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Dealing With Temptations

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2023-10-19
Dealing With Temptations

In the introductory article, we talk about the brain psychology and emotions in trading and learn some basic rules on avoiding the emotional traps. Let's dive deeper into how we can better make our thoughts and emotions work for us.

0% Loss Is Impossible

Even the best trader in the world makes poor decisions (see some examples here and here), and if you're looking for the ‘0% loss' holy grail, you're in a vain quest. The more attention you put on your losses, the more likely you'll let fear, nervousness and negative emotions drown you. The best thing one can do is to maximise their profits and, at the same time, minimise losses. That significantly reduces the amount of stress they put on themselves, allowing them to think clearly and reach better judgments.

What comes with losses are valuable lessons. Risk management, time management, emotion management, strategy testing, getting familiar with certain markets can be seen as some great examples. Trading is a skill, and you'll get better with practice.

Mirror, Mirror On The Wall

Some people beat themselves up for ever having a losing trade (no, don't do that), and some others put all the blame on the market. A market is a place where people gather to buy and sell something, so you as a trader (someone who buys/sells an asset or a contract) is part of the market. See how meaningless it is to point the finger to yourself again?

Yes, you can be affected by ‘noises' in the market, which is just another word for confusing or misleading information, but you don't have to act upon that. We hope that thanks to our repetition, you'll remember to give yourself some time to calm down and verify the news before placing a new trade.

It’s also recommended to consider others' actions as guidance on what would happen if we went down the same road. Herd behaviour is oftentimes susceptible to exploits; for example some whales can do a scamwick (make large short orders) in response to bad news to lure in those quick to follow, then open long orders big enough to get leveraged short degens rekt. After that market sweep, they continue to stay short. The Keynesian beauty contest reminds us to rise above the noise and control our impulses. Only then can we make the best tactical moves and succeed.

Stay Disciplined

The best trading strategy is one that is tested over and over again with time and best suits your personal preferences in terms of risk appetite, available capital, time spent trading and so on. However, without discipline, i.e. the determination to stick to that strategy regardless of things happening around, you'll end up placing a bunch of irrelevant, most-likely-to-lose trades as results of emotional responding. Of course your strategy should be as comprehensive as possible, consisting of a detailed risk management scheme so that you can react with confidence regardless of markets’ direction.

Back to the handling of emotions in trading, it’s required that traders learn to let them come and go. Self-observation on a regular basis helps one become aware of the war going on within during critical moments, thereby minimising the probability of them making any destructive move on the spur of the moment. It also gives them the needed pause to align with their trading plan. After all, it's not all about the constantly correct market interpretation; making the right decision as frequently as possible is, ipso facto, a more important ingredient of long-term trading success.