Control Your Emotions For More Profitable Trades

| November 8, 2009 | 0 Comments

Do you remember “ABC’s Wide World of Sports”?  It was on for years.  The program’s famous for showing triumphant moments in sports.  It was probably better known for the catastrophic mishaps it recorded.

Jim McKay, the host of the show, popularized the phrase “The thrill of victory and the agony of defeat”.

Anyone playing competitive sports knows exactly what he’s talking about.

I know you’ve felt it.  We’ve all experienced the “thrill of victory” and the “agony of defeat” at some point in our lives.

Emotions are wonderful things.  They allow us to experience the grandeur of life.  They can bring us the highest of highs and the lowest of lows.  How boring life would be without them.

However, trading is one area where emotions should be banished.

Allowing emotions to impact your trading is begging for disaster.

I know traders who have lost tens of thousands of dollars by letting emotions get in the way.  Emotional attachment to any trade (winner or loser) will eventually lead you down a path of destruction.

How about all those traders buying Lehman Brothers in the heart of the credit meltdown last year?  They were buying it because it was so “cheap”.  They were buying it because it was “Lehman”.  They said, “It couldn’t go out of business.”  They let a big emotion, greed, cloud their judgment.

Lehman filed for bankruptcy a short time later.

I know one trader who lost $60,000 in Lehman because he let emotions get the better of him.  He couldn’t accept he was wrong about the stock.

Do any of these sound familiar?

“I know this stock is going to come back.”

“How much lower could it go?”

“It’ll move higher any day now.”

Here’s the truth of the situation.

When you start talking like that, you’ve become emotionally attached to the trade.  To take the loss, you’d be suffering the “agony of defeat”.  To sell would be admitting you were wrong.

Most traders don’t come to their senses.  They wait until the loss is so large they can’t stand it anymore (or they’re completely wiped out).  It happens all the time.  Traders take a huge loss and all they can think about is the money they lost.

It’s how many traders end their career.  They vow never to return.  Or even worse, they return and repeat the same mistakes over again.

You see, many traders go into a trade with the expectation of being right.  That is the setup for emotional attachment.  Will it be the “thrill of victory” or the “agony of defeat”?

Trading doesn’t have to be this way!

Successful traders conquer their emotions and leave them at the door.

If you want to be highly successful, don’t become emotionally attached to your trades.  Realize and fully accept that any trade you make might not work.  That’s why defining the risk of each trade is so important.

You shouldn’t care about being right or wrong.

What you should care about is making money.  Focus on finding low risk trading set-ups.  Let your profits run when a trade is working in your favor.  And cut unsuccessful trades quickly and efficiently.  No questions asked.

Many traders use stop losses to control their downside risk.  By entering a physical stop with their broker, they take emotions out of the picture.  The position is sold automatically if the price hits their stop loss.

Some traders use a mental stop.  They don’t enter the order with their broker, but they have the exit point in their head.  They sell if the stock reaches their exit point.

If you use a mental stop, you must be disciplined enough to follow through with it.  Many traders say they’ll sell, but don’t, and let a small loss turn into a big one.

By controlling your emotions, you’ll be able to rake in big profits trading.

Trading success is all about controlling emotions.  You can’t have long term trading success without learning this important skill.  Don’t worry about being right.  Just focus on letting winners run and cutting losses short.

Check your emotions at the door!

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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