By Jeffrey Kennedy
The following is an excerpt from Jeffrey Kennedy’s Trader’s
Classroom Collection. Now through August 17, Elliott Wave International is
offering a special
45-page Best Of Trader’s Classroom eBook, free.
To be a consistently successful trader, the
most important trait to learn is emotional discipline. I discovered this the
hard way trading full-time a few years ago. I remember one day in particular. My
analysis told me the NASDAQ was going to start a sizable third wave rally
between 10:00-10:30 the next day... and it did. When I reviewed my trade log
later, I saw that several of my positions were profitable, yet I exited each of
them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper
today. Unfortunately, I wanted to hit a home run, so I ignored singles and
I now call this emotional pitfall the “Lottery Syndrome.” People buy lottery
tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small
profit in hopes of scoring a larger one. Problem is, home runs are rare. My goal
now is to hit a single or double, so I don’t let my profits slip away.
Since then, I’ve identified other emotional pitfalls that I would like to share.
See if any of these sound familiar.
Have you ever held on to a losing position because you “felt” that the market
was going to come back in your favor? This is the “Inability to Admit Failure.”
No one likes being wrong and for traders, being wrong usually costs money. What
I find interesting is that many of us would rather lose money than admit
failure. I know now that being wrong is much less expensive than being hopeful.
Another emotional pitfall that was especially tough to overcome is what I call
the “Fear of Missing the Party.” This one is responsible for more losing trades
than any other. Besides overtrading, this pitfall also causes you to get in too
early. How many of us have gone short after a five-wave rally just to watch wave
five extend? The solution is to use a time filter, which is a fancy way of
saying wait a few bars before you start to dance. If a trade is worth taking,
waiting for prices to confirm your analysis will not affect your profit that
much. Anyway, I would much rather miss an opportunity then suffer a loss,
because their will always be another opportunity.
This emotional pitfall has yet another
symptom that tons of people fall victim to chasing one seemingly hot market
after another. For instance, metals have been moving the past few years so
everyone wants to buy Gold and Silver. Of course, when everyone is talking about
it is usually the worst time to get into a market. To avoid buying tops and
selling bottoms, I have found that it’s best to look for a potential trade where
(and when) no one else is paying attention.
My biggest, baddest emotional monster was being the “Systems Junkie.” Early in
my career I believed that I could make my millions if I had just the right
system. I bought every newsletter, book and tape series that I could find. None
of them worked. I even went as far as becoming a professional analyst guaranteed
success, or so I thought. Well, it didn’t guarantee anything really. Analysis
and trading are two separate skills; one is a skill of observation, while the
other, of emotional control. Being an expert auto mechanic does not mean you can
drive like an expert, much less win the Daytona 500.
I am not a psychologist or an expert in the psychology of trading. These are
just a few lessons I’ve learned along the way... at quite a cost most times. But
if you are serious about trading, I strongly recommend that you spend as much
time examining your emotions while you are in a trade as you do your charts
before you place one. What you discover may surprise you.
For more trading lessons from Jeffrey
Kennedy, visit Elliott Wave International to download the
Best of Trader’s Classroom eBook. Normally priced at $59, it’s free until
Jeffrey Kennedy is the
Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15
years of experience as a technical analyst, he writes and edits Futures
Junctures, EWI's premier commodity forecasting service.