or paper trading of the method. You have to keep the faith or get with a method you have faith in).
  5. The embarrassment of public losses. You told everyone who would listen about a great trade you were taking and you were wrong. Social media has given us all the ability to embarrass ourselves anytime we want. (Never be overconfident in any trade, but always be sure of your stop loss.)
  6. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  7. Losing paper profits, you are up 20% on a trade then a massive whip saw takes back those profits in one move. (Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilled milk.)
  8. You are following a guru and come to realize he truly is a salesman not a trader. (You stop following gurus and look to learn how to trade for yourself using a method and a trading plan).
  9. You buy a super hot stock that you have researched for many weeks then it goes down due to a bear market. (Only trade stocks long in up-trending markets)

  10. You start trading a system that did amazing in back-testing and promptly lose 10% of your account. (You have to stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

Today I know that …

  
  Education
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mylessonsMy lessons may have been costly ,but they brought with them a kind of undertstanding more precious than gold.

😆 Playing the market is much different from being an investor.

😆 Pride is another word for stupidity if you claim credit for profits temporarily created by a bull market run wild.

😆 Paper profits are the illision of wealth created by the myopia of greed.

😆 Margin is a secuctive temptress more enticing than Delilah-and far more dangerous.

😆 Money doesn’t make people better ;it just allows them to become kinder and more charitable.

😆 Losing money doesn’t mean you’re a fool ,just as making a fortune doesn’t prove you’re a genius.

😆 Maturity means knowing how to cope with failure-and with sucess.

😆 The market respects those who treat is seriously and research it thoroughly ;it mocks those who think its rewards are freely granted to the followers of friendly tips and exicted phone calls from “helpful” strangers.

😆 Just as in every other game of chance ,all of your winning should never be left on the table.

😆 The law of gravity was not repealed for the sake of Dalal street ;even there the rule still holds that “whatever goes up must come down .”

😆 Forgiveness is a virtue even to myself ;I can forgive the fact that I failed-because I know that Iam not a failure.

 

Ed Seykota’s 6 Rules from the Whipsaw Song

  
  Education
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1. Do not be overly concerned about whipsaws a good trend pays for them all.

A whipsaw is when you enter a position but get stopped out quickly when the market reverses opposite to your position.  If you are a trend trader this may happen many times in a row in a range bound market.  This can be very frustrating to a trader and it may cause them to completely change their method.  The fact is that one really good trend will pay for all of these whipsaws as long as you keep your losses small, and if you change your system you lose the benefit of that big trend.

To avoid whipsaw losses, stop trading. -Ed Seykota

2. When you catch a Trend, ride it to the end.

Your system must be able to take a position in a trending market, but then also be able to ride that trend to the end.  Most new traders will jump out of trades before they are finished trending because they are scared the market has gone too far and will take back their paper profits.  Let a trailing stop take you out of a trade when the trend is over, and only exit once you are stopped out.

“The trend is your friend except at the end where it bends.” -Ed Seykota (more…)

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