One of the most difficult issues for traders to overcome is their emotional investment in the outcome of any trade they take. Every time you take a trade long or short there is some degree of emotional investment even in the most experienced trader. There is no nexus between being right and being profitable but nobody likes to be wrong and it takes a very resilient psyche to be wrong a lot and still keep going. Granted having money come into the account when you are wrong does help but it is still nice to be right.
Part of the issue with emotional investment is the notion of expectation and the natural disappointment that flows from this expectation not being met. A classic example occurs in predictive traders – the chart below is yet another magic chart from my LinkedIn feed. I call them magic charts because it is attempting to predict where the market is going – it gives a figure on how far it will go and it even draws a magic line to convince the market that it should follow this line.
The moment you give a prediction in terms of price as opposed to simply making a bet and all trades are bets then you have invested a great deal of your self-worth in the prediction. The natural consequence of this is that when your prediction doesn’t come true and the vast majority I have seen regarding predictions never come true is that your sense of self-worth is diminished. Each time your self-worth takes knock so too does your confidence and eventually, you cannot trade anymore because you simply don’t have the emotional reserves needed to do so.
It is a problem that is easily overcome in three steps.
- Don’t make predictions.
- You are not your trades.
- Don’t make predictions – you don’t have a clue.