There are many parts to trading. It is not just selecting a level to buy or sell and hope you make a profit (as many seem to try!) It is important to create a trading plan which consists of financial controls and to devise a trading style and parameters which the market must meet before entering a trade, exiting a trade and deciding where to place a stop loss.
Another area which we have less control over but will impact most of our trading decisions (around 80%) is trading psychology and the emotions we experience during trading. Unfortunately, it does not matter how many years you trade, psychological issues remain with you. All you can do is learn to control them as much as possible.
Common problems with trading psychology
Imagine you are long, and the market moves higher and you take your profit! You sit there extremely happy with yourself…until you see the market continue to rally! Now you are not so happy as you could easily have doubled your profit! The next day you enter another trade and as the market moves in your favour you recall your previous experience and therefore move your take profit much higher. The market nears your take profit and suddenly reverses before you can get out, and eventually you are stopped out Of course, you then regret becoming greedy and moving your take profit. The next trade you enter moves in your favour and as it reaches your take profit, fear forces you to leave it there, and not only does it hit your take profit, it continues to move in your favour and you could have made more. Welcome to trading!
Here I have touched on greed. Now, some greed is good; however, too much greed will work against you. Without a little greed we will not have the really good days, but with too much greed we will have too many bad days as the market will not always meet our expectations.
Fear can also play a role in trading
Another emotion I mentioned was fear. If you fear losing money it makes it extremely difficult to make money! The fear of losing or seeing your profit disappear will impact your trading decisions and often trick you into taking your profits too early.
To give myself peace of mind with taking losses, I rationalise it simply as reducing my risk. With profits, I place my take profit level with part of my position (as an alert) and when it trades there I will then make a decision on the balance, depending on my view and a second analysis. In the meantime, I cover my balance (PnL) over, so I am not tempted to exit my position too early. I want to trade my position…not my PnL!
Your ego will also play its part as we do not like to be wrong. The sooner you accept that you will be wrong from time to time the quicker you will overcome it. Nobody manages a 100%-win rate, not even the mighty Warren Buffet! Trading losses are just business costs…we all have them.
Finally, hope! In life hope is good; however, it has no place in trading. Hoping the market will move in your direction is a wasted effort as the market will go wherever it is supposed to go, regardless of how hard you stare at the screen or offer to make a deal with the Devil to prevent you being stopped out.
If you are not careful, your emotions will sap your energy during your trading day. There are some great books to help you understand yourself during trading. With trading you certainly do learn a lot about yourself, as well as the markets!
Armchair Trader readers can currently enjoy a discount on Chris Tubby’s trading courses using the discount code ARMCHAIR5% when booking. More details on Chris’ courses can be found at www.masterc.co.uk