If you have not read the first part of the Article, you might want to do so. The first part is here.
It is key to unerstand emotions and to understand where they stem from. Understanding your emotions will help you trade better. It will help you in your decision makeing process. Losing a trade is not bad. Many of us have been taught that losing is bad. And this tought is most times transferred to trading and we think that losing is bad. In trading, however it is not necessarily bad if you lost a trade or two. There is a post about this subject. You'll find it here (in english) or here (in german).
The first and most important step to learn from mistakes is to realize one did mistakes. Only than you are able to make a change.
Now that we understand the importance of our emotions, we can take the next step. It is easy to say emotions are important when it comes to trading. Everyone knows this. But again, this is a general statement. Let me narrow down to how and why emotions are important.
Mentally and to some degree also physically our mind and our body is designed to keep us safe. That is the very reason, why pain or loss hurt us more compared to having a gain. We established that already in my previous post (here). The degree of pain we feel is stronger than the degree of joy we feel. This makes as afraid of taking a trade. And this makes us scared if the trade we took goes against us. How many times have you decided to sit on the sidelines only to see your analysis was correct and the asset did move several hundred pips in your direction? Then we decide to take the trade no matter how much we are afraid. We take the trade, because it worked well. But many times at this stage, we fail to realize that the setup may not have been as good and we end up losing the trade. And we get afraid again. First we were afraid, then we were greedy. The key point to realize is that the market does what it does. Just because a setup was working before, does not mean it has to work the next time again. We are surrounded by uncertainty. If we do not understand this, we will always fall back to old habits of being scared and greedy. Our emotions will dictate our actions.
How do I deal with this? Again, this is a personal developement. What I do may not work for you. My approach may be totally different to yours.
I let go.
There is always a reason why I take a trade. Meaning, there is always a technical reason to take the trade. As long the reason is valid, there is no reason to get out. I need a reason to get in. And I need a reason to get out. If I take a trade and it closes red - meaning it is a losing trade- it is a losing trade. The trade failed. I had a reason to get in, but it didn't work out. I don't take it personal. A losing tade does not mean that I failed. It just means that this time the setup failed. It happens. I don't take a losing trade personal. But I try to identifiy if my analyis was fraudlent. Was I impatient? Did I force the trade? Did I disregard signs of warnings? If the answer is yes to at least one of the questions, then I try to incorporate this information in my decision making process for the next trade.
I know the market does not dislike me. Nor does the market like me. The market is not a beast I need to fight. The market does not even know me nor does it even care about me. My job is to understand what the market displays on the screen. My job is to understand the special character of the asset. And than I need to trade accordingly. When I say character, I make the market appear as a person or a living being. (This alone can be a topic for itself) The market is not a living being. Each asset has its own characteristic moves. For example GBP pairs are moving more volatile compared to lets say EUR vs USD. Knowing this will help me to narrow down my fear, when the trade goes against me. This information will help me narrow down my fear of giving back pips after it moved in my favour. This information may help me deal more rational with my greed when I am in e.g. 50 pips profit and the asset I trade has an average move of 70 pips a day. I may decide to close the trade on a sign of a reversal instead of hoping for more. Or I may pass a setup because the asset already moved 70 pips in the setup direction and the asset has an average move of 70 pips a day or 100 pips a day. Fear and greed are emotions all of us have to deal with on a personal basis.
I know I have no control over the market. The only thing I may control is my reaction to what the market shows me. And my emotions may influence my actions. If I really have a bad feeling about a trade, I get out. I take what I have (be it profit or loss). In doubt stay out. Or in doubt, get out. I do not shed a tear if the trade goes in my direction after I got out. I look at the chart and try to identify what gave me stomach ache. Maybe my bad feelings comes from a valid reversal setup that makes my doubt the validity of the trade I took. Sometimes we identify a setup and we take the trade, but the trade goes against us. And this is true for our exits as well. We will never know what the market will do next. We will never have a 100% accurate analysis. This is why I trade what I see. If I see the asset making a characteristic behaviour I take appropiate acction. Even it it costs me pips.
There is not what if. The only thing that counts is - What is.
I do not need certainty. I will never have certainty.
Hope you enjoyed reading this article. If you have any questions, please leave them in the comments section below.
Happy trading,
TT
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