The number one problem out there with most of traders is usually one of the following:
- Being ‘stuck’ with a position
- A position showing huge and devastating losses
- A single position that is way too big
The underlying problem is always the same. At some point in time things changed and control shifted. You started out being in control and then the stock you own started to control you. The position then went on to devastate your financial capital and ultimately devastated your mental capital.
The importance of day trading emotional control cannot be overstated.
Imagine you’ve just taken a trade ahead of RBI Intrest Rate Decision with the expectation of market going up quickly, enabling you to make a short-term profit.
RBI Intrest Rate Decision comes, and just as you had hoped,But for some reason, price goes down!
You think back to all the analysis you had done, all the reasons that NIFTY should be going up – and the more you think, the further price falls.
As you see the red stacking up on your losing position, emotions begin to take over – this is the ‘Fight or Flight’ instinct.This impulse can often prevent us from accomplishing our goals and, for traders, this issue can be very problematic, leading to knee-jerk reactions.
Professional traders don’t want to take the chance that a rash decision will damage their account – they want to make sure that one knee-jerk reaction doesn’t ruin their entire trading account. It can take a lot of practice, and many trades, to learn how to minimize emotional trading.
Traders often try to control everything in the market except the only thing they can control: Themselves.
Human beings, in general, are really, really bad at self-discipline and self-control, so what do they typically do? They try controlling other people to make themselves feel better (since controlling themselves is uncomfortable and difficult). In trading, people do the same thing, but they try to control the market instead of another person. However, the market is even LESS controllable than another person might be, and the consequences of trying to control it are disastrous.
Being “in control” is really all about fear. When we aren’t in control, we feel afraid. This is why some people are afraid of flying; because they don’t have control of what is happening, they are just passive passengers along for a ride, despite the fact that it’s the safest way to travel. Similarly, in trading, people give into their fear of losing and so they start trying to control the market by over-trading or by moving their stops and targets all around, risking too much, etc. Doing these things gives them a TEMPORARY feeling of control, but as soon as the market does something they weren’t wanting it to do, that feeling quickly turns into anger and even panic.
You can only gain control of the market by losing your need to control it. Read that last sentence again. You must be at peace with what you can’t control and simply give up the innate need and temptation to act in such a way as if you have control over the uncontrollable.
Again, the root cause is always ‘Control’. To be more precise: The loss of control. Here’s what you should do in order to avoid losing control:
- No game plan if the stock moves to the downside.
- SOLUTION: Use stop losses. Develop a habit of entering your stop loss immediately after opening a new position.
- Rationalizing losses and making excuses.
- SOLUTION: Your stop loss will take care of any rationalizing.
- Believing in a company, management, your analysis, fundamentals etc.
- SOLUTION: Your stop loss will protect you from black swan events, things you don’t know or couldn’t foresee etc.
See what the different solutions have in common? You got it. A stop loss. It is not influenced by emotions and rationalization and takes you out of a position if a stock reaches a predefined price level.
To make a long story short: You should do everything you can in order to regain control and then stay in control. If your position is in control of you, do whatever it takes in order to get back in control. Sell. Yes, that’s exactly what I said: Sell. Go to cash. Free your mind and stop rationalizing a losing position. Take a break. Regroup. Rebuild your mental capital. Then come back and stick to a disciplined way of trading. Use stop losses and stay in control.
As Dennis Gartman says: Every single disaster is due to traders not cutting their losses and letting them grow into huge losses. Cut your losses. Cut your losses. Cut your losses.
Self-control is often the determining factor in trading success, relationship success and life in general. Every good relationship book will tell you the only thing you can control is yourself. What other people do, how they act or think, is not in our control, no matter how it may seem. By working on ourselves, we can learn, adapt and succeed in relationships of all kinds, but first we need to let go, and be at peace with what we can’t control. This applies to trading exactly the same way.
For most traders, it takes them years or even decades to realize this same truth; that we can only control ourselves and not the market. This mistake costs a trader big losses along the way, along with countless late, frustrating, sleepless nights.
Always ask yourself who is in control. If a stock you own is controlling your every thought you have a problem. Sell as much as you need to in order to get back in control. Then STAY in control!