If you hang on to losing trades hoping for a big move, it could be your ego playing games. It’s hard to dodge, but a few steps could help minimize the effects.
Do you enter trades with a strong bias, then change course after placing them? Every trader wrestles with internal debates. Often, it’s our ego that gets us to overvalue our own ideas about what the market should do. And it’s normal—your ego wants to justify your successes, yet it doesn’t want to admit to, or face, losses.
Actually, any trade you make is based on some measure of ego, because you start with a directional bias. But how can you minimize the role ego plays over the long term?
Phase one is becoming more mindful and aware. If your losses build after placing a trade, are you losing because something went wrong in the market, or is a fear of losing generating poor decisions?
If your trading system is failing because of the market, you may be able to rectify these failures. It could be a stock going through a pullback, or overall fundamentals aren’t that great, or perhaps you didn’t tighten your stops as circumstances were changing. Read about ideas to fix a failing system in “Time for an Options Strategy Change?” in thinkMoney 47.
If you’re holding on to a trade that went sour because you’re afraid of failure, it may be time to take stock, no pun intended. Accepting losses is part of trading, but they can be hard to face. As such, you may end up holding trades longer than you need to. Face it: Drawdowns are frustrating and can make us more anxious.
If you think you’re trading on the fumes of ego, consider four steps:
1 – Stop trading. Work to analyze your trading from the perspective of learning how to lose instead of win. Once you accept that trading is about probabilities and that losing is part of the game, you may become less attached to results.
2 – Reassess. Compare your strategies by reviewing different scenarios and how you’d play them out. Plan how much you’re comfortable losing on a trade so when you see a trade is going sour, you already have a plan in place to exit at a point you’ve sketched out in your mind. A lot has to do with position sizing and trade management, so that when a trade goes against you, it won’t take you out of the game. Even if you have several losses in a row, your bankroll should be healthy enough to weather it.
3 – Trade without risking real money. Before putting real money in, use a trading simulator like paperMoney® on the thinkorswim® platform to help build your confidence without risking your capital.
4 – Take small bites. Start small when you return, with modest contracts and trade sizes. You may still want to get some skin in the game, and smaller sizes are naturally more manageable from a risk perspective.
You may never be able to completely eliminate ego from trading, but you might be able to control it. Being aware of the existence of ego and knowing how it influences you can go a long way.
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Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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