Keep Your Emotions In Check:
It’s good to be enthusiastic about what you are doing, but your emotions can be a liability when trading. They can cloud your judgment when you are in the middle of a trade. There is a fine line between being sensitive to changes in the market environment and getting caught up in the emotions of trading.
Often, a trader will get into a trade with a plan and then fail to follow the plan to conclusion due to emotions.
Let me give you an example:
Suppose you are watching the S&P 500 (SPY) and it is up a point on the day and the economic news is good. You decide you are going to go long on any retrace close to the VWAP and give it a 30 cent stop with a target 30 cents above the high of the day. Around 11 am SPY retraces 40 cents to just above VWAP. But you decide that the retrace might go further and you hesitate waiting to see if the price drops 15 or 20 cents lower. Within 2 or 3 minutes the price turns around without hitting VWAP and heads back up over the next hour to 50 cents above the high of the day.
You had a plan, the conditions for your entry occurred, and yet your emotions got the best of you and you missed the trade.
Here is another example:
Suppose the scenario was the same as the previous example but this time you took the trade just above VWAP. After you went long, the price drops just under VWAP and hovers around VWAP for 30 minutes in a 15 cent range. After 30 minutes it makes a 15 cent drop to ten cents below VWAP and you decide it might go lower and you panic and close out the trade short of your stop. Sure enough it turns around and heads up past the high of the day by 60 cents over the next hour and a half.
In this example you had a plan, the conditions were met, you executed the trade, but your emotions got the best of you and you lost faith in your plan and exited for a slight loss above your stop price and then missed out on a big gain.
So the point of these two examples is that you were in a calm frame of mind when you formulated your trading strategy for the day. You patiently waited for the trigger you were looking for. In the first case you hesitated due to an emotional decision and missed a trade. In the second case you lost faith in your plan due to your emotions and took a small loss instead of a nice win.
The moral of the story is that if you don’t learn to manage your emotions, they can be a liability when trading.