When I first heard of a trading plan, it reminded me of when my wife and I had our first child. Yes, the two have very little in common, other than the “birth plan.” My wife brought up an idea of a birth plan and I, for obvious reasons, went along with it. Everything was going according to the birth plan, even my “later, after the birth, poker game with the boys,” until it wasn’t. Sounds a bit like trading, doesn’t it? You sit down to trade and have it all figured out, until everything goes, not according to plan.
This is where you must pay attention to the warning signs and stick to your trading plan no matter which way the cookie crumbles. Some warning signs include catching yourself on being insulting and critical. Sometimes things just go against you, it is Not always your fault, it is Not always you who did something wrong. Stop the blame. Illusion of certainty, allowing yourself to think that this always happens to you and letting negative thoughts impact your trading, is another warning sign. Predicting irrational outcome, is simply irrational, sometimes the market just goes against your trade. It doesn’t happen all the time and it does not always do the opposite of what you thought it was going to do. Yes, of course you have had those thoughts, we all have.
So, you are officially done with step one of recognizing the warning signs of emotional trading. Now, what’s next? Here are some tools to help you deal with these warning signs and stick to your trading plan. Recognize how you feel. Label that feeling with one word, yes, it can be a swear word, but keep the swear jar handy. Keep a journal and write this feeling down. Think of similar scenarios from the past and their outcome, this is where journaling becomes useful. Use long term support trading, look to the past and you will see that the chances are high that the market will rebound, long term. Look at the 50 day, 200 day moving average. Hedge yourself, by buying treasury, and other volatility correlated asset classes. Protect your portfolio by having 30 percent of your income in cash. Slow down, look at yourself from a third person’s point of view and see the difference in the way you feel and the way you trade.