There is no secret sauce to control your trading psychology on ever single trade – but you can get better at it over time. More often than not it’s the impulsive trades that become destructive to our portfolio. You know the trades we make on a whim and hope with no more than 15 seconds of analysis.
Reminds me of those late night TV infomercials. We have all seen them and I’m sure at one point or another you bought something that you never really needed right? I just hope you never bought the Snuggie (come on people, it’s a blanket with cut holes in it.) But these impulse purchases are just the same for traders – and they CAN be avoided.
Ask Yourself These Questions Now
There are lots of great tips and tricks out there on avoiding impulsive trading. However, there are five key questions that I particularly think are helpful. These questions, if asked ahead of time, help make sure logical thinking and planning are a part of the picture.
1.) When did you come up with the trading idea?
Is this a chart set-up you have been waiting to see for the last month or is this an idea you stole off a trading forum on yahoo? Avoid trades that seemingly “appear” on your radar without much analysis on your part. Off the cuff trades can be fun – but typically no profitable.
2.) What is your plan for entry/exit/adjustments?
Impulse traders don’t even think about these three elements – they just make trades and worry about the other parts later. Have a trading plan in place ahead of time and make sure that any trade you make fits that plan.
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3.) What are the technical indicators showing?
Did you check to see if the technical indicators you are using show the same disposition for market direction? If everything is showing an over-bought market ready to top out then why go in and buy now? Just a few moments glance at indicators like MACD and Stochasticscan go a long way in avoiding a disaster
4.) How much money are you risking?
Even if you go ahead and make the impulsive trade, determining a conservative position sizecan be a big step in the right direction. Don’t over invest on any one trade – ever. Take marginal positions in different securities, strike prices, and expiration months.
5.) Historically, are you profitable trading on a whim?
Carve out some time to do some homework on yourself. Find the trades that you have made before on your “gut feelings” and see just how profitable they were. Look, some people are good at spur-of-the-moment trading…you might not be though. Dig deep into your trading records and find out.
Overcoming “Trade and Pray”
If any of these questions make you second guess a trade it’s probably a good thing. We have just conquered the greedy side of your emotions with logical planning. The real benefit to going through this exercise is to avoid the “Trade and Pray” epidemic. Make a trade then Pray it goes right…
These 5 simple questions (if asked) will prevent you from wasting valuable money on trades that don’t have any consistency in the long run. By following this simple solution, you will control your trading psychology and your portfolio with thank you later.
Original Link | OptionAlpha
— The Option Specialist