Trading psychology or mind games that shape your beliefs?
Once money and ego are involved, all well laid plans are rendered mute…
Trust me, you are not the exception. We all have an inner voice that can help us or lead us to doubt what we see.
We must do our best to recognize when our self-talk is in control and swaying us from our perfectly designed trading plan.
I have yet to meet a trader who hasn’t canceled a stop-loss as it was about to get hit. The fear of exiting a losing trade or avoiding the ego bruise of “being wrong” makes us do strange things.
In spite of the grip these demons have on us, I have developed some solid techniques to wake myself up when I am making poor decisions.
What to Do When You Lack Conviction in a Position
One of the classic trade management scenarios is not being sure if an open position is still a good risk. You start to doubt the position.
Usually we start to justify the trade and build a brand new scenario (mind games). This happens because the trade is not producing a result (one way or the other) in a perceived reasonable period of time.
The goal here is to get yourself a straight answer about the risk/reward. Here is how I handle it.
Ask yourself this question and believe your first answer, don’t rationalize, simply believe the first thing that comes to mind.
If I didn’t this trade would I want it?
This immediately snaps you out of the emotional fog and gets you to assess the trade from a fresh set of eyes.
What to Do When You Are Holding a Losing Trade too Long
Everyone is guilty of this and we all know it’s an account killer.
We spend days and months building the perfect trading plan but it all goes out the window if we don’t follow the rules.
The mainstay of any good trading plan is accepting a specific dollar amount and sticking to it. This is the only way for the probability of your edge to play out. The only way for the odds to work.
Why do we do it? Why do we hope our losers come back instead of taking the right action? There are plenty of answers but to me there are only two that make sense.
- You can’t afford to risk the money so you don’t want to take the loss hoping the price action will come back in your favor.
- You have a giant ego and you can’t admit your brilliant analysis is wrong.
Either way you are thinking wrong. You are messing with the odds. Here is a funny but very effective technique I have used to overcome this common challenge.
Say the following out loud to yourself. “I must hold this losing trade past my accepted stop loss and deal with the emotional stress of holding a losing position because there will never be another opportunity for me to earn money as a swing trader.”
Trust me. Say it out loud. You will exit the position immediately.
How to Correctly Manage a Winning Position
Too often we get ants in our pants when we have winner. We want to ring the register.
We feel good when we book a winning trade, it validates our skills and hard work. The problem is we needs some bigger wins to pay for the accepted small losses. Those small losses are the cost of doing business.
You are spending money to make money. The numbers work when you treat your capital as inventory. You will have some small wins and losses it controlling the big losses and holding the winners that make it rain.
Sometimes we lose sight of why we made the trade in the first place. This is where we need to go first when we want to make ourselves feel good by taking a small profit. We need to go back to the original trade scenario and get away from making a P&L based decision.
Here is how I do it. Ask yourself the following;
Has the reason for taking risk or the potential to earn money changed?
If you honestly assess and review the reason for the trade and nothing has changed, hold on to your guns and trust your strategy. There is a reason you set profit targets, so you can only risk capital when the risk was worth the reward.
If you have big one on the line. Hold on until you see a reason to reel it in.
