Livermore’s views on hope and fear lie at the heart of successful trading. He describes how traders fail when they allow hope of recovery to prevent them cutting their losses and fear of losing a small profit to make them sell prematurely, when more profit would have been available if only they had the nerve to stick with the trend.
“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day—and you lose more than you should had you not listened to hope….
“And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses.
“Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.
“I am fairly immune from the commoner speculative ailments, such as greed and fear and hope. But being an ordinary man I find I can err with great ease.”
“The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans sky-high also are beyond regulation by bodies of coldblooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous.”
How Important is all this?
What I’m talking about here is probably the most important aspect of trading. If you can control your emotions during trades, you have a good chance of success. If you can’t, you’ll almost certainly fail.