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Secret to Preventing Trading Losses is Managing Your Emotions and Mindset

InvestorEducation / Learn to Trade Dec 14, 2007 - 12:28 PM GMT

By: Nazy_Massoud

InvestorEducation

Best Financial Markets Analysis ArticleDid you know that the traders who lose the most money in trading are some of the most intelligent people?

So what's causing them to lose money?


If you asked them, they would probably have different answers as to why this happens. They might blame the markets, politics, their system – or may even point to themselves.

From my experience dealing with many traders, it usually boils down to how traders, like you, manage their emotions and mindset. This is what I call trading “emotional IQ.”

Does the following scenario sound familiar? Markets are very volatile and all bets are off. You've forgotten your trading plan. You try to listen to every bit of news, and become more and more confused. You either become very trigger-happy or you freeze. The results are usually the same…you lose a lot of money and opportunities.

So what differentiate traders who don't make money from those who make a lot of money? It's the way we handle our emotions and mindset.

Have you ever noticed that when you say the same thing to two different people, one laughs at you and the other screams? That's an indication of how they handle situations, and ultimately, what kind of results they are getting. By observing this, you can determine their “emotional IQ.”

We cannot deny our emotions. They are there. We are only in control of how we react to them. The good news is that we can modify our reactions and hence improve our trading results.

So what are some of the situations you are facing and how can you increase your trading “emotional IQ?”

1.  How Do You Handle Success?

It's very dangerous to win if you cannot control your emotions. You can become reckless, throw away your plans and trade from ego. When you trade from ego, you are gambling and letting your emotion take over. You might win in the short run – however, you'll lose in the long run.

I had a client who after winning several trades would put in a trade that would wipe out all of his winnings. He would then wonder if trading was the right business for him or not. He was questioning the business instead of his behaviour…

The other tendency is to ignore your wins and assume that it's no big deal. After all, you were expecting to win. Does this sound familiar? If so, you are not valuing your accomplishment. You are assuming that winning is a given. You're forgetting that trading is about playing a game of probabilities. Every win deserves an acknowledgement.

What should you do when you win?
•  Don't take your wins for granted – take credit for the good job you've done.

•  Celebrate it.

•  Notice what you did that worked.

•  Determine if there was anything you could have done better.

•  Repeat the process that worked for you.

2. How Do You Handle Losses?

Usually, you are in two camps.

One is to blame yourself and become really frustrated and angry. You can't forget the loss and your focus turns toward the negative P&L. When you are in a bad mood, you are unable to notice other opportunities that are right in front of you. Therefore, you end up losing a lot more.

The second camp is, you try to ignore the loss altogether and can't see it for what it is. You become anxious to make up the loss. Therefore, you take unwarranted risk and you increase your position. Then you lose even more. You get into a vicious cycle – the more you lose, the more you risk and then you lose even more…

What are the steps you can take to manage your emotions when you are losing?
•  Don't make it global – Don't say, “I always lose. I have bad luck. Markets are always against me.” By saying these, you set negative expectations and drain your energy.
•  Think about your losing trade as an isolated event.

Have you noticed what successful basketball players do? When they miss a shot, they don't think about the shot they have missed – they concentrate on the next shot.

When you lose a trade, don't focus on the loss. Focus on what is ahead of you.

•  When you lose, don't lose the lessons. Look at:

•  What worked

•  What did not work

•  What did you learn about:

•  The market?

•  Yourself?

•  The security that you were trading?

•  The methods that you were using?

3. How Do You Handle Fear?

A common way that people handle fear is to assume that they don't know enough. They study more, read more, find different gurus to listen to, take more classes and attend more seminars. They say to themselves, “If I know more, then I won't make any mistakes and won't lose any money or opportunities.”

The reality is that by staying out of the game, you are not really learning how to play the game.

Think about an athlete. They can hear the rules, read and learn them. However, unless they are in the game and practicing, they are not going to get good at it…

What are the steps you can take to handle your fear?

•  As Nike says, Just DO IT!!!
•  Remember something that you have done well. Remember how you felt and what you said to yourself. How did you see yourself…? This way, you will feel better about yourself and can move forward.
•  Celebrate your mistakes and nervousness.

I know this might sound funny. However, when we were growing up, we learned that if we did something wrong, we would be punished. To avoid punishment, most of us were afraid of making mistakes – therefore, we experimented less and less. We didn't take serious action unless we were sure of the outcome. Does this sound familiar?

By celebrating our mistakes, we are saying to ourselves that it's OK to experiment. It is OK to try new things. Then we are more encouraged to change things a bit.

•  Your past results are not equal to your future results – if you have failed in the past, it doesn't mean that you are going to fail again.

•  Know that you do not have to prove anything to anyone. Just take action…

4. Are You Being Present?

Are you allowing the markets to dictate your mood? So, when you win, you feel euphoric and when you lose, you feel angry? Are you equating your performance with who you are and how you feel?

If you are bored, do you try to find a trade even when there is none and thus sabotage yourself?

Do you get distracted with the news and let it impact your moods?

When you are not in the right state of mind, it does not help your trading.

As you think about a successful athlete, what emotional characteristic comes to mind? You notice that they are focused. They do not allow what happened a second ago to impact what they are going to do next – or they are going to lose.

What are some techniques you can use to change your mood?

•  Use the pause method. Take a break.
•  Take some deep breaths – by doing so, you'll increase the amount of oxygen to your brain and thus relax your muscles.
•  Listen to uplifting music. Studies have shown that one of the quickest ways to change your mood is by listening to music. When you go to the movies, the way they try to get you feel a certain emotion is by selecting the right music for the scene. Think about the “Mission Impossible” movies. What music comes to mind?
•  Change your focus – concentrate on something that you enjoy.
•  Have gratitude – think about the things that you are grateful for. Creativity and abundance come from a place of gratitude.

5. Are You Taking Responsibility?

What I mean by “taking responsibility” is to manage your own expectations.

Remember, trading is risky – the outcome is based on probabilities. It's not guaranteed.

When trading, ask, “If I take this risk, am I able to accept and embrace it?” If you cannot, then this trade is not right for you.

If you cannot accept any risk, then you are in the wrong business.

You may have heard the saying, “Do not see the market as you want to see it. See it as it is.”

Your success is not about what is happening in the markets. It's about your reaction to these markets.

Albert Einstein said, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them. “

To Making Success Your Habit™,

By Nazy Massoud

PS. For more Mental Edge tips and reports on how to have more profitable trades, go to www.MentalEdgeTrading.com .

Copyright © 2007 Nazy Massoud

ABOUT THE AUTHOR : Nazy Massoud, a Wall Street Insider, shows traders, investors and hedge fund managers how to develop the mental edge to execute trades more profitably. For more tips and a FREE report on "The 3 Biggest Psychological Triggers That Can Make or Break a Trader," go to www.MentalEdgeTrading.com .

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