Friday, October 06, 2006
Four Common Emotional Pitfalls Traders Face and How to Solve Them
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 traders 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 over trading can then potentially trigger an under trading response if the traders experiences a “trading injury” such as a big loss, along the way. They way to solve this is first to accept the reality that you are always going to miss out on something, somewhere. The second step is to establish game plans on paper and be held 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, then 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.
-- Dr. Doug
Copyright 2006, Doug Hirschhorn All Rights Reserved