We all know that a lack of discipline and being unable to control your emotions are the downfall of many a trader. One of the most regular stories I hear is how traders on a great winning streak, then go on and give back all of their profits in a series of losing trades.
Why is this? Well, after a decent winning streak, traders will be on an emotional high, feeling invincible. So what do they do? They go ahead and take more trades, trades that they would not normally take with a clear head. Trades that have not setup correctly for their normal trading rules, trades that are perhaps more risky, trades where they risk more than they should. Sound familiar?
The very nature of trading means that it will stimulate your emotions, both positive and negative, frequently swinging between extreme highs and extreme lows. Understanding how your emotions and subconscious mind work are critical aspects of trading and it is important to at least recognise when your emotions are running high.
The professional trader understands their emotions and understands how not keeping a check on their emotional state can impact trading. The professional trader knows that sometimes it is best to sit the market out.
The amateur trader however, often gets sucked in and lets their emotions rule their trading. The amatuer trader feels they need to always be 'in the market', leading to revenge trading when they are losing, or perhaps refusing to take a loss and widening a stop-loss. When they are winning overtrading and increasing risk and position sizes are a common trait. Of course this usually ends in tears. Sound familiar?
Emotions, if unchecked can lead to some regrettable trading decisions. Ultimately you need to remain disciplined and stick to your trading rules, but of course that is easier siad than done and requires practice and effort.
If you have just had a poor losing streak or a decent winning streak, it is often best to take a break, stay out of the markets and wait until you have your mindset and emotional balance back in check. If you just had a series of losses, do not rush in to try and 'win' it back. Assess what happened, review your trades and see if you made some errors.
If you just made some great profits, so do not rush to give it all back. Your trading plan should tell you what to do if you have a series of losers or if your account is drawndown by a certain percentage. Your trading plan should also tell you what to do after a series of winners. Reviewing your winners is jsut as important as reviewing your losers.
This week I had a great week. Sure there are some setups I am watching and I coudl take some more trades, but it is Friday so I intend to make sure I finish the week off on a good note and that means not giving my profits back. Sometimes not trading is the best trade of the day. I will spend some time reviewing my winners and assessing how I am tracking before I take my next trade.