R Curbs Trading Emotions http://www.netpicks.com/r-curbs-trading-emotions/

“That trading loss was a car payment!”

“I made more in this trade then I’d make working a 9-5 J.O.B.!”

I’ve heard these and many more emotionally charged statements like

this more times than I care to remember. On the surface they appear harmless since for most

people:

Trading win = Excitement Trading loss = Disappointment

Plus, after all, we trade to make money and a loss takes away from that

occurring. (more on that later). How bad can these types of trading

emotions be?

One of the reasons people love to use trading systems with a hard and fast rule set is because it is supposed to take something out of the equation:

Emotions.

You don’t enter a trade because the big green candle gets you nervous you

will miss the move.

You don’t market out of a losing trade because the P/L has gone negative.

Your trading system gives you the entry, exits, and with many systems

you get points to “scale and trail” your position. Your emotions are sidelined

only if you follow the rules of the system.

The truth is that even with a system that lays everything out for you, people still try to change things,

add/subtract rules, and let emotions get in the way.

Regardless of the system, trading emotions can take a perfectly good trading system and make it a losing

system.

Back to the two comments above….

What they have in common is they are full of emotion which is not good for a

trader. These emotionally charged statements can cause you to step outside of your trade plan and do

things that most would call amateurish.

“That trading loss was a car payment!”

Next time I will cut the trade off earlier OR increase the risk outside the preset

stop area.

Both of those plans are a road to failure. Cutting the trade off before the setup is invalidated ignores the

“noise” factor in the markets. Moving the stop away further away during the

trade can just give you an over sized loss that you didn’t plan for.

“I made more in this trade then I’d make working a 9-5 J.O.B.!”

Next time I will increase position size

OR let the trade run even further.

I think you can see the issue with both of those plans. Wins/losses are a

random distribution (you know you will lose just not when you will)

and an over-sized position may be taking place when the market takes

your stop.

Letting the trade run, while not a bad thing, has many people not reading

the signs that the run has ended and they give up most of their winnings.

Trading systems and trading plans are designed to take the emotions out of

your trading. When you celebrate each individual win or complain about

an individual loss, you are planting seeds that down the road can

influence your trading actions and results.

I took the “R way” after reading a book by Van Tharp. It’s not complicated but

you should not underestimate the subtle power it has over your

subconscious. R stands for risk and your wins and

losses are represented by an R multiple.

You buy a currency pair at 1.5000 and each pip is worth $10.00. Your stop is at 1.4980 which is $200 risk. Your initial risk is 1R.

If you get stopped out at your price you have a -1R loss.

Instead of logging a $200 loss on this trade you’d express it as a -1R result

instead of a car payment.

If you hit 1.550 and exit your trade, you’d log the trade as 2.5R which

means you made 2.5 X your risk of $200

Sound too simplistic for trading?

It is simplistic but the effects on your psyche can be quite impressive.

You can also think of it this way: each trade is comparing apples to apples. Using R forces you to compare every

trade to the amount of your initial risk and is a great “at a glance”

effectiveness of your trading plan.

What does having multiples of -1.5R tell you? Either you are not getting

out where you first planned on or you are getting horrible slippage on your

exits. Either way it quickly alerts you to an

issue.

What about having multiple .5R’s on your tally?

Either you are cutting trades off too quick or your entries are in need of

serious help.

Combining those two tells you that you are trading your account into the ground and it is time to assess. It’s a

new way of thinking for many and while it may only help with emotions

related to money…

it may also show you that your trading method is not what you thought it was

cracked up to be.