Nosce Te Ipsum – Know Thyself?!
At the time of writing this article I was in a short GBP/USD trade with all my strategy conditions fulfilled: downtrend, retracement, rejection candles signaling the end of the retracement and trend resumption. What do you know… it was a loser. Well, I guess we have to accept losses, don’t we? After all it is part of trading and I still haven’t met a trader who always wins. So losing is not the problem, but coping with it and finding the inner strength to remain calm and composed under stress. This is sometimes easier said than done because all sorts of questions start creeping into your mind and I hope this article will scratch the surface of trading psychology and will help you keep your emotions under control.
Skills That Don’t Suck and Must Be Mastered
What we must first understand is that our mind doesn’t react under stress the same way it does in normal conditions. In other words, once money is involved, we start to see things a bit differently than under normal circumstances. To overcome this we must acquire a very important skill:
Once we become disciplined traders, we will not allow emotions to take over and we’ll always follow the trading plan. One of the first steps to becoming a disciplined trader is to stick to the decision you made before you entered the trade. Why stick to that decision? Because before a trade, your logic is not affected by emotion, you are in a neutral state. After the trade is placed, all emotions and questions start rushing in: fear of losing, fear of failing, greed, uncertainty. A disciplined trader will know better than to make decisions while he/she is in a trade and will also follow the trading plan, the strategy and the money management he/she chose to use.
Patience is another skill that definitely needs to be mastered. More than once I found myself jumping into a trade before my strategy gave a good signal, and before all the conditions were fulfilled; almost every time this happens, the trade goes against me and closes Out of the Money. To make the long story short, if the strategy you are trading requires 2, 3 or 10 conditions, wait until they are all fulfilled and only then place the trade. There is another kind of patience involved: the one related to understanding that wealth from trading will not come overnight. Yes, I saw all the movies about Wall Street, millionaires and hundreds of thousands of bucks made every 5 minutes, but we are not those guys… well, at least I’m not. If we want the slightest chance to get there, we will need patience to execute our plan and slowly but surely the account is going to increase. If you believe you will achieve this kind of wealth overnight, you are mistaken and the market will punish you for it.
Peace of Mind
Don’t worry, this is not turning into a Yoga class and when I say “peace of mind”, I’m referring to the fact that you must accept a loss before going into a trade. In other words, prepare for the worst and hope for the best. Once you accept that it’s possible to lose the money invested in that trade, you will have peace of mind. By assuming that once you pressed Call or Put, you already lost whatever sum you invested, you remove a lot of the emotions involved. What else can go wrong if you imagine that you’ve already lost the trade? Maybe it’s a weird way of thinking, but for me it works. Try it.
“Skills” That Suck and Must Be Avoided
Fear is probably one of the first feelings that traders must learn to control. Trust me, fear can destroy a good strategy in minutes and an entire account in a short while because it is the trigger for other negative feelings. The fear of losing money can lead to missed opportunities, in other words you don’t take a trade because you’re afraid you might lose. Ok, you don’t take a trade today, you will not take one tomorrow or the day after, but what if those trades would have expired In the Money? The answer to that is:
Frustration starts to creep in. “Ah, my strategy was good, I should have followed it. Crap! I missed four trades that would have brought me money. I’m not going to be scared anymore.”… and you start trading. But because you are frustrated by the missed opportunities, you jump into the market without following your plan to the letter because you want to somehow make up for those missed profitable trades… you are now…
Now you want to trade more frequently than usual, maybe even switch to shorter expiry times to be able to place more trades but you forgot about your tested and proven strategies. All discipline goes out the window, you rip your shirt open, turn into the green Hulk and scream. “Come on you stupid market, I’m better than you! I’ll show you how good I am!” When that happens the market will always win; it will chew up your account and spit it out, it will snap it like a twig… obliterate it… destroy it. You get the picture I guess. So avoid those feelings at all costs.
Wrapping it up: Skills Worth Money
There is no secret recipe for learning to control your emotions and for becoming the perfect trader. For that, you have to reach deep inside, find your balance and most of all, you have to know yourself. Ok, ok, I know I sound like Mr. Miyagi from the “Karate Kid”, but I’ve been through all the stages that I talked about, I’ve blown accounts and lost money. So I’ve learned the hard way to control my emotions and maybe after reading this article, although it’s just the tip of the iceberg when it comes to trading psychology, you will avoid some of the mistakes I made. Don’t let the Hulk out!
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