Thursday, May 5, 2011

A Comment on the Psychological Nature of Trading - May 5th

A Comment on the Psychological Nature of Trading

Anyone sitting in front of a quote terminal this morning, is either jubilant (hopefully because they’ve been reading this blog and have some short positions in copper, cocoa, and silver, not to mention a favourable calendar spread in corn futures – offset of course with a still-profitable long position in the coffee that is suffering from a big decline), or experiencing a serious drawdown.  I will forego any specific discussion today, and focus instead on some of the psychological hurdles to successful trading.

Profits can be addictive, and at times seem to come easy.  In my experience, early success in trading can be one of the worst things to happen to a new trader, as it builds unrealistic expectations for future profits, which can often lead to overly aggressive trading when times are tougher, often resulting in losses.  On a day such as today, when the absolute size of the moves whether they are up or down are very large, quick mental calculations will taunt even the best of us… “Short just one silver contract would give me a profit of $16,500 today alone!” 

Whenever I find myself entertaining notions of trading in such a market, I take a cold shower and remember what my top priority must be:  MANAGING MY RISK.  Quick and easy profits are certainly attractive, but ‘quick and easy’ is misleading, and incredible profits can quickly turn into devastating losses.  My advice:  Take a deep breath and remember why you entered into your various positions.  What has changed?  Take a step back and think about what your exposure is.  Is it time to take something off the table, reduce your risk, or place some stops?  Whether you are on the right side of the big moves or not, volatile markets call for defensive trading.  Keep your head and you’ll keep your capital as well.

Good luck and happy trading!

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

1 comment:

  1. Great post! Agree with you more than 100% that risk management is really important. If you are able to manage your risk properly, you can save yourself from severe downturn and losses.