Restricting the Rationalization
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How to stop rationalizing poor moves in order to limit losses and stay on your trading plan
How familiar does the following scenario sound?
You wake up in the morning feeling a little off. When you boot up your computer, your brain is just a little bit out of sync.
Maybe you couldn’t sleep well, or maybe you’re just having “one of those days.” Thoughts creep into your head and you start to question whether you’re really good enough to make it as a trader.
Your confidence starts to slip and on your very first trade of the day you hesitate and pull the trigger later than your trading plan told you to. You tell yourself “better late than never.”
If you’ve been trading for a while, the above scenario, while not exact, might sound somewhat familiar to your experience. And while the lack of confidence present early on in the day is problematic and something to always be vigilant about, the ability to rationalize entering into a sub-optimal trade is the real boogeyman of the morning.
What Happens When We Rationalize a Trade
When we jump into a trade at a late, or otherwise subprime time, all of the variables that we carefully mapped out in our trading plan get shifted and skewed. A risk especially changes and in such a situation might become inflated since it has not been prepared to account for this late entry.
We’ve said it before and we’ll say it again: when you don’t follow your trading and make unplanned, rash moves, you expose yourself to unnecessary risk and threaten your entire portfolio.
Stay Consistent, Get Funded
The best traders are traders who stick to their plan and don’t rationalize bad trades in hindsight. The main reason doesn’t rationalize them is because they don’t make them. Any move that doesn’t follow your trading plan has no room at the table of your trading career.
Traders who pull in consistent profits have found their ideal system and they follow it to a T, over and over again. They don’t engage in random, spur of the moment behavior, like entering a trade late or early.
You’re Not Good Enough to Not Have a Plan.
Hubris has been the downfall of many traders. This is especially true of newish traders who come to the desk believing they don’t need a preset system in which to guide their trades.
An ego that convinces a trader that they need not follow a plan, but rather rely on their instinct and wit, will lead to a very short career in the industry.
Don’t Get Caught Up in a Bullish or Bearish Market
Disclaimer: this doesn’t mean there isn’t profit to be made in either of these types of markets.
The rationalization we’re trying to convey here is when you wake up and see prices soaring and think to yourself “I gotta get a piece of that!”
If it doesn’t follow your trading plan, settle down immediately. Don’t let yourself catch a case of FOMO (fear of missing out).
On the other hand, let’s say you’re having a boring day and want to pick things up a bit. Again, if it’s in accordance with your trading plan, no problem. But if it’s just an impulse and something you feel like doing whimsically, don’t do it.
Should you Stay or Should you Go?
Here’s an answer for you, do what your trading plan predetermined you would do.
Every trade you enter must have a clear exit point charted out ahead of time. This is to avoid scenarios in which you might rationalize staying in a losing trade or rationalize getting out of a winning trade early.
If you start to think like this, guided by in the moment, impulses, it may work for a short period of time, but over the long run, it will unravel and take your profits with it.
Say it with us: “follow your trading plan!”
Beating the Rationalization
Sadly, there’s no simple solution for beating rationalizations. They can come and go as they like and it’s up to us to fight them when we sense they are coming. The best defense against them is a well thought out and thorough trading plan. If you put yourself in a position where you know all of your available moves ahead of time, you will be less likely to resort to quick, shoot by the hip decisions in crunch time.
Painting by Maurits Escher
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