Trading psychology fables: Don’t let your emotions dictate your trading


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This is a classic topic of trading educational articles. And it’s like that for actual solid reasons. Nenad Kerkez, head of technical analysis and trading at Elite CurrenSea, has a really interesting article on how to avoid getting caught by the Emotional Spiral Resistance.

The mistakes he mentions, getting mislead by greed and fear, also took the best of Scott Barkley, president of ProAct Traders, who recalls suffering heavy losses trading Silver (XAGUSD):

“I had been trading Silver up for about a year. I was making more pips than I thought possible and succumbed to a rookie mistake even though I had been trading for 15 years. I let the two emotions that beat most traders take a hold of me: fear and greed.  

My left brain did not engage and control my right brain and I entered at the top, sure that Silver was going to break the $50.00 mark. The market immediately flipped on my trade and I thought that was a minor correction. I pulled my stop and lived through the correction, then decided to cost average this with a second position. The second trade forged ahead and I was sure that, at the least, I would get to break even on the first trade and profit on the second. I set a large stop and when I came back to my computer found that the market had turned 700 pips. Of course I lost on both trades with a huge loss to my former robust account.  

My hard lesson was: Never let greed or fear run your trading. The left side of your brain is the analytical side and it has to control the right side (where flight or fight reside)”.

After losing big, a popular feeling is to try to get back what you’ve just lost. Revenge trading is also a source of losing positions. Anil Panchal, analyst at Admiral Markets, was one of the victims of the EUR/CHF bloodbath induced by the SNB in January 2015, but despite trying, he got nothing back:

“It was way back in 2015 when SNB removed floor of its EUR peg vis-a-vis CHF. I held some EURCHF long and it was going quite well. Then, a sudden slump of 100's of pips that took me few minutes to analyze the reason. Even after knowing the reason, I tried to recover my loss by buying few small lots, expecting that the pair would bounce back. However, nothing happened and I lost a major chunk of amount from my balance.

Hence, the point was even after knowing the rationale behind the move, I tried to recover the loss and that cost me badly high. Never go against the market because trend is your best friend and revenge is your biggest enemy”.

Dr. Woody Johnson, psychology instructor at the Online Trading Academy, also shares a memory of how his emotions took the best of his trading, letting a NASDAQ short run into the weekend despite being against his own rules:

“The mistake had to do with holding a day-trade position over the end of the week. I was playing the cash index, Nasdaq, with an option. I bought one month of time with 10 contracts deep in the money. It was on a Friday. Toward the end of the day I knew it was important to get out of the trade but I became seduced by the bad news and assumed that the downward push would continue. Plus, the spread was big and even closing the trade while paying several hundred I still would have had a tidy profit of about $1800. But, I allowed the market to close with my position still in tow.

On Monday the Nasdaq gapped up and at the opening bell I was already $4K in the hole. It continued like that for a few days whereupon I finally liquidated the position with a substantial loss of over $25K.

The lesson was to follow all of my rules to a T. Also, another lesson had to do with greed: how it can distort judgement and distract your thoughts leaving you vulnerable to being seduced by forces in the trade that at that moment look good. If we took a few more minutes to confirm that what we are looking at is legitimate, we could identify those clunkers that masquerade as good decisions”.

Being seduced by “convenient” news releases or getting greedy and looking to make too much money on just a trade are regular outcomes that usually don’t end well. And you can only blame yourself for not following your initial trading rules.

 

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