There is an old saying that goes along the lines of Be careful what you wish for, it might come true. This seems to be especially true when traders have moved from unprofitable to profitable.
Traders traditionally wish/hope/pray for a rising equity curve but when they get one all sorts of interesting things begin to happen inside their heads. Small nagging doubts begin to appear about the integrity of the market and the potential for both continued gains and the possibility of holding onto what they already have.
Once this chain reaction of doubt and fear begins to take hold the trader is not long for this world as the discipline required to successfully execute a trading plan slowly dissipates. As the trader falls apart, they snatch defeat from the jaws of victory.
However, locking in a gain early is precisely how you will go broke. Consider the following from Jesse Livermore.
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a gain and I sold it out. Of all speculative blunders there are few greater than trying to average a losing game. Always sell what shows You a loss and keep what shows You a gain. That was so obviously the wise thing to do and was so well known to me that I marvel at myself for doing the reverse
Trading can be a scary business particularly when you have unrealised gains on the table as many traders have at present. However, some of this fear can be neutralised if traders understand and reflect upon what is occurring between their ears.
Traders quite naturally engage the market as if they were trying to minimise their exposure to mistakes and the fear of mistakes. Ego defensiveness is a natural behaviour. Trading is different from other forms of work because we face this issue regularly simply due to the volume of transactions we engage in. It is doubtful that property investors would face this more than once in their careers simply because their turnover or activity is so low.
This avoidance mechanism can take two forms both are equally destructive to the trader.
As the market moves against the trader information that justifies the original decision will be sought out. Thereby delaying the loss. It is embarrassing to take a loss and our variety of ego-preservation mechanisms will do almost anything to dodge this situation. So rather than acting logically to preserve your capital you engage in the various mantras that traders have such as it is a good share and good shares always come back. Or my favourite, we still get the dividend.
As the market moves with the trader information that confirms the possibility of a pullback will be given added weight- whenever markets have been running for some time crash theories abound as chicken little prognosticators run around yelling that the sky is falling.
This fear of losing open equity is a particularly powerful stimulus among traders so these stories are given extraordinary weight and positions closed too early.
Fear is an almost constant companion of the nervous trader. However fear does not usually exist in the present, it is an anticipatory response. The trader creates the fear in their imagination either by thinking back to previous events or by prequalifying the present fear by thinking forward.
Fear enters into our psyche in two forms.
Chronic fear.
This is more commonly referred to as worry and is of a relatively low intensity spread out over an extended period of time. It permeates all thoughts and actions on an everyday basis.
Chronic fear is a motivation eater and will stifle attempts to move forward. Some of the things we worry about are important most are not. Many are outside the realm of a trader’s influence. To combat chronic fear drag you need to drag yourself back to the present. For example, if you are fearful of a pullback in the market wiping out your open positions simply make certain that you have a well thought out plan for dealing with reversals..
This does not mean that you pick an exit level so close to the current market that you will be stopped out by the smallest perturbation. It means accepting that markets move and will go both up and down and there is nothing you can do about it other than to ride the trend.
Acute fear.
Acute fear can be a tremendous impediment to the trader. It is short-term, intense and can lead to a failure to perform. Interestingly it often manifests itself in a failure to add to positions via pyramiding. It is felt in the present, but it is still an anticipatory response based on future perceptions of what might happen if you undertake a given path.
Markets are uncertain; at times they do things that take us by surprise. But uncertainty is the default setting for markets since no one can predict the future. However, being profitable should not take us by surprise since this is the outcome of a robust system and is therefore something we expect. Being nervous in a market that is doing what you would like is an interesting phenomenon and one that requires a high degree of self-reflection by the trader.
Once again we are back to trading being an internal rather than external issue.
