Big egos are the #1 cause of account blow ups. No one likes to admit they are wrong. But unlike in life, the consequences of stubbornness are much more severe in trading. Getting attached to your opinions is the worst possible thing for your trading career.
Trading education everywhere talks about the importance of keeping your losers small, but people rarely talk about why this is so much easier said than done. Here is exactly how your ego will hurt your trading, and what you can do to master it to find trading success.
In Love With Being Right
A big reason why the ego can be such a problem for traders is because we are programmed to think being right is a good thing. In trading, timing is everything. You can be right about the company in the long run, but if you blew up your trading account trying to short it on the frontside of the move does it really matter that you were right?
You don’t become a trader for moral superiority and to get the feeling of being right all the time. We are here to make money. As we have talked about before, losing trades are unavoidable in trading. This means you have to get used to admitting that you are wrong all the time. If the market is showing signs that your thesis is invalid, it’s time to put your ego aside and get out.
Hard stops are a must for stubborn traders. If you don’t have the discipline to take yourself out of the market when it hits your stop loss price, you have to automate that process. Hard stops will take the decision out of your hands, and do it for you.
Inability to Cut Losses
Traders who have an issue with admitting they are wrong and controlling their ego will have a huge issue keeping their losers small. Stubbornness can wipe months of great trading in just a few hours. This is most common with short sellers of small cap companies that run up 200%. Everyone knows that company is overvalued. But that does not mean this is the right time to short it.
These traders get attached to their opinion about how bad of a company that is, and don’t cut their short even though the stock is still up-trending. They know they are right about the company, and cannot put their ego aside and take the loss. They end up blowing up their account and ending their trading career instead of admitting that they are wrong.
Timing in the markets is more important than the fundamentals of a company. So many new and inexperienced traders don’t understand that the market has to agree with your opinion/thesis in order to be a profitable trader. It is one thing to have an opinion about a company. It is another thing to be able to make money from the opinion.
Inability to Learn
The market is always right, and will continue to humble you regularly throughout your trading career. With an ever-evolving market, you will always need to be learning and studying to stay consistent and profitable in your trading. But unfortunately, your ego will often get in the way of your ability and desire to learn information.
No matter where you are in your trading career, you have to become a learning machine in order to find consistency in the markets. Don’t let your ego make you think that you ever know enough.
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