Emotional carryover is when you let the circumstances of one event affect your behavior in another. For example, last month I spent over an hour on the phone with my credit card company and I was really worked up. I turn around and my daughter comes over to give me a hug and the next thing you know I’m yelling at her. This of course set off another series of unpleasant events as you can imagine. Wow, talk about feeling like a jerk. I’m a caring and loving father. Why on Earth would I ever do something like that? Emotional carryover, that’s why. I was in such an angry, aggressive mindset that any breech of my personal space was immediately rejected. If only I’d hung up my emotions when I hung up the phone, I could have had a nice rewarding hug and we both would have felt great. Instead I let my emotions from one event ruin the next three hours.
So what does this have to do with trading? Everything! In fact emotional carryover is one of the most frequent causes of trading losses I’ve seen with clients. They’re going along following their plan and then one day slam, they take a loss. So along comes the next trade and they say to themselves, I don’t want that to happen again and the next thing you know they’re not willing to let the trade draw down the amount need to win. They’re no longer following their plan. They’re exiting or adjusting to early and actually CREATING losses. As a result they get into this loop that some traders, sadly, never pull out of. Or even worse, they get crazy aggressive and blow up their account. All because they couldn’t treat that loss for what it was, a normal part of trading.
To deal with emotional carryover from losses, know that it happens and recognize when it is affecting you. You’ll know you’re affected if you get this sick feeling when thinking about taking another loss. If this is the case, don’t trade until you can picture taking another maximum “acceptable” loss without an emotional effect.
One thing I tell my clients is to reframe the way they think about trading. Think of your maximum “acceptable” loss as the investment necessary to find out if the trade is going to work. Look at the maximum acceptable loss as money that is spent and gone before the trade is entered. Now drawing down is no longer a mental issue and anything you get better than your maximum loss is a gain. You will trade MUCH better this way.
When I say this, I’m often asked “What if I can’t think of it that way?” If that’s the case, you’re simply trading to large. You are either trading with money you can’t afford to lose OR you don’t have the confidence in yourself or your system needed to do well trading.
If you’re thinking of trading with money you can’t afford to lose, don’t do it because that would be stupid and I know you’re smart. Otherwise, get the training and coaching you need to be confident with yourself and your system.
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Live with passion!