(The following is a collection of work from Big Cheds' series on Trading Psychology. In this article, Cheds explores the ways that traders hold themselves back from success by letting their emotions cause self destructive behavior.)
Becoming obsessed with watching a play after you sell it:
Have you ever had the experience of selling something and as soon as the trade goes through you feel regret and worry that you made the wrong decision, leaving a large profit on the table? Or perhaps you are worried that the small loss you took would have turned around into a nice gain, and you are just throwing money away, like all those times before? You then become completely obsessed and lack any confidence with your trading abilities. Right in the middle of the trading day you have to stop everything else you are doing and watch that one stupid coin or stock to make sure it really does go the way you thought it would when you sold. Every time it ticks green you feel bad and when it ticks red you feel better, mired in a constant state of distress, distraction and agony.
When you find yourself behaving like this, that means you are way too emotional. This is also a sure-fire clue that you are playing with money you can NOT afford to lose. Your emotional responses are telling you that. One of the first rules of investing or trading is to only play with money you do not need and is if you lose it all you should not be impacted financially. When you ARE playing with money that you can lose(House money), even in a volatile and speculative market like Crypto you are able to remove a lot emotion from the equation and properly execute. When you have removed that emotion and attachment to those funds you are able to stick to your trading plan and be confident that when you exit a position that you have made the right decision and can live with the results no matter what. Selling with that type of confidence prevents you from becoming distracted and having to watch it even after you sell it. Avoid this at all costs and stay on track.
Some of you clearly can relate to this:
Hating yourself when you take profit too early:
Have you ever had the experience where you make a really nice trade, or at least you initially thought after scalping for a 10% gain? You take your eyes off this play for a while and move on to other things, and do not look again for a few days. Then one morning you wake up and see that it ran another 35%. You immediately feel terrible and start hating on yourself for taking profit too early. All for the rest of the day you make emotionally compromised decisions filled with frustration and self-doubt that end up costing you money. It is never a bad decision to take profit off the table, because you are defining your risk and locking up gains. If you want to avoid regretting future gains, then leave a small amount of your original position and let it ride.
SOLUTIONS FOR SELF PUNISHMENT
Make a decision and stick with it:
No matter what you decide to do, make sure you are completely committed to that strategy before hitting the button to buy or sell. This will help you avoid feeling regret later that comes from second guessing yourself. Before you push that button take the time to analyze what you are about to do and make sure you are 100% committed to the course of action with a rationale behind it. If things go the opposite way later, you can reference back to your rationale at the time of the trade and then examine it see if your thinking or methodology were flawed. For example, if you are selling because of an evening star reversal pattern and the bulls are later able to break above that pattern at least you know that you made the right decision at the time with the information you had available.
Start small with skin in the game and don't give up so easily:
A winning strategy can take many years to develop, so giving up on it after a short period of time makes no sense. When you are still trying to figure out the right strategy for you it makes sense to use very small sums of money. As time goes on you can slowly increase that amount as your confidence and skill set improve and see if all things remain the same. Think about it like a chemistry experiment. Start out small but it is critically important to have at least a little skin in the game to make yourself feel invested. A very important part of your journey to becoming a winning trader is mastering the emotions that come by having your money at risk. As you increase your position size it is important to stay focused on the mechanics of the trade rather than the amount of money you are risking.
Refusing to cut for a loss:
One really bad habit that you should try to avoid is refusing to sell for a loss. I know from personal experience how hard a habit this is to break, as well as how harsh the penalty can be for having this habit.
I cannot tell you how many times as a trader I have refused to sell for a small loss and ended up holding a big bag when it was all said and done. Looking at my brokerage account and seeing that small loss in red was uncomfortable, and I was unwilling to sell because that would make the loss permanent so I held in the hopes I could turn it around. What happened next? That small loss turned into a massive loss because I was too stubborn to sell and take my medicine. Instead of selling, I stood there frozen in panic just staring at the screen while waiting for the trend to reverse. Has this ever happened to you?
Going for a Hail Mary:
Sometimes after a series of bad trades it can be very tempting to swing for the fences and make one big gamble to try and win it all back. A long shot or gamble like this in theory can work but it usually does not and ends up leaving your bankroll crippled. Why do we do go for Hail Mary’s after a series of bad trades and mounting losses? Likely because of a lack of confidence in our ability to make a winning trade we believe we have to gamble on one long shot to win it all back again. A proper strategy involves risk management with correct position sizing and a trading plan. Remember, hoping is not trading. Confidence is also important, as you should believe that you have the skills necessary to grind it out and make a nice profit rather than swing for the fences and strike out.
Thinking everything is rigged:
Have you ever felt like the market was rigged against you? I know I have, and when I do this I give up and basically say “screw it.” I have felt this way many times when it seemed like everything was going against me no matter what I did. As soon as I sold, the stock or coin would go up. If I decided to average down it would immediately tank. Was the market rigged against me? No, the market just knows more than me and I was playing from behind, allowing my emotions to control me. When you feel like everything is rigged, then you are unlikely to give it your best, already believing you will fail. You are now likely going to subconsciously behave in ways that your trading will become a self-fulfilling prophecy. Has this ever happened to you?
SOLUTIONS FOR THESE BAD HABITS
Refusing to cut for a loss:
This is one of the most difficult habits to break, and the only way to do it is to hold yourself to some type of hard rule. I recommend having a ‘Good-til-Cancelled’ automatic stop loss level and NO MATTER WHAT selling at least 50% of your position if/when it hits. That way the remaining position will be much smaller and it will make future decisions easier as you will be less emotionally attached to the position.
Going for a Hail Mary:
This is a very dangerous habit to have, but luckily an easy one to break. All you need to do is have a hard and fast rule where you never put more than 10% of your entire portfolio into any play. This way you can help control your risk, and your emotion as you will have less money tied up in each play.
Thinking everything is rigged:
The market is not rigged against you and you have just as good a chance as anyone else to succeed. To avoid making failure a self-fulfilling process, always give it your best effort and put in the time it takes to improve your technique. Believe in yourself and keep on pushing until you achieve your goal.