Short Term Memory
If you are still keeping your largest winning trade and largest losing trade in your memory, more over if you remember the date, time or even an event that is associated with that memory, you probably giving a high importance to those trades over others with less importance.
This is like when you pick up a best sport player among 2 of players with an equal performance on average, just as the one you picked is loud and flamboyant and does a lot of interviews while the other one keeps to himself and does not possess any remarkable visual traits and uses a very conservative playing style.
This is called the short term or selective memory and regarding trading, this would greatly affect the trader's psychology!
Emotional Wrong Signals
If two traders have begun trading and continued for a year and made equal profits, but at the beginning of their trading the first trader had 3 consecutive winning trades, while Trader 2 has had 3 consecutive losing trades. Although the profits are equal for both of them, the first trader will be more positive at the end of that year than the second one. This will obviously has emotional effects.
The sense of invincibility would potentiate the first trader to fall into one of two mistakes, by either increasing the risk of a losing trade he is having or ignore a warning sign he would normally take care from. The second trade now feels that he had more than average losing trades and this will also potentiate him to fall in one of two mistakes, either by changing the strategy he was sticking to and made him profits or hesitate to take a trade that would make him a profit according to his own rules!
Fighting Emotions
Now we could notice that both traders have traded and made winning and losing trades fairly along the period of a year according to their applied trading strategies, but when emotions have taken a role, it could prevent them from deciding rationally the way that could make them profitable in the past. It's so important to find a way to stop emotions from affecting our trading adversely and cease short term memory. Some helping tips:
- Make a trades log, by recording your trades individually, their profit or loss progress and their end result; a winner or a loser one, this will let you have a more objective look over your trades to make the right decisions in the future and disallow short term memory.
- Create a trade criteria check lest, apply it to every trade including how much was the profit or loss on it and what the end equity was and better add it to your trades log, this will help making most of your trades meet your own criteria.
- Better recognize your self as an emotional person and make a personal limit for that.
Stay Cool
It's highly significant to have control overt your emotions. If you can get rid of their effects on your behavior fast then you can take your seat on trading again after terminating the emotional shock or euphoria of the last trade, if not, it's better to wait!
Getting over your short term or selective memory is a real challenge, more important is to subside the emotions coming with them. Getting back to trading s soon before doing that make it more risky than the potential gains and may even shorten your trading lifespan.
