No matter how hard you try to fight it, trading will test your emotional stability. It simply cannot be avoided. We as human beings are wired with an emotional, reptilian brain that will over-rule our rational and probabilistic thinking especially when dealing with money. Moreover, Alexander Elder states “Thinking about money interferes with decision making” (The New Trading for a Living). New traders look at open profits and think about the ways they can spend the money they just made in the market. Elder continues by saying “ Professionals focus on managing trades ; they count money only after trades are closed.” In other words, professionals focus on process not outcome . Additionally, when a novice trader is experiencing a large drawdown or a series of losses he or she is more inclined to hold losing positions below initial stops with the hope that the prices will recover. The inability to sell a losing position stems from our emotional brain. For example, emoti...
Price-based perspective on market behavior