Controlling Your Emotions

Looking out for number one

When taking part in any market one must be able to control ones emotions; simply put, you must act in your own best interest. There is no place for wishing and hoping in trading. You must be able to realize when you have entered into a losing trade and close it immediately upon recognition of the losing position. Failure to do so will only further damage your ability to make decisions based on technical data. The worst thing that can happen to a trader is to realize that he or she is in a losing trade and not close it only to find that it comes back and makes them money. This will build false expectations and, in essence, shifts responsibility to the market. Do not allow yourself to think, “maybe it will come back” because you will then have crossed from technical trading to wishing and hoping. If it does come back this will encourage further unnecessary risks. You must learn to enjoy taking losses and embrace them. Right now you are probably thinking, “what are you talking about?” Well let me say it could be worse, much worse. There is nothing like building your account on wishing and hopping only to realize that the market is not controlled by your wishes and prayers and it takes back everything you have made in one trade because you “thought” it would come back. Learn to act in your own best interest, if you are in a losing trade close it.

Closing out of losing trades is only one part of acting in your own best interest. What does it matter if you have learned to close losing trades but you are only taking 5 pips per winning trade? Once again it is not in your best interest to take 5 pips when you are risking 15+ pips per trade. I will compare it to a Bass tournament with a big fish prize that pays out 5 levels. Let’s assume that you have been entered as a candidate for the big fish prize. You don’t know how big your fish is in comparison to the others only that it has made it to the top five. In essence you have already won, you can’t lose. You may not get the jackpot but it is money in the bank. With that said would you ever withdraw from the contest? Of course not, that would not be in your best interest. Let’s assume you are in a trade and you are in profit. You, like the fisherman, have already won. So why would you ever forfeit the possibility of getting the Big Fish jackpot. To summarize, traders need to learn to act in their own best interest by cutting losses and letting profits run.

Visualizing Success

Confidence is extremely important when trading; you must be able to visualize yourself being successful. The saying “what we think about comes about” has more truth than you may realize. The power of the mind has been pondered for centuries and affects us in every aspect of our lives. I recently saw a special on television about studies conducted by Hitler during the holocaust. Hitler conducted studies on humans and the power of the mind. The Jews would be lined up to receive a number using a hot brand, they would have to wait in line and hear the screams and smell the burning flesh of there countrymen being branded. Occasionally they would use a very cold brand in place of the usually red hot brand and they found that the pain that was endured was equally agonizing and in some cases even left an unexplainable mark. This is a testimony to the power of the brain; it is a shame that these tactics were used; however, the results are quite amazing. With that said, you must take an active role in goal setting, otherwise, what are you visualizing? You must also visualize yourself making profitable trades. In your mind, break down the criteria in which you base your trading and visualize the market meeting that criteria. See the market bouncing off of your trend line which overlaps a Pivot point and visualize all the steps that you take to confirm each trade such as trend direction, currency volatility, etc. Then, most importantly, visualize the market accomplishing your target.

Losing

Be prepared to lose, it is part of trading. If you carry your losses into the next trade you will dwindle your account away. It goes back to visualizing success; if you carry that loss into the next trade you will subconsciously be visualizing a loss. You must take responsibility for your losses and realize that it’s not the broker’s fault or the market’s fault. The market holds no prejudices; it doesn’t care about your nationality, ethnicity, financial situation, it will take your money either way. The sooner you realize this the better off you will be. People who blame others for their shortcomings tend to revenge trade in order to get back at those who made them lose. However, they need realize it is their own fault, there is no one to get revenge on, and trading again will not accomplish revenge. Accepting responsibility for your losses will greatly cut down on revenge trading. The key to controlling losses is identifying them and immediately closing them. Don’t get married to a trade either. Realize the market has no boundaries and the direction you are trading may be wrong. When you close a loss you are protecting your previous profits and that is why you should embrace your profits as well as your losses. If you can learn to control your losses the wins will take care of themselves. To summarize, you can not carry your losses into the next trade as your subconscious is very powerful. What we think about comes about and if you are trading scared you will ultimately lose. We must envision winning!

Breaking Rules

You must have a set of rules or guideline when trading; however, just having rules is not good enough. You must follow the rules at all times. Many traders see the market jumping around due to some announcement and just enter because the market is moving. In doing this a trader disregards his or her own rules for trading. We must learn to wait for the trade to come to us. There is always another trade just around the corner. In order to follow a set of rules you must be completely aware of each rule in all situations including stops, limits, risk, etc. This will help you to be more mechanical and less emotional in your decision making. I want to reiterate the importance of not wishing and hoping. If you are hoping, then you are not completely prepared for the trade from a technical standpoint and you do not have a good hold on the existing situation. It would be in your best interest to close the trade, cut your losses and prepare yourself for the next opportunity. I would like to talk about one of the main reasons traders break their rules: Greed. Greed will keep an individual from taking profit at his predetermined level in hopes for more. It will also keep him from closing a trade at a loss at the predetermined stop level. Beyond this it will persuade an individual to take profit early which will keep the trader from capturing more potential profit. A trader must learn to plan his trade and trade his plan. If you plan to take profit at 30 pips than do it. If you think it’s going to continue for more profit only stay in if you would be willing to enter if you weren't already in it and make sure you move your stop to break even at a minimum. Another emotion that parallels greed is fear. Fear will keep you in a bad trade and force you out of a good trade. The majority of traders let their losses run and cut their profits short; you must do the opposite. In order to do this you must conquer you fears or you will sabotage your trading. To be a good trader you must conquer your emotions, build a strong self image, stick to a goal plan, embrace your mistakes, learn to relax, and control your anger to minimize revenge trading.