“Large profits are even more insidious than large losses in terms of emotional destabilization” – William Eckhart
Many traders spend a substantial amount of time building up profits and then, just like that, they are gone.
- Their loss gets them something that they want out of the markets.
- They are in an over-confident state.
If you have a series of wins or substantial profits, it can breed an aura of invulnerability. Everything you touch turns to gold and you know it.
But when you are in this state, you are likely to ignore the rules you have followed that got you the profits in the first place. Risk management and discipline go out the window; instead, you think you are “right” and end up holding a big loss.
This is why traders should practice state management.
The optimal state for trading is not too low, nor is it too high.
Van Tharp suggests that if you were to rate yourself a 5 out of 7, then you would be in a good state to trade.
So if you have had a large loss, or a big win, moderate yourself before you enter your next position. Remember, 5 out of 7 (or thereabouts).
And if you are not in the optimal state for trading? Don’t trade. Period.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a part owner of Forex Signal Provider fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free.