Overconfidence and the desire to keep experience the good feelings emanating from a big winning trade have easily ended up ruining several promising trading careers. In the moments after making such a trade, you might have the urge to come up with new patterns or tendencies that donât really exist. Based on your âfindingsâ, you convince your subconscious self into making more trades as soon as possible.
Just to be clear, this guide will not help you in avoiding all kinds of losing trades. This guide will only throw some light on those losing trades which originate from decision-making which is based on emotion, overconfidence and other brain processes that you might not be aware of. Hence, you can actively employ a set of processes in certain circumstances.
The Tendency to Lose Immediately After Winning: An Explanation
The most dangerous time to trade is immediately after you experience a big win. This might be a shock to some, but this observation is based on solid science that every trader needs to be aware of.
Would you really want to stop trading after just enjoying a big profit? Can you control yourself even if you wanted to? But this feeling of euphoria or over-confidence can easily lead to a big loss if you do not attempt to understand the way your brain works in such a scenario. When you are experiencing happiness (such as after making a huge profit), your brain releases a specific chemical called dopamine. The real danger is the addictive feeling you experience upon the release of dopamine.
In trading terms, you will show tendency to over-trade or do something uncharacteristic immediately after making a big winning. This is because your brain is subconsciously trying to make sure that the dopamine-induced euphoria is maintained for just a little longer. Under the influence of a prolonged euphoric feeling, your brain is less likely to pay attention to the severity of risk, which will lead to a big change from your usual trading strategy.
Our body will try its best to sustain that happy feeling by ensuring that it does not dim or fade away. Just like any other addiction (drugs, alcohol), dopamine is produced regardless of whether your actions are good for your state of mind or health. The very process of placing a trade, immediately after making a big win, will launch some more dopamine into your brain. In this manner, your feel-good factor, or âhighâ, keeps going on. It is vital that you understand this danger and recognize the losing streaks and eventual blown accounts that originate from it.
Somehow, the brain will get what it needs, regardless of a win or a loss. As a trader, you need to comprehend and be aware of this bodily weakness or flaw. This does not mean that dopamine is completely bad, since it can either encourage good or bad habits in a subtle fashion. It is your responsibility to be more aware of your surroundings or circumstances and ensure that only the good habits are reinforced. You have to gain a fair degree of control over your mind so that you can reduce its negative deviations.
Answers to the Dopamine Dilemma
Now that we have tackled the reasons behind losing money immediately after making a profit, the time is ripe for reviewing the solutions to avoid making a mistake in your future endeavours. The key to this is to develop a barrier which will warn or check you from committing an emotional/dopamine-driven trade. This barrier should be built into your overall trading process. Your trading process cannot be built on random moods or emotions. In other words, your process should work in such a way that any sudden release of dopamine does not push you to indulge in more instinctive trades.
The answers can be summarized as follows:
Formulate a trading edge which can be completely understood and defined by you.
Devise a trading process based on the above-mentioned foundations.
Ensure that you are the only one to experience your trading edge.
Your ultimate trading process should serve as a barrier or filter. Any trade of yours should be run through it first so that an emotion-driven trade can be eliminated.
The optimal way in which you can avoid losing your trading profits is to erase any doubts about what you are aiming for while scanning the dayâs charts. Once you have gained experience and optimize your trading edge, you only have to have to formulate a trading process and stick to it after filtering out the emotion-driven trading decisions. Your journey in the trading world begins with small steps, and if your aim is to stop losing profits through stupid decisions, then this is the first step to take in the right direction.
Article Source: http://www.bharatbhasha.com
Article Url: http://www.bharatbhasha.com/finance-and-business.php/492508
Article Added on Saturday, August 12, 2017
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