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Psychological Factors Matter When Trading


And if you learn to make a good decision and move on, you'll be less emotionally tied.


A reader named "TR" writes:

I've been having some trouble in deciding how I should be exiting and/or adjusting my iron condor trades.

Psychology plays a huge role in the decision. Look at it this way: Assume you pick a spot where you recognize the risk, don't like that risk, and exit the trade. You know it's the right decision for you.

Once the exit trade has been made, would you:

a. forget about it?

b. watch closely to see what would have happened?

If you chose "b," that's not to your advantage. If you learn to make a good decision and move on, you'll be less emotionally tied to your trades. That's a good thing. You can never make the winning decision every time. Your job is to keep your positions out of trouble.

In my opinion, the simplest method for doing that is to avoid holding into expiration. Yes, pulling the trigger is difficult, but over the longer term, you'll be a happier, less stressed trader if you can do that.

If you cannot make up your mind to pull the trigger, then consider this question: Which would make you feel worse:

a. not exiting when you know you should, and losing more money?

b. exiting and seeing the market reverse?

If you know which would make you feel worse, even when the amount of cash at stake is identical, then for peace of mind, you should minimize the chances of "feeling worse."

This is where the psychology of trading comes into play. If certain money-losing results make you feel far worse than others, then:

  • Avoid placing yourself into situations in which the best decision you can make is the one with that bad psychological outcome.

  • Avoid the choice that makes you more upset. If this is going to cost you money, then obey the suggestion in the above bullet point.

  • This is a decision-making process. Do the best you can (sure, try to develop skills that allow you to make even better decisions), but learn to live with those decisions.
No positions in stocks mentioned.

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