It's natural to want to be right, but being right has little value in the market unless your timing is also correct. The problem with the desire to be right, to seek validation from the market for one's ideas, is that it can create conflicting goals.
The primary goal of market participation is capital appreciation. But if one is instead focused on validating their ideas, and in effect satiating their ego, then one may lose sight of that primary goal. Indeed, being right can feel great. Lift spirits, boost mood, but also create a lapse of judgment. One may feel they have the Midas touch and as a result enter in to a poor trade that damages their returns.
On the other hand being wrong can be defeating, cause a sense of anxiety or despair, and thus impair judgment to not take risks where the opportunity to earn a reward may be in your favor.
Recalibrating reactions
It's easy to let the profit and loss of the day, week, or month impact our emotions. We may feel elated with a big win, and defeated with a big loss. But neither emotional reaction is ideal for the reasons expressed above. What is important, instead, is recalibrating to a neutral reaction whether one is winning or losing. That way being right or wrong is much less important than what the end result is.
This sounds easier said than done because it is. We are hardwired with dopamine-driven reward systems that fire off when we're right. We have similar, diametrically opposite neurochemical reactions when we are wrong. But these reactions are part of a signaling process that happens, at least in part, because we continually reinforce it.
Patterns become habits, habits become behavior, behavior becomes ingrained. But just because a certain set of behavioral reactions are ingrained doesn't mean that we're necessarily stuck with them for good. Mind over matter isn't just a cliche saying. It's a concept with a lot of validity, especially as it applies to this context.
The first step toward recalibration is accepting that our reactions are not ideal, that way we can become aware of them and begin to tamp them down. Instead of celebrating every win and mourning every loss, take a step back. Ask what is it that we're doing and why. Much of it comes down to one simple thing: our ego.
When we hold our ego in higher regard than the consistency of our performance in markets, we are creating a self-defeating cycle. When we stop celebrating our wins and mourning our losses in such a way that it impacts our outlook and psychology, we begin to form new neuropathways. Less reactive, more objective perception begins to become normalized.
That is to say, when we stop overreacting to our wins and losses, we start being able to think more clearly. Our brain starts to be less reward/punishment-centric and we start to think more rather than allowing our emotions to take control.
Thinking through what's happened and why allows for more objectivity, which promotes more consistency, which in turn gives us an entirely different outlook on how we react to our performance in the market.
Replacing emotion with reflection
Instead of celebration and mourning, we can replace those activities with a simple strategy: keeping a trading journal. The idea is simple. Every single time you enter or exit a trade, note exactly what you've done, why you've done it, how much you bought/sold, how the trade went, and even consider taking note of your thoughts at the time. How were you feeling? Were you excited? Scared? Did you think the trade through or was it made on impulse? Did you scale in/out or buy/sell all at once?
Most importantly, write down the thesis behind your trade so you can validate whether it worked out. If it did, great. See if there is room for improvement. If it didn't, take it apart and figure out what happened and how you can try to do better in the future.
By having a trading journal you can begin to remove your ego from your trading outcomes and start focusing on logical progression: improving your strategies, consistency, execution, risk management, and focus.
A trading journal can be kept on an Excel spreadsheet, Word document, written in a paper journal, or even using some of the trading journal apps (if you trust them to have all of that info, which they may share with third parties).
In closing
Once you have been keeping a journal for several weeks, focusing on the process rather than just the outcome and how it makes you feel, you should start to see improvement in your consistency, objectivity, and tactical opportunism when putting on or taking off trades.
Remember, the biggest enemy that you'll ever fight in the market is not shadowy hedge funds, algos, or bankers. It's yourself. We all have losing trades, and I call that paying tuition. It's up to you as to whether you choose to learn the lessons being taught by the school of the market.