Ego is an amazing thing isn’t it! We need just enough of it to give us the courage to trade, but if we have just a little too much … then we make poor trading decisions based on the belief that we could not possibly be wrong. Greed takes over. Before you know it, we are facing a loss that we don’t want to realise because we were so sure our analysis was correct.

When I first started trading I oscillated between joy and despair, joy and despair, joy and despair … and that was all within the first five minutes of entering a trade! Over time I have learned to gain some control over my emotions, but it is still a challenge that all traders must face.

As I have a degree in psychology, the mind of the trader began to fascinate me – especially since I was experiencing many of these psychological effects first-hand. Once we can become aware of our reactions, we have more of a chance of mastering our emotions. Knowledge is the key.

When you have made a loss, how do you react?
You may feel drained of energy, or perhaps you would like revenge on the market and as a result, you enter foolish trading positions. If you can understand your likely reactions, you’ll be more inclined to overcome your own emotional responses.

Cognitive Dissonance is the tendency to reject information that is contrary to the trading decision that has just been made, and to look for information to confirm that the trader is correct.

None of us like to be ‘wrong’, so we will often look for evidence that we are ‘right’, rather than accept the fact that we are not perfect.

Imagine that you have just purchased a new BMW. What a wonderful feeling you would have as you zoom around to your neighbours and relatives showing off your new acquisition. When you drive up to your brother-in-law’s house, he rushes out to inform you that BMWs have just rated below Audis. You now have a choice… either you could believe your brother-in-law and feel miserable or you could reject everything he has said and decide to feel good about your BMW purchase. To confirm your view you may tend to search out information about BMW’s magnificent safety record, superb design and superior resale value.

So often we seek out confirming information and reject contrary information. This can be very damaging to a trader’s bank balance. If we are in a trade and that share has made us money, we are bound to feel nice warm emotions of gratitude to that share for supplying us with a profit. That share could become our ‘favourite’.

Remember the 11th commandment of share traders: ‘Thou shalt not kid thyself’. The first step is to admit when we require radical improvement in a particular area. The second step is to act on what we have discovered.

Louise Bedford (www.tradinggame.com.au) is a full-time private trader and author of four best-selling books – The Secret of Writing Options, The Secret of Candlestick Charting, Charting Secrets and Trading Secrets. Register on her website to receive a free trading plan template and a 5-part e-course to get you trading like a machine.