Maintaining Focus

Regret is an ugly word. Regret can lead to remorse which manifests itself as we sit and stew about the action (or inaction) that we regret. The most common secondary emotion from regret is anger. “How could I be so stupid!” “What was I thinking?!” and other such phrases are commonly heard. I’d like to focus on the inaction of trading that leads to regret as it can lead to low probability trading.

Kahneman and Miller did research on what’s called counterfactual thinking. Basically, individuals imagine the opposite of a current event and contemplate what might have happened. The psychological impact of contemplating a result that is better than the actual event itself causes feelings of frustration, grief, anger, or insecurity. We’ve all looked at charts and seen the trades that “got away” even though we knew about the potential. We’ve all sat and wondered why we didn’t take the trade, it’s easy to point out mistakes and criticize. Times like this are when your future performance as a trader is at the proverbial fork in the road.

I’d argue that it’s more damaging to a trader’s belief in their skills/system when a “big winner” is noticed after the fact. As an example, let’s say a stock was on my watch-list and I’ve been waiting for a high probable setup to trigger. A bit of good news comes out and the stock gaps up over my entry point by a few pennies and thus the opportunity is missed. The next day I’m looking through my watch-list and I notice the stock I barely missed had a nice 4% increase without my participation. The thought of what could have been is more damaging to the psyche than say 3 max loss trades in a row.

That sucks, no question, but if it gets in your way and clouds objectivity then the real damage can occur.  Having a well defined trading plan and following it objectively with discipline goes a long way to keeping your emotions in check. Most importantly, you’ll also be able to focus on the task at hand and over time the thoughts of what could have been will be fleeting. If you trust your system and follow your trading plan then opportunities will present themselves again. If you remain objective and not dwell on the missed opportunity, you’ll be ready.

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