There are many Stock Market Traders few are truly successful. Many traders fail for the same reasons being the extreme amount of leverage.When money is on the line, our emotional attachment to it can take over our decision-making process. I thought it would be helpful to examine most common trading problems resulting from mental breakdowns. By examining the emotional conduits to decision making, hopefully, I can provide some solutions to correct common trading mistakes.
1. Unable to Manage Emotions
Overconfident Greed Invincibility Anger Revenge Anxiety/Stress Dissatisfaction Fear/Panic Hurried/Distracted Exhausted Depressed
Many people with borderline personality disorder (BPD) experience intense emotions and have trouble regulating them. Emotional dysregulation is a core symptom of BPD, characteristics of the condition, like unstable relationships, risky or impulsive behavior, and stress-related changes in thinking. Emotional instability is also part of the diagnostic criteria for BPD You will not be in the best position to make a good decision when any of these apply to yourself. Nobody is forcing you to make a trade. Trading discipline is as much knowing when not to make a trade as when it is a good time to initiate a trade. There is no rule book of success that says you have to trade every day or even every week.
A lot of this can be achieved by developing a structured approach on how you go about your trading. In essence a trade discipline that you adhere to while being aware of emotional states that can hurt your trading. It should be plain obvious that a trader that is well rested and has worked out a structured trade plan is in a much better position than a trader that is stressed, tired and battling a bad trade. Don’t put yourself in that situation. Avoid it at all costs. The long term effects can be much more costly than the expense of the current losing trade. Take Professional Help if you are unable to manage emotions during trading.
2. Turning negative emotions during Whipsaw
Of course some of these emotional states may appear once you are already in a trade. In this case try to turn them into an advantage. One of the big take aways over the years for me has been to recognize that when I start feeling giddy or even euphoric about a trade it is usually a really good time to take some profit or profit altogether, move stops higher.
It is at moments like this when your trading psychology can take a beating, especially when a winning trade turns against you and your gains evaporate or, worse, turn into a loss. Especially in options trading this can happen very quickly and is very common. A 200% gain can turn into 0% gain or 100% loss. Think a trader gets frustrated or angry over this? Sure. And then the door opens for trading mistakes to occur: Average down into a losing trade, trading emotionally, revenge trade, you name it.
The flip side is an emotional state where a trade goes against you. Taking a loss quickly without question is in most cases the best solution. First off, recognize that trades will go against you, it is a fact of life. You are not omniscient and there is 0 point of beating yourself up over it. Now if you have made an obvious mistake and then are set on repeating the same mistake over and over again then yes it might be a good time to beat yourself up over bad trading behavior, but in general if a trade goes against you get over it and put it out of your mind. Yes by all means analyze if you made an obvious mistake, but do not obsess over it. Keep your emotional slate clean.
Use the emotion of the crowd to your advantage. Easier said than done if you get caught up in the same emotion. A key solution to deal with this is to trade the chart and simply never risk so much capital that if the trade goes against you can’t live with the result. It is when people risk too much capital that they get stressed about trades. Rule of thumb: If you are stressed about a trade you have likely put too much capital at risk. Reduce the risk.
3. Manage Opportunity Cost
Another factor to consider: Opportunity cost. If you sit on a 100% winner and you ride it back to a 0% gain you just lost a double. Gains matter and anytime you let them slip away you need to make up for them with another trade. Don’t be greedy, but be disciplined about locking in profits.
One of my golden rules of trading: Take profits when they present themselves. You are not an investor who sits on a stock for 10 years. You are a trader and aggressive capital appreciation is your goal, otherwise you are just scooping water out of a leaking boat. That approach only works so long as you have capital left.
What many people do is stare at their P&L when putting on a trade. “Oh gosh look how much money I’m losing (or winning)”. Bad move. Right then and there it is clear that too much money has been put at risk in the first place, even if the trade goes in your favor. Equally as important: Once the P&L is the primary consideration you are not focused on the trade set-up any longer which is a SIN in trading.
4. Adhere to a Trading Process
All of the pitfalls outlined above are why trading processes and associated risk management techniques exist in the first place. They are borne out of mistakes. They are meant to protect you from an unpredictable world and your emotional reactions in response to unexpected developments taking place.