Thursday, November 6, 2014

Emotions that differentiate between losers and winners

“After placing the orders, we leave the rest to the market forces.” – Sam Evans

Good traders make a new trade regardless of the outcome of the last trade. However, rookies often allow irrational emotions to guide their actions when they are making trading decisions.  Why are some traders always frustrated while others play the markets joyfully? Let’s read some cogent examples.

1.      The bad trader is afraid to make a new trade because of the fear that it may lose. This fear comes regardless of the fact that the setup may be flawless and there’s no reason not to trade the setup. On the other hand, as long as the entry criteria are met and there’s no reason not to enter the trade, the expert wouldn’t hesitate to take the trade.

2.      The bad trader tends to be fatalistic in outlook, thinking that trading is a scam or that permanent success isn’t attainable. On the other hand, there are more than enough proofs that trading success is possible, plus permanent success. The expert always keeps their chin up. When facing roll-downs, the expert knows it’s a fleeting experience.

3.      While there is no reason not to trade a setup, the bad trader feels that a trade setup needs much more time to consider before an execution is made. She/he wants lots of confirmation and guarantee before opening a trade, without knowing that one can trade the best setup and still lose.

4.      I was doing it before; I used to check several different websites for fundamental, sentimental, and technical confirmation before I took a trade. I wanted to be sure that most pundits were saying the same thing before I took a trade. Needless to say, I still lost in spite of my painstaking effort. The expert trader is satisfied with the limited information she/he has access to.

We don’t need to look for complicated analysis or think that there must be a million reasons supporting a setup, before we trade the setup. No matter how beautiful a strategy is, it would still sustain occasional losses.  You may think that a particular trading methodology is wonderful, but when it goes thru baptism of fire in charting effort, we’d see how it can survive. When risk is under control and the performance is enhanced, the results can then be optimized. When a position first goes in our favor before reverting to the opposite route, we can get out without sustaining any loss on that trade. 

Irrational emotions are the reasons why the bad trader is worried while trading, getting frustrated or hesitating to take a trade and eventually missing a great trade or sustaining huge negativity in the markets. Rational emotions are the reasons why the expert trader is calm when trading – being profitable overall.

We evaluate the motion in the markets as money-making opportunities and when we consider the cost of each trade (particularly low spreads), we’d appreciate the benefits over time. We’ll only consider the probability of making money after we also put spreads into consideration. Since there is a cost for each trade, we wouldn’t want to overtrade.

The quote below ends this article:

“Strange as it may seem to some, my trading has evolved to a point where I no longer attempt to predict whether stock prices will rise or fall… I found that most of my profits came as result of simply cutting off trades that were either losing or giving up their previous gains; and I could profit from trades entered practically on the flip of a coin.” - Chris Ebert


Learn from the Generals of the Markets: Market Generals

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