Have you ever held on to a losing position, just hoping and perhaps praying that it would turn around? How long were you willing to hold that position? Did the pain ever get so great that you actually had to accept the loss and move on?
The trader’s definition of an investment is a day trade that went wrong! It is kind of a trading joke but to many it is more of a painful reality. As traders, we need to remove our emotions from our trading. It is definitely not easy to do. One of the many things we can do to reduce the effect of emotions on our trading is to objectively analyze our trades before we enter them.
Before our capital is at risk, we are more likely to identify risks and properly evaluate them. Once we are in the trade, it is difficult to admit when we are wrong and all too often novice traders will loosen or remove stops rather than own up when they are wrong. By identifying the risk in the trade prior to entry, you are more likely to remain calm and allow your stop to do its job since you know the worst case scenario before you are in.
Another simple solution for minimizing emotional trading is to maintain separate accounts for day trading and swing or position trading. Many traders already have separate accounts for trading different asset classes but try to day trade and swing trade stocks in the same account. This should be avoided.
As part of a day trader’s routine, they should make sure they are out of ALL positions and have cancelled their unfilled orders by the end of the trading session. This is complicated if there are also swing trades in the same account. But the biggest danger to having swing and day trades in the same account is the temptation to hold onto a losing position in the hopes that it will miraculously “come back” the following day. The problem is that the following day suddenly becomes the following week. Then the following month, and before you know it you are the accidental investor, holding a losing position desperately wishing for redemption.
Trading is more about psychology than market analysis. You need to understand the psychology of the masses that trade in the markets. More importantly though is the need to understand your own mental strengths and weaknesses. You can have an excellent trading plan, but if you lack the mental preparedness to follow that plan through, you will not have successful results.
Most brokerages will allow you to open a second account that is accessible with the same login as the first account. There really are no excuses for not applying this simple technique for dealing with emotional temptation.