When you see hope creeping into your trading, usually there's trouble ahead. As we regularly seek to cover trading psychology in our columns, I now want to look at the emotion of hope.  We all have desires for success in trading, but often our dreams of success can stand in the way of recognizing the reality when a trade is starting to invalidate our reasons for holding it.  The human brain's survival mentality typically focuses on the good news and avoids the bad news, and as a result the mind tends to start searching for other indicators that still justify the position.  The way out of this trap is to write down your primary driver for being in a trade, and if that rationale is violated, your daily review of your reasoning will catch this violation and dictate that you exit that position. 

Why does hope creep up on us in our trading?  Because it tends to define a gap between what we want and what is actually happening. Our hope is a desire to achieve the perfect or idealized outcome, while reality is telling us something different.  My performance used to suffer from this perfectionism.  We all know that the reality of trading is that no one is perfect.  What separates the winners from the losers is how quickly they recognize that their initial hypothesis is being invalidated by the market, and then taking action on this changing viewpoint.  So flexibility in thinking and willingness to admit a mistake quickly are key attributes to good trading.  The great traders will have their share of losing trades, but they keep the impact of those mistakes small, while getting the most out of their best ideas.

Another way to think about hope is to define what type of game you are playing.  When you invest, you do so because you expect that your investment approach has a positive expectancy, or an "edge" that you can capture over time.  In contrast, when you go to Las Vegas to gamble, you know you are playing a losing game over time, though you still hope to be one of the lucky few who beat the house.  A trading system where you have an edge can be run as a business, not as a gamble, if you use discipline and proper money management to realize your edge over a large sample of trades.  But once you lose your edge and start hoping, you are doing no better than gambling at a casino.  And most of the time, the house will win these gambles.

Hope is basically an ego defense; we don't want to admit that we are wrong on a trade.  The ego wants to uphold an ideal version of self that allows for only successes and not failures.  Many traders lose millions of dollars trying to protect the ego's version of reality.  Your goal should be to trade without ego, without personal judgment of your self worth.  In order to make money trading, your goal is to keep losses small while letting winners run.  Make an assessment of your trades each day, and when you start to feel hope coming on, make a resolve to exit these situations and eradicate hope from your trading behaviors.

Price Headley is the founder and chief analyst of BigTrends.com.