Monday, November 06, 2006

Trading Psychology: Watch Yourself Trade Via an Out of Body Experience

We all have made trades that we've looked back on and asked ourselves, "how the schmuck could I have made that trade?" I can't count the number of times I have wished I could go back in time and tell myself not to make a dumb trade. Not because it didn't turn out the way I had hoped, as I am fine with losing small amounts on "good trades", but because the entry was flawed to begin with. Here is what I've done to combat this problem.

Before each trade, I try to relieve my body of all emotion and become as objective as I can. I close my eyes, get into a sort of meditative state, and project my conscious self into the upper corner of the room. Looking down at my physical self, I ask myself the following questions:

1. Am I following one of my setups?
2. Am I not chasing an entry?
3. Is the risk/reward favorable?
4. Would I tell my mother to make this trade?

If the answer to these four questions is "yes", I go ahead with the trade. I know it may seem laborous to do this before every trade, but it only takes about 10 seconds to complete this simple mind exercise. My entries have measurably imporved, while my penchant for risk taking, though not completely controlled, has been reigned in to a manageable level.

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