What makes an outstanding tennis player, card player, chess player…? Its many things but removing ego and emotion are high on the list. I was lucky to watch some of the World Tennis Finals live at the O2, London, this week and the very best (Federe, Djokovic, Nadal) limit their emotional highs and lows when playing. Trading is no different. I have to leave emotion and ego out of it. When I analyse my errors this week all but one are due to emotion. The emotion of over confidence, usually after I’ve had a good win.
One way to limit emotion is knowledge. Real understanding of how to read the market through price action. I trade for several hours per day but back test trades each day for a similar period.
Here is a blown out chart of this week on the EUR USD 5 minute chart:
As we can see from above, each day provides many opportunities for success if we’re reading the chart correctly – or losses if we’re not. If we’re patient, balanced, calm, focused, not distracted and we really know what we’re doing then there is a chance of winning. But bring emotion into it and it can all go wrong very quickly. Sure that happens to the best of us from time to time. If it does, walk away. Go and watch tennis. Actually that was not the reason I went to the O2, I go most years. But trading the next day, or indeed after any short break, I need to start back slowly. Sit back, take a long look first before trading. The edge is a precious and small thing, it needs protecting.
Why is trading difficult? Because there is so much money involved it attracts the very brightest. And, as with chess or all the games mentioned above, we are always matching up against someone. When we take a trade there is always someone (or more than likely some sophisticated computer algorithm) that is taking the opposite trade. That is how it works. Therefore to win we need an edge that is preferably unemotional.