Emotions and The Holy Grail in Trading.(I)

9 Dec

Forex-Success-FormulaIt is widely believed by new traders, that there is a single trading system (i.e. a single set of trading rules), that is composed of a small group of technical analysis indicators (e.g. two stochastic lines and the MACD), with a certain configuration of technical indicator settings (e.g. twenty bar and thirty bar stochastic lines and a fifteen bar MACD), that can be traded on any market using any trading style (i.e. scalping, day trading, swing trading, or position trading) and always makes a profit. Many new traders spend years searching for the holy grail of trading, believing that it is the key to their being a consistently profitable trader. If you are one of the new traders that is (still) looking for the holy grail, today is your lucky day, because the holy grail of trading is revealed in the very next paragraph.

The Holy Grail of Trading Revealed

The holy grail of trading is … that there is no holy grail of trading. I will repeat that just in case there is any doubt … the holy grail of trading is that there is no holy grail of trading. There is no trading system, no group of technical analysis indicators, and no configuration of technical indicator settings, that is guaranteed to make a profit. Disappointed? Well, don’t be, because knowing that there is no holy grail of trading is a big step towards becoming a consistently profitable trader.

In order to be a successful day trader, you need to have the right tools, choose the right markets, and trade the right trading systems. However, it is just as important to have the right psychological and emotional outlook. Without the right psychology, your emotions will have a big impact on your trading, and may even prevent you from trading at all. The two main emotions that day traders experience are fear and greed, and while you will probably not be able to remove these emotions completely, you will need to manage them.

Fear

Fear is the emotion that stops us from doing things that might be too risky. In the right quantity, fear is obviously an emotion that we need, but when fear becomes too great we can be prevented from doing things that might be necessary. In day trading, the main fear a trader has is that they are going to make a losing trade and lose money. This is a rational fear as no trader wants to lose money, but it is irrational if it prevents the trader from taking any trades in the first place. As an example, a trader might make a losing trade, and then be too fearful to make the next trade, which of course turns out to be a winning trade, and would have covered the previous loss. By letting the fear take control, the trader now has a net loss, even though a winning trade was available. The emotion of fear can be overcome by acknowledging that all day traders have losing trades occasionally, but as long as they are less frequent than the winning trades, there is nothing to be afraid of as there will still be a net profit.

Greed

Greed is the opposite emotion to fear, in that it is the emotion that makes us do things we would not normally do. The right amount of greed is necessary because it gives us the motivation to work at something, but when we are too greedy we will start doing things even when we know that we should not. In day trading, greed can make traders make random trades, or hold on to positions longer than their trading system dictates. For example, if a trader is watching a market moving strongly upwards, the trader might be tempted to make a trade even though their trading system says not to. The trader has allowed the greed to take control, and more often than not in this scenario, they will be buying right at the end of the move and will have a losing trade. The emotion of greed can be overcome by testing and then trusting in your trading system, and knowing that if you follow it correctly, it will make a profit without taking every potential trade.

Trading Stress

Trading stress is stress that is caused by the act of trading. For example, the fear of losing money can place a trader under significant stress. Perversely, trading stress only compounds the original problem. For example, if a trader is having difficulty making a trade management decision, the stress that ensues will only make it harder to make the decision, and will almost guarantee that the decision is made badly.

The solution to trading stress is knowledge and experience. Knowledge gives a trader the ability to trade well, and experience gives a trader the confidence to trust in their knowledge. When a trader knows that they have the ability to be profitable, and they also have the confidence to believe in themselves, it is much easier to overcome any stressful situations that might arise.

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