When the trader is greedy they think “what if the market moves another 20 points”, when the trader is fearful they think “what if the market is turning around now and I lose everything?” They try to avoid the discomfort of regret which makes them blind like driving in foggy conditions.
So, the trader’s performance is heavily impacted by what they think and what they think is heavily impacted by their state. Usually traders are euphoric on days they make profits and depressed on losing days, but they need to separate their mental condition from their account condition.
Human beings think in contexts and compare what they have now with what has just been. So, if a trader just made a $1000 loss and now they are in a $800 profit, they most probably don’t take the profit because they want the additional $200 to get square.
But if your previous loss was $600 then you most probably are happy about the $800 because now you are $200 in net profit.
This type of thinking is counterproductive because just like the famous coin toss example, the current trade has nothing to do with the previous trade. Each trade should be treated, managed and evaluated as a stand alone individual trade.
Often it is the trade where you just wanted to make one more point before you close out that turn into the worst losses. It is much easier for the human psyche to cut a trade that went into a loss immediately than to cut a trade that was in a nice profit.
That’s why you need a tactical approach to your trading, a documented step by step clearly laid out strategy, and based on those you can analyse your performance metrics. Having these in place will help shift your emotional state to a rationally thinking state.
With a toast to your trading profits
Mandi
