There is an old saying that the market is driven by fear and
greed. Anyone that has placed more than a couple of trades will
surely have experienced these two emotions.
All traders experience emotion. The distinction between a
successful trader and an unsuccessful trader comes down to how
they deal with that emotion. Let's look at how these emotions
affect a successful trader and an unsuccessful trader in various
scenarios:
1. The trader's three previous trades have been losers. The
unsuccessful trader will consider this before placing his next
trade and be fearful that this trade will also end up a loser.
This might result in a delay in placing the trade whilst waiting
for the price to confirm that they were right - thus missing a
perfectly good entry. They might suddenly discover that some
other factor, previously unconsidered, is a reason not to enter
the trade at all. Basically they will be fearful of another
loss.
The successful trader will have tested their strategy
extensively and will be aware that a series of losing trades is
very probable. They will also measure their success on whether
they place the trade according to their system rather than
whether it is purely a winner or a loser. They trust their system
and place the trade when the set-up occurs. The fear is removed
from the trade because they know that several losers in a row is
to be expected.
2. Once a trade is entered it immediately moves against the
trader. The unsuccessful trader will fear that they have made a
mistake. They fear making another loss so they wait and hope that
the market moves back in their favour. The fear of taking another
loss now controls their trading decisions, they might move their
stop further out so the market doesn't take them out for a loss.
They might ignore the trade, hoping that it will get back to at
least breakeven - the daytrade becomes a position trade of a few
days and then it becomes a long term 'buy and hold' strategy.
The successful trader, of course, will know from extensive
testing of his system that such trades happen and that the trade
might come round or it might hit the stop. His stop is in place
and it will remain in place - the system dictates where the stop
is, not the trader's fears.
3. Once a trade is entered it immediately moves strongly in
the traders favour. The unsuccessful trader will suddenly see a
villa in the sun or a new sports car flashing before his eyes.
This trade is going to the moon so he removes his price target
and decides to let it go. Greed has now completely taken over his
trading decisions and the previous plan (if any) is ignored. Of
course, markets rarely move in one direction for long and when
the market turns the greed turns to fear as the dream slips away
and the trader tries to hold on until the price gets back to
where it was. The daytrade becomes a position trade...
The successful trader has set a target, either a certain price
or a timed exit and will stick to it. If the trade only takes 5
minutes then that's just great, there's plenty that won't.
Fear and greed are human emotions - we can't do anything about
that. But, when it comes to trading we need a way to control
those emotions. Here's a few tips:
1. Know your system. If you have confidence in your system
this helps to override those feelings of fear and greed.
Confidence can only come from designing and extensively testing
your own ideas. You can never be fully confident when you rely on
someone else's tips or signals.
2. Automate your system. Computers do not suffer from fear and
greed, they won't hold onto a loser praying for a miracle or
screaming at the screen that the market is wrong - they'll just
cut it if that is what the system says to do.
3. Money management. Quite simply, no matter how good your
system you must only risk a sensible amount - and always money
you can afford to lose.
Tim Wreford runs Online Futures
Trading, a website that provides information and resources
for traders. Tim also provides a free
day trading system, the results of which are updated daily on
the site.
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