Trading & Emotions: A Love-Hate Relationship
What does it mean to make a succesful and profitable trade? Every trade is different, but for many traders trading is a roller coaster of emotions. One moment they are happy and at the other moment they end up emotional, sad and disappointed.
Let’s take a good look at what we call a typical succesful roller coaster (figure below). The graph is a random hourly chart from a downward trend on EUR/USD. We take a short position after a head-shoulder-head formation and place our stoploss above the second shoulder.
- The Sell Stop order has been hit. Our stoploss and take profit are set. There is a big drop, let’s go!
- The chart is going sideways for a while, let’s hope it will continue. “Should I take profit already?”.
- Worries are starting to come.”My equity is negative right now… I should have taken profit when I had the chance…”
- Some slow but positive comeback! The equity is recovering and we are getting some confidence gain.
- Take profit hit! Good that we stayed with our strategy and didn’t make an emotional decision.
Loss aversion is an unwillingness to accept losses while trading. Even though you know, based on previous results and following a profitable strategy, that you will end up profitable.
Take a look at the results of our ArtiTrader ‘Albert Einstein’ below. We can see that over a long time there has been many periods with many losses. The last All-Time-High was even almost 2 years ago.
Most people forget that trading does not make you fast money in a short time, but it is a good opportunity to invest in and make a good profit over a long time.
We fear loss because our brain does not assign the same weight to a €100 loss as it does to €100 gain. The happiness of finding €100 on the street doesn’t equate to the frustration of opening your wallet and realising you lost €100 you needed to pay for something. Think of it this way, not having a relationship with someone isn’t as painful as having someone and then losing them. Our brain typically assigns 2.5 times the weight to a loss, as it does to a gain (Kahneman and Tversky, 1979).
How can we profit from this knowledge?
As first, remember that you can never predict the prices. The only thing you can do to be successful is to stick to a proven strategy. You will then be less funerable to the emotions that come with trading. Successful traders are aware that prices need ‘space’. It takes a while before a position is profitable. This is also the case with scalping. With scalping it is much faster than with normal trading, but even there you have to dare to hold the position.
Imagine the emotional roller coaster with the next trade. This ensures that you are mentally prepared. In the results of ‘Albert Einstein’ above we can see that in the end it can become profitable. But it does includes a roller coaster ride. Successful traders are so well prepared for this emotional roller coaster that they never allow themselves to enter that state. They do this through a good preparation and a good plan to which they adhere.