THE TRUTH BEHIND THE EMOTIONS OF TRADING

Learning to trade is as much about learning to control your emotions as anything else. Trading psychology is an entire field and a quick search on Amazon will bring up dozens of books on the subject.

Trading decisions can very quickly become based on how one feels, rather than on rational thinking. In this post, we will look at the emotions most likely to affect our trading and how to remove emotions (or at least their effects from our trading.

Which emotions are most common for traders?

The following are the trading emotions that are most likely to affect the way you trade:

1. Fear

Fear affects us in several ways. The fear of losing money will often prevent us from entering a trade when we should. The fear of missing out (FOMO) can cause traders to chase the price and make impulse trades. And the fear of giving back profits may lead a trader to exit a trade too early.

2. Elation

When a trader has a winning trade that goes according to plan, or a streak of easy, profitable trades, they may enter a state of elation. This can cause them to become careless and overconfident, and overestimate their ability. This is a very dangerous emotion for traders as it can lead to taking on too much risk.

3. Greed

Fear and greed are the two emotions that drive the market as a whole. Greed goes hand in hand with overconfidence and leads traders to ignore their process and take more and more risk.

4. Boredom

The reality of trading is that there are often long periods when there are few opportunities and the best thing to do is stand aside. This is when boredom creeps in and causes traders to enter marginal trades just to have something to do.

5. Frustration

It’s no secret that trading can be very frustrating at times. Frustration can easily cause a trader to abandon their strategy and start looking for other ways to trade. Moving from one strategy to the next seldom ends well.

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.

Conclusion

Learning how to remove emotions from your trading should help you make better decisions when you are under pressure. By learning more about emotions and trader psychology, you will also have a better understanding of what is driving the market. In fact, when you can control your own emotions, you can profit from the forex market psychology that drives prices by acting calmly and rationally.

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