November 20, 2006

I Want To Be Impulsive

The markets keep reaching new highs. Oil prices are at their lowest levels in years. HP profits are up despite a government investigation. Many market indicators are positive. There's a sense of optimism in the air and you can't wait to cash in. It's at times like these, however, that some traders have trouble with discipline. After making a few winning trades, they want to celebrate. It's understandable but potentially dangerous.

Winning traders maintain discipline. Successful trading is a matter of odds. It's vital to get the law of averages to work in your favor. The more trades you make, the more likely you will win. But you can't make impulsive trades or abandon risk limits. After a few winning trades, though, acting impulsively is what most traders want to do. Behavioral economists call this phenomenon the windfall effect. It's much like playing with the house's money at a casino. You win big and you figure you can gamble with wild abandon.

When you trade the markets, however, sometimes you will win but oftentimes you will lose. Losses are commonplace when trading. So when you win, you must retain the profits you make for those times when, by shear chance, your method temporarily stops working. How can you maintain discipline? It isn't as easy as it may seem. Self-control takes psychological energy, and just like physical stamina, when your energy runs out, you get worn out to the point that you can't keep going. Similarly, you can only control your impulses for so long before you feel like acting out and doing something wild and impulsive. Some trading experts suggest recognizing this fact. For example, if you want to act out, stand aside and do something impulsive to get it out of your system. You might want to do something fun and exciting outside the trading arena, or even do some recreational gambling to celebrate, and pat yourself on the back. Once it's over, though, it's time to get back to work.

How else can you maintain discipline? First, admit your limitations. Self-control is like a muscle. You need to practice self-control. Don't try to be superhuman. You can't run a marathon tomorrow if the farthest you had to run in the past year was between your front door and your car. You need to work up to it. Don't expect to be able to maintain self-control without extensive practice. Give yourself time to build up your self-control skills. Second, make a strong commitment to build up your self-control skills. Take the matter seriously. Until you commit to change, you cannot improve your ability to maintain discipline. It's similar to losing weight or quitting smoking. A person must first acknowledge that he or she has difficulty with self-control before change can happen. Admitting that you need to improve your self-control skills goes a long way. Don't trade impulsively. The winning trader is the disciplined trader. The more you can stay calm, rational, and in control, the more profits you'll take home.


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