Pier 5 Condo

Too many traders fail to appreciate how hard it is to control your emotions when trading options. For some reason, they expect it will be easy to exit a losing trade… and equally easy to stay in a winning trade.

But what we often imagine is easy (in theory) is harder (in practice) than we think.

Since emotions can cause you to make bad decisions, I recommend developing a solid set of trading rules to “neutralize” your emotions. Otherwise, your emotions may wind up getting the best of you — and getting the best of your trading account as well.

When option traders finally put real money in the market, they’re likely to experience one of these common emotional responses…

But first, if I may, I’d like to share a quote about investing that inspired this post in the first place.

“Investing in stocks is definitely the best course of action, just so long as you’re the kind of person who can will him/herself to stop in the middle of an orgasm.” -Jeff Yeager, The Ultimate Cheapskate’s Road Map to True Riches, p. 204

This quote made me laugh. Because it says something about how us option traders must force ourselves to behave.

* When a trade is moving in your favor, you have to “pull out” even though your trade may still look like it’s going to make more money.

* And when you’re in a losing trade, you have to exit even when it looks like the trade might turn round.

No doubt, this is challenging for anybody to do.

But this won’t be as hard to do if you craft solid trading rules and follow them religiously.

Now, new traders tend to let their emotions get the best of them.

For instance, if a new trader is in a trade that’s moving in his favor, he will probably exit his position too early. His emotions will tell him, “You’re making bank… you better get out while your trade is still up.”

This is greed talking. They listen, so they take profits early.

On the flip side, when new traders are in a losing trade, they will tend to stay in too long. As their emotions rage, they hear, “Hey, don’t worry, this trade still has time to recover. You’ve only lost a fraction of your investment. Stay in for just a little bit longer.”

Naturally, they’re listening to the voice of fear, the fear of loss. If they listen, they will experience substantial losses.

If you dream of becoming an option trader with a million-dollar trading account, then you must learn how to ignore your emotions, even when fear and greed are demanding that you listen to them.

Remember: Always use a tested-and-proven set of trading rules to control when you get into a trade and when you get out.