I find that I swing between phases of great, consistent trading and phases of, well, not so great and relatively inconsistent trading. I’ve realised that it has a lot to do with what is happening in my personal life and how these things spill over into my everyday mind set. When things are good (or stable) in certain spheres of my life, my confidence is higher and my trading is more disciplined (I need some balance).
When things are a little more challenging on the home-front, it weighs heavily on my belief in myself and manifests itself as what can only be described as poor trading. Strangely enough though, when I am under pressure and things are difficult and challenging I tend to thrive. So it is emotional distress that impacts my sense of self-worth, and therefore, my trading. Having seen this now, I can tackle it by sticking to rules based trading.
Take for example the first few months of this year; I was going through a bit of an emotional time in January and February, and thus traded extremely aggressively in Anglo American (JSE code: AGL) for those two months. I sort of switched off the “be patient and wait for setups” machine and traded that stock like my flat was on fire. It went rather well for a time I’ll admit (not without the odd burnt finger here and there), but in truth it was poor trading. Without realising it I tapered off the extreme risk trades and started trading with more discipline again as my emotional state started stabilising around the end of March. I realise now that I was trading like a mad man because I was emotional about something, and not because it was in my own best interest.
April and so far May have seen a lot more consistent and conservative trading and I am once again waiting for the setups to mature before taking trades. It’s a strange thing to think about, but I allowed myself to really act very recklessly because of an external source of emotional distress. I guess it all comes back to emotional control and understanding what emotion you are feeling and then finding the right way to counteract it in order to keep making logical decisions that are in your own best interest. It’s one thing knowing the theory, but every now and then life gets the better of you and you don’t realise that you are actively making mistakes.
The solution I think, is to set up a checklist for myself that I can go through every day in order to identify my own emotional state. I need to ask myself questions like; how am I feeling today?, what has happened that could have upset me?, what has happened that could make me feel overconfident?, are these things really so important that I should allow them to impact my trading decisions?, and should I be trading today? I will give it a little more thought to refine the questions (and probably add a whole lot more), as I believe that a checklist like this will really help me to stay on top of what I am feeling and how those emotions can potentially impact the decisions that I make.
Nobody ever said that you would have to become your own psychologist if you wanted to be a trader did they? Challenge accepted!