Tuesday, March 29, 2011

Wolfinger on Emotional capital

I found a blog called "Options for Rookies," written by Mark Wolfinger. In the linked entry, there is a first hand account of a relatively new trader caught up in an churn of emotion.

The blog has entries on a lot of topics that I don't have the time or inclination to explain, such as basic option strategy and trading tactics. The author was an options market maker in the 1970s, but does try to bring ideas down to a basic level.

A lot of traders focus entirely on the account balance, the profit and loss. A big factor is the emotional state, the emotional capital, the wear and tear on a person's psyche. What a trader chooses to spend time and energy on will have a huge long term impact on the bottom line. Sometimes it is better to exit a trade, even if odds favor it working out, if the emotional capital expended is too much.

There is the old investor cliche, "sell down to the sleeping point," for investors that can't sleep at night because they worry about their investments. I don't have a witty equivalent for short term traders, perhaps conserve your time and energy, spend it wisely.

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