Trading Psychology – Controlling Emotions Pt1

Trading is 95% Psychological

Watch the video at the bottom of this post!

The cold hard truth is this:  You are your own worst enemy in trading.  There.  Now you know.  Maybe you sort of knew this.  Maybe you’ve been sort of ignoring this fact or maybe you’ve been blaming the ‘big, bad market’ for stepping on you all the time, but the simple truth is, you’re the one making decisions and your emotions are usually getting in the way and you are your own worst enemy.

Now you’re probably going to develop a lot of technical skills.  If you’re a trading junkie, like I am, you’re going to be reading a lot of books, taking a lot of courses and seminars and you’re going to learn a lot of the technical side of things, and when I say ‘technical’, I’m talking about technical analysis, but not just technical analysis, I’m talking about other technical aspects of learning something.  In the end, you’re going to constantly end up shooting yourself in the foot because you are your own worst enemy and you haven’t learned to master your own trading psychology, yet.

Okay, okay, what is trading psychology?  Well, it’s knowing when to quit and when to push.  That’s a big part of it.  Sometimes the markets are just not good to trade. You should not be trading in the stock market if the markets are in a very bad mood and you’re just not able to handle it.  Other times, you need to know when to push.  If you’re doing extremely well and you need to use more leverage, you really need to stack on to trades and so forth, that’s part of the psychology aspects of trading.

Taking your stop losses: If I still need to tell you that you should have stop losses. Then clearly you haven’t been listening to anything I’ve ever said.  If you’re not using stop losses, then please give your head a shake ‘cause you know you should know better.  That’s all I’m going to say about stop losses.

Hitting your targets: It’s usually a pretty good idea to have a good target price in mind.  If you’ve got a target price and when it actually does hit your target, you don’t actually buy or sell, whatever the case may be, then that’s a psychological issue you need to address because clearly, you’re not following your rules.

Controlling greed, fear and hope: We all have these things.  They’re inside of us all the time, especially when we’re in a trade, these emotions are constantly tugging at you, trying to make you make bad decisions.  If I was to tell you that greed, fear and hope was a huge part of trading, it would be a huge understatement.

The last point here is ‘Discipline, discipline, discipline’.  I am extremely lazy when it comes to trading.  I don’t want to be stuck in front of the computer all day long.  I don’t want to be scanning the markets for hours on end trying to find opportunities, so I try to make it as easy as possible.  But the simple truth is, if you want to be successful in trading, if this is more than a hobby for you, then you’re going to need to develop some serious discipline so that you can do the things and continue to do the things that you need to do to be successful.  It’s going to take some work – oh, the dreaded ‘work’ word – but I keep it at a minimal amount of work, for sure, and discipline is huge part of that.

Are you an average trader?

I want to talk to you about what an average trader is.  The majority of people fall into this ‘average trader’ category.  Basically, they seem to think that trading is easy and for whatever reason they buy a stock, the stock’s immediately going to go in their favor.  Heaven forbid they actually are successful, because now that reinforces that behavior going forward and it really sets up for a major disaster.  If you’re an average trader, you have no trading plan or view of trading.  It’s just that simple.  Most people treat this as a hobby and they have no trading plan to speak of.  They have absolutely no money management rules.  If you’re sitting here reading this and you have no money management rules whatsoever, don’t worry.  You’re part of the average trader that is out there.

Are you prone to emotional swings?  So, price goes up, you’re immediately happy; if price goes down, you’re trying to jump out of a window.  Those types of emotional swings are typical with average traders.  Are you nervous most of the time when you’re in a trade?  Can you sleep at night?  Average traders don’t have confidence in their system or their plan so they’re usually pretty nervous whenever they’re in a trade.  You quickly give back to the market your recent gains.

Let me know if this sounds familiar:  You make $500.00 on a winning trade.  You feel great.  And then on the very next trade you get cocky and, bang, you end up losing $500.00 or more and you give back all of those gains that you just made to the market.  This is very common.  It doesn’t mean you’re a failure.  It just means that you’re average.

You try to recoup losses immediately, also known as revenge trading.  Oh, I used to love revenge trading.  Basically, here’s how this goes.  You end up taking a huge loss.  We’ll just pick a number.  Say you lose $1,000.00 on a trade.  Now, you’re on a mission.  You immediately go out looking for a trade that you can make so that you can make that $1,000.00 back.  You end up chasing a bad entry or for whatever reason you end up pushing the pace and get into a wrong stock and you end up losing even more.  Any of these sound familiar so far?  I’m not done yet.

You’re glued to your computer all day long watching every price movement like a hawk.  This goes hand in hand with your emotional swings.  It goes up, you’re happy; it goes down you’re ready to beat your head on the keyboard.  If you’re stuck all day watching prices and you’re constantly on an emotional roller coaster?  Don’t worry.  You’re not alone.

How about this one?  Do you ever review your trade results and follow up on your winners and your losers?  I can guarantee you that professionals definitely follow up on their trades.  And if you’re not following up on your winners – do you think this might be a good idea?  You have a winning trade and you actually look back at it and say “Hmm, what did I do right in this trade?”  How about your losing trades?  How about looking at your mistakes and determining where you’re going wrong over and over again?  Do you think that’s something that might help you improve your trading?  Most people don’t do this and they continue to lose. This is why they’re average traders.

Here’s a really easy one.  Are you losing money in the stock market?  If you are, you’re like the majority of people, which puts you in the average trader category.  I remember reading a quote that if you want to be successful in the markets the easiest way to do that is to “not be average”. In part 2 find out if there is an “idiot” making trading decisions for you.


Founder of Market Insiders President and CEO Dynamic Wealth Financial Inc. Author of Trading Master Plan

Click Here to Leave a Comment Below

Bob Tuttle - October 9, 2010

Hey Dave, thanks.
Stops, while I know is essential to good trading, have caused every loss I’ve had, and it’s agonizing when the price turns around and heads north. This leads me to believe either I don’t know how best to set stop losses, or I’m entering the trade at the wrong level. This almost got me classified as a day trader, which is not my plan.
As for emotions, I’m guilty of looking for the home run, and have actually had two – ABIO and DNDN, set no stops – real fast day movers; I was real greedy, but sold at the first fearful downturn. Another, MOS is a big winner in a longer term. I decided not to set a stop on MOS, but to keep close check, and bail if the chart told me. It’s gone way beyond target, and I now have your trailing stop formula in place.
Most of my trades wind up as minor losses, due to, of course, predetermined stops, or minor gains, because it didn’t do what I wanted it to do. Yet, I’m still in the black, and still studying.

Dave - October 9, 2010

Great job Bob,

Sound like you’re on the right track. It takes persistence but eventually the patterns start to get easier as you get more experience. Slow and steady wins the race and money management keeps you on course. Keep making adjustments as needed and avoid large losses.


Leave a Reply: