Managing emotions. Its a topic few like to talk about, but it is vital to success as a trader. Trading can reduce even the most resilient individual to a basket of nerves. Though there is no one-size-fits all solution, as everyone has a different psychological makeup and set of circumstances under which they are trading, there are some general tactics I believe can help almost everyone manage their emotions to the betterment of their PnL. Many of these tactics support the old adage that “an ounce of prevention is worth a pound of cure.” Phrased another way: Don’t put yourself in situations where you are likely to experience huge emotional spikes.
1. Have an awareness of the market environment as a whole and manage risk appropriately. I’ve seen many traders identify a great trading setup and execute it flawlessly, except they failed to account for a choppy or extremely bullish/bearish market and quickly found themselves in over their head. My newsletter updates you on support and resistance levels in the market each night to help you adequately prepare.
2. Size positions appropriately. The most obvious recommendation is to never take a position so large it can sink your account. Stocks get halted. International events and market catalysts manifest seemingly from nowhere. Stuff happens. The flipside to this, which is a mistake some particularly conservative traders make, is to trade such small positions that its impossible to ever make money, after slippage, commissions and a reasonable loss rate are taken into account. While such an approach might seem cautious, you are stacking the deck against yourself. Position sizing is one of the key things that I teach in my Tools for the Trade course.
3. Journal. Track your own trades; see what worked and what didn’t. Over time, you will recognize patterns in your own trading. Maybe you always make your money in the morning then lose it in the afternoon. Perhaps your risk management is better on short trades than long. Or maybe you always blow it Friday afternoon when your focus is on the weekend. Use this information to adapt!
4. Pace yourself – there will always be another trade opportunity. The market is an opportunity generating machine, so there’s never a reason to chase a trade that’s already half played out. Nor is there a reason to stay in a bad trade in the hope that it will turn around; move on to something else.
5. Don’t surrender a green trade. This might be the most important tactic on this list. Nothing will crush your spirit more than making a great trade, then through greed, lack of attention or whatever…you blow it and it becomes a loss. The simple solution requires discipline: scale out of your trades. Once you have some profits, sell half or a third of your position and ride the rest. I go over this in quite a bit more detail in my courses.
6. Don’t think paper trading is adequate preparation for trading real money. While it can have value as a learning tool, paper trading will not help you manage your emotions. There is something very different about handling actual money you’ve worked hard to put in your account. If you are doing great trading on a simulator, that’s fine, but recognize that because of the emotional component that success might not translate to a funded account.