Let’s talk about the good times, the winning times, and why most traders sabotage themselves out of reaping the benefits of their hard work. So you’re a bit seasoned at this point, wins are beginning to come at a much more rapid pace. You’ve developed your ‘style’ and you have very specific attributes you’re looking for in a stock. You’re not making consistent money yet, but you’re well on your way. The lesser known problem you have is trimming off your gains when everything is going so well.
When you’re winning, you’re less likely to concern yourself with anything that might be a potential problem, especially something that feels as good as euphoria. A primary characteristic of euphoria is that it creates a supreme self confidence where the possibility of anything going wrong is beyond belief.
It’s when you’re winning that you are most susceptible to making a mistake whether it be overtrading, too large of position sizing, breaking your rules or just generally operating as if we’re in the wild west and you’re just out here gunslinging. However, the market very rarely acts as you wish in these scenarios. Once these future mistakes begin to downtick against you, you quickly go from that euphoric feeling to a negative tone fast. This is one of the greatest expenditures of mental capital there is. The emotional pain becomes significant.
Everyone seems to have different amounts of mental capital, or different thresholds of when overconfidence or euphoria begins to take control of their thought process. The second that this irrational exuberance takes control, the trader is in big trouble.
In a state of overconfidence, you simply cannot perceive any risk because the nature of euphoria does not allow you to believe anything can go wrong. If nothing can go wrong then there is no need for any system of rules to be in place and there are no boundaries to govern your behavior. So in these instances, the propensity to trade much larger than normal size is not only appealing, but compelling!
Once that larger than normal position gets put on, the danger begins. The larger the position, the greater impact each tick has on your P&L. Combine these feats with the subconscious feeling that nothing can go wrong and you are setting yourself up for a world of pain. Once the trade starts ticking against you, you go into a mind-freeze state where your world has just come crashing down. You feel angry and betrayed by the market, when really you were betrayed by your emotions.
It is not only important to create a winning attitude, but also a healthy amount of restraint when one is winning. If you are unable to emotionlessly win, you cannot make it as a trader.
Do you have balls?
Can you think of a time you put on too much risk when things were going well?
Do you find you have a higher propensity to put on trades when you are in a good mood?
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