Financial Service

Keys to Trading Success: Combining Head and Heart into System

Do you rely on your head or your heart to make a trade?

Some traders will claim they are all heart. They listen to their “gut” or emotions to decide on how to proceed with their trading system. Other traders are all about the statistical numbers. Everything has to be analyzed at all angles, as they take out all the emotional aspects.

Yet, in actuality, all traders use both aspects of the head and the heart when they engage in market trades. What occurs is that one aspect of themselves will come out to the forefront during certain market conditions, or these aspects will compete or disagree, leaving a trader vulnerable to fear and uncertainty in their trading system. 

The keys to trading success for an expert trader is to use both the head and the heart to their advantage at the same time. Not only will they feel confident in the statistical analysis of the trade, they will feel emotionally confident in their trading system. The head and the heart work in concert to provide gains during favorable market conditions and help them ride through challenging losing periods patiently.

Trading with the Heart

If a trader has strictly an emotional investment, they are looking at the short-term emotional excitement associated when making a great trade with high gains. They may feel overconfident and reckless when the market is in their favor, and fearful when the market turns difficult as they can lose confidence in their trading system. Often, a trader who trades with their heart won’t completely understand the trading system they are using. They rely on emotional instinct and expectations to grow their portfolio.

When a trader relies on an emotional expectation, that expectation will only cover the first 2 to 3 months as the excitement can disappear quickly once routine hits or a losing period strike. In addition, emotions can be complex, which leads to uncertainties when engaging in trades.

Trading with the Head

A trader who trades with his head uses the analytical components and statistical expectations in all trading endeavors. They may have everything plotted out such as their profit objectives, mathematical expectations and trading horizons. Yet because they don’t have any emotional expectation, they feel no joy when accumulating the profit or engaging with the system. The trading activities can become dull as they feel more and more disengaged with trading day by day until they start to no longer feel as if this is the career they want to have.

When using a mathematical expectation, a trader is more than likely to only use their head when the stakes are low. When the stakes are high, emotions can take over as this may lead to confusion and mistakes.

Use a Trading System that Combines the Head and the Heart

Trading systems should engage both the head and the heart. Ask yourself the important question: “Why do you trade?”

Most people will automatically say it is for profit. Yet there can be other reasons such as feeling excitement for the trade or engaging in the intellectual challenge when competing against other traders. If all your expectations are consistent, when you have a profit objective, mathematical expectation, trading horizon and emotional expectation, you can develop the mental edge that can be maintained year after year.

To do this, your head and your heart have to agree on every trade so you don’t undergo tension with the trading system. You can accomplish this by studying everything about the trade regarding its behaviors and evolution. You need to feel confident and clearheaded with the trade from both a heart stance and a head stance. Be comfortable regarding the dollar amount for the average stock trade and the length of the trade as well as the winning percentage. Have both reasonable emotional and statistical expectations, as this strategy will help you build up a higher belief in the trading system.

You also need to have a realistic viewpoint of winning trades and losing trades to help control your emotional expectations. To do this, keep the following expectation in mind: expect from your testing that you will only win half of the trades in a row while expecting to lose twice as many trades in a row as you will only receive half of all expected profits.

By keeping this expectation in mind, you are both mentally and emotionally prepared for the fluctuating market as your heart and your head can more easily and clearly make trades that are in agreement with both expectations at the same time. This will help you reach long-term success and win trades by using both your heart and your head.

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