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Understanding the difference between the emotions you can’t avoid and the ones that will ruin you when trading
– by Ryan Henry of TrendLizard.com
Trading can be an emotional rollercoaster. Watching a trade move firmly in your favor is exhilarating. Tracking the movements of a high-flyer that you are preparing to trade is exciting. Buying into a price move that you have big plans for is satisfying. Taking a big gain off the table is really fulfilling. Conversely, watching a promising trade reverse and fail on you can be painful. No doubt, emotional responses come with almost every facet of the trading game.
It’s probably not a great idea to live and die with every trade you make, especially since you can almost guarantee that you’ll lose half the time. A less stressful approach is to understand that taking losses is the cost of doing business, just like the electricity bill. But honestly, these aren’t the types of emotions you have to worry about. The ones that can foil your plans of being a consistently successful trader are the ones that impact your trading decisions.
For me, one of my biggest emotional reactions I get from trading has nothing to do with the trades I’ve actually entered. Once I’m in a trade, the hard work is over. The only reason I am in the trade is because that trade fit my requirements perfectly and my risk is manageable – I won’t take the trade otherwise. And from there it’s out of my hands. Sure, I might be happy about a big gain or sad about a loss, but not for a second do these emotions impact my trading.
The most dangerous emotion I feel is the anxiety that comes with a trade I have not yet entered. This is where pricey emotional mistakes could be made. When a market starts moving quickly and I cannot yet quantify what that market is up to, I get anxious. Sometimes I want to just take the trade, regardless of the context of this strong move. This feeling of anxiousness is something I can’t help; it’s who I am as a trader because it pains me to miss any strong move that takes place on an instrument I track. But that doesn’t mean I allow these emotions to dictate my trading. Every trade is entered with the hope that price will move as fast as possible. But I also know what conditions create a ripe environment for such a strong move; that’s the exact basis for my trading system. Specifically, I need to see a market that is giving us trendy price movement in the direction of a dominant trend. If those conditions don’t exist, then I can’t reasonably expect to participate in that strong move, unless I’m in the business of just randomly following my emotions as I see fit. That’s not exactly a formula for success.
When sharp price action emerges out of nowhere, it’s a good idea to let it develop to better understand its intentions. Trends change, and these sharp moves may very well signify that an important, tradable change is taking place. But if is, we can wait for whatever we’re trading to prove the change in trend before getting involved. Specifically I want to see price prove that a change has occurred, by correcting the new, strong price pattern, and then resume its new trend.
By understanding what my trading system is designed to do and that I won’t possibly catch every big move, it helps me better cope with the types of emotions that could otherwise lead to undisciplined and unsuccessful trading.