Hope and Fear in the Marketplace
By Carl Loffmark
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"The key to trading success is emotional discipline. If intelligence were the key,
there would be a lot more people making money trading.”
~ Victor Sperandeo, Professional Trader
Our Emotions
Having an opinion regarding the price direction of a commodity and following it each day can be fun and exciting. There is no stress involved since there is no money on the line, however trading a position with money on the line can be fraught with emotion. Human emotions such as fear and hope can affect our ability to trade a position according to an intended plan and can have disastrous consequences.
Hope
Hope is an easier emotion to live with than fear. Hope can be very destructive to an investor because it prevents us from closing out a losing position. When we listen to hope, we hang on to a losing position too long and hope the next day the position goes in our favor. Each day the position goes against us, we hope the next day will be better. Hope is much easier to sleep with than fear and can lead to enormous trading losses.
Fear
Fear of losing profits on a winning position leads us to close out a profitable position too soon, before the intended target is reached. Fear can make us question our conviction and shake our confidence: it is an uncomfortable feeling to live with and is a common reason why traders exit profitable positions prematurely. We may feel good about taking a small profit and no longer being afraid, but we have failed to capitalize fully on the opportunity we have been waiting for. Fear keeps traders from making as much money as they ought to.
How to profit
Investors must reverse these natural emotions. Instead of hoping a losing position gets better tomorrow, we must fear it may get worse. Likewise, instead of fearing we will lose our profit, we should hope our profit becomes bigger. This way, as investors we can let profits grow while keeping losses of original capital to a minimum.
An important way to overcome these emotions is to have a trading checklist and reaffirm the reasons for the position at the end of each trading day. Trading decisions should be made after the close of trading, in order to make an objective and less emotional decision. Avoid making trading decisions when the markets are open. A trader who can sit tight and be right is uncommon, as it is easy to become impatient and doubtful as the market takes its time doing what we think it ought to. Without having faith in our trading plan, we will not go very far in this business.
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