Option Trading: Keeping Your Emotions in Check
By A.J. Brown | November 13, 2008
Many option traders underestimate how difficult it is to manage emotions when trading. They automatically assume they will have the self-control to get out of a losing trade asap... and ride a winning trade for all it's worth.
But what we often imagine is easy (in theory) is harder (in practice) than we think.
This is why I'm a strong advocate of trading rules that help you keep your emotions in check. Without firm rules to follow, you may soon find yourself on an emotional roller coaster that quickly drains your trading account.
When option traders finally put real money in the market, they're likely to experience one of these common emotional responses...
But first, if I may, I'd like to share a quote about investing that inspired this post in the first place.
"Investing in stocks is definitely the best course of action, just so long as you're the kind of person who can will him/herself to stop in the middle of an orgasm." -Jeff Yeager, The Ultimate Cheapskate's Road Map to True Riches, p. 204
When I read this, I laughed out loud. Because I think it's fairly accurate in describing the amount of self-control an option trader must have.
* When you're in a winning trade, you have to exit when things are still looking relatively good.
* And when you're bleeding cash like crazy, you have to bail out even if you believe the trade will recover and turn profitable.
No doubt, this is challenging for anybody to do.
But not as hard as you may think IF -- and only if -- you create strong trading rules that you adhere to all the time.
Now, get this. Most new traders allow their emotions to control their trading.
When in a winning trade, many new traders jump out too early. Their emotions say, "You've made some money; get out while you still can!"
This is greed talking. Usually, they listen and wind up taking profits too early.
When in a losing trade, many new traders stay in too long. Their emotions say, "You've only lost a little bit. The trade will turn around. Don't worry."
This is the fear of loss speaking out. When traders listen, they lose big time.
If you're goal is to make a lot of money as a professional option trader, you simply have to keep your emotions in check. Drown out the voices of fear and greed -- even when they're yelling at you.
And this is why I strongly recommend that you use trading rules to override your emotions and dictate when you enter and exit trades.
Topics: Investing |
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