To be a consistently successful trader, the most important trait to learn is emotional discipline. I discovered this the hard way while trading full-time a few years ago. I remember one day in particular. My analysis told me the NASDAQ was going to start a sizable third wave rally between 10:00 and 10:30 the next day...and it did. When I reviewed my trade log later, I saw that several of my positions were profitable, yet I exited each of them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper today. Unfortunately, I wanted to hit a home run, so I ignored singles and doubles.
I now call this emotional pitfall “lottery syndrome.” People buy lottery tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small profit in hopes of scoring a larger one. The problem is that home runs are rare. My goal now is to hit a single or double, so I don’t let my profits slip away.
Since then, I’ve identified other emotional pitfalls that I would like to share. See if any of these sound familiar.
Have you ever held on to a losing position because you “felt” that the market was going to come back in your favor? This is the inability to admit failure. No one likes being wrong, and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I know now that being wrong is much less expensive than being hopeful.
Another emotional pitfall that was especially tough to overcome is what I call “the fear of missing the party.” This one is responsible for more losing trades than any other. Besides overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend? The solution is to use a time filter, which is a fancy way of saying wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. Anyway, I would much rather miss an opportunity then suffer a loss, because there will always be another opportunity.
This emotional pitfall has yet another symptom to which tons of people fall victim: Chasing one seemingly hot market after another. For instance, metals have been moving the past few years, so everyone wants to buy gold and silver. Of course, when everyone is talking about it is usually the worst time to get into a market. To avoid buying tops and selling bottoms, I have found that it’s best to look for a potential trade where (and when) no one else is paying attention.
My biggest, baddest emotional monster was being a “systems junkie.” Early in my career, I believed that I could make my millions if I just had the right system. I bought every newsletter, book, and tape series that I could find. None of them worked. I even went as far as becoming a professional analyst who guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills. One is a skill of observation, while the other is about emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.
I am not a psychologist or an expert in the psychology of trading. These are just a few lessons I’ve learned along the way, and at quite a cost most times. But if you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one. What you discover may surprise you.
By Jeffrey Kennedy, chief commodity analyst at Elliott Wave International (EWI)
