Thought I would share a few lessons learned the hard way regarding trading psychology. As Dirty Harry opined in "Magnum Force", "A man's got to know his limitations", or stated another way, everyone has their own demons to deal with. The best system in the world is next to useless if you can't force yourself to follow it and make the trades it calls for, even if on occasion you might "outguess" it. One common problem is becoming "married" to a position and riding it into the ground. Say you take a position and it goes against you, but you feel so strongly that your position is the right one that you forgo the normal protective stop, and at some point, even double and triple down. Now you are *really* married to the position with the attitude that come hell or high water, the market isn't going to make a fool out of you on this one. Now, of course, the market goes on one of its famous tears, the reason for which is not important, but you hang on and eventually the market does start to come back. At what point then, having been so seriously underwater, do you start to lighten up "just in case" the market suddenly heads back the other direction? So, you liquidate your position as the market comes back to you, your only solace being that "it could have been (and was) so much worse". Now comes the tricky part. Ask yourself, if you were not willing to allow the market to come back all the way to make your position green, how much better off you would be if you had set a reasonable stop and if it was hit, then so be it, and saved yourself a lot of anguish in the process. You might have even forgone prime entry opportunities during the tear that could easily have negated the initial loss. Just food for thought from one trader to another.
