Knowing when and when not to be making trading decisions by being honest with yourself when it counts, can present some huge challenges. Let’s have a look at trading psychology and the psychology of motivation, and how it can potentially expose you to additional, unnecessary risk.
Our motivation either to enter or exit a trade can vary in more ways than we can imagine. If we summarise motivational factors for entering a trade, I think that we can all agree that most, if not all of us, enter a trade hoping to make a profit. Our reasons for exiting a trade however, can vary, but for the most part, I think that positions are exited either to take profit or reduce loss. I think it’s also safe to assume that we can associate positive feelings and emotions with profits and negative feelings with losses. In other words, we associate positive emotions with opening a trade and positive as well as potentially negative emotions with closing one.
How is this useful with respect to trading?
Our motivation for making trading decisions whilst emotionally unattached, contra emotional attachment, to a potential outcome, either positive or negative, can be very empowering, as our decisions are made from a space of clarity, and by choice, not desperation. When you find yourself in a trade that has lost its validity, for any number of reasons, and the market begins moving against you, if you are not honest with yourself, you may find yourself looking for reasons to justify remaining in the trade.
When you’re initial reason for entering a trade has been invalidated, if you’ve set one, the trade will be closed by your stop. If you’re not that lucky, then its time for you to make a decision, which may introduce some new challenges, as admitting being wrong can be tough. If you’re uncertain what to do, then there are other methods you can employ to uncover how you’re really feeling about the trade in question. If you pay attention to your body, you might notice any or more of the following changes in your physiology and behaviour:
- Self touching (e.g. nose, eyes, ears)
- Patting/fondling of hair
- Crossed arms/legs
- Lip tapping
- Increased body heat/perspiration
- Nail biting
- Hands thrusted into pockets
- General nervousness in stomach
Pay attention to your body and what its doing. These subtle clues are very useful when assessing yourself whilst in a potentially stressful situation. When you consciously begin to notice some of the signals listed above, or others, be aware that your motivation for being in the trade may be different than what it was initially. To help discover your current motivation for being in the trade, ask yourself the following questions:
- Are you experiencing negative emotion, as a result of being in the trade?
- Are you viewing your position from within a timeframe other than the one used to qualify the trade, or are you using indicators other than those you normally use?
- Have you adjusted your stop to allow for more risk?
If you answer yes to questions 1 & 2, then you are looking for reasons to justify staying in the trade, which is a clear sign that you have begun doubting the validity of the trade. Warning signal!
If you answer yes to questions 1, 2, & 3 then you are looking for reasons to justify staying in the trade and you’re lying to yourself about it. Moving your stop to allow greater risk, is your way of telling yourself something other than the truth. Ultimately, you’re trying to convince yourself of a fallacy – that the trade is still valid. Warning signal!!
Whenever you have experiences like the one mentioned above, once you’re out of the woods, go back a reanalyse the following:
- Was your risk to reward ratio at least 1 to 1?
- Did you enter the position based on multiple converging factors using your advantage?
Granted, some lessons are more expensive than others, but as long as we learn something each time, then we’re doing fine.