DailyGenesis.com

Emotions are the most powerful force in the universe. At least that’s what I think today. I might feel differently tomorrow.

There are a lot of ways in which emotions exert their power, but one way I have noticed recently is in trading.

Sometimes I paper trade a trading strategy. I don’t really do it on paper, but use a software that let’s me practice trading with fake money. I’ll have huge success. Then, I’ll trade the exact same strategy with real money, and I lose.

What’s the difference? It’s emotion. I would not have even thought about this before, but I’m now convinced the single hardest thing about trading is learning to deal with emotion. Emotion leads you to bad decisions. When it’s fake money, it’s easy to say “let’s just give it a little more time and see if it turns around.” When it’s real money, that doesn’t work.

So how does one overcome emotion in trading? I’m still working on that, but I know at least three things:

1. It takes practice, just like anything else. I had to admit to myself that I had to practice dealing with my emotions.
2. The less money you have at risk, the less emotional you will be. So, starting extremely small and gradually notching it up is the best approach. The gradually part is critical to that last statement. Human nature will say “as soon as I see success, jump in with both feet.” That will be your doom.
3. You have to develop a trading system and make decisions based on the system, not based on a whim. To do this, you have to work a system over a period of time so that you can trust the the system. Given this, it’s not something you can do quickly. It takes time. Your first goal can’t be to make money. Your first goal has to be to “learn to trade.”

This entry was posted on Thursday, April 19th, 2007 at 10:26 pm and is filed under Philosophy, Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.