Create a trading checklist. Why? Because you don't want inner emotions that might not have anything to do with investing get the best of you.
Many of us believe we're in control of our emotions when we trade, but sometimes we run into weaknesses. Maybe we become too attached to a stock, or get out of it too soon when it doesn't perform as expected. Let's explore some ideas that can help, including keeping a trading checklist to help prevent emotions from getting the best of us, and applying trading rules that can override the temptations we might otherwise be unable to ignore.
Consider keeping the following trading checklist somewhere handy as you trade and invest. It can help remind your rational self to stay in control of the situation.
Consider establishing some trading rules that can help you snap out of it when emotion comes into play. Of course, different rules apply to different investors depending on their trading strategies and goals, but some general ones can be applied in many situations. Here are some rules you might want to put on your trading checklist:
EMOTIONS GETTING THE BEST OF YOU? FIX YOUR BRAIN.
Try establishing rules, routines, and other helpful strategies to keep your head in the trading game.
Many investors and traders set trading standards but abandon them—sometimes mid-trade—because of fear, greed, over-excitement, and so on. Or, they change rules between trades.
Consider setting a routine that you can stick with. It might not be easy to establish, and it takes discipline. Don't get discouraged if it takes time to find a trading routine you're comfortable using. Once you have a routine and your rules in place, however, you might find yourself:
If you trade on a “daily” timescale where potential buy and sell pricing signals come just once a day, yet you check your trades or charts throughout the day, you’re inviting emotion. After all, your signals (your rules) stipulate that you can only take one action a day, perhaps at day’s end. So checking more often can be a strong sign that you’re too emotionally connected to your trade. It works the other way, too. Are you avoiding your routine, and why? Have losses or unfriendly market conditions made you a bit despondent? Here are some ideas to consider:
Consider this baseball expression: "He took his batting problem to the field." It means a player sometimes starts making errors in the field because he's been striking out at the plate. The player is letting emotions involved with one aspect of life start to affect him in a completely different area. Traders and investors sometimes fall into this trap, as well, especially when problems from their personal lives start affecting their trading.
Unusually high trading emotions can even be a canary in the mine for personal troubles. Self-evaluate and ask yourself if you have larger life stressors than you realized. Have you experienced change, or a death, in your family or social circle? Moved your residence, lost a job, had a physical injury? Here are some trading strategies to consider:
Individual investors sometimes feel outdone by the scope and speed of an increasingly automated trading world. A missed trade, or an ineffective stop-loss, was wiped out by the big boys, the complaint goes.
But the error often lies with the individual. The trade is too high-risk for the trader’s predetermined risk tolerance. Yet, instead of discarding the trade in search of a new one, he or she trades emotionally, believing the trade will make money with a tighter stop. The reality is that by keeping a tighter stop than the stock price action indicates, the trade risk goes up. Normal price action will wipe out that stop-loss quickly—too quickly. The trader’s normal emotional reaction is to gripe that stop losses don’t work. But it wasn’t the big guys behind that move; it’s likely that a herd of individual investors all set tight stops.
Now's the time to recognize your mistake and work on avoiding it in the future. Here are some potential stock trading rules:
One common emotional trap is believing that trading defines you as a person. Sure, most of us hold money in high regard. There’s nothing wrong with that. Money supplies our basic needs, but it also feeds our bigger appetites. To many, money means freedom. By that reasoning, it’s no wonder emotion is automatically attached to trading. When you're over-identifying with trading, remind yourself why you trade.
Sometimes all your trading brain needs is a few fixes—in the form of a checklist and some rules.
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