When the markets are choppy and you are unsure of what to do next, trading can feel like riding an emotional rollercoaster. You can feel euphoric bliss after a win, but overwhelming disappointment after a loss. Experienced professional traders, however, stay calm and relaxed even after a series of losses. They don’t let the natural ups and downs of trading impact their emotions.
Why do traders feel ups and downs? Part of the problem is defensiveness. We all want to win, and oftentimes, we need to win. But success is never assured, so we see what we want to see when afraid, and usually feel joy and relief when we win, but feel disappointed and upset when we lose. But ideally, the winning trader stays rational and unemotional. Even a seasoned trader can fall prey to emotional ups and downs occasionally, however. As one professional trader put it, “It is easy to start doubting my approach and wonder about the validity of what I’m doing…During winning periods, it is easy to become overconfident, and that can lead to trouble. While overconfident, I feel a false sense of security. I’m tempted to take unnecessary risks, and I start to think that I don’t have to do any more research to find and figure out new ways to extract money from markets. It is easy to fall into a sense of complacency.”
Some traders are especially prone to experiencing an emotional rollercoaster as a result of improper risk management. They may be prone to risking too much capital on a single trade, for example. And when they take big risks, they are likely to feel overly ecstatic when they win big, but especially beaten when large amounts of trading capital are wiped out after a big loss.
Mental Edge Strategies
How do seasoned traders control their emotions? Seasoned traders accept the fact that their trading performance may moves in cycles. Sometimes they are profitable and sometimes they are not. Accepting this fact of the trading life helps them control their emotions. In the words of one trader, “I realize that if I have a big winning period that I shouldn’t get overly excited because, most likely, I’ll have a flat or losing period just around the corner. That’s the way the market works. No style of trading makes money all the time. The odds are that after you have a big winning period, you’ll go through a period of losing money shortly thereafter. I try to make enough money to give myself a cushion to handle the losses when they come.”
Since your trading performance may move in cycles, it’s vital to manage your risk to account for the ups and downs. With proper risk management relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It’s easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. It should not be treated like recreational gambling. As a business professional, it’s essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze the market action and trade opportunities as they present themselves.
Trading can wreak havoc on your emotions unless you take precautions. Through proper risk management, though, you can control the extreme ups and downs that are inherent when you have your hard earned capital on the line. Winning traders, however, stay calm, objective, and rational. If you can trade in this optimal state of mind, you’ll increase your chances of achieving enduring financial success.
By Michael S. Shopshire, PhD. Mental Edge