Lessons from the Pros

Three Ways To Reduce The Impact Of Emotion When Trading

I have always suggested and firmly believe that learning how to become a consistently profitable market speculator is not that difficult. The logic, rules, and strategy are certainly not rocket science. The challenge comes in when you actually attempt to execute a consistently profitable strategy. The main reason for this challenge is the fact that we are humans with human emotion. From birth, we run from things that we are fearful of and gravitate towards things that make us feel good. If you take this natural action in trading, you are in for big trouble.

The consistently profitable trading buys after price has declined and just after the majority has sold (red candles), at price support (demand). Buying when everyone else has just sold is not a comfortable thing to do. When shorting properly, you have to get excited to sell after the majority has bought and after a big rally in price, this will challenge every emotional bone in your body. Here are three ways to help reduce the emotional obstacles to consistently profitable trading.

Change The Candle Color

Most people use red and green candles which makes for a nice looking chart but may not always be the best choice for real trading. If you are selling short AFTER a rally in price and INTO an objective resistance (supply) level which is the high probability shorting opportunity, you are likely getting ready to sell short right after a bunch of big green candles form. Selling short after a series of big green candles is NOT comfortable as that creates the strong illusion that price is going to keep going higher.

Above is a chart of Google; this is a trade I setup for students in the Extended Learning Track (XLT) – Momentum Intraday Trading class. Notice the strong rally up into the pre-determined supply level which is where the low risk, high reward, and high probability shorting opportunity was. I changed the color of the candles to black to take out some of the emotional challenge of shorting at the supply (resistance) level. Had I left these candles green and red, we would have been looking to sell short after a series of green candles which can be scary for the new trader. Changing the color of candles is not a bad idea if you are new to trading and focus on candle color too much. Always remember, the color of the candles is not nearly as important as the location of the candles.

Set It And Forget It

The simple task of pushing the buy and sell buttons can be an emotional challenge in and of itself as many traders simply can’t get over the fear of being wrong. The good news is that you don’t have to push the buttons when you enter and exit positions anymore. This is a huge benefit new traders have that was really not available just a few years ago. In the XLT, we call this "set and forget" trading. The way this is done is through "bracket orders."

Above is a bracket order from TradeStation. The order I have highlighted is an initial long entry to buy. Attached to that buy order is a protective sell stop order to manage the risk and a sell limit order for profit taking. In the trading world, this is called a "3 sided order." Once you know where your support (demand) level is, your protective stop price, and your target for profit and you have decided that you wish to take this trading opportunity, you can use this 3 sided order to really be hands-off for the trade. You can (and should) walk away from your computer and the entire trade will play out without you. This is a fantastic way to reduce the emotional challenges of trading and create more free time for you.

Focus On Risk

Here are two facts of trading that are not comfortable for most people. First, there is no certainty, and second, you will have losses. The key is to understand that the best traders are the ones who know how to lose properly, keeping the size of losses (not necessarily the frequency) to a minimum. Let’s go back to that Google trade setup from XLT – Momentum Intraday Trading. When price was approaching the supply level for a short entry, there are two different thoughts that one can have and it is these two thoughts that determine whether you are going to be successful or not. The novice thought is to worry about price not turning lower and the dreadful outcome of being wrong. The consistently profitable trader is actually very excited because they know that the trading opportunity is very low risk as you are entering your position as close to your protective buy stop as possible. Make sure you always adjust your position size to a level that you’re more than comfortable with and when it’s time for entry, instead of watching the chart and fearing a potential loss, focus on how low risk the opportunity is.

For more information on supply and demand as it relates to trading and charts, please read some of my prior articles found on the Online Trading Academy website.

Hope this was helpful, have a good day.

- Sam Seiden

sseiden@tradingacademy.com