Great traders know that the biggest challenge and obstacle to trading success is not the markets or their strategy or any outside force. No, the biggest challenge is between their ears.
Simply put, emotions and emotional decisions destroy trading profits. And that is why the best traders spend a lot of time working on their mindset and understand how to separate emotions from logic.
It is a process traders have to go through and it never really ends - you just get better at controlling your emotions and impulses. And it comes in most handy during corrections and bear markets.
I sell options. I don't buy anything. Not stocks, options, or any other security. I sell options because I get paid up front to take on risk and I can control how I create my wealth and income. Over the years, I have learned a lot about how to control and manage emotions. Here are 3 secrets I've learned that help the most.
Have a Clear Set of Rules
No matter what trading strategy you have, you should have a clear set of rules for entry, defense, and profit taking/exit. Rules help keep emotions in check because they give you a plan to follow. Your job is to simply execute. For example, if your rules state that you don't defend a trade until a specific level is hit, and a stock moves against you in a big way, but does not hit the level, you don't execute defense. Emotionally, it may feel horrible and may cause you to want to act on impulse to do something, but your rules will stop you from doing so. Your job is to follow them. And many times, you will find you win the trade. If you want to learn more on how to develop a clear set of rules and strategy, grab a copy of The 5 Key Elements of a Winning Trading Strategy Here
Don't Fall in Love with Any One Trade
A trade is just a trade. If will either win or lose. Don't fall in love with it or get attached to it. If you have rules and follow them, this will help you. Inevitably trades will go against you and you will have losers. Don't think you have to make back your loss on the same stock or underlying you lost the money on. I've seen this so many times where people "feel" like they have to keep playing a stock the've been losing on to make back their money. It's like they have to beat the stock to put it in its place and show they are better. That's crazy. Your goal should be to find and trade the best setup per your rules and strategy. Never get emotionally involved with a trade.
Your P&L Means Nothing (If You Sell Options)
This one may not apply to you, but it does to me. Because I sell out of the money options, my P&L will fluctuate wildly with swings in the market. One day, I can be up 6-figures per my P&L and the next day down 6-figures depending on what is happening. What matters is price. Is the price approaching or at the levels I've sold? If not, then I am fine. I just need to let time work for me. I also know that if a trade does go against me, I have defensive rules that I follow. If I managed my trading by the way my P&L moves, it would be a nightmare. Instead, I look at the amount of cash I have in my account relative to what my starting amount was. That tells me if I am losing or not. And I can manage around that cash keeping myself profitable. If you sell options, don't use your P&L as your main guage of success.