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Loss in "Emotional Capital" Can Lead to a Crisis in Confidence (Part 1)

12/01/2008 10:02 am EST


Timothy Morge


Most traders do not have the ability to identify all the major turns in a given market, but if you could, you would make a fortune, right? Reading the market correctly is only part of the story—though most traders cannot read the market well in real time. To make money consistently, you have to be able to read the markets, employ sound money management, and know when and where to take your profits. Sounds hard, doesn’t it?

Wait a moment—I forgot another key ingredient! To be a consistently successful trader, you have to keep control of your emotions, and you can never run out of “emotional capital” when trading, or all that hard work and preparation will end in failure. I’m not trying to be an armchair psychologist. I’m sharing what I have seen in my own 37 year professional trading career, as well as what I have seen while teaching literally thousands of traders to trade or to trade better.

Emotional capital is very much like the capital in your trading account: If you run low on either, you are in serious trouble as a trader. And worse, you spend emotional capital while watching the markets, as well as when you make a winning or losing trade. Like focus, traders expend emotional capital whenever they are focused on the markets. And if you are trading with too little emotional capital [or focus], you will likely make poor trading decisions.

Several weeks ago, while working with one of the traders in my one-on-one mentoring program, I saw a perfect example of a gifted trader that tried to trade while low on emotional capital. The trades were quite striking—you can see the quality of the trade selections decline as he continued to take trade after trade. And although the day didn’t cost him much, if he had been trading this same market, on this same day, and with a pocket full of emotional capital, I believe he would have had a huge winning day. Let’s look at his charts and see if I can describe what I saw as I watched each of his trades unfold during our mentoring sessions that day:


This is a 352-tick bar chart of the US 30-year bond futures. The trader had been waiting patiently for several days to catch a large move lower in the bonds. He had a feeling one was coming, but he was patient and he was waiting for the market to give him one of the high-probability trade entry set ups we go over and over in mentoring.

Note that price was making lower highs and lower lows—a classic sign of a cascade lower in a trending market. And also note that price was bumping along the center line, or the Median Line.

If price mounted a nice counter trend rally, the trader wanted to sell at the upper Median Line parallel; if price plunged through the center line, the trader was willing to sell a re-test of this center line if price rallied from below it. But viewing the charts, he was now fairly certain he’d get his chance to get short and grab one or two points in the bond futures. He had been watching for about three hours already on the morning this image was taken. He was anxious, waiting for a trade entry he recognized to appear.

More in Part 2 tomorrow…

I wish you all good trading!


Timothy Morge

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