We put our money in a system of underlining risk in the pursuit of financial gain and the pursuit of happiness. We place a lot of trades when the potential profits are there but sit back when the risk is too high.
We do not want to be left behind, so we follow the crowd, when there is a slight unforeseen movement and there is a lot of talk about something bad happening, we follow the masses and abandoned ship. This fear (and greed for some) becomes a controlling emotion and dictates the way that we trade. The behaviors we exhibit in the face of fear and greed are due to these powerful emotions, but regret is just as powerful and can influence our decisions just as much.
Regret is powerful because it can keep us from placing a trade because we do not want to make a mistake, we want our decisions and strategies to perfectly work each time. We avoid this pain by avoiding placing a trade and avoiding failure. This avoidance behavior will not lead us to potential profits. It can also lead up to holding onto losing trades as we do not want to take a stop when we think the market is about to turn. We have this internal conversation of, “if I take the stop now and the market then goes to my take profit level I am going to regret taking that stop”. So, we end up holding onto losing trades until they become so enormous that to take a stop would end up being heavy blow to both our own perception of our abilities and our confidence but also to our capital. Risk management is essentially the strategy you implement to preserve your capital when things go wrong.
Regret can work both ways, it can work when making a trade and when doing nothing. Regret can be a good motivator as it can give us that kick that we need and it gets us to work on what we did wrong so that we can make it right. The point of being a good trader is not to be perfect, but to be able to learn from your mistakes and correct them.
When something goes wrong with your trade, revaluate your strategy and the market, do more testing, and try your skills on another trade. We need to remind ourselves that it is not the end of the world and that there is always time to fix what is not working.
The key here is to take the trade, do not let regret hold you back. Not all risks are bad. Taking risks that are minimal and calculated are essential to growing into a successful trader.
- Ryan Mowatt, The Performance Coach