Control Your Emotions For More Profitable
Trades
The Dynamic Wealth Report
November 18, 2009
by Justin Bennett, Editor
Do you remember “ABC’s Wide World of Sports”? It was on for years. The
program’s famous for showing triumphant moments in sports. It was
probably better known for the catastrophic mishaps it recorded.
Jim McKay, the host of the show, popularized the phrase “The thrill of
victory and the agony of defeat”.
Anyone playing competitive sports knows exactly what he’s talking about.
I know you’ve felt it. We’ve all experienced the “thrill of victory” and
the “agony of defeat” at some point in our lives.
Emotions are wonderful things. They allow us to experience the grandeur
of life. They can bring us the highest of highs and the lowest of lows. How boring life would be without them.
However, trading is one area where emotions should be banished.
Allowing emotions to impact your trading is begging for disaster.
I know traders who have lost tens of thousands of dollars by letting
emotions get in the way. Emotional attachment to any trade (winner or
loser) will eventually lead you down a path of destruction.
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How about all those traders buying Lehman Brothers in the heart of the
credit meltdown last year? They were buying it because it was so
“cheap”. They were buying it because it was “Lehman”. They said, “It
couldn’t go out of business.” They let a big emotion, greed, cloud their
judgment.
Lehman filed for bankruptcy a short time later.
I know one trader who lost $60,000 in Lehman because he let emotions get
the better of him. He couldn’t accept he was wrong about the stock.
Do any of these sound familiar?
“I know this stock is going to come back.”
“How much lower could it go?”
“It’ll move higher any day now.”
Here’s the truth of the situation.
When you start talking like that, you’ve become emotionally attached to
the trade. To take the loss, you’d be suffering the “agony of defeat”. To
sell would be admitting you were wrong.
Most traders don’t come to their senses. They wait until the loss is so
large they can’t stand it anymore (or they’re completely wiped out). It
happens all the time. Traders take a huge loss and all they can think
about is the money they lost.
It’s how many traders end their career. They vow never to return. Or
even worse, they return and repeat the same mistakes over again.
You see, many traders go into a trade with the expectation of being
right. That is the setup for emotional attachment. Will it be the
“thrill of victory” or the “agony of defeat”?
Trading doesn’t have to be this way!
Successful traders conquer their emotions and leave them at the door.
If you want to be highly successful, don’t become emotionally attached
to your trades. Realize and fully accept that any trade you make
might
not work. That’s why defining the risk of each trade is so important.
You shouldn’t care about being right or wrong.
What you should care about is making money. Focus on finding low risk
trading set-ups. Let your profits run when a trade is working in your
favor. And cut unsuccessful trades quickly and efficiently. No questions
asked.
Many traders use stop losses to control their downside risk. By entering
a physical stop with their broker, they take emotions out of the
picture. The position is sold automatically if the price hits their stop
loss.
Some traders use a mental stop. They don’t enter the order with their
broker, but they have the exit point in their head. They sell if the
stock reaches their exit point.
If you use a mental stop, you must be disciplined enough to follow
through with it. Many traders say they’ll sell, but don’t, and let a
small loss turn into a big one.
By controlling your emotions, you’ll be able to rake in big profits
trading.
Trading success is all about controlling emotions. You can’t have long
term trading success without learning this important skill. Don’t worry
about being right. Just focus on letting winners run and cutting losses
short.
Check your emotions at the door!
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• Natural Gas (Under $4.50)
The December contract is trading at $4.42 as I write this. Working Natural
Gas in underground storage hit a new record high last week, 12% above
the last 5-year average. As of November 6, there’s an estimated 3,813
billion cubic feet in storage. Look to Thursday's Nat Gas inventory
report for the next move.
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