Many novice traders ride an emotional rollercoaster, feeling euphoric bliss after a win, but overwhelming disappointment after a loss. Experienced professional traders, however, stay calm and relaxed even after a series of losses. They don’t let the natural ups and downs of trading impact their emotions.
Ideally, the winning trader stays rational and unemotional, but even a seasoned trader can fall prey to emotional ups and downs occasionally. It’s natural to question your method at times. “It is easy to start doubting my approach and wonder about the validity of what I’m doing,” said Manuel, a hedge fund manager Innerworth interviewed a few years ago. At the other extreme, it’s also natural to become euphoric and feel omnipotent. “During winning periods, it is easy to become overconfident, and that can lead to trouble.
While overconfident, I feel a false sense of security. I’m tempted to take unnecessary risks, and I start to think that I don’t have to do any more research to find and figure out new ways to extract money from markets. It is easy to fall into a sense of complacency.”
Novice traders are especially prone to experiencing emotional rollercoaster. They may not use proper risk management. They are prone to risking too much capital on a single trade. And when they take big risks, they are likely to feel overly ecstatic when they win big but especially beaten when large amounts of trading capital are wiped out after a big loss.
Through proper risk management, however, relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It’s easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. It isn’t recreational gambling. As a business professional, it’s essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze market action and trade opportunities as they present themselves.
How does a seasoned trader like Manuel control his emotions? He realizes that his trading performance moves in cycles. Sometimes he is profitable and sometimes he is not. Gaining awareness of this fact helps him control his emotions. “I realize that if I have a big winning period that I shouldn’t get overly excited because most likely, I’ll have a flat or losing period just around the corner. That’s the way the market works. No style of trading makes money all the time. The odds are that after you have a big winning period, you’ll go through a period of losing money shortly thereafter. I try to make enough money to give myself a cushion to handle the losses when they come.”
Trading can wreak havoc on your emotions unless you take precautions. Through proper risk management, though, you can control the extreme ups and downs that are inherent when you have your hard-earned capital on the line. Winning traders, however, stay calm, objective, and rational. If you can trade in this optimal state of mind, you’ll increase your chances of achieving enduring financial success.