I’ve seen this over and over in my trading. Emotions happen when you trade a live account with real money at risk. And it’s not just me – the top questions I get at Trend Following 101 are about emotions in trading.
I’d like to give you what I find to be the most powerful tool for changing your behavior. Even better, most people find this change to be easy.
My wife keeps telling me I should charge big bucks for this, but I can’t just let people suffer when the fix is so darn easy.
I firmly believe better trading skills makes the emotions of trading easier to handle. Better trading skills will improve your trading psychology. Keeping your risk per trade low and having preset exits takes you off the emotional roller coaster of trading and put you on a path to higher profits.
This is why I give concrete, step-by-step actions on how to enter markets, how to deal with market risk, and how to exit markets. These practical skills are crucial for getting you money from the markets, but they do more than just improve skills. Better skills stabilize your reactions to trading real money.
But better skills aren’t enough to keep your emotions on an even keel. Sometimes, you need more. That’s why I am giving you straight up, clear instructions on how to use your emotions for your benefit rather than have them work against you.
It’s hard to change your emotional reaction to trading. It’s all mixed up with feelings about money and our drive to be correct – frankly, I don’t even know if it is wise to change these feelings.
It can take a lot of time too – which is something even more precious than money. Few people have the patience to go through years of therapy while losing money trading – and it turns out you don’t have to.
It’s much easier to slightly re-direct your emotions so you re-enforce proper trading behavior. Keep those emotions in place, but use them to strengthen good trading behavior. You’ll still feel those strong emotions – you’ll just be using them to power trading profits.
Being Right about Making Money—Is Wrong
I’ve found most people have a strong need to be correct, to be right, and to be accurate. I have this drive too – I like to be right. We get rewarded for being correct in nearly aspect of our lives.
This drive to be right doesn’t stop when you start trading – it gets stronger because now you have money on the line. The payoff for being right isn’t winning a debate over a few beers – it’s cash money in your pocket! Perhaps you’d buy a car with this money.
But this is where some people can make a big mistake. It’s an expensive mistake, too.
Some people confuse being right about the market with being right about putting money into the trading account. It’s a fine line between the two, but they are not the same.
If you have to choose between being right about the market and being right about putting money into your account, choose putting money into your account.
This idea is a simple trick that might double your trading profits. Let yourself “be right” about putting money into your account instead of trying to be right about your market analysis or the movement of the market.
I can’t stress this enough – always, always remember the goal of trading is making money. Being right about making money is what you want to do instead of being right about your market ideas.
You’ll find putting money into your account is addictive – you’ll want to “be right” more and more often!
When you let yourself be right about putting money into your account, you harness one of the strongest emotional drives. You use your strongest emotions to focus like a laser beam on making money.
Oddly, this distinction is hardest to make during winning trades. When you have a losing trade, it’s pretty clear you need to get out of the market. The trade is going against you, and you are losing money. Getting out is a matter of survival, so you just do it.
But when you have a winning trade, well, the market “proved” you right. You’re correct. You start to feel you’ve figured out the market, and forget that making money is the object of trading. That’s when it happens – we forget the goal is to make money, and instead focus on being right about what the market does.
It’s a good feeling too – you’ve beaten the best and brightest, and put money into your pocket at the same time! It’s especially hard to keep your head straight at these times.
Here’s where reminding yourself to be right about making money will really help your trading profits. And it’s one of the core strengths of trend following, too.
Trend following is all about the price action. We let the markets tell us when to get in the market, and when to get out.
Markets are fickle – they change direction, and sometimes there isn’t a good reason for the change. So instead of focusing on being right about the direction, focus on making money. Ask “What will make the most money for me over time?”
As trend traders, we let our profits run on every trade, and we have a pre-set exit point for winning trades.
So we’re already a few steps ahead of the game. We want to be right about putting money into the trading account, so we have a plan that focuses on getting money consistently out of the markets.
Use this simple trick to keep focus on the goal of trading – and you just might double your trading profits.
Your Friend in the Trend,