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None of us are perfectly rational, which is why having self-awareness and a healthy mindset makes a huge difference in trading.
Let’s say that two different traders end the week with the same net P&L. Both Trader #1 and Trader #2 are up 5k, the difference between them is that Trader #2 was up $10k at some point but gave back $5k at the end of the week.
If you’re Trader #2, here’s the million dollar question: how do you view that $5k that you had and lost? A lot of traders will enter the next week thinking about making up that $5k that they gave back. Others will focus on the fact that they have $5k more in their trading account than the previous week, and get back to business as usual. Simply put, the mindset of making back money is a position of weakness that often leads to compounding losses. When you are aware of your emotions and tendencies you’ll be able to maintain discipline and reduce losses until you find the next premium opportunities.
As soon as you commit to an emotional act, such as a “revenge” trade, you are putting yourself in a position where you’re likely to make mental mistakes and have irrational thoughts. What you have going on between your ears is a huge part of what we call alpha hunting. It’s often the difference between success and going on tilt. Playing premium setups is a given. Losses are a part of the game. However, if you can’t separate the bottom line and your perspective on reality, the game is lost before it’s played.
Ultimately, self-awareness is what allows you to trade technically and stick to your process.
Happy trading.
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