Psychology of trading

I spent most of last night and this mornings car journey wondering whether I should get out of my DIAGEO trade or not.

Nothing wrong with the stock really, it was more a case that it didn’t fit my new rules. A remnant from my previous system that I held onto.

Under my new rules keeping it would have meant pulling my stop loss further away (i use a mixture of different MA’s to place stops) and potentially meant that I was risking over 10% of my bank on it. Most successful trend traders would scream in terror at the idea of such disregard to risk. However, my head was screaming “close close”, but my greed was shouting “sod it, forget the 10% loss, write it off already and you’ll be rewarded if the stock continues to trend long, you could hit your 2012 target within the next 2 months if you keep it open”.

It wasn’t until about 10am this morning that I wondered “what would I say to someone else if they were asking me what to do?”. Straight away I knew I would suggest they close it, and find a new stock to trade that fits the rules and doesn’t pose so much risk against the bank.

So that’s what I did. DIAGEO will no doubt go on to trend long, and I’ll see that I would’ve made lots of money. But in a way I’d feel just like a kid using a cheat in a computer game. Making massive profits using techniques not following my rules never feels particularly rewarding. There’s no structure to it and it doesn’t provide any evidence that your system is working.

So after a night and morning of contemplation over all this I’m now certain I made the right decision in closing. I’m viewing It as 10% gained as opposed to 10% I could have lost. It now frees up a small amount of bank that I can use to pick another trade that follows my rules.

I’m rather proud that I tackled this hurdle and came through unscathed. It was a strange situation due to a change in system mid position. It certainly threw me a little. It shows I’ve matured and learnt as a trader. Last year I might have held and hoped. Onwards then towards a scientific, technical, unemotional approach. I’m slowly feeling like I’m getting my head around the psychology of trading.

I feel good today.

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