Emotional instability can manifest itself in both negative and positive emotion. For instance, if you make a mistake and lose money, the negative emotion attached to that loss can influence you to make all sorts of irrational decisions further on down the line. It can sap your confidence so that you become unable to pull the trigger on a subsequent trade that may have a lot going for it. Alternatively, it can cause you to chase bad trades in the hope of quickly recovering the initial losses you made. It sounds intuitive, but so many traders are led by their emotions in this way without even realising it.
In the case of positive emotion, an emotionally unstable trader is quick to be swept up in the euphoria of bull markets and bubbles. They are also much more likely to attribute a previous successful trade to their own expertise rather than to luck or fortunate timing. This leads them to approach future trades with a kind of dangerous arrogance that markets will quickly punish. Wall Street veterans often speak about traders who come of age during bull markets as being afflicted with this bias. They started trading when the market as a whole was moving up and so develop an unconscious bias that their success is down to their own skill rather than to a rising tide that lifts all boats.
This is not to say that you should erase all memory of prior losses and move forward as if they never occurred. Doing so can leave you vulnerable to repeating the same exact mistakes. However, good traders have the ability to put their trading history into context and learn from their previous trades without placing too much emphasis on them. It sounds good in theory, but can be incredibly difficult to do in practice. Remember, that regardless of whether your last trade was a win or a loss, its outcome shouldn’t influence your next one. And your next trade is not the be-all, end-all; it’s just the first of many.
Don’t be a lone wolf
It’s quite ironic that even though we have the entire world at our fingertips, so many of us still choose to go it alone. Retail traders who trade in isolation, experience some notable disadvantages relative to institutional traders that not many people discuss.
When older institutional traders review their education in the business, they often refer to the various mentors they had when starting out on a trading desk. These relationships allowed them to benefit from the wisdom and experience of older participants who had seen more and had experienced a wide variety of market cycles. In this way, they learned lessons that could be painful and costly if learned in isolation.
And it’s not just about mentors. Working alongside other budding traders creates an environment where people can learn from each other’s mistakes and successes. Having others around you that are aware of your trading and how it’s going for you also makes you accountable in a manner that’s almost impossible to recreate on your own. As with any competitive activity, being in contact with people who challenge you and inspire you to work harder is the key to improvement.
The internet affords you the luxury of connecting with other traders from all across the globe and forming relationships that can be mutually beneficial. Of course, it takes time and commitment to find the right people and to not just create echo chambers that feed you back what you already believe. However, when done right, interacting with other traders and taking part in communities can be very beneficial to both your knowledge and state of mind. Developing trusting relationships with others that allow you to discuss your ideas, strategies and outcomes in an honest way gives you a sense of perspective that is absent when you’re alone.
And even if you are completely antisocial and would rather keep to yourself, there is so much incredible content out there from veteran traders that can fill the role of mentor for you, even if you never actually speak to them. The general idea is that you should be humble enough to take some time out of your trading day and find other traders who you can look up to and learn something from.
If you have been struggling to find your tribe of traders, I invite you to join HYCM’s weekly webinars and workshops, where I demonstrate how to analyse recent movements and discuss market events of the coming week, and guide attendees in practical exercises designed to hone the technical side of trading, respectively.
Register for the webinars and workshops on the HYCM website
High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
The post 3 important lessons for traders of all levels appeared first on LeapRate.