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Saturday, July 26, 2008

How do successful Traders Control Emotion ?

How do successful Traders Control Emotion ?

Great traders are often thought of as talented anticipators of direction or momentum, or as exceptionally skilled risk managers, which many are. But an oft-overlooked trait which should always be mentioned is the successful trader’s ability to control emotions.

Use your Head !

I definitely think every trader struggles with controlling our emotions from time to time, and it is one hurdle which trips up many would-be traders that never choose to get beyond it. And it is a choice - either you control your emotions, or your emotions control you.

I’ve traded in the same office with guys who broke keyboards over a $500 loss, and I’ve seen guys who can literally take a nap when up 6 figures on the day they are so cool, calm and relaxed - just total control. The difference between them wasn’t their account size either - it was in their minds.

Mapping a Path to Profits

I suppose the simplest approach for getting to where you want to be is that you seek to build that control over time. There’s a natural tendency to treat trading like watching a horse race and get excited or upset, depending upon the outcome.

However, the best traders have found the boundaries of their comfort zone, and they stay right on the edge of them. They know before they put on a trade what the worst-case scenario entails, and they proceed with the trade with that in mind, able to accept it if it happens. They stay within their risk limits by doing so. Further, they know that if they put on too much risk, they’ll not only lose more than they should, but they’ll likely make some poor choices along the way by focusing on the loss rather than making the best decision at any point along the way.

A great trader is able to think clearly from start to finish, and while there may be some mild irritation (enduring pullbacks), minor impatience (if the position stagnates), or slight satisfaction (as the trade begins to work), they avoid letting those emotions drive their behavior. They truly do stick with their plan, making modifications to it not on a whim, but only when absolutely necessary.

A Simple Solution

The best way to achieve that state of control is to chose to trade small enough that the outcome of any one trade doesn’t carry huge meaning. That will help to formulate a good habit of focusing on the trade, not the P&L (which is where emotions come from usually).

As you gain more control, you incrementally add more risk over time as you are comfortable, gradually increasing that comfort zone but not trying to achieve it overnight.

Develop good habits with small trades, and then slooooowly build your trade size along the way. If you strike the right balance between growth over time and clarity right now, you’ll be well on your way.

Posted by: Srikanthbabu Kaliki

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