If you follow me on social media you know my favorite saying is ‘keep yo head to keep yo bread’. Here’s a brief explanation of why I think this is important.
It’s easy to get excited as the market goes up or down and we win our accounts grow. The faster it happens, the more we’re at risk to acting on emotion. That is exactly what we want to avoid.
When we lose our heads, bad entries happen. In good markets, bad long entries get bailed out time and again. In markets that are reaching a peak, bad long entries start to get severely punished. Thus we accumulate larger than usual losses and potentially compound losses if we don’t recognize market conditions changing.
Failing to keep your head can also hurt good entries. Imagine you buy a stock when you think the market is near bottom. It’s showing relative strength, but more apparent heavy selling comes into the market quickly one morning and your position is quickly down 5% with most of the market red. What do you in the situation? All too often we prematurely exit even though our original reason to buy the stock stands.
Risk is always there in trading. If we buy the wrong dips or fade the wrong rallies, we don’t get too many bad trades until a notable drawdown happens.
The whole point is this. We can’t let our emotions over-ride our decision making. After you become a seasoned market participant, you’ll be able to react to good trading opportunities instinctively. If we remain calm in the fire, there’s no need to reduce position size and trade defensively. If we don’t, our drawdowns are generally deeper, our confidence is more shaken and our willingness to aggressively bet on the next fat pitch drops significantly at THE WORST time.
Emotions in markets are real. We can’t completely avoid them, but we can be aware of them and manage them. If you’re trading without a plan to reduce emotions, take a moment and think about how your trading history would be if your biggest gains weren’t accompanied by unusually large losses.
Trade ’em Well