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 imagine will be easy to do is actually much harder in real life.
Which is why it pays to follow rigid trading rules that “overrule” your emotions. Without them, your emotions may take you for a ride.
Here are a few common emotional responses people have when they first risk real money on a trade…
But first, if I may, I’d like to share a quote about investing that inspired this post in the first place.
“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
When I read this, I laughed out loud. Because I think it’s fairly accurate in describing the amount of self-control an option trader must have.
* When you’re in a profitable trade, you must liquidate your position even though the prospect for more profits may still appear strong.
* And when you’re in a losing trade, you have to exit even when it looks like the trade might turn round.
Hard stuff, for sure.
But this won’t be as hard to do if you craft solid trading rules and follow them religiously.
Now, get this. Most new traders allow their emotions to control their trading.
For instance, if a new trader is in a trade that’s moving in his favor, he will probably exit his position too early. His emotions will tell him, “You’re making bank… you better get out while your trade is still up.”
This is greed talking. Usually, they listen and wind up taking profits too early.
When in a losing trade, many new traders stay in too long. Their emotions say, “You’ve only lost a little bit. The trade will turn around. Don’t worry.”
This is fear of loss talking. They listen, so they suffer big losses.
If you’re goal is to make a lot of money as a professional option trader, you simply have to keep your emotions in check. Drown out the voices of fear and greed — even when they’re yelling at you.
And this is why I strongly recommend that you use trading rules to override your emotions and dictate when you enter and exit trades.
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