How to control your emotions when trading
Emotion-free trading is something almost impossible to achieve. However, we can eliminate most of the negative effects of emotions in the following ways:
1. Become aware of your emotions
Just being aware of your emotional state is half the battle. If you are able to verbalise the emotion dominating your thinking at any time, that emotion will begin to lose power. You will immediately become aware that the action you are about to take may have more to do with satisfying an emotional need than your trading plan.
2. Keep a trading journal
Keeping a trading journal that includes the reasons for each trade and how you felt before, during and after a trade will teach you even more about your emotional state. You will soon see patterns in your thinking and behaviour and learn to avoid the situations that make you act irrationally.
3. Trade small
The more risk you take on each trade, the more stress and anxiety you will feel. These will amplify the effects of other emotions on your trading. If your emotions are having a noticeable effect on your trading, you are probably trading too big. Reduce your trade size until you feel completely relaxed when you have a position on.
4. Use your risk management process to limit the damage
Traders use money management plans and a risk management process to protect their capital when things go wrong. That includes protecting their capital from the effects of emotional trading. You should do as much as possible to make it difficult to break your trading rules when emotions take over.
5. Stay healthy
Being a trader is a lot like being a professional sportsman, which requires being on top of your game at all times. Eating well, exercising, and getting enough sleep will make you a lot less vulnerable to the effects of emotions.
6. Resolve issues from outside of your trading
If you are having problems in other areas of your life, they will affect the way you trade. If you can’t resolve them, cut back on your trading and be aware that your thinking may be clouded.