Emotional Vs Strategic Trading
Do you ever catch yourself making pointless trades? Only to find yourself giving money away to someone else and/or paying your broker’s bills? In this post I want to talk about emotional trading.
Emotional trading can be the result of a variety of factors. Some of the more common reasons are: boredom, heavy losses on the day or losses from the previous day, bad swing trades, family issues, trying to hit a quota, worrying about something, and basically anything that throws you off mentally. All traders, but especially newer traders, put themselves through some serious stress.
So what defines good vs. bad trading? If you think you might be trading emotionally, you’re most likely correct. Before you take the trade, ask yourself: what are the odds of this trade working out? Is it worth the risk? Is it worth my time, stress and effort? If the answer is no and you’re trading the ticker anyways, you need a break and a reality check. Emotional trading can work out every once in a blue moon, but if you want to make it in this career, you need to cut that out completely. If you find yourself clicking buttons left and right, take a break. When I say take a break, I mean take a few days off. You'd be surprised how well this works. The most successful traders out there trade less and wait patiently for opportunities. You should do the same. Don’t force trades simply because you’re down or want to make money today. It won't end well: trust me, I know from experience. If you get caught with your pants down on an emotional trade, it’s better to admit defeat and call it a day. Sure, you hear stories of traders coming back from heavy losses on the day, but ask yourself: is that a healthy, consistent way to trade? And what happens if I dig a yet a bigger hole? If you’re the type of trader that feels they “must” make their money back on the ticker they lost it on, then I will wish you luck, because revenge trading rarely works out. Consistency is key.
So what is “strategic” trading? I mentioned earlier that it’s often better to admit defeat on the day if you’re down. That said, more advanced traders and traders that are able to CONTROL their emotions (this is key) are able to trade on despite having taken losses in a previous trade, even if it was a sizeable one. They merely assess the new trade independently of the last, and if the risk/reward is good, they go for it. Unless you’re able to do this consistently, if you’re trading like crap on a certain day, just cut the day short. The markets will be there tomorrow and the next day.
Let's put this in perspective. Say you make 20 trades a month. 5 trades a week. And let’s say you win 75% of the time, so you’re winning on 15 trades. By that math, you’re still going to be down 5 days out of the month. Now let's say you decide to PUSH on those days you’re down: now the losses become worse and it comes right out of the green days you already had or were going to have. If you had simply admitted defeat on those 5 days, you got to keep your gains on the other 15 green days. Do you see what I'm saying? It’s simple math and probabilities. I know I’m oversimplifying and it’s not always this clean cut, but what I'm trying to do is help you put this into perspective. A trader isn’t a gambler; we have BETTER odds than the casino. Use that edge to your advantage.
One crucial concept is at the heart of “strategic” trading: add to winners, NOT losers! Have you ever heard that scared money doesn’t make money? Why is it so hard to add to a loser but not to add to winners? Have you ever asked yourself that? As traders were are so eager to take profits, but we let losses slide more than they should. If the trend is in your favor and you’re up on the position, don't be scared to add as long as the trend continues to be in your favor. I've found myself adding to winners more often now and cutting starter losses quick. It works. And let me tell you, it's easier. Yes, some of these winners may come back and you may break even, but it works more often than you might think and it’s a more “strategic” way to trade.
Lastly, to address the “shoulda, coulda, woulda” mentality: IT DIDN’T HAPPEN, MOVE ON!!!
Please comment.
Your IU mod,
DerrickJL
So what defines good vs. bad trading? If you think you might be trading emotionally, you’re most likely correct. Before you take the trade, ask yourself: what are the odds of this trade working out? Is it worth the risk? Is it worth my time, stress and effort? If the answer is no and you’re trading the ticker anyways, you need a break and a reality check. Emotional trading can work out every once in a blue moon, but if you want to make it in this career, you need to cut that out completely. If you find yourself clicking buttons left and right, take a break. When I say take a break, I mean take a few days off. You'd be surprised how well this works. The most successful traders out there trade less and wait patiently for opportunities. You should do the same. Don’t force trades simply because you’re down or want to make money today. It won't end well: trust me, I know from experience. If you get caught with your pants down on an emotional trade, it’s better to admit defeat and call it a day. Sure, you hear stories of traders coming back from heavy losses on the day, but ask yourself: is that a healthy, consistent way to trade? And what happens if I dig a yet a bigger hole? If you’re the type of trader that feels they “must” make their money back on the ticker they lost it on, then I will wish you luck, because revenge trading rarely works out. Consistency is key.
So what is “strategic” trading? I mentioned earlier that it’s often better to admit defeat on the day if you’re down. That said, more advanced traders and traders that are able to CONTROL their emotions (this is key) are able to trade on despite having taken losses in a previous trade, even if it was a sizeable one. They merely assess the new trade independently of the last, and if the risk/reward is good, they go for it. Unless you’re able to do this consistently, if you’re trading like crap on a certain day, just cut the day short. The markets will be there tomorrow and the next day.
Let's put this in perspective. Say you make 20 trades a month. 5 trades a week. And let’s say you win 75% of the time, so you’re winning on 15 trades. By that math, you’re still going to be down 5 days out of the month. Now let's say you decide to PUSH on those days you’re down: now the losses become worse and it comes right out of the green days you already had or were going to have. If you had simply admitted defeat on those 5 days, you got to keep your gains on the other 15 green days. Do you see what I'm saying? It’s simple math and probabilities. I know I’m oversimplifying and it’s not always this clean cut, but what I'm trying to do is help you put this into perspective. A trader isn’t a gambler; we have BETTER odds than the casino. Use that edge to your advantage.
One crucial concept is at the heart of “strategic” trading: add to winners, NOT losers! Have you ever heard that scared money doesn’t make money? Why is it so hard to add to a loser but not to add to winners? Have you ever asked yourself that? As traders were are so eager to take profits, but we let losses slide more than they should. If the trend is in your favor and you’re up on the position, don't be scared to add as long as the trend continues to be in your favor. I've found myself adding to winners more often now and cutting starter losses quick. It works. And let me tell you, it's easier. Yes, some of these winners may come back and you may break even, but it works more often than you might think and it’s a more “strategic” way to trade.
Lastly, to address the “shoulda, coulda, woulda” mentality: IT DIDN’T HAPPEN, MOVE ON!!!
Please comment.
Your IU mod,
DerrickJL
