Emotions in the Day Trading Life – Introduction
In the financial market, only one thing is certain: uncertainty. In my life as a trader, no day has ever been the same as the previous one. Today I might make a killing but tomorrow, I might be at a worse situation than I started. In a certain week, I will have a losing streak while in the following week, I will have the best week ever. This uncertainty is always certain to all traders. A good example is the billionaire hedge fund manager, William Ackman. In 2014, he had the best performance in the hedge fund world. His funds gained more than 40%. The following year, ’15, he suffered his worst year losing more than 20%. The same has happened to all investors and traders too. Warren Buffet, the best money manager of the decade has had his worst days too. However, these investors have not given up trading or investing because of a huge drawdown. In fact, the years following the losses have become the best in their investing careers. I would not be writing this if I didn’t fail early in my trading career.
The secret all successful investors and traders use is using the losses to their advantage. While a normal person will lose money and give up investing or trading, the wise person will take time to internalize the situation and then learn from the mistakes. In fact, failure is your best friend in the financial market. I have not seen any successful investor/trader who has not had a down moment. For instance, David Einhorn, one of the best activist investors lost more than 20% last year, Ken Griffin (founder of Citadel) lost billions in 2008, Warren Buffet lost more than $400 million in 1978, while Dan Loeb has lost more than 20%, As a trader, the most important thing you need to know is that your technical and fundamental knowledge are not all you need. In fact, these two are secondary when compared to your emotions. The fact is that you cannot control where the market will go in the next 20 minutes. If we did, we would all be making money on a daily basis. What you can control is your emotions. A few months ago, I opened a trade and expected to exit it within 30 minutes. I was sure that my analysis was right. The trade started making losses. Huge losses. I lost about $2,400. The reason I entered the trade was that I wanted to make $200 so that I could reach my weekly target. After closing the trade, I decided to do the opposite of what I had done with increased risks. Luckily for me, the trade managed to go up to $3,200 but I failed to stop. I decided to let it reach $3,500. I ended closing the trade at $1,600.
In the financial world, a common maxim states that, bulls make money, bears make money, and hogs get slaughtered. In short, this means that bulls and bears will know when to exit a trade. Hogs on the other hand are greedy. When they have winning trades, they look at them waiting increase their profits. In many cases, this does not happen. When they are in the red, they tend to believe that a reversal will happen and then recover from the loss. In many cases, this does not happen and they end up losing more money. Failure is your friend. This is something you should always have in mind. In addition, you need to understand that not all trades will make you money. A good example is billionaire Ackman who has publicly accepted that some of his trades such as that of Target failed. When you fail, it is not your end. It also does not make you a worse trader just because you have lost a few pips. These losses will make you a better trader because they will make you avoid the costly mistakes.