Four Common Emotion Pitfalls Traders’ Experience

Peak performance in trading is frequently hindered because of the emotions a trader feels, and more importantly how their trading behaviors change based on those emotions. I have found that the following four emotional experiences have the greatest, direct impact on a trader’s ability to achieve higher levels of success.


1)      Fear of Missing Out

2)      Focusing on the Money and Not the Trade

3)      Losing Objectivity in a Trade

4)      Taking Risk Because you are Up (or down) Money


Fear of missing out occurs when a trader is more afraid of missing an opportunity than they are of losing money. As a result, traders tend to overtrade in a desperate effort to ensure that they do not miss out on money-making situations. This overtrading can then potentially trigger an undertrading response if the traders experience a “trading injury” such as a big loss along the way. The way to solve this is first to accept the reality that you’re always going to miss out on something, somewhere. The second step is to establish game plans on paper and hold yourself accountable to executing those plans.


Focusing on the money and not the trade limits performance because the trader quantifies their success based on their profit and loss data. As a result, when he or she is up or down a certain amount of money that they view as significant, they alter their trading behaviors regardless of what the actual, real trading opportunity is that is presented to them. The way to solve this is to quantify your success based on HOW you traded not HOW much you made on the trade. Did you have edge? Was it your pitch? Did you make a high-quality trade?


Losing objectivity in a trade occurs because traders develop emotional ties to their previous entry levels. The trader is no longer making trading decisions based on the trade, but rather based on how much they are up or down in the trade. The key to overcoming this is for the trader to continually ask him/herself, “Why am I in this trade?” and “If I was not in this trade right now, would I enter this trade long, short or do nothing?”


Taking bad risk because you are up or down money

People do not like to lose – especially money. Normal solid risk/reward thinking becomes skewed once a trader is up a large sum of money. They begin to experience something called “mental accounting” and they treat money differently based on how they made money or how quickly they earned it. On the flip side, when traders are down money, they tend to be consumed with trading for revenge and trying to make it back, oftentimes as quickly as they lost it. As a result, they may take “shots” or do the “screw it” trade because they feel helpless. To solve this destructive behavior, the trader should use their trading journal to document their emotional highs and lows and what triggered it so they can be in tune with when they are feeling over-confident or angry/frustrated. Once they recognize these emotions, they should immediately call a time out and step away from the computer or reduce the risk they are taking until they can bring themselves back to center court.

Bernard Baruch’s 10 Trading Rules

While pure trend followers and technical analysts will not agree with all of Mr. Baruch’s principles it is interesting to read through them, they are the same as some of the top traders and investors of our age. Some of these all traders can agree on.

Bernard Baruch was a millionaire in his early thirties after a few good runs in the stock market and devoted the remainder of his life serving the public and helping the U.S. win World Was I and World War II. He was a big believer in serving his country and that was the main purpose for the remainder of his life after he made his fortune.

Here is a summary of his 10 rules summarized:

1. Only speculate if you can do it full time.
2. Ignore inside information and tips.
3. Have a complete understanding of a companies fundamentals before you buy the stock.
4. Don’t try to buy bottoms or sell tops.
5. Cut your losses quickly.
6. Focus on and buy only a few stocks.
7. Review and update your investments periodically for changes.
8. Study your tax position to know when to sell at greatest advantage.
9. Never invest all your funds. Keep a reserve.
10. Stick to the field you know best in investments.

His biography is a great read for anyone interested in this great man and master trader who counseled presidents and was a close associate of Winston Churchill. It is interesting that it shows how far ahead of his time Mr. Baruch was in not only stock speculating but also discrimination and economics.  If you are reading it for only his advice on stocks just read Chapter 19: My investment philosophy. It is one of the greatest chapters you will find anywhere on advice for successful market speculation. He will explains to readers that economic conditions do not drive prices, peoples perceptions do. Cut your losses fast. Sell your worst performers and keep your best. Know what you are investing in. You can only truly learn the rules of stock trading by experiencing the losses personally.

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