The Importance of Being Under Control When Trading

From Dr Brett

"To the extent…that shifts in markets lead to shifts in profitability, and emotional shifts that range from overconfidence to underconfidence, traders would tend to run maximum risk just as their methods were degrading and minimum risk as their results were improving. This would ensure losing results over time, making the market seem rigged against human nature. It is not just the trading method, but the trader's management of this method, that might be crucial to long-term success."


Trading is an emotional game for most participants, yet the most successful traders/investors learn to keep their emotions in check.  That can be a very difficult task when dealing with real money and market conditions that can be frightening.  That's one reason why it's important to recognize the risk of any investment at the time the trade is initiated – and to also have a plan that describes how long you can afford to hold the position before exiting or otherwise making an adjustment.  For many, it's difficult to exercise good judgment in the heat of the battle.

The current bear market has been strong, lengthy, and heart-breaking for investors who only understand investing from the long side.  And that's the majority of investors.  They have been under-served by the professionals in the industry.  That includes stockbrokers, financial planners and advisors, and financial journalists.  Very few investors are aware that they can hedge their investments with options.  The only 'hedge' any of them understand is to sell all or part of their holdings.  Don't misunderstand – selling a portion is a very reasonable hedging strategy. But it's far better to understand how to use options to control risk.

As losses mount, it's human nature to become frightened.  And for good reason.  For every investor there is a point at which the pain is intolerable and it becomes far more important to preserve what remains of your net worth than to make any attempt to recover, or partially recover.  That's when panic sets in and decisions are made.  As you are all aware, it's important to be in control of your emotions when making important financial decisions.  And that's more important for long-term investors than traders because the latter can quickly change their minds and get right back to 'work' by making new trades. The investors would probably be so upset by what happened that it would be a long time before he/she would  consider re-entering the market.

If you have not yet learned to make wise decisions under stress, then do yourself a favor at at least have a good idea of how to minimize losses if the market does not behave as you anticipated.

259

Comments are closed.