A typical error many traders fall for is cutting their profits short while letting their losses run. The explanation behind this so common occurrence is simple: when losing, we hope that the market will reverse and we will then be able to make back the loss. When profiting, we get fearful and anxious that market may also reverse and that we will lose the profit we made so far. Some profit is better than no profit and therefore we decide to close the trade early before we hit our target.
If fear and anxiety are so detrimental to our trading, common sense would be that we should find a way to eliminate them from our trading repertoire. We may believe that if we manage to control them, our trading performance will skyrocket. But this is the exact problem in managing emotions: no matter how hard we try to control them, we just cannot do it. On the contrary, we may realize that the more we try to eliminate emotions, the more they insist to complicate our lives. Modern psychology stresses the importance of learning to accept difficult feelings rather than try to make them disappear. So what should we do?
First, just stay with the unpleasant emotion. Allow it. Make space for it. Do not fight. Do not struggle. Most importantly, do not avoid it.
Isn’t the need to stop feeling fear& anxiety that makes us decide to close the trade early? The thought that the market may reverse and that we will lose our profit is so uncomfortable that we must end the discomfort associated with it. Trading plan, indicators and previous market analysis may be ignored for the sake of avoiding feeling discomfort. But even though anxiety is uncomfortable, it cannot harm you. Struggling with it can potentially cause more damage.
Understand how your mind (your thoughts) may be sabotaging you and causing you to feel fearful. Your mind may be telling you:
“Don’t be greedy, exit now. Some profit is better than no profit”
“Market is reversing. I cannot risk losing my profit”
“ I must make up for previous losses even if profit is less than planned. Cannot afford to end up to a loss again”.
The mind is a masterful salesman and will tell you all the right things to convince you that you are correct to act in the way you do. But what it really does is making you feel anxious and more likely to not trade according to your trading plan.
Realize that you can choose not to act according to what your mind suggests. It is perfectly normal to have the unhelpful thoughts mentioned above. This is the nature of the mind. But do you really have to act upon them?
Clarify what are your trading goals and plan as well as your values as an investor. What are you trying to achieve via trading? How are you going to do it? Which are your short-term and long- term goals? What are your expected returns?
Then act according to your values and goals instead of listening to your mind’s unhelpful talk. Remember that you do not need to eliminate emotions. You can let your thoughts and emotions just be without buying into them. Instead of acting upon your anxiety, you can just go on doing what truly serves your investor values and trading plan.
Guest Post by Maria Meramveliotaki of www.mindyourtrade.com