Are These Four Emotional Pitfalls Sabotaging Your Trading?

Aug 13, 2009: 4:20 PM CST

I wanted to share an excerpt with you from Jeffrey Kennedy’s Trader’s Classroom Collection on emotions in trading.  This selection is taken from not only a larger article available for you, but from a series of other lessons that are available free for a limited time.

I find it helpful that Jeffrey mixes personal experiences along with valuable information in his writing.

“To be a consistently successful trader, the most important trait to learn is emotional discipline. I discovered this the hard way trading full-time a few years ago. I remember one day in particular. My analysis told me the NASDAQ was going to start a sizable third wave rally between 10:00-10:30 the next day… and it did. When I reviewed my trade log later, I saw that several of my positions were profitable, yet I exited each of them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper today. Unfortunately, I wanted to hit a home run, so I ignored singles and doubles.

I now call this emotional pitfall the “Lottery Syndrome.” People buy lottery tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small profit in hopes of scoring a larger one. Problem is, home runs are rare. My goal now is to hit a single or double, so I don’t let my profits slip away.

Since then, I’ve identified other emotional pitfalls that I would like to share. See if any of these sound familiar.

Have you ever held on to a losing position because you “felt” that the market was going to come back in your favor? This is the “Inability to Admit Failure.

No one likes being wrong and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I know now that being wrong is much less expensive than being hopeful.

Another emotional pitfall that was especially tough to overcome is what I call the “Fear of Missing the Party.”

This one is responsible for more losing trades than any other. Besides overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend? The solution is to use a time filter, which is a fancy way of saying wait a few bars before you start to dance.

If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. Anyway, I would much rather miss an opportunity then suffer a loss, because their will always be another opportunity.

This emotional pitfall has yet another symptom that tons of people fall victim to chasing one seemingly hot market after another. For instance, metals have been moving the past few years so everyone wants to buy Gold and Silver. Of course, when everyone is talking about it is usually the worst time to get into a market. To avoid buying tops and selling bottoms, I have found that it’s best to look for a potential trade where (and when) no one else is paying attention.

My biggest, baddest emotional monster was being the “Systems Junkie.”

Early in my career I believed that I could make my millions if I had just the right system. I bought every newsletter, book and tape series that I could find. None of them worked. I even went as far as becoming a professional analyst guaranteed success, or so I thought. Well, it didn’t guarantee anything really.

Analysis and trading are two separate skills; one is a skill of observation, while the other, of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.

I am not a psychologist or an expert in the psychology of trading. These are just a few lessons I’ve learned along the way… at quite a cost most times. But if you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one. What you discover may surprise you!”

(Reprinted in part with permission from Elliott Wave International)

Corey Rosenbloom, CMT

5 Comments

5 Responses to “Are These Four Emotional Pitfalls Sabotaging Your Trading?”

  1. Name Says:

    Wow what a helpful post Corey. Would another pitfall be being too rational? I don't have proof but it seems to be the case that these markets are completely rigged in almost every nuance. Hence, the lack of putting aside reason could be a pitfall. Not considering what the vested interests want could be a pitfall. e.g. It could prevent you from say putting all of your money into FAS right now when it's actually risk free to Rifin.x = 920, which might double your money in a month. And- probably the market will give you multiple opportunities to sell there, as many people won't realize that it's actually XLF=18. Hence, not taking enough risk seems to me to be an emotional problem with trading right now. Not recognizing what the top looks like and whether we're there yet might also be a pitfall. It has certainly been one of mine.

  2. Corey Rosenbloom, CMT Says:

    Haha! I feel that exact same way sometimes!!

    I wouldn't make a principle of putting aside reason, but if the market continues to blow through technical resistance level and melt divergences like they're nothing, then the only rational thing to do would be get long the market – we've been told 100 times “Don't Fight the Fed.”

    I'll have to write Jeffrey and tell him to add two more to his list of Pitfalls!

    Thanks! Good comments!

  3. Name Says:

    Perhaps those caught in a true crash are only those passively long who don't even read blogs like this! Let alone write them! Rather than keeping our powder dry, perhaps it's our sells that we should be keeping on ice. Given stop losses, isn't this just an issue of overnight gaps? How big could an overnight gap be? Can one just buy puts or VXX overnight to cover this off? How big of an overnight gap would be a sign that I need to sell at the open before I can even get my stoploss in, e.g. doomsday?

  4. sandew Says:

    I read somewhere we only “trade the price” not the 'News'. And when we allow news override the chart reading, we let subjective emotion creep into the trade via the backdoor of news analysis.
    And yes, i think it was Keynes who said “Markets can remain irrational for a longer period of time than we can remain solvent”.
    So, just throw the news out of the window and trade the price on the screen (I admit, it is easier said than done)
    Sandew
    Delhi- India

  5. sandew Says:

    I read somewhere we only “trade the price” not the 'News'. And when we allow news override the chart reading, we let subjective emotion creep into the trade via the backdoor of news analysis.
    And yes, i think it was Keynes who said “Markets can remain irrational for a longer period of time than we can remain solvent”.
    So, just throw the news out of the window and trade the price on the screen (I admit, it is easier said than done)
    Sandew
    Delhi- India