Trading Psychology Lesson [PRO TRADING TIPS]
Professional trader Derrick Oldensmith takes you through trader psychology, and offers tips for managing the volatile emotions of real world trading.
The cycle of trader emotions applies to the entire market and traders.
Did you come up with an idea when the market opened? Did you execute that trade? How do you feel after executing the trade?
It is okay to feel a little nervous, but you should mostly feel optimistic and hopeful that the trade will work out and you’ll start seeing your P&L go up. It is only natural to start feeling a little bit excited.
You might be saying, “I can’t believe I bought this stock for 20 cents risk at the open and now I’m up multiple dollars.” Then you get another leg up and start thinking, “I am the greatest trader in the world. I should have bought more. I can’t believe that I only bought 400 shares, I should have bought 4000. I'll just add now because everything I touch is gold.”
However, the market starts to decline a little bit and your P&L is not as high as anymore, then you start to feel a little anxious about it. This is where denial comes in and begins to almost take over. You know that you are supposed to implement those trading rules from class, but it’s a really good company, and it is only a temporary setback. Right?
This denial is when risk management really goes out the window and the stock goes down further. When you don’t have risk management in place, it causes fear.
By this point you gave everything back, and you are panicked because you no longer have a plan. You continue to hold, praying the market goes back up, but it keeps going down, making you desperate. You begin to think about the worst-case scenario. Personal emotions will dominate here and you might feel as if the market is rigged or set against you.
If you ever find yourself in this situation, letting your emotions or ego get in the way of your plan, remind yourself why consistency is key and why you must follow your plan and the market, not your emotions.
Rules must be put in place to combat emotions; emotions often steer us in the wrong direction.
What is the solution to all this? Well it’s actually pretty simple, write your plan down and create a list of what to do based on how the stock might perform. That way you’re prepared and won’t let fear and emotions take over when you need to act.
The perfect trader would be able to look at a trade, recognize the flaws and make adjustments next time. With any trade there should be at least one or two reasons why it should succeed as well as at least one for why it might fail.
It’s very easy for a trader to become fixated on that single reason why it might fail. Remind yourself that you already made the trade. You already took on the risk, you could have already taken the entire potential loss, so stick to the plan and watch the trade play out. Remind yourself how many layers of probability there are on your side and never trade to try and catch up — that’s where the plan begins to fall apart.