More On Emotional Considerations In Your Day Trading
by David Adams,
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UNITED STATES, Jan 15 — You have a responsibility to be prepared mentally each day you choose to day trade. Many traders shun the emotional realities of trading, and this aspect of trading is among the most important. Recent findings in scientific studies reveal, unequivocally, that a traders emotional state during a trading session may be the single most important factor in determining whether a trader has a successful day or loses money. On the other hand, the market is inanimate and overconfidence is poorly deployed in the trading environment
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ou have a responsibility to be prepared mentally each day you choose to day trade. Many traders shun the emotional realities of trading, and this aspect of trading is among the most important. Recent findings in scientific studies reveal, unequivocally, that a traders emotional state during a trading session may be the single most important factor in determining whether a trader has a successful day or loses money. In my experience the best way to quiet a group of chatting traders is to ask them about their emotional preparation to trading.
For a variety of reasons, traders are reluctant to discuss how they feel, at the emotional level, during their trading. Whether the root cause of the this phenomena is vanity, inability or reluctance to share emotional tendencies, or a societal norm for traders to be mentally “tough” is unclear. What is clear, however, is the incontrovertible evidence that states that your mental and emotional state has a profound effect on your ability to trade. In a past article I discussed outside factors like television, radio, and music that effect our emotional state, and in this article I will discuss internal emotional considerations each trader must conquer. There is a feeling that some traders are gifted, that they are natural born traders. It is my opinion that some traders have an emotional profile that makes them successful, as oppose to a technical style. As a chaos theory trader, I am convinced the market is, at the macro level, random and difficult to predict. At the micro level, certain patterns occur over and over.
That being said, most of the successful trading systems share some common characteristics and very little has occurred in the past ten years that we could consider revolutionary breakthroughs in trading technique. To be sure, no trading style has in any way pulled ahead of the pack of mainstream traders. Sure, we have new styles of trading, but the ultimate judge of trading successfully is profits and losses, and the new styles have done anything but disproved the long standing tenets of trading with their profits and losses. So what kind of emotional situations hinder a trader? Emotional attachments to a trading position are among the toughest to recognize and rectify.
For a variety of reasons, traders invest their emotions into a particular trade in the belief they are right, despite overwhelming evidence to the contrary. For example, a trader may decide the market is going to go in a certain direction for a certain period of time and positions his trade to capitalize on this perceived winning trade. Before long, the market begins to move counter to the trader’s theory, but the emotionally invested trader does not take corrective action because he is convinced he is right. Despite his indicators telling him he wrong, despite the market price action that is telling him he is wrong, the trader has invested himself so deeply in his conviction he is right he rides a trade straight into his stops. (if he has stops) When I think I know what the market is going to do, especially if it is contrary to what my chart is telling me, I know it is time to stop for the day. What causes this phenomena? The need to be right, basically. The literature on this topic suggests there are more than one factor that contributes to emotional attachment to a given trade. Losing trades are a part of day trading, and how you handle a trade at the emotional level will determine whether or not you can trade successfully. You are not going to always be right, and an individuals ability to accept that he/she was wrong and move on to a new trade is essential. It sounds very easy, but it’s not.
Many traders are unable to adjust if they are in a losing trade, it unnerves and rattles them. I have watched many traders battle this problem and most are unable to conquer emotional investment in a trading position. For some, their need to be right simply overwhelms the intellect they possess. While emotional investment in trading positions is not necessarily the end of a traders career, it takes a considerable amount of work to overcome. Another serious emotional issue with traders is overconfidence, especially on a day with many winning trades. This is a tough issue to deal with. As you make good trades throughout the day, you become convinced that any trade you make will be a winner. It’s a great way to give back all you have earned, which is not uncommon. This usually occurs on a trending day when nearly all your trades will be profitable if you stay in the trend. Of course, the next day may well be a trend in the opposite direction, or a consolidating market, and your overconfidence becomes a distinct liability. You must be nimble in your trading, and not lock in on ideas to the point where you are not able to properly focus on the market.
Overconfidence is terminal to a trading account. You must stay a student of the markets, not the master. There are few masters of the market, just observant and nimble traders. In summary, we have looked at the effects emotions have upon trading futures. Many traders tend to become emotionally involved in the positions fail to adjust to the trading situation. They have an intense need to be right. Other traders become confident, which is a great attribute to have if you are in a sporting contest with another opponent. On the other hand, the market is inanimate and overconfidence is poorly deployed in the trading environment. Your ability to recognize the emotional demands of trading will, more or less, be a major contributor to your success.
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