06 Aug Overcome psychological blocks in your trading
When first starting out in any trading career, the trader is inevitably faced with the fact that there is a disconnect with gaining profit from trading in a “live” account, vs. a paper or “demo” account.
More often than not, the beginning trader will attribute this to a trading-system failure and begin to tweak their system again and again in order to achieve maximum performance. I myself have been down the same path, losing much capital, before I realized that this had very little to do with my trading system, rather everything to do with my trading psychology and my hidden "Fears".
I urge you to take the information in this article to heart, because if these so-called “four fears” are conquered, many pathways will open up to you in terms of your consistent profitability.
1. Fear of Loss
The fear of loss in undoubtedly one of the strongest fears to overcome. When someone's hard-earned dollars are on the line, anxieties creep in that can utterly kill a trade plan. Worse, is the fact that this can be a paralyzing factor; holding you back from taking action when action needs to be taken. Abandoning your trade plan or getting paralyzed with fear tends to erode your confidence in yourself which will lead to more bad decisions, etc. etc. - the cycle continues.
No one in this business likes to take a loss, but unfortunately it is a necessity if you want to survive. The longer you remain in the game, the more likely you will hit the winner(s) which will consistently bring your P/L back into the positive zone.
Having a written plan is really key in navigating pitfalls of your psychology. Just being able to glance over at your written plan will instill a sense of comfort in your brain and will create a positive association with the process. Even if you do take a loss, you will be able to accept it a lot easier because your plan will (hopefully) have detailed instructions about what kind of exit you will take if the trade goes against you.
Don't ever fall into the mindset of hoping a loser will come back to "breakeven". If it's not in your plan, then don't trade it!!
2. Fear of Missing Out
This can be characterized as a type of greed emotion. It is a powerful feeling when you see a herd of people profiting from a move in a certain security, only to realize that you missed the boat.
The absolute worst way to handle this is to get in late to a trend. If you think about it: piling into a late trend means that you are basically buying around the time when everyone else is up 20,30,40,or even 50% on their positions - and we all know what happens when someone makes a quick 50% on a trade right?..they usually take their profits, which means that you are the bag holder.
Learning to filter out the media hype is important, because the motivation of the media is to report on things that are fleeting, thrilling and exciting, but not necessarily the best for your portfolio. Always keep in the back of your mind what their motivations for reporting on stocks that are up 40% and you will stay out of trouble.
How many of you know someone who bought at the very top of the market in housing? How's their home value today?
3. Fear of Letting a Profit Turn into a Loss
The excitement of seeing a position turn into profit can sometimes be a powerful deterrent from your original trading plan. We all want to feel like winners, so many traders will take smaller profits to get that endorphin rush of "being right". Learning how to properly exit a trade is considered by some to be more important than the entry. If you are consistently taking smaller profits while your losers get out of control, in what direction do you think your account will be headed?
One solution to better cope with this is to take half the position off while letting the other half ride. If this isn't part of your overall plan, then perhaps trailing stops might be a better solution. Either way, keeping a solid journal which lists all your trades exits and entries will help you spot problems early on so they can be addressed quickly.
4. Fear of Not Being Right
Freud described our ego as the "id" - "The id is the part of the mind containing the drives present at birth; it is the source of our bodily needs, wants, desires, and impulses" Much like the ego might direct our decision making in the other 3 Fears, the Fear of Not Being Right is more deep-rooted in your own internal mental conflicts. Perhaps you dealt with feelings of failure, or unworthiness with a parent or someone close to you which is manifesting itself in your trading.
Seeing trading as a probability game and detaching yourself from preconceived ideas tying your self-worth with your net worth will help you create more positive results. Unfortunately in trading, someone who is a perfectionist will rarely succeed - rather someone who can experience losses and associate them with a positive feeling (a feeling that you are sticking with your system) will more likely succeed.
Your trading plan MUST account for the emotions or fears that are unique to your personality. If you patiently work through each one, with hard work, you will see your account grow as well as learn something valuable about yourself.