How to Control Your Emotions When Trading Options
Many option traders underestimate how difficult it is to manage emotions when trading. They automatically assume they will have the self-control to get out of a losing trade asap… and ride a winning trade for all it’s worth.
But what we often imagine is easy (in theory) is harder (in practice) than we think.
Which is why it pays to follow rigid trading rules that “overrule” your emotions. Without them, your emotions may take you for a ride.
When an option trader finally risks his own money on a real trade, his emotions might cause him to respond in the following manner…
First, let me share with you a quote I came upon the other day. It’s what inspired this post.
“Investing in stocks is definitely the best course of action, just so long as you’re the kind of person who can will him/herself to stop in the middle of an orgasm.” -Jeff Yeager, The Ultimate Cheapskate’s Road Map to True Riches, p. 204
This quote made me laugh. Because it says something about how us option traders must force ourselves to behave.
* When you’re in a winning trade, you have to exit when things are still looking relatively good.
* And when you’re bleeding cash like crazy, you have to bail out even if you believe the trade will recover and turn profitable.
No doubt, this is challenging for anybody to do.
But this won’t be as hard to do if you craft solid trading rules and follow them religiously.
Here’s the thing: The newer the trader, the more likely it will be that he will let his emotions control him.
When in a winning trade, many new traders jump out too early. Their emotions say, “You’ve made some money; get out while you still can!”
This is greed talking. They listen, so they take profits early.
On the flip side, when new traders are in a losing trade, they will tend to stay in too long. As their emotions rage, they hear, “Hey, don’t worry, this trade still has time to recover. You’ve only lost a fraction of your investment. Stay in for just a little bit longer.”
This is fear of loss talking. They listen, so they suffer big losses.
If you ever hope to become a professional trader, you must learn to control your emotions. Ignore greed and fear of loss, no matter how loud they yell at you.
Use a solid set of trading rules to govern the emotional component of option trading.
