Emotions are inherent to our behaviour. They can take us to the top, but can also ruin our life. To make good decisions your mind needs to cool down and does not succumb to your feelings. The same mechanism has to be implemented in trading. Especially if you have just started.
Today, I will write a little about the role emotions play in trading. Moreover, I will give you some hints on how to avoid trading based on emotions.
The significance of having emotions under control
It cannot be stressed enough that emotional trading is not something that will bring you success. To make a profit through trading you need to stay calm and make cool decisions.
Let’s say you opened long position before the publication of Non-Farm Payrolls (NFP) and you anticipate the rise in the price of EURUSD as soon as the reported figure of NFP is higher than the prognosis. This would allow you to gain great profit in a short period.
Finally, NFP news arrives and it looks like you were right. The number is higher than the prediction. However, the price is not rising but falling.
Now you are looking for a mistake, you look back to your actions and analysis and meantime, the price continues down. You see your loss increases and the fight or flight instinct dictates what you do next.
This is not a rare situation that the traders react on impulse. But this is a huge risk as emotions are not good advisors. That is why professional traders take all the measures necessary to exclude emotions from trading. It will take time to learn this ability but if you think about trading seriously, do not omit this step in your career.
3 most frequently occurring emotions
A range of emotions the traders experience is quite wide. There is anxiety, fear, nervousness, anger, greed, excitement, disappointment, confusion and many more. Now let’s take a closer look to 3 most frequently occurring during trading.
This is obvious you want to trade to make money. But if you want a big win right away, if you only trade when there is big money in play, that is greed talking. And this is dangerous as trading big money may mean a big win, but on the other hand, may bring a huge loss as well.
Maybe your greed is caused by overconfidence. You opened a few successful positions and now you are on the winning streak.
Be careful, always stick to your trading plan and strategy that was chosen beforehand.
Most commonly traders experience fear when they invest too much. Probably, you will not cry too much over $10 loss. But how about $100 or $1000?
Bigger amounts increase your nervousness, you are under the stress and the likelihood you will make a mistake magnifies.
Fear can also appear if you suddenly decide to trade differently to your trading plan. You are not prepared for such trade and start feeling anxiousness.
Excitement is something you want to feel. In a moderate amount, that is. Too much excitement can blind your perception just like fear. But a little bit of excitement will keep you going, will motivate you to choose the right methods.
You need to believe in what you are doing. Be convinced this is the right path. When you have a trading plan prepared, stick to it. Trade according to it, trust your doings and feel the excitement.
5 hints on how to avoid trading based on emotions
There are many ways to success. I am not saying one is better than the other. But what I am saying is that one can work for one trader and not necessarily for the other. The crucial element is to have a plan that suits your individual preferences. Of course, in the beginning, you need to learn a lot and take an example from more experienced traders. But with time, you will be able to create a plan that will work best for you.
Below I introduce 5 tips that will help you to keep your emotions in check.
1. Formulate individual principals
You need to create your own unique set of rules. You must think over the amount of money you wish to gain as well as the amount you are ready to lose. You must also include take profit and stop-loss levels. Then, it is just a matter of following them.
2. Enter the trade under proper market conditions
The situation on the market changes frequently, but sometimes it takes a long time until the proper conditions present themselves. It is not a good thing to rush into the trade before it happens. If you do not feel it, if you are not convinced the circumstances will work in your favour, do not enter the trade. Sometimes the best option is to hold on and wait a little more.
3. Reduce the trading amount
Trading large sums of money has a psychological effect that can influence your judgment and lead to the loss. Start slow with a small investment. It can be as little as $1. With time you will build confidence and will be able to successively increase the trading amount and, at the same time, exposure to risk.
4. Create a personal trading plan and keep the trading journal
As I mentioned before, a good plan is a key to success. You have to start trading prepared for various outcomes. Having the individual plan helps you to stay focused and to have control over your emotions.
An additional thing that might help in your way to avoid emotional trading with success is managing the trading journal.
5. Take it easy!
If you are able to sit relaxed in front of your computer, you are on a good path to success. When you like what you do, when you enjoy it, it is much simpler to act with a cool mind and not with emotions.
All the best!