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 (and this is a BIG "but") what we think will be easy for us to do is, in actuality, extremely difficult.
Since emotions can cause you to make bad decisions, I recommend developing a solid set of trading rules to "neutralize" your emotions.
Otherwise, your emotions may wind up getting the best of you -- and getting the best of your trading account as well.
Here are a few common emotional responses people have when they first risk real money on a trade...
First, let me share with you a quote I came upon the other day.
It's what inspired this post.
"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 profitable trade, you must liquidate your position even though the prospect for more profits may still appear strong.
- And when a trade moves against you, you still have to close your position, even if you think the situation could turn around in you favor.
This is definitely NOT easy.
But this won't be as hard to do if you craft solid trading rules and follow them religiously.
Here's the thing: The newer the trader, the more likely it will be that he will let his emotions control him.
Example: New traders are notorious for taking profits too early.
That's because their "inner miser" is saying, "Hey, you've made enough money.
You should get out while you still can.
" This is greed talking.
They listen, so they take profits early.
On the flip side, when new traders are in a losing trade, they will tend to stay in too long.
As their emotions rage, they hear, "Hey, don't worry, this trade still has time to recover.
You've only lost a fraction of your investment.
Stay in for just a little bit longer.
" This is fear of loss talking.
They listen, so they suffer big losses.
If you ever hope to become a professional trader, you must learn to control your emotions.
Ignore greed and fear of loss, no matter how loud they yell 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.